How Microsoft's Decision Making Led To Xbox's Troubles in the Market
One of the most notable developments in the console industry over the course of the last decade or so has been the collapse of the Xbox console platform. From trading blows with PlayStation on an equal footing (to the point that it actually outsold the PS3 for the bulk of that generation, with the latter only finally pulling ahead right at the very end), the Xbox brand then went on to fall to its competitor in a 2:1 lead with the Xbox One, before sales completely collapsed with the successor to that, Xbox Series – and this, in spite of Microsoft having made a series of moves that indicated a strong and competitive showing from them.
Today, less than five years after the Xbox Series launched, Microsoft has ceded the console market. While the company is still continuing to sell and support its own consoles, and has more hardware in the works – including a next generation Xbox platform, as well as an Xbox handheld in the vein of the Steam Deck or Nintendo's Switch – they have also started to port their games, including their core franchises such as Forza, over to the competition, including PlayStation 5. Sales of Xbox consoles have completely collapsed – current lifetime sales estimates for Xbox Series range from 26-35 million units as of November 30, to PS5's 75 million units shipped as of December 31. In other words, the best case for Xbox right now is that it is being outsold more than 2:1 by PS5, and the worst case has it nearly 3:1. Xbox sales last quarter were low enough to be comparable to the Wii U's worst quarters (and this happened during a Holiday quarter). Sales of Xbox have completely evaporated in Japan and Asian markets, as well as numerous mainland continental European markets such as Spain, France, and Italy. Xbox has also alienated traditional international strongholds such as Brazil due to their pricing policies over the last few years. Game Pass subscriptions have completely stalled as well, and growth from the console segment in particular has slowed down, per Xbox's CEO Phil Spencer. Physical sales of multiplatform games on Xbox have completely evaporated, to the extent that even Nintendo versions of several major multiplatform games outsell Xbox versions, even in traditionally strong Xbox markets such as the UK.
In other words, the Xbox console platform seems to be stalled, and Microsoft internally seems to be in the process of deemphasizing its importance – at the very least. We know at this point that Microsoft is not drawing any lines in the sand as to what games will come over to the competition, and we know that Phil Spencer wants to differentiate Xbox with features and capabilities, rather than exclusives. This is already indicating a retreat from the traditional console paradigm. Based on decisions they take in the future, there is a significant possibility that they will eventually end up scrapping maintaining their own platform entirely in favour of simply supporting other platforms with their own software – this is exactly what happened in the smartphone and mixed reality spaces, for example. The best case scenario currently appears to be that Microsoft keeps making their Xbox consoles even while they continue to support PC, PlayStation, and Nintendo with their games. Presumably, by keeping hardware parity with PlayStation and PC to the extent possible, they will also ensure continued third party support, at least for multiplatform games, even if sales are low – because if creating an Xbox build is cheap enough, then why not do it?
But it does seem like the time of the Xbox platform as an equal, viable, credible pillar of the console market has come to an end. While there is every chance Microsoft will still continue to support the product line, it at best may enjoy a position similar to the Pixel phones in the broader Android smartphone market (or Microsoft's own Surface line for the broader PC market) – a small, high end, niche reference device that is profitable and high margin, and does well for what it is, but ultimately has a small slice of the market.
How did we get here? What led us to this point? The Xbox brand's struggles are not down to one inciting incident, or one poor decision. They come down to a series of poor decisions and misreads of the market, one stacked on the other, with attempts at course correction misfiring – sometimes due to Microsoft's own poor decision-making, and sometimes due to factors outside their control. In this piece, I look at the major decisions that have contributed to the decline of Xbox hardware.
FIRST PARTY CUTBACKS
The very first misguided decision that Microsoft made was the severe contraction of their first party portfolio in the latter day Xbox 360 era. While in the Xbox days, as well as the early Xbox 360 days, Microsoft had attempted to cultivate a strong lineup of exclusives for the platform, via in-house development, partnerships with studios, and third party exclusivity deals, by the time Don Mattrick took over, things had changed. Mattrick decided to focus all in house development either on blockbuster franchises (such as Halo, Gears, Fable, and Forza), or on the development of software for Kinect (which we'll get to in a bit). All other extraneous developers and partnerships were shown the boot. Ensemble Games got shut down. Rare got assigned to exclusively Kinect games for a while. Microsoft let go of Bungie (the custodians of Halo, their crown jewel). Lionhead got assigned to making a Kinect version of Fable. Microsoft didn't step in to acquire BioWare (with whom they had worked on Mass Effect and Jade Empire), letting EA pick them up instead. Microsoft didn't step in to acquire Bizarre Creations (with whom they had worked on the Project Gotham Racing franchise), and they ended up shutting down. Smaller first party projects such as Crackdown or Alan Wake got no immediate follow ups.
