← Decoder with Nilay Patel
Decoder with Nilay Patel
Inside Xbox's executive shakeup
00:43:08
Xbox boss Phil Spencer is retiring, and the future of one of the video game industry’s major pillars looks more uncertain than ever.
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Host (Intro/Outro Announcer)
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Tom Warren
For a lot of Americans, credit card debt feels like a fact of life.
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Host (Intro/Outro Announcer)
I think it's just important for people
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Tom Warren
to understand how credit can work for you or against you, why that little piece of plastic has so much power.
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Host (Intro/Outro Announcer)
That's this week on Explain It To Me.
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Tom Warren
Find new episodes Sundays, wherever you get your podcasts.
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Neil I. Patel
Hello and welcome to Decoder. I'm Neil I. 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 of 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 parental leave right now, but Microsoft has 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. There's a lot to say about Xbox. The story of the console and Microsoft gaming is a complicated one, with a lot of twists and turns since that first Xbox console made its big splash in the industry 25 years ago. But for a majority of the time since, it's been stuck in third place behind Nintendo and PlayStation. That's a surprising thing to say for a division of a company worth trillions of dollars that also owns some of the celebrated gaming properties in all of entertainment. And so Phil Spencer, who started at Microsoft in the late 80s and took charge of Xbox in 2014, was given the job of trying to turn things around. Since then, he has tried many things. The Netflix style Game Pass subscription service, a major push into cloud gaming, buying Activision Blizzard King, which makes Candy Crush, and many, many different iterations of Xbox hardware as of last year. He even had plans to bring Halo to PlayStation, something game industry insiders thought was basically impossible five years ago. But as you'll hear Tom explain, the game industry has been changing faster than Xbox has been able to transform itself, and almost none of Spencer's strategies have ever really clicked. Xbox is still far behind Nintendo and PlayStation, and in PC games, it still stands in the shadow of Valve, which runs the dominant Steam store and now makes the Steam Deck handheld. Microsoft has spent tens of billions of dollars trying to acquire its way to a stronger position against the rise of games like Fortnite and Roblox, mobile giants like Tencent, and a zero sum war for attention dominated by app like YouTube, Instagram and TikTok. And yet it has very little to show for all of that. And so today, Phil Spencer's grand vision of 100 million game pass subscribers streaming Xbox games to whatever screen they want on a cloud platform, well, that feels out of reach. But as Tom says, it's not lost forever. Xbox is far from dead and there's hope that new leadership will take some big swings and make something happen again. 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.
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Tom Warren
Yep, this happens every time I take vacation or leave. Microsoft decides we're going to do we're going to do something massive and ruin Tom's life.
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Neil I. Patel
That's just punishment for all of the scoops you have dropped on this 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.
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Tom Warren
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 replacement, replacing Phil Spencer, essentially. So, yeah, big news, A big shake up, 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.
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Neil I. Patel
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.
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Tom Warren
I think there's two surprises, right? It's obviously that Sarah wasn't named Xbox Chief and that Asher is the, the successor because that just was. Wasn't. Yeah, that was a. 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 stepped back a little bit since the Activision Blizzard acquisition a little bit publicly, but yes. So Sarah's kind of become the face of exports during that time and, and she took over the, 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, that's a, that's a change in itself, right, because it's usually Phil. So I think everyone just kind of thought, okay, well she's been prepped for, to be Phil's replacement eventually, whether it be, you know, a couple years, five years, whatever, it didn't happen. But behind the scenes, I know the Xbox fans had heard, expected that this was going to happen. Sarah Bond would be there, 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. 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 surprised to see Asha named. Right. Like that was. 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 game, it's like, particularly with Xbox, I think, because Phil has kind of instilled that, that over the years they come to that expectation. So. So yeah, I think that was the surprise of it. But I don't think Sarah Bond was a surprise to me.
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Neil I. Patel
I want to come to Asha, the new leadership and particularly sort of 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 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. And I kind of see this and I say, okay, if I'm such an Adela 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. None of this came to anything. We got to reboot this whole thing. Does that feel as important inside Microsoft as maybe Sarah wasn't the right person?
