The Resuscitation of Xbox
I'm not sure it's entirely fair, but it's right there: if the new leadership of Xbox just wrapped up their 'Charm Offensive', the next phase looks to be the 'Harm Offensive'.
While Asha Sharma and team spent their first 100 days rejuvenating the XBOX brand, killing off AI, dropping subscription prices, restoring exclusives, bringing on talent, retro green translucent anniversary consoles, an Oprah moment! Yeah, these next 100 are going to be significantly tougher. Including, it seems, mass layoffs...
It's harsh, but I also think it's a sound strategy. You want to give consumers hope that you've heard what the problems are and to showcase that you intend to change them, instantly in some cases. At the same time, there are very real structural and business problems in the division, which is going to require some drastic actions to help course-correct. If you launch those first, it's just going to fuel the fear, uncertainty, and doubt about the entire endeavor. So you start with the carrots before switching to sticks...
During said charm offensive, I noted that Sharma's fast, big moves reminded me of the early days of her boss, Satya Nadella, when he took over the larger Microsoft org a dozen years ago. One of his very first moves was to announce Office for iPad. Obviously, it had been in the works for some time – hence it being ready to be shown off – but the key was the symbolism of the move. It signaled a new day and era for Microsoft. After Steve Ballmer's "lost decade" of mostly milking profits from Windows, the company was ready to change and reorient itself to move forward.
Sharma's moves were arguably more dramatic, because she was rapidly retconning a lot of what Phil Spencer and team had spent the past several years putting in place. Of course, that's also fairly easy to do when none of that stuff was working. And Sharma's 'Next 100 Days' memo outlines just how dire things are:
We will end this fiscal year at about a 3% accountability margin, down year-over-year. Excluding Activision Blizzard King, over the past five years, we have spent over $20 billion on ongoing investments in our content, platform, and hardware subsidy, but our annual revenue has declined nearly half a billion during that time. Going forward, this cannot continue.
Yes, that's aside from the nearly $70B spent on Activision Blizzard. And that's important to note because that deal was masking the growing disaster within Xbox. The core was no longer working, Microsoft was buying revenue to mask it. Sharma ripped the mask off. "Going forward, this cannot continue."
Earlier this week, she was noting that her job, first and foremost, was to build Xbox back into a leading entertainment company. Just last week, she was specifically noting that her job wasn't about the margins – something which Nadella and Microsoft CFO Amy Hood were clearly pushing the division on previously. But as this memo showcases, it is also still about the margins. Xbox isn't a charity, it needs to be sustainable, as Nadella has made clear.
Part of that, unfortunately, means layoffs. And part of it means backtracking from the weird, piecemeal strategy put in place by Sharma's predecessors. 'Xbox Everywhere' doesn't make sense if Xbox is nowhere. And while I think it's fine to do some level of cross-promotion and pollination of older games and/or IP to other platforms, the goal obviously has to be to bring more people back to Xbox, not to make it so that no one needs to buy an Xbox.
As such, exclusives are back on the menu. Which also means ripping off some band-aids with your would-be awkward partners like Sony. Sorry, we're no longer going to be feeding you so that you can kill us even faster.
In a way, I'm reminded a bit of another famous tech CEO coming in: Steve Jobs. When Jobs came back to Apple in early 1997, the company was obviously in bad shape. Infamously close to death. One of the first orders of business was massive layoffs – executed by then-CEO Gil Amelio, before he himself was executed and Jobs was officially elevated into his famous 'iCEO' role.
Jobs too had a sea-change moment like Nadella, albeit in reverse, by striking a deal with Microsoft to ensure that Office would continue to be supported on the Mac. Everyone remembers the equity investment, but this was the key to that deal. Well, and Bill Gates showing up on screen behind Jobs during his keynote at Macworld in Boston. While the "Big Brother" vibes are humorous today, this moment also signaled a new era at Apple and a path forward, "for Apple to win, Microsoft doesn't have to lose". 17 years later, Nadella had the same message in reverse.
Sorry, I've gotten a bit lost in the nostalgia here. My point is that after these moves, Jobs also acted fast to cut the product lines – perhaps most notably, killing off the Mac clones. One can't help but see parallels here between Xbox putting their titles on other systems and the Mac clones. On paper, it sounds like expanding the addressable market and getting paid to do so. In practice, it nearly destroyed the soul of Apple and perhaps was doing the same to Xbox.
Yes, I just compared Sharma's early efforts at Xbox to the magic of both Satya Nadella and Steve Jobs. That's unfair – to them and to her. It's early – just 100 days! – we'll see where this goes. But certainly her first moves have been impressive and have completely transformed the vibes around the brand in short order.1 But now comes the hard part. The layoffs and getting the business actually in order.
While the strategy sucked, Xbox also got blindsided by component prices – of course, fueled in part by Microsoft's own role in the AI arms race... That perhaps puts 'Project Helix' – the next Xbox – in jeopardy, or maybe just makes it more likely that they rely more on third party manufacturers for the hardware. Uh oh, that sounds a lot like Xbox Clones... What's the plan for Game Pass? Mysterious new business models? How long until they spin out Activision Blizzard?
Speaking of disastrous massive acquisitions... While Ballmer handed Nadella a range of issues – cough, Nokia, cough – Microsoft's underlying business remained in great shape. Xbox's business is perhaps more like Apple's back when Steve Jobs came back: on the brink. The big difference, of course, is that Xbox is under Microsoft. So it's sort of a hybrid of those two situations. Xbox is not going to die tomorrow, but they still need to figure out the correct path forward to be viable.
A bunch of good will has seemingly been restored, fast. A smart move ahead of some major, but necessary hard calls. Hang on...
M.G. Siegler
M.G. Siegler
M.G. Siegler
1 Especially when you consider that she was thought to be the assassin sent by Microsoft to terminate Xbox. Perhaps death by AI, was the general feared given her previous role. Good on her for quickly changing that narrative. ↩
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