Yeah, a huge part of that strategy is making Microsoft gaming as big as it is, bigger than Xbox. Acquiring Activision, doing all the other acquisitions of the studios they've done. I look at this and I say, well, it doesn't matter if Sarah was the best manager or the worst manager, the strategy that she was instrumentally a part of failed. They've been doing these things where they respond to the strategy and try with a goal of either increasing the revenues or scaling up. And it just hasn't been going smoothly. Let's be honest, especially over the past couple of years.
Apple's services revenue is not Severance. It's not Ted Lasso. Yeah. It's 30% of in-app purchases in games. Yeah. It's pretty much games, right? The biggest chunk of Apple's fast-growing services revenue is in-app purchases in games and they are never going to give that up unless literally the governments of the world demand that they give it up.
But for some reason Microsoft keeps thinking that they're going to do it.
Hello and welcome to Decoder. I'm Nilay Patel, editor in chief of The Verge, and Decoder is my show about big ideas and other problems. Today, let's talk about the future of Xbox. Phil Spencer, the CEO of Microsoft Gaming and a two-time Decoder guest who's led Xbox for more than a decade just resigned. But in a shocking twist, his deputy and long-assumed successor, Sarah Bond, is also out, too. And Microsoft Gaming is now in the hands of Asha Sharma, one of Microsoft's AI executives with no prior game industry experience. It's a major leadership transition that suggests Microsoft wants to make serious changes to its gaming division, which owns franchises like Halo, Call of Duty, and Minecraft. There's literally no better person to talk about all this with than Tom Warren, a senior editor here at The Verge and author of the excellent newsletter Notepad. Tom just had a new baby, he's actually out on paternity leave right now, but Microsoft has a long habit of disrupting his time off with major news. So, Tom was gracious enough to come back on the show after he published a major scoop about what exactly went down at Xbox this past week. Okay, here's Verge senior reporter Tom Warren on the future of Xbox. Here we go. Tom Warren, you're a senior reporter at The Verge. You are currently out on paternity leave, but Microsoft just brought you back.
Yep, this happens every time I take a vacation or leave. Microsoft decides we're going to do something massive and ruin Tom's life.
It's just punishment for all of the scoops you've dropped on the company over the years. So this week, as you were playing with your beautiful new baby, Microsoft initiated a major shakeup at Xbox. Something we've seen coming for a little bit, but maybe not on this scale or this magnitude. Describe what happened at Xbox this week.
Phil Spencer, the long-time sort of CEO of Microsoft gaming technically, but Xbox chief is what he's known as. He's retiring, so he's leaving Microsoft. Sarah Bond, the Xbox president, is also leaving Microsoft. And then they're actually promoting Asha Sharma, who used to be on the core AI side at Microsoft to the CEO of Microsoft gaming, so replacing Phil Spencer essentially. So yeah, big news, a big shakeup, should we say, of Xbox, which I think has been, I think with Phil Spencer it's been a long time coming, right? I think Xbox fans have expected that retirement, but perhaps not so much Sarah Bond leaving.
So, and this is I think the shakeup, right? We knew Phil was going to retire. He'd been messaging that for some time. He's been there for a long time. He's a Microsoft lifer, really. Phil's been on this show before, and we're going to run some clips from his past interviews on Decoder, because I want to get your take on what happened between those interviews and now. But at just a very high level, we knew Phil was going. Is it that everyone expected Sarah to be his successor, and that didn't happen, and that's the surprise here?
I think there's two surprises, right? It's obviously that Sarah wasn't named Xbox chief. And that Asha is the successor because that just wasn't... Yeah, that was quite a surprise and a surprise higher, really. But yeah, so Sarah has always been the sort of number two. She's always traveled with Phil and always been kind of like the face of Xbox over the past couple of years as Phil's kind of, I say he's stepped back a little bit since the Activision Blizzard acquisition a little bit publicly. But yeah, so Sarah's kind of become the face of Xbox during that time and she took over the platform work, the hardware work. So whenever there was any mention of like the next gen Xbox, it was Sarah that would come out and talk about it, not Phil. So that's a change in itself, right? Because it's usually Phil. So I think everyone just kind of thought, 'Okay, well, she's being prepped to be Phil's replacement eventually, whether it be, you know, a couple of years, five years, whatever.' It didn't happen.