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Tom Warren
It's a couple of things, right? So obviously Microsoft came in as balloon 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 get like the corporate Microsoft was saty Nadella and Amy Hood putting the pressure on that new division to, you know, return, return the money that they've invested into, 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 accele, you know, get. Getting more people using export services essentially. So that became the strategy of like, okay, we need, we need to get to TVs, we need to get to mobile, 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, improve those margins, essentially. So, so when you're trying to pin blame on whoever it is, it's like it comes from the top ultimately. Like Satya and Amy, they, they're pushing these margins and I think they're slightly unrealistic in the context of gaming anyway. Like there' margins that Sony has, for example, they've put the pressure on. Phil has, I think he's, he's kind of stepped away a little bit over the last couple of years, so not so laser focused on Xbox. And then that's allowed Sarah to have a lot of power over Xbox and accumulate like marketing power and do. Do the. This is the exports campaign in her own org. 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.
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Neil I. Patel
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 I 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 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.
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Tom Warren
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 you. And that's how you're going to get more users, right, ultimately into your. 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 years. I think that that's been the problem 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.
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Neil I. Patel
Right.
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Tom Warren
Yeah. And I think that's kind of where Ash is coming in.
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Neil I. Patel
We need to take a quick break. We'll be right back.
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Host (Intro/Outro Announcer)
Support for decoder comes from Adobe. For every big idea, your Documents folder tells a story. Let's say you've just finished pulling together a brief. So you hit export on final version PDF, but then you open the file and you immediately notice a typo. Several versions later, you're exporting final v4 actualfinal draft PDF. Adobe Acrobat Studio can save you the digital clutter with PDF spaces. It takes your document and turns them into a living project that you can engage with, get insights from, and collaborate with others on. You can gather all your files into one workspace and have a whole conversation with your AI assistant about it and ask questions to get deep insights about your project. You can even invite people to your PDF space and let them add files, comments, notes and more. You could doodle in the margins or even turn your project into your own personal podcast episode. Acrobat Studio lets you generate an audio overview of your project in just one click. Learn more at adobe.com dothatwithacrobat. Support for the show comes from Shipstation. If you're a fast growing business, one of the quickest ways to stop momentum is getting buried in shipping. So if you're constantly bouncing between disconnected apps just to get orders out the door, it might be time to take a look at ShipStation ShipStation is a simple, all in one platform that centralizes order management, rate shopping, inventory and returns, warehouse tools, and powerful analytics in one convenient dashboard. Shipstation says that by sharing tracking details, you can cut customer service inquiries by 12% and the returns management system gives you data on what's coming back and why. You could try Shipstation for free for 60 days with full access to all features. No credit card needed. Just go to shipstation.com and use code decoder for 60 days for free. 60 days gives you plenty of time to see exactly how much time and money you're saving on every shipment. That's shipstation.com code decoder shipstation.com code decoder Support for this show comes from LinkedIn. For small businesses, every hire matters, but the time and resources required to hire right are Limited. Luckily, LinkedIn Hiring Pro is built for that reality. It's your hiring partner, designed to help you hire with confidence by servicing only the right candidates without turning hiring into another full time job. Hosting a job isn't always the hard part. It's finding, connecting with and screening the right candidates. Hiring Pro streamlines the entire process from drafting your job to shortlisting candidates and conducting AI powered interviews for initial screenings. Conversational interface lets you describe what you need in plain language. No recruiter jargon needed. Nearly 60% of hires find a candidate to interview within a week. With Hiring Pro, you spend less time searching and more time connecting with the right talent. Hire right the first time, post your first job and get $100 off towards your job post@LinkedIn.com partner. That's LinkedIn.com partner. Terms and conditions apply.
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Neil I. Patel
Hey everyone. This segment of decoder sessions features my boss Helen Havelack, the publisher and l' Oreal Group's Global Vice President of Tech and Open Innovation. I think you're gonna enjoy this conversation.
