Opinion : Offering Perspective on Xbox’s Potential Shift in Strategy

I haven’t written about Xbox in a while. While part of the reason is due to my busy personal life, the primary reason is that Xbox has been relatively quiet recently. By that I mean: as they transitioned to the Series X/S generation and introduced xCloud while attempting to leave the Xbox One generation behind them, Xbox felt fresh again. Renewed. Focused. Thus, I felt there was a lot to analyze and project about where they were headed.

Enter 2024. Bethesda and Activision-Blizzard have been acquired, Xbox Game Studios is now one of the largest gaming development companies and publishers in the world, Game Pass is well established, and there are countless games in development from first-party. So everything is bright sun and blue skies right? Well…about that.

Just a short while ago rumors began swirling in channels that Xbox was considering releasing a portion of their games on other platforms. Earlier this week the dam broke, and now a wealth of sites are reporting that Xbox has changed direction and will move forward with a much broader publishing strategy in the future that will include PlayStation and Nintendo platforms.

With that in mind I’ll attempt to do what I typically do: provide a perspective on the potential shift as it relates to the industry. And let’s be clear, as of this writing we haven’t heard directly from Xbox on the matter. CEO of Microsoft Gaming, Phil Spencer, will be providing a formal update next week. I’m merely attempting to predict what we can expect and why.

The Console Market

Let’s begin with the console market. When many of us think about console gaming, the “big three” of PlayStation, Nintendo, and Xbox instantly come to mind. Rightly so, it’s essentially been that way for over 20 years. And, immediately, we come to one of main points of contention with the status quo.

Since home gaming took off in the late ’70s, it has seen countless changes in the industry players and leaders. From Atari to Sega, Intellivision, NEC, SNK, Panasonic, Philips, and more, the home gaming market has seen a long list of companies throw their hat into the ring. Despite that, the model generally remained the same: sell a boxed unit and lock-down profitable software units that would help grow that install base.

In 2024, nearly all of that has changed. I’ll come back to the “nearly” aspect shortly, but, for now, let me illustrate my point. 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.

As we talk about global revenue, you have to also account for the fact that Xbox’s primary audience is in North America. Add these factors together, and you have to account for the following:

• The overall install base of “console ownership” isn’t growing substantially and hasn’t done so in a good number of years.
• Recent hardware numbers for Series X/S suggest sales in the ballpark of the Xbox One, seemingly a disappointing result.
• Players spending more on live-service, on-going games which account for the majority of play time.
• With digital ownership now accounting for the vast majority of sales, alongside friends, achievements/trophies, and personal preferences, players are more invested than ever in specific ecosystems.
• The “preferred platform” is more prevalent today due to the fact that the third-party, live-service games, often with crossplay, account for the most played console games by a wide margin.
• Purely from a console install base and global brand perspective, Xbox is in a distant third behind Nintendo and PlayStation.

All of these factors lead to an obvious conclusion: The Xbox One generation did far more harm to Xbox as a brand than I believe we truly realize. Sorry, let’s not get sidetracked. Ahem, the conclusion is this: it doesn’t make sense financially for Xbox to fight tooth and nail to try and claw a few points of market share in the console space.

Revisiting my “nearly” comment, it’s certainly plausible that Xbox could gain a small percentage of market share in the console space with an aggressive, console-focused strategy. However, even if they gained a few points, the overall ROI simply isn’t there to warrant it. And it’s diminishing at that. That time in history has passed.

Game Pass

As with other aspects of Xbox, I’ve written and analyzed Game Pass quite a bit. I don’t want to rehash what Game Pass has done for Xbox or the positives that it brings as a service. I would hope by now that, if you’re reading this, you’re aware of them. And if you’re not, most of what I said a few years ago still holds true.

So looking at the now, Game Pass is still growing but seemingly not at a sustainable rate (or a rate which is considered acceptable by internal metrics). Most important to note is that subscription growth on the Series consoles has generally flattened. Thanks to the leaked court documents during the ABK acquisition, we know the service saw no notable growth in 2022. And even with tentpole releases such as Starfield and Forza Motorsport in the second half of 2023, along with excellent third-party support, Game Pass reportedly didn’t see a large increase in subscribers.

Thus, there are only two options. Either Xbox finds new ways to grow the service or the service itself has to evolve. I have to imagine that both options have been examined extensively.

If Xbox plans to maintain the service’s structure as it is today, a simple price increase is likely the easiest to implement logistically. But I’m sure there’s hesitancy there as it’s a risky balance ensuring customers will feel that the value of the content warrants the increase. In that vein they could trade more revenue per subscriber with fewer subscribers overall (thus making it wash with regard to revenue), and it also becomes more difficult to entice new subscribers.

The obvious answer is to offer Game Pass on more devices to reach more subscribers. This is where PC Game Pass has played a large role in the past 12-18 months. But the barrier of entry is critical here. With gaming being more accessible and inexpensive than it has ever been, asking non-traditional gamers to buy a console or to use their PC (assuming it’s capable) for gaming is a big ask.

