Founder, Stratechery
Ben Thompson Explains the XBOX Disaster
This is our full conversation with Ben Thompson.
We discuss why Microsoft's Xbox strategy failed, why he thinks GTA 6 should cost $200, how console wars shaped the modern gaming industry, what went wrong with Xbox Game Pass, why AI is reshaping competition across tech, the future of Microsoft's gaming business, and why regulators often block mergers at exactly the wrong time.
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About Ben Thompson
Ben Thompson, founder of the tech analysis site Stratechery, has been publishing articles and appearing on podcasts in recent months, offering commentary on major technology companies and industry trends. In a July 2026 Stratechery article, Thompson wrote a hypothetical earnings call script for Meta CEO Mark Zuckerberg, arguing that Meta should focus on its core advertising business and entertainment rather than competing directly with AI companies like OpenAI and Anthropic. On the Sharp Tech podcast, Thompson criticized Meta's messaging around AI, stating that the company should lean into connecting and entertaining people rather than positioning itself as a productivity or coding company. Thompson has also written about Apple, Google, and Anthropic. In a June 2026 article, he described Apple's delayed AI features as "vaporware" and argued that the company's approach to AI, centered on the iPhone's personal context, could be a long-term advantage if executed properly. In another piece, he analyzed Google's business model, describing its advertising business as highly profitable while noting that its cloud division is growing faster. Regarding Anthropic, Thompson wrote that the company's safety-focused messaging aligns with its business interests, and he expressed concern about the influence of companies building advanced AI systems. He has also discussed topics including the Xbox business, memory chip shortages, and SpaceX's potential IPO and plans for data centers in space.
Transcript (64 segments)
H
Host0:00
Ben Thompson, the founder of Stratechery. He's been on an absolute tear during a slow news cycle. Does it feel like a slow news cycle to you?
B
Ben Thompson0:10
I don't know. The summer is always slow. I take a couple days or I slow down a little bit myself.
H
Host0:17
I feel like you've done a good job of providing really insightful and interesting pieces during a slow time where I didn't know that I wanted.
B
Ben Thompson0:26
I'm doing you a favor. Is that what I'm hearing?
H
Host0:28
Yeah. I didn't know I wanted you to adopt the voice of Mark Zuckerberg for 20 minutes and go on a tear, but it's not like that was driven by a specific Wall Street Journal article or Bloomberg scoop that we need to know. It's more just resetting on the meta narrative. I want to talk about the meta narrative, but can we start with Xbox?
B
Ben Thompson0:49
Sure. I want to know first, let's go back in time a little bit and I want you to reality-check me on the story I tell myself about how Microsoft wound up in the situation it wound up in with Xbox. I think it stems from DirectX, the graphics layer that allowed games to be run on multiple graphics cards. That was a Microsoft-licensed piece of property. So this is why we don't have the Chrome.
H
Host1:20
You want to go really far back?
B
Ben Thompson1:23
Because we didn't get an Amazon gaming console or a Google gaming console. That's interesting. You can go really far back. Back in the day, the main technology for 3D was OpenGL, which had various pros and cons. That's the origin of the Nvidia story: making cards to do 3D graphics, from the Riva 128 to the TNT to the GeForce. In the '90s, when I was in college, Quake came out as the first real 3D game. There was a great Twitter back-and-forth with the old id Software people about how they burned everyone out making it. Microsoft came out with Direct3D as an alternative to OpenGL, which was easier to use and more tied into the platform. That's all PC gaming. The Xbox, as I think about it, and a lot of gamers get annoyed when I write about gaming because I don't really care about the game part; I'm more interested in the strategy and how it fits into the overall company. What is your review?
H
Host2:54
Yeah, can we get a GTA 6 review?
B
Ben Thompson2:57
No, well...
H
Host2:58
I feel compelled. Number one, I feel Rockstar is charging way too little for this game. They're charging $80? Like, this is a game.
B
Ben Thompson3:06
Listen, you're going to get canceled for this. This is a nuclear take.
H
Host3:10
No, they should be charging like $200 for this.
B
Ben Thompson3:13
I know.
H
Host3:13
GTA 6 is like the last great game. Think about it: it was built entirely pre-AI. It is the pinnacle of this AAA...
B
Ben Thompson3:26
Craftsmanship. Years of blood, sweat, and tears to the extent where Twitter analysts are counting cigarette butts outside to see how much crunch they are in right now.
H
Host3:40
I don't even think he's trading the stock. I think he just wants to know the love of the game.
B
Ben Thompson3:46
Gamers are insane. I always tread in this water very carefully. But no, I feel compelled to buy GTA 6 just in honor of it existing.
H
Host3:58
Even if I don't know if I'm ever going to play it. So I'm definitely going to do that, and I'd be happy to pay $200. $80 is ridiculous. They should charge more. Anyhow...