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Tom Warren
We're gonna start with with a decoder. Classic question Giv what does tech and open innovation mean at l'?
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Neil I. Patel
Oreal?
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Tom Warren
Who is on your team? What kind of projects do you work on?
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Helen Havelack
Open Innovation is all the partnerships that we have in l', Oreal, working with startups outside, and it's really a great time right now to be doing open innovation because we're doing things in vertical farming and sustainable cultivation and biotech. So we do all those partnerships and our team is responsible for them. And the Augmented Beauty team is all the tech tech that started 15 years ago when we kind of had a blank page. And now how can we bring beauty and Tech together.
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Tom Warren
How do you decide which projects to invest in?
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Helen Havelack
At the beginning, I was trying to push as much as I could to get people to think that beauty was relevant for tech. So we were really tech centric. And then over time, we started thinking about how to look more at beauty products that we can upgrade thanks to tech. And so we have a little bit more kind of process behind how we choose projects. Now we try and kind of do things like upgrading the hairdryer to be able to do three out of four people have a hairdryer at home. And so how can we make it better? Or this year, like the flat irons that we're using and LED masks and stuff like that. So we do have a little bit of that kind of process, but we leave some space for serendipity and some creativity. So we have scientists all the way to engineers, and we let the scientists kind of think of some new clever ideas, too.
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Neil I. Patel
We're back with Verge senior reporter Tom Warren talking about the future of Xbox. Before the break, we're discussing why executives Phil Spencer and Sarah Bond are out after years of trying various strategies to help Xbox catch up to the competition. But now I want to get back to where those plans came from and pinpoint where it all started to go off the rails. 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 they'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?
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Tom Warren
So going back to, like, where it all started, this mess with Exports, essentially, is Exports one where they failed that. That sort of era. And what happened at that time is the place.
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Neil I. Patel
This is like 2013. This is over a decade.
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Tom Warren
2013. Yeah. Yeah.
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Neil I. Patel
Okay.
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Tom Warren
And that, that led up to kind of 2017 and the launch of XCAD and all that sort of st. But going back to that sort of era, they. They lost that generation.
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Phil Spencer (clip)
Right.
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Tom Warren
And it was a huge. A huge cost to them because that's when 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 from, away from those libraries now. So they knew they'd lost that, that real key generation. So the response was this. Do Game Pass because that will allow people to bring their games to different devices, you know, so cloud vision, mobile, etc. So I think that was the only kind of response they could. And it was, 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, 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, you know, the costs for developing games, which frankly are just getting more, 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 Experts. 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, with these attachments to your phone, essentially.
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Neil I. Patel
It's worth noting that they ran into Apple's App Store rules. They were not able to do this in a way that actually worked.
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Tom Warren
Exactly. So they hit a bunch of regular hurdles. They had to launch it as, as a Xbox.com play in your browser. You couldn't get an app or anything like that. So that completely knocked them back.
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Phil Spencer (clip)
Right.
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Tom Warren
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 he was very. Yeah, they were very restricted in what they could do. So that kind of put their strategy back. Now who you blame for that?
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Neil I. Patel
Like, I Think you can blame Apple in a very significant way. Yeah, there's like pretty major antitrust ramifications of that that Apple is still feeling.
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Tom Warren
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 exports mobile store. So we've moved on from, you know, having an exports 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 that was 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 two years ago. So. And it hasn't happened A lot of that idea of going for, for mobile recently and, and trying to do this cloud store thing has just been over promising and under delivering and relying on registry change. That just hasn't come.
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Phil Spencer (clip)
Right.
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Tom Warren
Or it's come and, and whoever's, you know, whether it be Google or Apple, they've appealed.
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Neil I. Patel
Right.
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Tom Warren
We just pushed it down the 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's gonna. It. It fundamentally will eat into those, 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 they've been up play like 50% getting past 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, it hasn't been going smoothly, let's be honest, over, especially over the past couple of years.