Instead, Microsoft decided that with Xbox getting all third party games as a default, they would focus on getting exclusive content and features for those on Xbox, supplemented by their flagship franchises as tentpole releases for the core audience, and their Kinect releases for the expanded audience. Unfortunately, this started a trend and a refrain that would continue to haunt Xbox from this point on, and would not be addressed until it was too late – the issue of Xbox lacking strong, system-selling, exciting exclusive titles to invite customer interest and investment in the platform. With Sony especially doubling down on in-house quality exclusives in this period, with titles such as God of War 3, Klllzone 2, Uncharted 2, and of course, The Last of Us, really making waves with core audiences, Microsoft suddenly and unexpectedly found themselves on the back foot with the all important core audience going into the next generation. And that's when the problems really started to manifest.
MISREADING THE MARKET
The latter half of the Xbox 360's life cycle coincided with an oft-repeated observation by several industry analysts, to the point that it became accepted wisdom, unquestioningly. The success of the Wii, the success of gaming on social media platforms like Facebook, as well as the success of smartphone and tablet gaming, juxtaposed against the struggles that the console and PC market were seeing at the time, led many to conclude that traditional video games were on the way out, and would be replaced and subsumed by mass market video game paradigms such as smartphones and tablets.
Microsoft attempted to respond to all of this in one go with the Kinect, which ended up being a huge success on the Xbox 360. Presumably the success of the Kinect emboldened Microsoft and convinced them they were on the right track, because they ended up misreading the market entirely. For the Xbox 360 successor, they made not a powerful, straightforward developer friendly machine that was focused on delivering compelling games that wouldn't be found anywhere else. Instead, they set out to make an iPad for the living room. The Xbox One would be a media-focused box, with the Kinect as a mandatory part of the interface. The result was that the final box would end up being underpowered compared to the competition, and straddled with an unnecessary gimmick that core audiences had not asked for, and even the expanded audiences that the original Kinect captured had gotten bored of and moved on from. It was underpowered and overpriced, costing a whopping 25% more than the PlayStation 4 at launch.
Unfortunately, this wasn't the extent of the missteps and misreads either. Microsoft's tunnel vision in focusing on a media box for the living room ended up in them creating a product that was singularly U.S.-centric (this, again, is a problem that would haunt them from here on out, and is something we'll look at more in-depth soon). Their other misreads, however, ended up antagonizing customers everywhere. Perhaps responding to the cries of the danger that the used games market allegedly seemed to pose to the industry at the time (this never ended up panning out), or to force a shift to a digital paradigm well before the market was ready (again, this ended up alienating a lot of global markets), or because it legitimately was needed for the cloud assisted computing that Microsoft was pitching as a big part of the Xbox One – whatever the reason, the Xbox One required an always-online connection with mandatory check-ins to validate what you were playing. Used game sales were blocked, and customer ownership of the games they played was reduced to being an easily controlled and revocable license.
The outrage from all of this was immense, and it meant that, in spite of the strong sales performance of the Xbox 360 in its later years, Microsoft was headed into the launch of the Xbox One forced on the back foot. The pre-launch period of the Xbox One, as well as the year or so immediately following its release, was marked by mixed messaging and constant walkbacks by Microsoft in an attempt to placate the audiences they were trying to sell to – from completely removing the online requirement and game DRM, to eventually dropping the price (until it was eventually lower than even the PS4, at least for a while), to disbanding and eventually discontinuing the Kinect.
Unfortunately, while Microsoft had been busy shooting itself in the foot and then trying to bandage itself up so it could get back in the race, Sony had brought the PS4 to the market, a console, that seemed to be designed exactly along the lines of the Xbox 360 when it was first brought to the market – powerful, straightforward, elegant, developer-friendly, and cheap, with a focus on a bunch of compelling games that it was promised would not be found anywhere else. The Xbox One launch was a monumental setback for the Xbox brand, coming down to the several misreads of the market Microsoft made in succession back then. However, it was not irreparable – we have seen companies be in similar situations previously and come back from it. Sony did it with the PS3, and Nintendo did it in the same generation as the Xbox One with the Wii U followed by the Switch. Xbox could have mounted a comeback. Unfortunately, their poor decision making and reads of what the market continued from here on out.
