I've been covering Xbox and Microsoft for over a decade at this point, and the same problems keep coming back, time and time again.
For every good decision Microsoft makes, they seem to eventually inadvertently step on a rake, cartoonishly lying in wait. The community memes Xbox's decision making, "Xbox is so back. Xbox is dead," month in, month out, as Microsoft's inability to offer a consistent service and mission continues to play out like a bad comedy.
It's not just Xbox, either by a long shot. GitHub is in crisis as well. And Windows has a huge initiative called Windows K2 going on right now, specifically with a focus on quality.
CEO Satya Nadella himself said at the investor call last week that it needs to win back its customers, as Xbox, Windows, and other Microsoft product users flee to alternatives at a cadence that clearly has them rattled. Xbox is one thing, but how do you take a monopoly like Windows and manage to screw it up so badly? I guess we could also ask Skype, MSN Messenger, Windows Mobile ... and various other dead Microsoft products, but I digress.
The focus today is on Xbox, which has been something of a canary in the coal mine for Microsoft's current existential crisis.
Incoming Xbox CEO Asha Sharma has been making all the right moves and saying all the right things. Xbox fans are feeling positive and optimistic for the first time in years. I'm here to ruin it (sorry).
Even as Asha Sharma works around the clock to fight for Xbox's future, the truth remains: Xbox's biggest problems have not gone away. And the biggest of all those problems is Microsoft itself.
Asha needs to defeat Microsoft itself
For Xbox to survive, Asha doesn't need to defeat PlayStation, Nintendo, Steam, or anyone in the gaming space: she needs to defeat Microsoft itself.
Post Activision-Blizzard acquisition, for some odd reason, Microsoft came to Xbox with an insane and somewhat unprecedented aspiration: Xbox, the gaming company, would now chase a 30% profit margin target. A target that no other gaming platform in history has even come close to consistently.
Chasing this profit margin (known as an "accountability margin" internally) had an absolutely devastating impact on Xbox as an entity, with ramifications that will continue to play out long into the future.
The biggest victim of this accountability margin target is, by far and away, Xbox hardware, which may now be too far gone to recover.
Many headlines have been written about Xbox's free-fall quarterly hardware declines. -30%~, -30%~, -30%~ like grim countdown to midnight. It paints a picture of an Xbox that is undesirable to consumers, but that's not exactly accurate. The truth is even worse: Microsoft intentionally engineered this decline. We'll be talking about the number "30" here a lot today.
One of the things Microsoft sacrificed to chase these "aspirational" profitability metrics was Xbox hardware stock. Xbox Series X|S consoles are not sitting idle on store shelves. The demand is there. The stock isn't. Microsoft didn't purchase the units required to meet demand, quite clearly because the hardware itself doesn't translate directly into high margins. And now, in the year of Grand Theft Auto 6, Microsoft will have no Xbox Series X|S stock to sell. The memory has already been purchased by PlayStation and other firms that think annually rather than quarterly. And as the AI route continues to destroy memory inventory, there's absolutely nothing the new Xbox leadership can do about it.
It's the same short-sightedness that has typified Satya Nadella's Microsoft throughout his entire tenure. Nickel and dime today; panic tomorrow. We're now in panic mode across Microsoft's entire stack: Xbox, Windows, and beyond.
Indeed, documents seen by Windows Central and verified by proven sources revealed a range of options Xbox considered to try and meet Microsoft's "30% by 2030" accountability margin targets. These included every absolutely dire option you can imagine. It included things like cost-saving by cutting backward compatibility with Xbox One and Xbox Series X|S generations with future hardware, and moving towards "evolving to be more software-based vs. hardware-based."
The previous Xbox leadership fought to save what remains of Xbox hardware and get the upcoming next-gen Xbox Helix greenlit, complete with backward compatibility on top. But the previous margin aspirations remained ...