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Neil I. Patel
So it's really funny. 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.
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Phil Spencer (clip)
We don't have this vision of everybody's paying US$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.
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Neil I. Patel
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 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 one day, five years from now wake up and it's all streaming and subscriptions, or is it?
- [26:01]
Phil Spencer (clip)
Now? 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, such that subscriptions will be part of the solution, but not the only solution.
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Neil I. Patel
Even as Phil was saying that to me, I was thinking, I don't believe you. But 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 15amonth from every single Xbox gamer?
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Tom Warren
The interesting thing is when was that? That was in 2022 that you spoke to.
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Neil I. Patel
Yeah, it was just. It was right around. Yeah, 22. Right around the Activision.
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Tom Warren
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. Exactly. I think it was 2021 or 2022. But they, they did a slide deck the. The hardware gaming team which leaked in the FTC trial and it was like 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 four years. Right. Like that growth is not, it's just not there for them at 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 exports, content and services revenue. We don't see it being much bigger than that.
- [27:54]
Neil I. Patel
And that's when they bought Activision. Right. That interview was right after they'd announced the deal. It was before it closed, regulatory approval and everything. But their thesis for buying Activision was we need to be a bigger player in mobile because that's where the new gamers are and Activision has all these mobile games and actually Call of Duty, which is what everyone is focused on, is the least of our concerns here. What we're after is King. We're after Candy Crush and all of the mobile IP that Activision has to offer us. I'm looking at it, you know, from a pretty outsider perspective. I don't think this has worked out. I don't think this has played out well for them. What do you think?
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Tom Warren
It's still early days and they've consumed it in a way that it's hard to tell. Right. This is the classic thing with Microsoft's financials. Every quarter they hide something else that's not, not quite working into. Like they've done Surface devices. They, they used to do Surface revenue. Now it's Windows and OEM and devices. So they bundle that stuff when it's not quite working. So I think we'll know if it's not quite working when they start doing tricks like that. But at the moment it's still too early to say. But I mean the mobile side, like I said with the Xbox mobile store earlier, I think the King stuff would have definitely played heavily into that. Like they, they could have sold exclusive content in that store and not have to pay 30 cut to Apple, Google, you know, Valve, etc. So I think there was, there was a vision for that to be additive to the business and the growth and everything. But yeah, I mean the mobile stuff is still, I don't know their mobile strategy really.
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Neil I. Patel
Actually, Phil was clearest about this when he was on, in, in 2022. Let's play that clip because I'm curious to see your reaction to this in the context of the news today in
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Phil Spencer (clip)
terms of the opportunity, and I keep saying this over and over and it is true. It definitely starts with a view that people want to play games on every device that they have. And in a funny way, the smallest screen that we play on is actually the biggest screen when you think about install base in phone. And that's just a place where if we don't gain relevancy as a gaming brand and I think other. We're not the alone in seeing this over time, the business will become kind of untenable for any of us. That if we don't, if we're not able to find customers on phones on any screen that somebody wants to play on, that you really are going to get segmented to a niche part of gaming, that running a global business will become very challenging.
- [30:29]
Neil I. Patel
So I listen to that and I think, well, Nintendo exists. They seem to be doing just fine without being on phones. Sony is running what seems like a fine business in the PlayStation without running on phones. And then right next to all of this, arguably the most interesting category of gaming devices in the past five years is Steam Decks and Steam Deck alikes, which are all running Windows games. Better on Linux than on Windows.
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Tom Warren
Yeah.
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Neil I. Patel
And I'm actually kind of at a loss here, right. There's this desire to put mobile games on Apple's platforms on Apple's terms and this very clear statement that if they don't do that over time the business will become untenable and then the rest of the industry is not doing that at all. And they seem to be fine. How do you reconcile those ideas?
- [31:13]
Tom Warren
Like obviously with Nintendo, they have a strong collection of ip, right. That they can leverage and they can be exclusive and they're always putting out great content that people buy the hardware for. They don't have a problem there. Microsoft's gaming output over the last decade hasn't been the strongest.
