Destructoid Checkpoint: A Premium Xbox Experience

In a recent interview with Mashable, Xbox president Sarah Bond described the plan for the next generation of Xbox, rumored to arrive in or after 2027, to be a “very premium, very high-end curated experience.” 

This combines with a worrying report from Jason Schreier and Dina Bass at Bloomberg that covers the internal pressure the Xbox division is under to improve profit margins. Fans of the brand and its history in gaming are feeling left out in the cold, with rising prices, shuttered studios, and canceled games replacing the fantasy that they were fed when Microsoft was in the process of buying Activision-Blizzard.

The sad reality is that this was always coming. It is the inevitable conclusion of one part of a business becoming heavily indebted to another.

You don’t know what you don’t know

It can be hard to watch popular conversation unfold around sensitive topics in gaming, especially when things cross over into the brand-war territory. During the Activision-Blizzard acquisition, a popular topic among my fellow Xbox fans was the idea of revenge. We were going to own Call of Duty, Overwatch, and all these other games. It was time to hit back at PlayStation for all those exclusive titles that they lorded over us.

These newly purchased IPs would all be pulled from sale on PlayStation, forcing the Sony Ponies to buy Xboxes if they wanted to play them. It was the fantastical thinking of imbeciles, given volume and weight purely by the algorithms of a social media machine that is now designed to show people things that might enrage them, in an effort to ensure precious engagement. 

The simple reality is that the Xbox division was taking a massive $65 billion investment from the rest of Microsoft, and would be beholden to the rest of the business in a way that they simply hadn’t been before.

Big business is surprisingly simple, really only seeming to be complicated to those who have never experienced its sheer brutality. If you give me a million dollars, and I invest it in company A, and make a profit of half a million dollars, but would have made a profit of a million dollars if I invested in company B, then whoever gave me that original one million dollars will just feel like they have lost half a million dollars.

The actual money made on any investment will always be compared to the potential money made in another investment, and that difference will be considered a loss. If Microsoft were going to hand a division a $65 billion check, it would want the highest possible returns—not just those in line with what that division typically does, but those in line with its highest-earning divisions. 

This type of culture and business practice seems to be backed up by the Bloomberg report, which notes that the Xbox division has been under growing pressure to reach a 30% profit margin over the last two years. This lines up perfectly with the acquisition. The average profit margin in the industry is reported to be anywhere from 17% to 22%. Microsoft’s gaming business had a 12% profit margin in the first nine months of 2022, according to court documents.

Work the averages

When put in a position where certain profit margins must be hit, the first things to go are the projects that will drag down your averages. A studio that is making 10% profit is simply not returning enough money, so it’s better to just chop away that particular branch than care about the fruit it might yield. 

The focused division is forced to take on a similar culture to the broader company culture, in that it must look at where it is spending money and send funds to the projects with the greatest potential return on investment. If the targets are percentage-based, you can never have enough wins at a 10% profit margin to hit a 30% goal, no matter how much money you actually make. 

So you end up with closed studios, canceled projects, and lots of layoffs, which is exactly what has been happening at Xbox, despite Microsoft making plenty of money. 

For hardware, the problem is much more interesting. Most gamers just don’t buy very many games. Xbox, Sony, and Nintendo all go to a lot of trouble to produce hardware, sometimes at risky cost factors, to entice people into the ecosystem. The profits will flow from software sales, but not really from people who only buy two games a year. 

Former Microsoft employees have hinted that Call of Duty: Black Ops 6 lost $300 million due to being available in Game Pass. If this is true, it changes the narrative around the combined impact of Game Pass and the Activision Blizzard deal. What was touted as the ultimate means for revenge actually just turned into a dagger pointed at Xbox’s own heart. 

This is why we are seeing an ever-intensifying push from Microsoft to increase prices for Game Pass and hardware, and publish titles to Nintendo and Sony consoles, and why the original fever-dreams of Xbox pulling games from them were absolute madness. 

They simply have no choice. Those margins must improve due to the financial strain of having a $65 billion weight on their balance sheet. 

This brings us to the “premium” experience of the next generation. Microsoft has, at times, shown itself to be capable of badly missing the boat when it comes to the average game, but what if they don’t need to care about the average gamer anymore? It is likely that Microsoft will continue in its current aim to be all things to all people, but it could very well be the case that they are happy to sell a very expensive console experience, and if you don’t buy that, they’ll sell you their games on any other platform you wish to play on.

My advice to Team Green is to start saving your pennies now, and keep in mind that, next generation, it might make more sense to buy blue if that “premium” console experience comes at a premium price point.