The first quarter of 2024 has been another interesting one for Xbox. There have been positive announcements, a very well-produced Developer Showcase, and an Xbox Business Update which are all buoyed by a slate of fantastic looking first-party games scheduled for release this year. And yet, despite this, the news somehow feels negative. Without trying to sound overly dramatic, it seems like this has become a bit of a recurring theme for Xbox over the past couple of years. The question I find myself asking is: Why?
Prior to the Xbox Business Update with Phil Spencer, Sarah Bond, and Matt Booty (and hosted by the awesome Tina Amini), I wrote this perspective on what we should expect to see. I talk and write a lot about business decisions like this, and, as you might expect, sometimes I’m on target and sometimes I miss by a mile. On this one, however, I hit the mark and thus didn’t find any of the information surprising. In fact, I would argue that the news was far more positive and targeted than the wild rumors and “leaks” that were distributed so heavily prior – including Starfield and Indiana Jones remaining Xbox console exclusive (at least for now).
I’ve said this before, but the reason I write about Xbox more often than other console manufacturers or publishers is that they are generally more accessible. They share information more broadly, and they have a more communicative nature with their fanbase. As a fan of the industry, a podcast host, and an EiC, I naturally appreciate it. That said, I also think it’s at the crux of what I’m attempting to decipher. With that in mind, I’m writing this article in response to Phil Spencer’s latest interview with Polygon while simultaneously using it to demonstrate a point. Let’s see where it takes us.
There are three core points that Spencer calls out in his discussion with Polygon regarding the state of the industry and AAA game development. To paraphrase:
- The cost of AAA development has grown so much that it becomes a substantial risk for publishers to take risks on new IPs. That impacts creativity, which he believes is a cornerstone for the industry.
- That cost is particularly prohibitive with regard to exclusives given their limited reach.
- The overall console market is not growing. This means they all just continue fighting for the same piece of the pie despite rising costs.
Let’s address each of these independently.
First, I believe it to be quite widely known that the cost of AAA game development has ballooned to an unsustainable level, generally speaking. We’ve heard this from studio heads, publishers, and industry leaders alike. In fact, it was something that former PlayStation and SIE CEO, Shawn Layden, was very outspoken about late in his career (and has continued to state since leaving SIE).
As a recent example in this space, you can point to Immortals of Aveum. Developed over years by very talented industry veterans at Ascendant Studios, published by EA, and widely accepted as a “good” game, it failed to meet sales expectations. Since that point, Ascendant Studios has had to layoff approximately 45% of its workforce and restructure. Examples like this are commonplace in an industry where a single “miss” can devastate a studio after years of work.
Ahhh, exclusives. At least we’ve never discussed these before, right? The debate over exclusives feels like an endless battle where nobody ever wins. So as I typically do, let’s stick to the facts and the data. And, generally speaking, they are quite clear, which is likely why Spencer chose to mention it.
I wrote this last month prior to Xbox’s Business Update:
In 2022, the global console market accounted for just 28% of global gaming revenue. Of that, a minority percentage was actual game sales compared to in-game or service content. And of that, an even smaller, minority percentage were exclusive, platform-specific releases. Exclusive game releases account for a very small percentage of overall gaming revenue (particularly if you exclude Nintendo, which is almost a separate segment in itself). Perhaps more notable is the fact that growth in the overall console segment is relatively stagnant.
The fact is that the market for “console exclusive” releases has evolved greatly in the past 10-15 years. And, while there are certainly success stories to still point to, they are fewer and further between.
The most common push back I see on this (in my circle anyway) is, “But if you publish great exclusives, it will drive players to your ecosystem, and they will then spend more on your platform.” It’s one of those thoughts that, when said aloud, makes sense and begins to convince you that it’s the reality. The issue? It’s not.
There are countless data points to show this, and, again, Spencer has talked about this on several occasions. The fact is: players have largely moved to digital ownership and therefore have already built an association with their platform of choice (which is further compounded by aspects like achievements/trophies, friends lists, etc.). So while there may be an occasional push to buy a spectacular exclusive that comes around on a platform that isn’t your “main,” the continued, downstream revenue simply doesn’t exist on a large scale.
I see it out there, I see commentary that if you just build great games, everything would turn around,” he said. “It’s just not true that if we go off and build great games, all of a sudden you’re going to see console share shift in some dramatic way. We lost the worst generation to lose in the Xbox One generation, where everybody built their digital library of games.