- [31:30]
Neil I. Patel
Right.
- [31:31]
Tom Warren
Recently it's got a lot better. But they didn't have the respect of the industry for their content either. They just don't do the sort of storytelling that Sony does with PlayStation games. They don't do that sort of content. So they've had a content problem, which is hence all the acquisitions, right? But I think with the, with the mobile stuff, it's like what essentially Phil is saying here is that we need all this content to pull eyes away from TikTok, right. To put. Because no one is buying our console of a certain age, right. And they're worried that people my age in like 30s, 40s, and they're the people that are keeping the consoles, but no one in their 20s right now is buying a console anymore. Like that's, that's their worry. And then the next generation is not going to buy consoles. That's starting to impact Sony as well. It's not a unique thing to Microsoft. Don't know so much about Nintendo because they're, you know, they are very unique definitely with the Switch, but I think that's their one and that's driven this whole thing for content. This, you know, we, we need content. We need a way to get people on mobile. We need to, you know, get, meet people where they are. This whole thing of like play across different devices on TV and all this sort of stuff. Xbox cloud gaming. But the reality of it is that where they're at now with like Xbox cloud gaming, it's their vehicle for cross platform, no doubt is that mobile is a small percentage of, of people who actually play on it.
- [33:00]
Neil I. Patel
Right.
- [33:00]
Tom Warren
And originally it launched as mobile. It was only mobile. Like that, that was their, their play. Most people that play on Xbox cloud gaming are playing on an Xbox One or an Xbox Series S or X and Xbox Ones because they can't play the games because they're exclusive to Series S and X now. So I think their problem is they, they're stuck with that amount of loyal customers. You know, it's not, not a problem because it's good to have loyal customers, right? But they want that growth. They've acquired all these companies. They were expecting to be better at mobile, better at cloud, but Apple or Google have not allowed them to do that. We all know why they don't. They won't open up their stores because if they did, Microsoft and Sony would completely dominate.
- [33:41]
Neil I. Patel
Right.
- [33:41]
Tom Warren
And they wouldn't have a store for one of the most lucrative revenue streams on the App Store. So I think that that's the key thing is that they can't get to mobile easily and they're kind of, they've been playing around, trying to work around it and you know, they've done cloud gaming, all that sort of stuff. But ultimately they do need an app in the App Store like everyone else that allows you just to easily buy a game and stream it. Like that's, that's their goal, that's, that's what they want. They're nearly there on Android.
- [34:11]
Neil I. Patel
We say it a lot and but it's always worth pointing out again, the Apple services revenue is not severance. It's not Ted lasso. Yeah, it's 30% of in app purchases in games like by far the biggest chunk of Apple's fast growing services revenue is in app purchases and games, and they are never going to give that up unless literally the governments of the world demand that they give it up.
- [34:35]
Tom Warren
It's gonna be a really messy fight for them to give that up. So. But for some reason, Microsoft keeps thinking that they're gonna do it, you know, some regulation change. All right, well, look, I mean, I get it.
- [34:46]
Neil I. Patel
If you can buy King and you get Candy Crush and then you can lawyer your way into immediate 30% margin growth, that's a good play. It just seems like they couldn't pull it off.
- [34:57]
Tom Warren
They've seen there was some regulatory pressure recently, but it's not enough to what they want to do.
- [35:04]
Neil I. Patel
We've talked about Phil as the CEO of Microsoft Gaming, and it's easy and tempting to collapse that to just the Xbox. We've talked about how it's important now, especially that the Activision deal is closed, that they run a bunch of mobile games too, and they're making some money in mobile. It's hard to know how much. Right next to that is Windows gaming. Right. And maybe now the rampocalypse means there won't be gaming PCs anymore. Right. And the idea that Nvidia is going to sell every GPU in the world to Sam Altman means there won't be gaming PCs anymore. Yeah, but that was more than a flicker during all of this. Right? People buying gaming PCs, playing Windows games, eventually buying Steam decks. Just our own audience. Every time we covered a Steam deck or something that looked like a Steam deck deck, we could tell people really liked these things.