B
Ben Thompson4:06
Yeah, we had one of the youngest people on our team commenting on people online complaining about the price. He said something like, 'You had 10 years, you couldn't save up $80?'
H
Host4:18
I know, seriously.
B
Ben Thompson4:20
Like, whoever you are, I know kids that do lemonade stands and they clear like $100, you know.
H
Host4:27
Oh, absolutely. I want you to know the old $20 'I'll keep the change.' Nothing will make a kid's day better than that. Although unfortunately with inflation, I think now it's sort of expected. It's unbelievable how expensive things are these days.
B
Ben Thompson4:39
So anyhow, we're back to the console era. The way I think about Xbox: go back to Microsoft pre-iPhone. Their corporate strategy was 'three screens and the cloud' – the desk via PC, the pocket via phone, and the living room. They didn't miss mobile; they had Windows CE in 1999, but they had the wrong conceptual model, treating it as an extension of the PC. The third screen was the living room: how to get in? Well, people have consoles plugged into their TVs. If we get in and own the console, we own the gateway to the living room. They needed permission, so they created the Xbox game console. Interestingly, that strategy totally failed. People buy consoles to play games, not to have an internet portal. So they sold a multi-purpose console to people who wanted games, and non-gamers didn't buy. Eventually, the living room gateway was taken by devices like Fire Stick and Roku. The Xbox was too expensive for that purpose. But ironically, the Xbox 360 was very competitive and that generation is the most interesting. Then came Xbox One, expensive with Kinect and restrictive DRM, designed to realize the living room vision, but gamers hated it. So their vision killed their console. I wrote over a decade ago that they should kill the program or spin it out. These stated corporate goals were not achieved, and it continues to exist just because it exists. I was actually sympathetic to that: I worked at Microsoft from 2011 to 2013, when the stock was $40 for a decade. Employees valued Xbox for morale, even though it was a failed division trying to achieve goals it couldn't.
H
Host8:38
Yeah. What do you think the naming scheme says about that project? I always found it odd: Xbox to Xbox 360 sounds like the third but it's the second; Xbox One is the third but it's one; Series X feels like the 10th but it's the fourth. They never just did Xbox 2, Xbox 3.
B
Ben Thompson9:06
Yeah. Well, you're asking the wrong guy about naming things. Total mess. They called it the 360 because it was coming out alongside the PlayStation 3, so they wanted to be on the same level with a three in the name.
H
Host9:22
Yeah.
B
Ben Thompson9:22
So, what's interesting about PlayStation 3 is that it was Sony's big misstep. They had the Cell processor, they wanted to get Blu-ray off the ground, and consoles were differentiated by hardware. Sony had beaten Nintendo with discs, but with PS3, they made it too expensive and the extra capabilities weren't used. But it worked for Blu-ray.
H
Host10:14
Didn't they win? And didn't Xbox go with HD DVD and lose?
B
Ben Thompson10:18
They did, but the PS3 was way too expensive and ran hot. The extra capabilities weren't used because it was the first HD generation. Games shifted to engines like Unreal, so asset creation at HD was much more expensive. Developers needed to be on everything, so games ran everywhere. That was the Xbox 360's best generation because they had a simple to develop for architecture. Then Sony learned their lesson: they created generic hardware and differentiated through exclusives, buying small studios and pushing them to develop killer games for PS4, like Spider-Man and Last of Us.
H
Host12:25
Exactly. The PS4 was an unbelievable generation because of exclusive games. They crushed Microsoft because for cross-platform games, they ran everywhere. Sony limited the economic potential of their studios to their platform but made it back through licensing fees from EA and Activision because 80% of gamers were on PlayStation. That continued to PS5. And that brings us to the Game Pass disaster. How is it?
B
Ben Thompson13:17
I didn't want to ramble too long. I was going to give you a chance. We love it. I have a bunch of other questions not related to gaming, but I love this history.
H
Host13:27
I think the console history is fascinating because it tracks technological change. You can draw parallels to model releases and how decisions set you back.
B
Ben Thompson13:51
Yeah, the development. It's interesting, you can always draw lessons. So you get to Microsoft at this point. I wrote at the time, 'time to give up'. I wrote multiple times they should give up on Xbox, and at this point Microsoft...
H
Host14:09
Was there ever an option after they bought Activision to make Call of Duty a console exclusive, or would that have been an FTC problem?
B
Ben Thompson14:17
Well, we'll get to that because that's part of the story. So Microsoft decides to try a new business model. They're moving from selling consoles to being a services company. They do Xbox Game Pass. Instead of buying individual games for $60-$80, you pay one price per month. No publisher wants to participate because they make money upfront. But Microsoft goes ahead.
H
Host15:28
Were they looking at what happened to the music industry as an example of making products more accessible through bundling?