This idea that if we just focused more on great games on our console, that somehow we’re going to win the console race, I think doesn’t relate to the reality of most people.
On Spencer’s third point that the console market isn’t growing notably: again, this has been true for some time. Technology has changed the global gaming industry substantially, and, of course, it will continue to do so. Depending on the models you look at, growth in the console space is only expected to be a couple of percentage points over the next few years. As Spencer pointed out, this means that the companies are all fighting for the same size pie despite costs rising substantially.
No matter how you slice the numbers, it’s an unsustainable model. And that means new ways of thinking have to occur. And just to be exceedingly clear, this is true for Xbox, PlayStation, and Nintendo. In fact, Sony’s President, Hiroki Totoki, recently pointed to the same thought process regarding broadening margins by delivering more multi-platform releases.
In the past, we wanted to popularize console and the 1st party titles’ main purpose was to make the console popular. It is true, but there is a synergy to it. So if you have strong first party content, not only with our console but also other platforms like computers, 1st party can be grown with multi-platform and that can help operating profit to improve. So that is another one we want to proactively work on. I personally think there are opportunities out there for improvement of margins, so I would like to go aggressive in improving our margin performance.
I hope to be able to talk more about PlayStation in the near future, and, in fact, it’s fair to say that Nintendo successfully made a major shift when they developed the Switch, thus combining their home and portable markets into one.
So, coming full circle, if these aspects of the gaming industry in 2024 are widely known, accepted, and understood, then why the negativity around shifting strategies? Speaking purely in terms of my opinion, it’s due to the fact that Xbox is so communicative.
As I said at the start, one of the reasons I enjoy writing about Xbox is that the leadership team is so open. When you compare Xbox leadership’s approach to how they communicate about their plans versus PlayStation and Nintendo, it’s night and day. Nintendo keeps fans on a strictly business relationship. Depending on your perspective, that can be good or bad, but it does remove a certain amount of speculation from the community.
And while PlayStation shares overviews of their strategy with investors from time to time, they are certainly not out in front of their fans like Xbox is. And, funnily enough, the last PlayStation deep dive of their strategy provided by SIE President and CEO, Jim Ryan, included plans to account for all the aspects discussed above.
One of the aspects I’ve appreciated about Xbox since it entered the industry in 2001 was the brand’s focus on pushing technology forward. From broadband internet to Xbox Live, online multiplayer, Achievements, a digital store-front, and more, they’ve pushed the console industry forward in a number of ways. Sure, they don’t always land successfully, but that’s to be expected.
Over the last few years, they’ve continued in that vein. A focus on Game Pass, cross-play and cross-progression, xCloud, cloud saves and data sharing across all devices, and more. That focus has created a gaming environment in the Xbox ecosystem that I truly enjoy and engage with on a daily basis. But with evolution in the industry comes change in strategy. And change isn’t always seen or felt to be positive.
It’s fair to say that some see Xbox’s evolving strategy to be counter to the focus on making Xbox the best place to play. And, in turn, this will devalue the Xbox console and even the ecosystem to a degree. There may even be some truth to that, but it’s the degrees that matter in that equation. From the top down, change is inevitable and required. And, at the end of the day, as it is always, it’s about the bottom line. And these companies will do what they have to in that vein. Again, Spencer is very clear on this:
We’re a business. I’ve said over and over. I don’t get any luxury of not having to run a profitable growing business inside of Microsoft. And we are that today. But just across the industry — you mentioned it, and in sitting here at GDC, I reflect on friends of mine in the industry that have been displaced and lost their jobs and how just, I don’t want this industry to be a place where people can’t, with confidence, build a career. So that’s why I keep pivoting back to: How does this industry get back to growth? But to your question, for us as Xbox or any of the teams that are out there, it is really an outcome of an industry that’s not growing. It can grow and it will grow again. But you see this time right now and the implications have human impact. And we should all reflect on that and think about it.
In the end, I believe the reason the evolving strategies discussed by Xbox leadership are debated so heavily is that their leadership is as open as they are. PlayStation, Nintendo, and publishers alike all have the same data and are having the same conversations. Xbox is just more transparent about it. And while I, and many others, appreciate it, it also means that it becomes a much larger narrative across the gaming community.
No matter where you stand on any of the ways that the gaming industry is changing, I hope we can continue to have respectful, meaningful conversations about it. And, at the end of the day, I hope we all continue to remember why we fell in love with this industry in the first place: the games. It’s the best medium in the world.