- [35:48]
Tom Warren
Yeah.
- [35:48]
Neil I. Patel
Why did they ignore that opportunity? Because it seems like it was right there for them the entire time.
- [35:53]
Tom Warren
They, oh God, this could be another podcast episode. They have a history of Windows failures, which is why Steam is the most popular now. But I think they've never, they've never really got Windows gaming and PC gaming. Right. I don't think they've had the right expertise in there. They've done console, like their console platform's great. But yeah, there is a big opportunity on PC and I think that's kind of, of what they're seeing right now. So they're. That now it's like the reality scene of mobile and cloud isn't ready for them to, to get that growth. So now they're like, okay, PC. So the next gen Xbox is a PC. It's going to be a PC, Right? It virtually is now it's running a custom version of Windows, very stripped down like you know it's not no start menu inside but, but the next one. Their bet is that they can essentially convince PCOEMS to build Xboxes right, which then boot up into their own interface which when then they can say subscribe to Game Pass. Yeah, buy our games in the store. But is the reality that those people are just going to buy them and just use Steam? Yeah, that's, that's their problem. And this is like the very big question of the next gen Xbox, whatever Asha does with that work that's going on at the moment and what this next strategy is going to be because that is. Yeah, that's kind of a big question.
- [37:24]
Neil I. Patel
We have taken on a quick break. We'll be back in just a moment.
- [37:35]
Host (Intro/Outro Announcer)
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- [39:43]
Neil I. Patel
support
- [39:44]
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for the show comes from Anthropic, the team behind Claude. If you've spent any time lately trying to get an AI to do something useful, not just sound impressive, but generally help you think through a hard problem or task, you may have heard the name Claude. Claude is made by Anthropic and they've got a few things going on right now that are worth paying attention to. First, Claude code. It's a command line tool for developers that understands your entire code base, run tests, iterates on solutions, and then handles complex tasks end to end. Developers have been using it for everything, not just coding, and that's exactly what led them to build something called Cowork, which takes the same agentic power and brings it to everyone else. No terminal required. You point it at your files, set a task, and Claude works through it autonomously in the background while you focus on other things. Less back and forth, more deep, sustained work getting done, Anthropic is committed to keeping that conversation ad free. That means no sponsored suggestions, no third party influence on what a television tells you. Claude's only job is to help you keep thinking. Try Claude for free at Claude AI Decoder and see why problem solvers choose Claude as their thinking partner. Support for this show comes from LinkedIn ads sometimes even the strongest B2B marketing ends up in front of the wrong audience. If someone's seeing ads for high end cookware but can barely make instant ramen, that's a sign your strategy needs a reset. So when you're ready to reach the right professionals, you should check out LinkedIn ads. LinkedIn has grown to a network of over 1 billion professionals, including 130 million decision makers. And that's where it stands apart from other ad buys. You could target your buyers by job title industry, company role, seniority, skills and company revenue so you can stop wasting budget on the wrong audience. It's why LinkedIn Ads generates the highest B2B return on ad spend of all major ad networks. Seriously, all of them? If B2B growth is the goal, LinkedIn ADS is one of the most efficient ways to put your message in front of the people who can actually say yes. Spend $250 on your first campaign on LinkedIn ads and get a $250 credit for the next one. Just go to LinkedIn.com decoder that's LinkedIn.com decoder. Terms and conditions apply.
- [42:28]
Neil I. Patel
We're back with Verge senior reporter Tom Warren. Before the break, Tom is explaining the recent history of Xbox's struggles. But now I want to look at how pet to current Microsoft Gaming CEO Asha Sharma, her previous role in AI and how this leadership change could affect the future of the Xbox. The new head of Xbox is Asha Sharma, the CEO of Microsoft Gaming. She does not appear to have any gaming background. I mean, she's out there posting on social media like what game should I play? Like she's making overtures to this audience. But before this, she led core AI at Microsoft. She was a VP of product at Meta, she was a CEO of Instacart Art. She's got a corporate operator background. Like she's been at the big company, she's run big projects, she's faced the pressure, she's handled it. But she's not a gamer. And Phil very famously is a gamer. I would point out that Nintendo is not run by gamers. Sony is not run by gamers. They're actually arguably more successful. Maybe this is actually the thing you need distance from this audience.
