The gaming business is a challenge now for Microsoft and here are the reasons why

November 3, 2022

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The recent news about Microsoft’s 2023 first-quarter earnings gave us a lot of insights into the company’s gaming business. And from the details of its earnings calls, regulatory filings, and interviews, it’s hard not to notice that challenges outweigh the Xbox good news reported by Microsoft.

On an earnings call, Microsoft CEO Satya Nadella reported that PC Game Pass subscribers grew 159 percent year over year while the earlier 10 million figure for Xbox Cloud Gaming doubled and reached more than 20 million. In addition to that, Microsoft said that half of all the current Xbox Series S users are new. While that news sounds great, there are also some downsides to them. For instance, Xbox Lead Phil Spencer confirmed that each $500 Xbox Series X or $300 Xbox Series S sale causes Microsoft to lose between $100 and $200 on average.

The company tries to counteract that through game and accessory sales and its subscription service. However, Spencer admitted that the market has a limit in terms of the subscribers the company can get. This shows in the number of 25 million overall subscribers Xbox reached for its Game Pass service. While the number is obviously huge compared to the earlier 18 million subscriber population on the platform, this is far from the number targeted by the company. According to Axios, Microsoft was hoping to reach a 73% growth rate for Game Pass for its fiscal year ending June 30, 2022, but it only got a 28% increase. Spencer interpreted this as the limit of its audience reach. “At some point you’ve just reached everyone on console who wants to subscribe,” Spencer said during WSJ Tech Live.

Spencer’s statement speaks the truth as the number of customers in the market is limited. However, aside from that argument, is it also possible that the content on Game Pass on consoles prevented the company from reaching its goals? It is possible. While Xbox never runs out of new games for gamers to try, the offering of new AAA exclusives is another topic. Microsoft’s first-party game portfolio is somehow a barren desert, making the Game Pass almost uninteresting and typical in the eyes of individuals looking for their first game subscription. Spencer addressed it in a recent podcast interview on the Same Brain, hinting at the arrival of Starfield and Redfall and possibly other titles like Fable, Forza Motorsport 8, and Avowed.

“One thing we’ve heard loud and clear is that it’s been too long since we’ve shipped kind of what people would say is a big first-party game,” Spencer admitted in the podcast interview. “We can have our excuses on covid and other things but in the end I know people invest in our platform and they want to have great games.”

While the arrival of the new original Microsoft game titles is something great to expect in the coming months, current customers might also be greeted with something unpleasant. The reason for that is the possible price hike in the Xbox services and products. It can be recalled that the company formerly assured the community that it wouldn’t raise the price of its “recent” Xbox products, but with the global recession affecting its business, the hike is inevitable. Microsoft detailed during its recent financials that it has been facing some challenges in its cloud provision, which its Xbox business relies on. According to the company, the energy crisis in Europe could increase its budget needs (up to $800 million) for running its cloud services.

“For us running the business, we have to look at the return on our business, the cost of the business. We’ve held price on consoles, and held price on games, and our subscription. I don’t think we’ll be able to do that forever.” Spencer said. “I do think that at some point, we’ll have to raise some prices on certain things, but going into this holiday, we thought it was really important to maintain the prices that we have because consumers, right now, are more uncertain than they have been in a long time.”

The hardware side of Microsoft’s gaming business is also rather frustrating. Spencer revealed that Project Keystone was canceled despite being spotted on his shelving unit recently. The Microsoft Gaming CEO, nonetheless, tried to appease anticipating fans by saying that the company could reconsider the same concept in the future. “Will we do a streaming device at some point?” Spencer said during WSJ Tech Live. “I suspect we will, but I think it’s years away.”

As for HoloLens, the future is a blurry vision. In a report, an Insider said that there is “no roadmap to speak of” for Hololens since Microsoft is trying to focus on its US Army contract (which is still facing challenges after the Army reported that the military Hololens or IVAS caused the soldiers to experience headaches, eyestrain, and nausea). Microsoft CEO Satya Nadella also said that the company is pursuing a “software-led approach” on Metaverse instead of producing more XR hardware, which further makes it unclear whether we would see more of HoloLens devices in the future.

Lastly, Microsoft is still fighting to get approvals for its Activision acquisition. According to the company, it wants to use it to boost its plan for further infiltrating the mobile market through a dedicated mobile Xbox app. Of course, the merger could also translate into great gaming projects by Microsoft in the future, but with regulators around the globe still doubting the deal (and Sony still expressing objections about it), that might have to wait a bit longer. 

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