CONCEDING THE GLOBAL MARKET
Without question, this is the biggest Achilles' Heel that Xbox consoles have had since their very inception. Xbox was perceived as an unusually "American" brand from the get-go, and this ended up having ramifications over the years. Xbox's branding was America-centric, and Microsoft also consistently failed at properly marketing their console to global audiences. Where Nintendo and especially PlayStation had built up appeal in multiple markets around the world, which would show up for their new hardware and games no matter what, Microsoft seemed to be content focusing on the Anglosphere and Latin America, almost entirely ignoring continental Europe, the Middle-East, Asia, and Japan. We discussed this in the earlier section, with how the Xbox One's functionality had been designed around and catered to the U.S., but the problems ran deeper than that. Microsoft would launch major releases globally with no support for local languages. The UI would be machine-translated for major markets like Germany, leading to distinctly subpar experiences. Microsoft would barely market their games or products in markets outside the Anglosphere. Major system features would come much later to non-U.S. markets, or be severely cutback when they came, or they would never come at all.
Over the course of several years, multiple decades, Microsoft has consistently failed to treat non English speaking markets with the same importance that it treats English speaking ones. Localization, UI, marketing, game releases, all are subpar for most markets globally that do not speak English. These are the very markets that Nintendo and Sony have cultivated a loyal audience in. In these markets, Microsoft ended up essentially relegating itself to an also-ran non-entity, presumably running the calculus internally that focusing on the big money-making markets was more profitable. However, even if markets such as Germany, France, Spain, India, or Japan may not contribute as much to lifetime console sales as the U.S. may, they are certainly major markets – all put together even if not individually. Microsoft ended up foregoing 10s of millions of units of sales to their competition without even trying to fight for them. This was, is, and continues to be the single greatest issue Microsoft's Xbox efforts face. By willingly relinquishing most of the global market to their competitors,
PC RELEASES
Consoles have differentiated and sold themselves on the promise of major exclusives. This has been a paradigm that goes all the way back at least to the NES/Famicom. Platform holders either try to develop compelling exclusives in-house, or secure them from development partners. Even when exclusives aren't the best selling games on most consoles, they are what prompt adoption of a console among enthusiast and core audiences, adoption that then ripples across the mainstream mass audiences. Exclusive releases often coincide with spikes in console sales, and also stand as demonstrations of a system's capability, all while also generating buzz and discussion around the console.
Microsoft gave up this advantage at least partly in the Xbox One era, when they committed to releasing every single first party release on PC and Xbox simultaneously. The initial impact of this was low – Microsoft initially did not release PC games on Steam (meaning their PC releases were rejected and ignored by the bulk of the PC market), which left those games functionally Xbox exclusive for a large portion of the market. Moreover, Microsoft also launched the Xbox One S, a very popular redesign of the Xbox One that boosted sales. However, after Microsoft committed to PC releases on Steam, their global console sales started dropping sharply. After 2016 (the release of the Xbox One S, and the final year where flagship Xbox games did not get day and date Steam releases), every following year saw sales decline over the previous year, right until the launch of the Xbox Series.
The effects continued even beyond the Xbox One generation – the Xbox Series, for example, notably did not see a console sales spike (and in fact saw a decline) the release month of Starfield. Microsoft spent over a decade conveying to people that they didn't particularly mind if players played their games elsewhere other than an Xbox. Especially in light of the other issues and struggles conveyed above, players who wanted Xbox games decided to take Microsoft up on that, to the point that, especially with the rise of PC gaming over the last decade, even well before Microsoft decided to bring their games over to PS5, they had more or less conceded the exclusivity advantage entirely.
FOCUSING ON THE WRONG THINGS
I mentioned earlier that Microsoft's misreading of the market did not end with the Xbox One era, but instead, continued onwards. This is a series of smaller decisions, each of which was misguided, and none big enough to really register on its own. However, all of them cumulatively do start weighing, and they are a good representation of the systemic issues Microsoft's Xbox division has faced.