- [43:25]
Tom Warren
Yeah.
- [43:26]
Neil I. Patel
What do you think she's going to do with this strategy now?
- [43:28]
Tom Warren
I still think that they will pursue Xbox everywhere. Right, right. But not in the sort of way, not in the sort of over promising, underd delivering scenario I hope, because that was just a mess. And I do think she's, she's kind of signaled in her memo of a return to Xbox. We don't really know exactly what that means because let's be honest, what does Xbox mean at the moment?
- [43:53]
Neil I. Patel
Also Phil's been there the entire time. How do you return to the thing? The guy who made it exactly is leaving. Yeah.
- [43:58]
Tom Warren
But I think she's kind of signaling there that console's going to be a little bit more of a priority than perhaps it has been over the last couple of years. But who knows? We have to see when she talks more broadly about that. I know the reaction to her in particular has been around questions around AI. Right. Because she's been at core AI at Microsoft for a couple of years. I don't necessarily get the impression that she's coming into suddenly, you know, AI everything at Microsoft Gaming. I think she, I mean they're just naturally going to do that anyway because it's Microsoft and Microsoft is heavily invested in AI. So I think that's. No, there's no question that's going to happen there anyway. But I think her background, if you actually look at core AI, she was more about platform scaling there with the foundry business at Microsoft AI, Core AI. And that's kind of what she did at Instacart as well. Platform scaling and then user acquisition at Meta. So I think if you look into what she's actually doing done and what she has expertise in, it's exactly what experts kind of needs, right? Like they need someone who can get teams executing and get that user acquisition, the platform scaling, the stuff that they need to build and get ready to, to actually see this vision through. Because the experts everywhere, vision I don't think is terrible, but I think it's just trying to execute on certain parts of it. They've been really sloppy with it and just a little bit too early. So I don't think the strategy is going to change, change dramatically. But I think the next gen console and the PC stuff and where they try and push that way is going to be the COVID for, you know, the strategy they, they originally wanted to do. But yeah, I don't think she's like some AI plant. I, I just don't get that impression.
- [45:38]
Neil I. Patel
Let me ask you this big, big question. You know, you've done a lot of reporting over the last year and a half about this new console and it being a PC and this strategy and whether or not it's organized or disorganized. I, I think I'm. What I'm hearing you say is she's going to execute it, right? Like there's execution problems here. Maybe the company did not trust Sarah Bond to execute the strategy after Phil left. Maybe we need to reset it all and so Asha's just gonna execute that. Well, that's one approach we can see if that's what she actually wants to do. Then there's what I hear a lot of people saying, especially gamers who are prone to hyperbole, that her job is to just shut it down, right? Is to just bring this to an end. Because Activision didn't work, Bethesda didn't work work. All Satya Nadella cares about is replacing all of us with AI agents that are using Excel or whatever he cares about. It's Microsoft just wants to wash its hands of this business and she's just going to trim it down to sell it to, I don't know, whoever wants to buy it. Do you think that's true? Is there a risk there?
- [46:34]
Tom Warren
A few years ago, Nadella thought about spinning off Xbox, right? But instead Phil convinced him to do all these acquisitions and do abk. So he invested, obviously heavily. That's big. Microsoft's biggest acquisitions. I don't think shareholders are going to like them just writing off Activision Blizzard, right? Like, that's just. I, I can't see them running into the Ground. So. And I think some of the people that have been coming up with this theory and one of them is obviously an exports co founder, which is, which is interesting. But I think it's rooted in the idea that Nadella doesn't want hardware. Right. Which notoriously Windows Phone, you know.