B
Ben Thompson15:39
That was the bet. You had to make it up in volume. That's why the Series S came about – underpowered but cheaper, starting at $300. But developers build to the lowest common denominator. They had package deals with S and Game Pass, but no independent developer wanted that. So they bought developers like Bethesda and Zenimax, but those developers aren't releasing incredible titles annually except Activision.
H
Host16:44
Exactly. The issue with buying these companies is you're paying for their existing business plus a premium.
B
Ben Thompson16:55
Their existing business was selling single copies of games to all platforms. Microsoft was going to force these studios to lose money by putting games on Game Pass, while still selling on PlayStation out of necessity. They thought gamers would switch from paying $70 per game on PlayStation to $20 per month on Xbox, but that didn't happen. They cannibalized their existing business without expanding the market. They expected 75 million Game Pass subscribers, but have only 30 million and decreasing. Phil Spencer retired, which essentially means fired. They brought in new leadership, laid off thousands, but there's a critical decision: what to do? They're stuck in the middle, and this doesn't work.
H
Host18:46
What did you read into their approach of laying off 1,600 people now and keeping a 1,600 person rift? It's a terrible idea. Every VC would tell you to cut hard and cut deep.
B
Ben Thompson19:05
And then move forward with the team. If you're on the ship, we're going to Valhalla together. I have some sympathy because I appreciated the note. They're in big trouble and they're stating it clearly. If they only cut 1,600, everyone knows there will be more cuts. So it's a bad spot. They tore the band-aid off as much as they could. Now they can be overt and talk to employees about what they're working on. People are less likely to bail given the employment climate. So they can hopefully do better cuts openly. I don't envy Xbox leadership.
H
Host20:25
Probability of a spin out.
B
Ben Thompson20:27
I think it needs to happen. This is my regret: for years I said give up on Xbox. Then Game Pass seemed interesting, so I said let's go for it. Should have stuck to my guns. It was a disaster. I don't see it now. They hired Matthew Ball as chief strategy officer. I have a lot of respect for his takes.
H
Host21:04
So I'm curious what he's thinking about.
B
Ben Thompson21:06
This gets to the question before.
H
Host21:09
Is there a scenario where they just write off these acquisitions and say all this stuff's going to be exclusive, like Call of Duty only on Xbox? Basically giving into the FTC's worst fears.
B
Ben Thompson21:24
But those fears didn't make sense at the time. What's funny is we lost billions of dollars.
H
Host21:35
Yeah. It would be a good pricing test of the power of a AAA game to say you can only get Call of Duty on Xbox. How many incremental Xbox sales do you get? That would reveal the real value of the game. Switching gears: we keep seeing AI companies go quiet, then come out with huge revenue and up rounds. The 10th best company in a category has the financial performance of the leading company from 5 years ago. What do you make of that?
B
Ben Thompson22:42
This is just a thing in tech in general that has always stuck out at me.
H
Host22:48
Has it been though? Like CRM for example. If you go back to 2015, was the 10th best CRM company performing like the leader?
B
Ben Thompson22:59
Of course not. The example I always go back to is Apple buying Beats for $3 billion. Everyone was shocked, but Apple was a $500 billion company; $3 billion is nothing. The numbers don't really mean anything. There's inflation in tech numbers. On mergers: Getty Images called off Shutterstock deal because UK regulators said they'd have to sell the editorial business. It seems odd to block a merger when the industry is under attack from generative AI. Consolidation is the natural response to an external threat. These companies are declining and easy to price. Regulators are most likely to block when consolidation is needed, and they do nothing when it matters because the future is unknown.
H
Host26:13
Do regulators do any good? I used to think they probably do more harm than good blocking mergers. I'm the one who just said maybe Microsoft should make Call of Duty exclusive, so who knows?
B
Ben Thompson26:32
We were looking at that $3.7 billion deal. Both companies were around $300 million market cap, and the deal was priced in January 2025, so both had declined. Maybe they should have done the deal anyway, I don't know. It could be worse: you could be Netflix making a bid for Warner Brothers that the stock market hates, then you abandon it but you already decided you're desperate and screwed anyway.
H
Host27:12
Oh, well. Thank you so much for taking the time to chat with us. Have a great summer. Enjoy the break, and we'll see you soon.
B
Ben Thompson27:21
Yeah. Good luck with the lemonade stands.
H
Host27:23
Yes.
B
Ben Thompson27:24
Try to make it. Don't go into debt.
H
Host27:28
You're going to run into a kid that has CLA.
B
Ben Thompson27:30
Raise some money. Yeah, I know. Clara and a lemonade stand.
H
Host27:33
CLA and a lemonade stand. Five easy things.
B
Ben Thompson27:35
What happens in token?
H
Host27:36
Interest free. Interest free? It might. Well, thank you so much and have a great rest. We'll talk to you soon.
B
Ben Thompson27:41
Talk to you later.