But behind the scenes, I know that Xbox fans had expected that this was going to happen. Sarah Bond would be the, you know, the heir apparent. But behind the scenes for a good year or so, I've been hearing different things about Sarah Bond. Different from what perhaps the public perception is of her, and just different, just not what you'd expect, I guess, from what you see of her and stuff. So to me it wasn't a surprise. I was like not surprised to see her not named, but I think it was more of a surprise to see Asha named, right? Like that was kind of the surprise to me. I know Asha a little bit. I've spoken to her a few times, but she's like a non-gamer. She's very straight about that and honest about it, but not that that really matters, I don't think, to be a CEO, really, to be honest. But to Xbox fans and, you know, that gaming segment, if they see a non-gamer, it's like, 'Yeah.' Particularly with Xbox, I think because Phil has kind of instilled that over the years. So they come to that expectation. So yeah, I think that was the surprise of it, but I don't think Sarah Bond was a surprise to me.
And when I come to Asha, the new leadership in particular, the sort of that the Microsoft AI of it all because that seems like an important piece of the puzzle. I just want to stick with Phil and Sarah for one more second. There's the reporting you have done about Sarah personally and her skills as a manager and potentially CEO. And then there's Phil and the strategy he pursued for Xbox and Microsoft gaming. And a huge part of that strategy is making Microsoft gaming as big as it is, bigger than Xbox. Acquiring Activision, doing all the other acquisitions the studios they've done. I look at this and I say, well, it doesn't matter if Sarah was the best manager or the worst manager. The strategy that she was instrumentally a part of failed. And I kind of see this and I say, okay, if I'm Satya Nadella or importantly Amy Hood the CFO of Microsoft, I'm saying we've done some of the biggest acquisitions in history, certainly the biggest acquisitions in Microsoft history. And none of this came to anything. We got to reboot this whole thing. Does that feel as important inside Microsoft as maybe just Sarah wasn't the right person?
It's a couple of things, right? Like so obviously Microsoft gaming has ballooned now, right? Because it's got Bethesda, obviously Activision Blizzard has made it bigger than ever before, right? And then you've got this tension of Microsoft, like the corporate Microsoft of Satya Nadella and Amy Hood putting the pressure on that new division to, you know, return the money that they've invested into this project essentially. So through profit margins. So they've cranked that pressure up over the past couple of years and it's forced Phil, Sarah, everyone under them to then respond, right? So they've done these studio closures, they've done cuts, they've done price increases, they've tried to accelerate, you know, getting more people using Xbox services essentially. So that became the strategy of like, 'Okay, we need to get to TVs. We need to get to mobile and all this stuff.' And there was a lot of like, I guess trying to rush that, it felt like, and forgetting that the console was their base of like building up Game Pass and their base of taking those people and perhaps moving them elsewhere and, you know, user acquisition growth, all that sort of stuff. And it just feels like they tried to rush that and they did this 'This is an Xbox' campaign which is just super strange. It was trying to say that phone was an Xbox and it was born in this idea that they need to speed up the margins. They need to, you know, get more revenue, get more growth, and improve those margins essentially. So when you're trying to pin blame on whoever it is, it's like it comes from the top ultimately. Like it's Satya and Amy. They're pushing these margins and I think they're slightly unrealistic in the context of gaming anyway. Like there's not the margins that Sony has, for example. They've put the pressure on. Phil has, I think he's kind of stepped away a little bit over the last couple of years. So not so laser-focused on Xbox and that's allowed Sarah to have a lot of power over Xbox and accumulate like marketing power and do the 'This is an Xbox' campaign in her own walk. And then just yeah, it just hasn't gone well, that it hasn't gone well for consoles. Even if you argue that Microsoft perhaps doesn't care about selling consoles, which maybe they don't, but I think they probably thought that they could replace them with cloud and mobile a little bit quicker, but...