Poor allocation of development resources. This manifested in the form of games that released repeatedly in an poor state, relying on post-launch updates to fix them - Halo MCC, Sea of Thieves, ReCore, State of Decay 2, Crackdown 3, Halo Infinite, Redfall, Starfield. It resulted in a lot of premature announcements and cancellations. It led to multiple titles getting stuck in development hell, and/or releasing at a quality level lower than expected.
The focus on continuity and compatibility with Xbox Series meant they were supporting existing controllers, accessories, and UI settings and preferences. Smart Delivery meant delivering a smartphone style seamless experience for cross-get hardware. Unfortunately, these were all effort expended in the wrong direction. While the innovations were appreciated, their absence was a deal-breaker for no one, and the market, in fact, seemed to prefer a more discrete generational break, of the sort the PS5 delivered.
Choosing to focus Xbox production on Series S for cloud streaming stacks, handcuffing Series X output for a whole year and a half, practically handing Sony the lead with the PS5 for the generation. Cloud gaming itself would prove to be a dead end, meaning Microsoft sacrificed console sales for growth in a segment that it yet to properly manifest at large.
Foregoing exclusivity not just for their own titles, but also with third parties. Microsoft chose to instead focus on Game Pass day one releases for third party deals, meaning games they had marketing deals for were still launching on PS5 with full content and feature parity. This was different from the sorts of third party deals Sony was getting in, where either the game was exclusive to their console outright (at least for a while), or had exclusive content and features, or if nothing else, was only allowed to be marketed with their branding, leading to the perception of the game being exclusive to their system only.
To Xbox's credit, a lot of these changes were explicitly pro-consumer, and sought to remove the unnecessary friction or expense related to console gaming. Bu it was a misread of the console market, and of what the console market, above all else, wants – high quality hardware, with multiple high quality games to truly substantially show it off and induce a purchase.
ACQUISITIONS
The one that probably dealt the final death blow to Xbox as a console platform. Microsoft's acquisitions were meant to address an issue they had had since the Mattrick era – their poor lineup of compelling games and exclusives. To address first party deficiencies without having to wait for the process of setting up a studio, incubating its development pipeline, cultivating and attracting talent, and slowly and organically growing the studio to be world class – the sort of thing that Sony and Nintendo had done – Microsoft decided to use the considerable financial resources at their disposal, and go shopping for existing studios. It started innocuously enough – purchasing indie developers that needed the financial support (such as Obsidian and Ninja Theory), or purchasing developers that had been functionally Xbox first party developers anyway (such as Playground).
Then they escalated it to buying a publisher outright with Bethesda. Bethesda's situation was unique – they had multiple high quality brands and developers, but as a publisher they had struggled financially. They were entirely privately held, so easy to acquire outright. And they were small enough that it prompted to regulatory oversight.
Unfortunately, the next acquisition Xbox tried was Activision Blizzard. This was a gigantic investment, and while with ABK under the Microsoft Gaming umbrella, Microsoft saw revenues spike immensely, the $70B investment that the purchase entailed meant that the Xbox division was now under intense scrutiny from Microsoft shareholders and the board in a way it never had been until then. Until now, Xbox had been able to fly under the radar so to speak, with any money it was making (or losing) small enough that it never particularly registered for any notable stakeholder. But with $70B spent in a prolonged drawn out regulatory battle to get ABK, Microsoft expected returns on the purchase right away. Unfortunately, that is counter to how the console platform business works, which would entail slowly building the brand over the course of years with a series of high quality releases, which themselves may underperform relative to potential until a critical mass of momentum was hit (this was the exact playbook Sony adopted in the PS3 era).
Instead, with the pressure to deliver returns right away, Xbox had no choice but to opt for multiplatform releases, sporadically initially, but soon enough, across the board. Which was the final step that led us to the point where Xbox has been de-emphasized, and Microsoft has functionally "gone third party".
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Ultimately, Microsoft is still in a good place as far as their games business goes. They will now get to enjoy the fruits of being the biggest third party publisher for video games in the world. However, they did sacrifice their console division in the process. Whether or not that ends up being healthier for them, and for the market at large, does remain to be seen. But right now, after this tumultuous decade and a half Xbox has gone through, we have ended up at a point where Xbox's importance to the console market is going to dwindle even further in the coming months and years.
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