More short-term gains for long-term pain followed: putting games onto competing platforms, like PlayStation, helping Sony meet its own targets at the expense of Xbox's long-term viability as a platform. The fact that Microsoft engineered Xbox to have as little hardware stock as possible helped justify this move away from exclusives. And the stock situation remains in play, which is why you should not expect Asha Sharma to have a great deal of breathing room on exclusive games. At least in the near-term, Xbox has no stock to sell ... so why invest in exclusive games? Why invest in marketing Xbox hardware that doesn't exist to sell?
It's a self-perpetuating problem now, and at least in the medium term, selling games on PlayStation and other platforms will help Xbox invest in its future. But, it well and truly remains to be seen whether or not Xbox hardware will survive Microsoft's short-term auto-immolation on this front.
All of this is before we discuss the Xbox Game Pass Ultimate price hike, the attempt to put games up to $80, the total destruction of Xbox's customer service layer, and other misguided margin-chasing ideas.
Microsoft engineered Xbox's decline by chasing a grossly negligent, imaginary margin target — and now we're all seeing the negative impacts. Far from growing, even post-inorganic growth, Xbox has now started shrinking again. Good job.
Asha Sharma has only known success so far: will Microsoft let her succeed?
Microsoft sprinted towards a future that doesn't exist, arrogantly assuming players would sit down and take it. While it twiddled its thumbs, assuming it no longer needed to actually compete, PlayStation, Valve, and others have lined up to take advantage.
SteamOS is a real, genuine threat to Windows in gaming, and could eventually evolve to threaten Windows across the board. Google is also working on a desktop version of Android, complete with its own Xbox Play Anywhere-like premium gaming initiatives, armed with more capable AI integrations and Google Apps corporate services that are gaining ground on Microsoft 365.
Apple and Google will continue to prevent Microsoft services from gaining traction on mobile, taking advantage of Satya's short-termism over Windows Phone. PlayStation, Nintendo, and Valve have no intention of playing nice with Xbox either — knowing full well Microsoft has no Xbox Series X|S hardware to sell if it even wanted to. The water is thick with green blood, and for some reason, it was only Microsoft that couldn't smell it.
Asha Sharma has made the right moves and picked the low-hanging fruit. But the big problems Microsoft has created entirely for itself will continue for as long as the AI-induced memory shortage continues (which, by the way, Microsoft also helped engineer, ironically).
Asha Sharma will have to do the impossible: not only will she be competing with a surging Valve, a dominating PlayStation, and the Google/Apple duopoly. She needs to defeat Microsoft's miserable and defeatist short-termism.
Asha Sharma knows how to grow massive platforms. She's had nothing but constant success throughout her career thus far. After speaking with her, I firmly believe she will fight like hell for Xbox and its future. But, she will have to do the impossible: not only will she be competing with a surging Valve, a dominating PlayStation, and the Google/Apple duopoly. She will need to defeat Microsoft's miserable and defeatist short-termism.
Games take years to make — not quarters. Xbox needs a plan that spans years — not quarters. Fixing Xbox's image, desirability, and depleted trust will take years — and absolutely, not quarters.
RELATED: Ranking the biggest problems faced by Xbox CEO Asha Sharma
Windows K2 and the new Xbox initiatives are great ... for now, until Microsoft's top-level leadership loses its nerve, or some AI-powered Excel spreadsheet tells them to do otherwise. Saving Xbox will require full subsidization to correct the mistakes that CFO Amy Hood and CEO Satya Nadella made, as well as vast new investments in its Xbox PC efforts, as well as on-going investments in an increasingly competitive gaming franchise space. And further investments in finding ways to appeal to younger cohorts, which Microsoft (and the industry at large, frankly) has utterly neglected.
I'm not sure Microsoft has the stamina for all of this. So, I need you to understand that Xbox is absolutely not out of the woods yet.
Make no mistake, until Microsoft's top-end leadership shows it is capable of real long-term thinking, putting short-term shareholder greed to the side, Xbox, Windows, Surface, and all of Microsoft's products, services, and customers will continue to suffer.
I also believe with my whole heart that Asha Sharma will fight Microsoft's current tendencies for stagnation ... if she succeeds with Xbox, she'll have done the impossible. Perhaps the Microsoft CEO seat will follow someday as a result.
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