25 years later, Xbox is trying to reinvent itself again

Microsoft has spent the past 25 years trying to shake up the game console market. The original Xbox, which launched on November 15th in 2001, took on an industry dominated by Sony and Nintendo. Twenty-five years later, Xbox finds itself in a similar position. It’s not starting from scratch this time around, but to reach another 25-year milestone, it needs to do something radically different.

The original Xbox was radically different. Born out of a fear of Sony putting a PC in the living room, Microsoft built its first game console around familiar PC technology. A custom Intel Pentium III processor powered the original Xbox, alongside an Nvidia GPU and 64MB of unified RAM. It was different from the fully custom architectures that Sony and Nintendo used at the time, allowing Microsoft to entice developers to its platform with tools that were more familiar to PC game makers.

Microsoft also included two hardware features that were unusual for a console at the time: a built-in hard drive and Ethernet port. The hard drive let game developers cache content without having to rely fully on optical discs, and Xbox players could also use it for game saves without having to purchase a separate memory card. You could even rip CDs to an Xbox and listen to custom soundtracks while playing games.

Xbox wasn’t the first to bring online gaming to consoles, but Microsoft took a different approach. Instead of relying on a built-in modem like Sega’s Dreamcast, Microsoft included an Ethernet port, anticipating a shift toward broadband internet connections. Xbox Live, which launched in November 2002, really nailed the entire online experience. There were friends lists, unique gamertags, voice chat through a bundled headset, and integrated multiplayer services. Microsoft created an entire platform for online gaming, making it easier for developers to support and fundamentally changing how people played games together.

The Xbox 360 took these ideas a step further, with swappable hard drives, digital game downloads, wireless controllers, and backward compatibility. It also turned Microsoft’s game console into an entertainment hub for the living room, complete with streaming video apps. Kinect was perhaps its most radical addition. Launched in 2010, the motion-sensing device used cameras and microphones to let players control games with their bodies and voices. It quickly became the fastest-selling consumer electronics device in early 2011.

But the success of Kinect and Microsoft’s ambition to turn Xbox into a home entertainment device helped lead to its first major strategic misstep with the Xbox One. Microsoft positioned the successor to the Xbox 360 around TV, entertainment, and an always-online future, instead of focusing on the games that had made Xbox successful. Its plans for online DRM and restrictions on used games sparked a huge backlash, while bundling Kinect pushed the console’s price $100 above Sony’s PlayStation 4. Six months after launch, Microsoft was forced to drop Kinect from the Xbox One console bundle to close that price gap.

The Xbox One showed what happens when Microsoft loses sight of what gamers want. The company spent most of that generation playing catch-up to Sony’s impressive PlayStation 4 sales. But its weakened position also forced Microsoft to once again try something radically different with Xbox Game Pass.

Introduced in 2017, Game Pass shook up the very economics of how people play games. The subscription service lets you access hundreds of games instead of buying them individually. Microsoft went on an acquisition spree to power its Game Pass ambitions, buying up smaller studios, Bethesda, and eventually Activision Blizzard.

Game Pass has become one of Xbox’s most compelling features, but it has also raised difficult questions about the economics of putting all of Microsoft’s first-party games into a subscription service on day one. It has pleased Xbox fans, but Microsoft hasn’t demonstrated that it can turn the service into the mass-market success it once envisioned. Microsoft has also stopped regularly disclosing subscriber numbers, making it harder to judge if the service is growing or not.

These days, Microsoft is spinning many Xbox plates. The Xbox Series X and S consoles that launched in 2020 are way behind Sony’s PS5 sales numbers, and Xbox Cloud Gaming hasn’t yet been able to reach the millions more players that Microsoft has always wanted for its ecosystem.

Xbox Cloud Gaming promised to make games accessible on phones and tablets without needing a dedicated console, and combined with Microsoft’s messy project to bring Xbox games to PS5 and Nintendo consoles, the efforts have raised questions about what the Xbox brand actually represents these days. Microsoft hasn’t quite decided whether it wants to be a full third-party publisher, an ecosystem owner, or an unusual combination of both.

Some of Microsoft’s recent radically different Xbox bets haven’t paid off, so it’s now turning its attention to a much smaller Xbox division, with a restructuring that will see overall Xbox headcount reduced by 20 percent by the end of Microsoft’s fiscal year in June 2027. “I believe the future of gaming will look more like its beginning, when a small team with a big idea could change how the world plays,” Xbox CEO Asha Sharma wrote in a message to Xbox employees today.

Microsoft is celebrating 25 years of Xbox today with an event in Seattle for fans, where it’s launching Xbox Playback, a personalized look back at players’ 25-year Xbox history. There will be more fan-focused announcements throughout the day, but I’m not expecting any news on the next Xbox console. The celebration is awkwardly timed, because rumors have suggested that Microsoft is also preparing for more Xbox layoffs in November, during the same month it’s celebrating a milestone.

The reset also comes as Microsoft is preparing for a next-generation Xbox console, codenamed Project Helix, which will play both Xbox games and PC titles. It sounds like an effort to combine Windows and Xbox like never before. The next Xbox could also play every Xbox game ever made, thanks to Microsoft’s impressive bets on backward compatibility over the years.

It’s an interesting full-circle moment. The original Xbox was essentially a PC built for the living room. Project Helix appears to be taking a similar approach, but this time around bringing the flexibility of PC gaming into a console experience. If Microsoft gets it right, it could open Xbox up to a much bigger library of games, and entice people trying to decide between a console or a gaming PC.

The problem for Xbox is getting consumers to care about this next console, especially when its games are available on PC and sometimes on Sony’s and Nintendo’s platforms. “Xbox has the best console ecosystem around, packed with consumer-friendly features like free cloud saves, Game Pass, and my preferred controller,” says Jon Clarke, cofounder and editor-in-chief of DayOne. “None of these things are particularly sexy or flashy. They’re simply features that work, and that can make them difficult to get customers excited about.”

Rebuilding the Xbox brand and launching a new console gives Microsoft an unusual opportunity to make another bold bet on the future, just like it did 25 years ago. But the risks this time around are greater, after more than a decade of trying and failing to catch up to the competition.

“Up against competitors that have firmly established their place in the market, Xbox finds itself in a difficult position,” says Clarke. “Rebuilding the brand will be an expensive endeavor, and the bold ambition of combining the best of console gaming with the openness and flexibility of PC is easier said than done.”

Xbox also needs good games, and after years of studio acquisitions it now has plenty of IP to play with. “Many of those franchises have lost their luster owing to years of mismanagement and potentially a generalized lack of vision,” says Jez Corden, executive editor at Windows Central. “Microsoft from the top will need to be willing to invest here to ensure Xbox’s franchises can not only find new audiences, but simply maintain what they already have.”

Xbox also faces the challenge of RAMageddon’s impact on the hardware industry right now, pushing the prices of components beyond levels that consumers can comfortably afford. “If Xbox is to reclaim any of its former glory, innovating on the costs of the traditional video game ‘console’ will be absolutely paramount, otherwise it’s hard to imagine that it will continue to exist in its current form,” says Corden.

A console projected to cost between $1,200 and $1,800 won’t grow the Xbox ecosystem. It could make more sense to let PC makers build their own Xbox hardware, opening up the platform to a wider range of prices and devices rather than relying on expensive flagship consoles.

Twenty-five years ago, Microsoft built a PC and called it an Xbox. Now it’s preparing to build something that looks increasingly like a PC again, only this time it needs to convince people that it should still be called an Xbox. Microsoft has another opportunity to shake up the console industry, but its biggest challenge might be convincing players that Xbox needs to exist as a console at all.