- [47:16]
Neil I. Patel
Yeah. You talk about writing an acquisition.
- [47:18]
Tom Warren
Don't get me started.
- [47:18]
Neil I. Patel
Nadella came in as the CEO, the new CEO and his first job was to write down the Nokia deal and get rid of it. And so you're like, maybe he can just do it again.
- [47:29]
Tom Warren
Yeah, maybe. But this time he was there when the Activision deal went down. But yeah, I can't, I can't see them running the console into the ground. I think there is a realization over the past couple of years the reaction to them putting games on PlayStation and Switch and then really devaluing the console and their core. This is their like only remaining consumer brand.
- [47:53]
Neil I. Patel
Yep.
- [47:54]
Tom Warren
That's, that's successful and all right. We, we can't really call it successful right now perhaps, I don't know, like it's in a weird spot. Right. But it's still a respected brand, a known brand across the world. Whereas Windows is in a weird spot. Surface is pretty much span towards commercial really. And yeah, this is, this is the last one. If they mess this up, then they don't have that. That inroads to consumer which also punishes them in AI.
- [48:16]
Neil I. Patel
Right.
- [48:16]
Tom Warren
As well. So I think there's a realization of that. So I just can't see that they would completely exit out of the base of like what's known as Xbox. And I think if they were going to do that, Ash is not the person for that. I think the person to do that would be Matt Booty. Right. You'd promote him and then just focus on shipping games and selling.
- [48:36]
Neil I. Patel
He's the content officer.
- [48:38]
Tom Warren
Yeah. So I think you do that if you're in the Deloitte and that's what you truly wanted. You just wanted to do content and just be a third party publisher which is, you know, what everyone kind of thinks Xbox is going to do.
- [48:49]
Neil I. Patel
Yeah. Or you just keep collecting your 30% of Candy Crush revenue and you just don't talk about it. Earnings reports and it'll be fine.
- [48:55]
Tom Warren
Like yeah, Candy Crush and Minecraft are like, yeah, just make right.
- [48:58]
Neil I. Patel
Yeah, you can just print that money and keep those things going and not talk about it and hope no one notices and then spend your time trying to increase copilot adoption with consumers or whatever they think you're going to do. But it sounds to me like you're saying we should watch out for actual moves to make Xbox more relevant.
- [49:14]
Tom Warren
That seems to be what Ash is trying to signal in her memo. Like that whole return to Xbox is kind of. It's very vague, but it's very interesting at the same time as well. I mean, if they want to keep this game pass revenue going, they can't ignore that base, right? So yeah, and it's a nice bit of revenue.
- [49:31]
Neil I. Patel
All right, Tom, I'm going to let you go back to that baby of yours. Thank you so much for jumping on and explaining all your reporting to us. I hope Microsoft can keep things chill until you're officially back from leave. But I make no promises on behalf of Sachin Adala.
- [49:44]
Tom Warren
No, I thought February is a good time. You know, it's quiet. Very good.
- [49:49]
Neil I. Patel
Thanks so much, Tom.
- [49:50]
Tom Warren
All right, thank you.
- [49:53]
Neil I. Patel
I'd like to thank Tom Warren for taking a break from his friends to leave to join me on Decoder today. And thank you for listening. I hope you enjoyed it. If you like, let us know what you thought about this episode or really anything else at all. Drop us a line. You can email us at Decoder. We really do read all the emails. Or you can hit me up directly on Threads or Blue sky. We're also on YouTube. You can watch full episodes at Decoder Pod. We also have a TikTok and an Instagram. They're at Decoder Pod as well and they're a lot of fun. If you like Decoder, please share it with your friends and subscribe wherever you get your podcasts. If you really like the show, hit us with that five star review. Decoder is a production of the Verge and part of the Vox Media Podcast Network. The show is produced by Kate Cox and Nick Stat. It's edited by Ursa Wright. Our editorial director is Kevin McShane. The Decoder Music is by Breakmaster Cylinder. We'll see you next time.