Microsoft's Xbox Division Faces "Reset" Amidst Financial Woes

Just 100 days ago, when new Microsoft Gaming CEO Asha Sharma replaced long-serving executive Phil Spencer, she said she’d work to “understand what makes [Xbox] work and protect it.” Now, Sharma and Xbox Studios chief Matt Booty have laid out the many things that are not working for the Xbox brand in a brutal self-assessment the they say necessitates a wholesale “Xbox reset.”

The message sent to Xbox employees and shared publicly via Xbox Wire last night paints a grim picture for practically every facet of the Xbox division. That portion of Microsoft is currently only seeing a “3% accountability margin” (read: profit margin), down year over year and well below both the game industry average and the lofty 30% margins that Microsoft is reportedly seeking across the board.

It’s an underperformance, they write, born out of being “over extended” by moves like the $69 billion acquisition of Activision. That mega-merger came on top of $20 billion in spending on other acquisitions, platform investments, and hardware subsidies over the last five years, the executives write. But despite the spending spree, Microsoft’s overall gaming revenues are down nearly $500 million compared to five years ago.

While Microsoft has over-invested in acquisitions and platform spending, Sharma and Booty also admit that Xbox has “not adequately funded” the company’s “industry-defining franchises.” That has been somewhat apparent to anyone paying attention to the steady stream of studio-level layoffs and game cancellations coming out of Redmond in recent years. And the company now acknowledges that a “reliable pipeline of first- and third-party exclusives” is “critical to our success,” a notable change from the multi-platform strategy it was pursuing with gusto just a couple of years ago.

Hardware is hard

On the hardware side, Microsoft is facing the same surge in storage and RAM pricing as the rest of the industry. But the Microsoft executives also say they “believe we have been impacted more greatly than many of our peers due to the choices we made over the last half decade,” a vague but worrying statement about Microsoft’s specific console supply chain issues.

While Xbox hardware sales had started cratering long before these cost increases came to pass, Microsoft says it’s now facing the somewhat opposite problem of being “currently unable to make as many consoles as players want to buy.” Taken as a whole, it all likely means that we’ll see a reprise of last year’s multiple Xbox price increases before too long.

The dire hardware component situation means Microsoft now says it will pursue a new “business model and partnerships for hardware” for Helix, the recently announced project that will play both Xbox and PC games. The mention of “partnerships for hardware” there is particularly interesting, given that Microsoft recently lent the Xbox brand to Asus for the Windows-powered ROG Xbox Ally. Maybe Project Helix will resemble Valve’s decade-old Steam Machines effort, with outside manufacturers releasing their own hardware running Microsoft’s OS and gaming platform at various price points and power levels.

As a whole, the “Xbox reset” memo paints a picture of a gaming brand that has endured years of scattered decision-making and meandering strategies. The document barely addresses the company’s cloud-centric strategy of the early 2020s, which led to overinvestment in a game streaming service that’s still a relatively small slice of overall Xbox usage. And while Microsoft’s Xbox Game Pass subscription once seemed like a ray of hope for the division, that service has recently been shedding millions of subscribers after massive subscription price increases last year, suggesting it had mainly succeeded by underpricing access to Microsoft’s own first-party games.

In the wake of Microsoft’s recent management shake up, it seems that rank-and-file Xbox employees will once again be the ones to bear the brunt of these and other bad strategic decisions. Bloomberg reports Sharma is planning an unknown number of layoffs across the Xbox division shortly after the June 30 end of the fiscal year, alongside “significant” cuts to marketing and other departmental budgets. Who knows, maybe having a gaming division with even less money and manpower will finally be able to turn things around for Xbox.