To broaden the Game Pass base, then, the service would need to be offered on non-traditional gaming devices (such as a native app on a TV). This opens the door to customers who may not even know what the modern consoles are and/or have zero interest in ever gaming on a PC. And again, as I’ve written about before, this is where Xbox has been building for some time. Bluetooth controllers, Xbox as a service across devices, touchscreen controls, and xCloud are all designed with the same end-goal in mind: removing barriers of entry.

I don’t want to get too into the weeds on this point, but extending Game Pass in that vein is far easier said than done. Agreements with varying TV manufacturers, localization, bandwidth and data cap limits, UX/UI usability, controller and device connectivity, and more, all become challenges. And there is no “one solution fits all” for each of the issues either, particularly on a global scale.

So with all of that in mind, how do you take what works well with Game Pass and extend it to a broader audience/make it more profitable? I’m certainly not sure, but I can promise this is an on-going top priority within Xbox leadership.

Revising the Strategy

As of this writing we now know that Phil Spencer will be speaking next week on the “Vision for the future of Xbox.” When Microsoft CEO Satya Nadella said Microsoft was “all in on gaming,” he wasn’t lying. In the past five years, we’ve seen an investment unlike any other in the history of the industry to grow Xbox as a developer, publisher, and brand.

But as with all things, nothing comes for free, and certainly not tens of billions of dollars. And while we should absolutely wait for the official word from Spencer next week, it’s feeling like papa Microsoft has come knocking and some changes are needed to increase overall revenue and profitability of the Xbox division going forward.

The challenge then becomes implementing significant changes while retaining confidence in the brand and perceived investment value by your dedicated fanbase. And trying to do that after an already extensive recovery from brand damage over the past several years? That’s a thin line I personally wouldn’t want to be walking on (though the paycheck would be nice, I’m sure).

So what changes are coming? Again, we don’t officially know. But I’ll step out onto a creaky limb and predict what I believe we’ll hear.

• A broader game distribution strategy fueled by their publisher growth

To me this seems fairly obvious and, honestly, should be expected. Xbox is one of the largest publishers in the world now, and they’ve danced around games going to other platforms previously. Given not only the Bethesda and Activision-Blizzard acquisitions, but their development of notable, live-service games, there’s likely a lot of revenue that can be earned on other platforms, which is simply too much to ignore.

• A purposeful overview of the shifting strategy with an emphasis on retaining the value of investing in the Xbox ecosystem

I suspect this is where the initial details will be shared on how Xbox plans to publish some of their games on additional platforms, including the Switch and PS5. My guess is that we will hear about the first few games with the door being left open for the future. I would also expect an emphasis on how the best value is still within the Xbox ecosystem, either via console or PC. In that vein, Game Pass will likely be a focus, as will timed exclusivity for major titles such as Indiana Jones from Bethesda.

• A focus on the Xbox-specific games that will be delivered in the near-term and a tease of a summer showcase

Further doubling down on the value of being an Xbox console or PC player, I believe we’ll get another reminder of the games that are releasing in 2024 along with a mention of a June summer showcase to highlight new games from Xbox Studios.

The one aspect I’m not so confident in is also likely the largest: extending Game Pass onto the Switch and/or PS5. While it feels like this is a long-term goal in some form, it comes with a great number of questions. Branding, content breadth and delivery cadence, pricing, revenue sharing agreements, and a lot more all come into play. Personally I don’t think this is in the cards, at least not any time in the near future. As I’ve written about before, it’s not the technical implementation that is the biggest hurdle. It’s all the other aspects of that type of agreement.

Given that, the recent speculation around Xbox examining a potential handheld device begins to make more sense. But I don’t want to go down that road just yet as that brings even more questions into play.

But Wait, There’s More!

All of the above said, there are additional aspects I haven’t covered. And I certainly won’t be able to tackle them all in this article. But if you’ll indulge me thinking out loud for a moment…

What does the hardware roadmap for Xbox look like over the next decade? While Xbox has announced they’ve begun work on the next console, and we have some details on what may be coming in that vein, what are the long-term implications? All signs point to an all-digital, account-driven future long-term. While that’s a transition that occurs over a long period of time, when does that cut-over directly impact console development? And to what degree?

I’ve also read concerns around incentivizing third-party support on Xbox. It’s an area that Xbox has made strides in over the past several years, and many of us who game in the ecosystem today have appreciated those efforts. So how do they ensure they don’t backslide on that front? My guess is that, by removing the barriers of entry and providing enough incentive for players to invest in the future Xbox ecosystem, the developers will follow as a percentage of the playerbase (growing over time) will merely shift from console to pure digital access through other devices. As always, time will tell because this relies on bringing in new customers while largely retaining the old.

And most importantly…what about my beloved physical copies!? I’m joking, of course, but I always have to raise my hand when the topic of “who buys physical games still?” arises.

To close out (for today at least), I’ll say this. I am confident in Xbox. I’m confident in their leadership. And I’m excited for the brand’s future. What we’ll likely see is merely an extension of an ever-evolving industry that is driven by technology and a growing, global market. With change often comes compromise, and I will be the first to admit there are aspects about modern gaming that make me clamor for the days of old. But taken on the whole, gaming is better than it has ever been. And I still think its brightest days are ahead. See you next week…