Actually, this is my big question. And this is again, you know, there's the reporting you have about Sarah as a manager and a leader, which I want to come to, but then there's the, well, it's Microsoft. All Satya and all they care about is mobile and cloud. That's like not even the AI part of it. Like this is a business that runs huge cloud services in Azure and needed a new foothold in mobile, and they basically bought Candy Crush to get a bunch of mobile revenue. Of course, that's what they wanted to do. And it feels like actually the decision is not so much about Phil Spencer and Sarah Bond. It's this whole strategy failed, and now we're going to try a new one. And I'm just curious if you have insight into the balance, right? How much is the strategy failed, we just need a new regime, versus we need a new strategy, and Sarah specifically cannot execute a new strategy.
I don't think they're going to change the strategy all that much, because the strategy kind of makes sense in a way. Like, you want to get to mobile, you want to get to cloud because that's how you're going to get more users, right? Ultimately, into your system without not selling enough consoles, essentially. So I don't think the strategy is terrible, but I think the execution has been over the past couple of years. I think that's been the problem but predominantly is the execution of the strategy. The messaging publicly has been pretty bad. So I think it's more a regime change that's needed to bring some sort of element of people who understand user acquisition, right? Yeah. And I think that's kind of where Ash is coming in.
Let's talk about Xbox strategy as a whole, because if you're saying it's not changing, it's worth taking a beat to just understand what the goal has been. And I would say since 2017, Phil Spencer has been very clear that what he wants to get to is everyone is subscribed to Game Pass, you can play Game Pass games anywhere because you're streaming from the cloud, and we're going to get out of this race of console generations and exclusives. Because they essentially lost to Sony, permanently lost to Sony. There was no coming back with a new generation. Did that work? I mean, I think we know now there's executive turnover, it didn't work. But did it ever work? Was there ever a glimmer of it working?
So going back to like where it all started, this mess with Xbox essentially is Xbox One where they failed that sort of era. And what happened at that time is PlayStation... This is over a decade ago. Yeah, yeah. And that led up to kind of 2017 and the launch of xCloud and all that sort of stuff. But going back to that sort of era, they lost that generation, right? And it was a huge cost to them because that was the generation that people started their digital libraries, right? That weren't on PC. People on PlayStation have built up those libraries. They're not willing to move away from those libraries now. So they knew they'd lost that real key generation. So the response was let's do Game Pass because that will allow people to bring their games to different devices, you know, this whole cloud vision, mobile, etc. So I think that was the only kind of response they could and it was designed to be consumer-friendly, right? Like, you got day one games that they published immediately. So they took a bit of a risk. It was quite a bold move, really, to do that. And still Sony doesn't do day one games, for example. So they took a risk. The problem with Game Pass that's happened, obviously, they've had to fuel it with content, right? So they've done all these acquisitions. Bethesda, Activision Blizzard, nameless others, as well. But the problem then with Game Pass is that you're giving your games away with a subscription, but you need to scale that up, right? So it needs to hit a certain amount of million people that you've got that concurrent revenue every quarter and you can rely on where it isn't cannibalizing or eating into the traditional sales of those games that fuel the costs for developing games, which, frankly, are just getting more complicated to develop games these days and a lot more expensive. So they've had those issues with Game Pass, and ultimately, I think the strategy was to respond to try and get that growth, right? To try and scale up this idea of, and the way they put it was 3 billion gamers, right? That was the launch of xCloud and remember xCloud and now it's called Xbox Cloud Gaming was originally a mobile play. So it was literally to try and get people into the idea of playing streaming on mobile with these attachments to your phone essentially.
It's worth noting that they ran into Apple's App Store rules. Exactly. They were not able to do this in a way that actually worked. Exactly. So they hit a bunch of regulatory hurdles.
They had to launch it as an xbox.com/play in your browser. You couldn't get an app or anything like that. So that completely knocked them back, right? Even when they were trying to play test it, Apple were like on the test flight saying no, you have to change this. You know, like they were very restricted in what they could do. So that kind of put their strategy back. Now who you blame for that, like I think you can blame Apple in a very significant way.
There's some pretty major anti-trust ramifications of that that Apple is still feeling.
Right. And then fast forward from that point from launching xCloud and having all those issues to a couple of years ago, they're still trying to get that resolved, right? They're still trying to push for this app. They're still trying to get a store in there now, essentially is the idea. They're going to have an Xbox mobile store. So it's moved on from, you know, having an Xbox Cloud Gaming app. It's more ambitious now. We want to do a store. We want to sell content in there directly to people. And there was the promise that the app's going to arrive from both Phil and Sarah to be fair. But then Sarah then promised it was going to launch in a month in an interview and that was 2 years ago. So and it hasn't happened. A lot of that idea of going for mobile recently and trying to do this cloud store thing has just been over-promising and under-delivering and relying on regulatory change that just hasn't come, right? Or it's come and whoever's, you know, whether it be Google or Apple, they've appealed, right? Which pushed it down there so many months. So yeah, so they've had all these hurdles with this strategy, but I think ultimately Game Pass has a problem where it fundamentally will eat into those margins of studios. And it's like, how do they, if they can't scale it up, then they have to increase the cost of it. So again, we saw that last year that they've been up by like 50% Game Pass Ultimate. So they've been doing all these things where they respond to this strategy and try with a goal of either increasing the revenues or scaling up. And it just hasn't been going smoothly. Let's be honest, especially over the past couple of years.
So it's really funny because so when Phil Spencer was on the show in 2022, I asked him about this vision that the future of Xbox is Netflix. Here's what he had to say. Then there's the other part, which is, man, it would be really cool if everyone just paid us 15 bucks a month all the time. And the games came out and everyone was just happy and that base of revenue was recurring and it was a little more stable than hits, than console generations. Is that the move? Because that seems like where you have been building for a long time, but it's harder to get there than maybe anyone anticipated.
We don't have this vision of everybody's paying a $15 a month. We think the subscription is an interesting business model for certain kinds of games and for certain customers. But I really see it as diversifying the way people build their library of games or creators can reach the customers that they want to reach with the content that they build. But it will always be part of the business in my view. I think people buying their games and owning their games will be an important part of the business for years and years to come.
To be fair, I heard that line at the beginning of the streaming transition in music. Very famously from Steve Jobs, actually. People like to own their music is a thing that he used to run around saying all the time. Now I feel like we're hearing it from the games industry. Is that just the point on the curve that you're at? Is some people are going to buy it and some people are going to stream and we're going to have one day 5 years from now wake up and it's all streaming and subscriptions or is it...
No. Games are fundamentally different and I'm definitely not smarter than people who did music subscriptions or video subscriptions. I just think the fundamentals of gaming are different. So it's that subscriptions will be part of the solution but not the only solution.
Even as Phil was saying that to me, I was thinking, I don't believe you. Like you've gone all in on all of these moves to get recurring revenue. And we were having that conversation in the context of them buying Activision. And Candy Crush is the most stable recurring revenue you can get. It's endless downloadable content. It's endless power-ups. It's people paying money to literally play the game every day. Did you have the same reaction to them saying their goal was not to get to $50 a month from every single Xbox gamer?
The interesting thing is when was that? That was in 2022 that you spoke to me? Yeah, it was just, it was right around, yeah, 22 around the Activision. That year was quite pivotal internally. So I think that was when they kind of realized that Game Pass wasn't going to do the number, like they'd hit a ceiling on console and they didn't have this mobile growth that they were expecting. And like internally at that time because that I think it was 2021 or 2022 but they did a slide deck with the hardware gaming team which leaked in the FTC trial and it was like the ambition was 100 million people on Game Pass by 2030. And a lot of that growth was through Series S and X, that was the desire, right? But some of it was also cloud and mobile, right? Like a chunk of it. And obviously that's not going to happen unless something crazy happens in the next 4 years, right? Like that growth is just not there for the moment. I think the last time they reported it was 34 million. So the messaging changed in 2022 basically from like Game Pass is our thing to like, well, it's going to be like 20% of Xbox content and services revenue. We don't see it being much bigger than that.
