Microsoft reminds us just how big the Xbox business has become | The DeanBeat

While the job losses were tragic, Microsoft did show that it still cares about making some of the best games it possibly could for its core constituency of Xbox fans. I would argue (of course, in hindsight) that I expected this. The roots of this were sowed in the lessons of the past.

I remember Microsoft’s game business in its infancy. It started with Ed Fries, a developer who loved games and started building a real business within the software giant. It grew thanks to games like Microsoft Flight Simulator and Age of Empires.

Alex St. John and his fellow Beastie Boys friends launched DirectX to enable games and game devs to have access to the wide variety of video/3D graphics cards, sound devices and other hardware that worked on the Windows platform, giving the PC the flexibility that game consoles didn’t have.

While St. John got himself fired, more renegades — Seamus Blackley, Ted Hase, Kevin Bachus, Otto Berkes, Nat Brown — persuaded Fries to support the Xbox with games and eventually Bill Gates to sink billions of dollars into the Xbox game business. Gates and Steve Ballmer brought in adult supervision in the form of Office guru Robbie Bach and Internet shipper J Allard with the mission of dealing with Sony and Nintendo. Microsoft attempted to buy other companies like Nintendo and Electronic Arts, but failed. Then it decided to make do with the smaller companies like Bungie that it could buy.

Somehow, they got the job done. I wrote a book about this, and its sequel too.

The original Xbox took off thanks to Halo, but Microsoft lost around $4 billion on the first Xbox. It had to stop wrapping $100 bills around every console it shipped, and so it rushed out the Xbox 360 four years after the first machine. They had accumulated too many games and game studios in the hopes of getting the important one. As Microsoft put more people behind Bungie, it realized it had to close a bunch of other studios or cut ties with other developers. At one point, Microsoft had to try to take on Sony in the market when it had only 1,000 game devs while Sony had 2,500.

This was the cycle of a game platform. First you open up the tent wide and let in all the game studios in hopes of finding the killer app, or the tent pole. When you find it, then you shutter the less important games and double down on the ones that work. This is how Activision eventually came to have 10 studios working on Call of Duty. Along the way, you have to size your resources to match your ambition.

Allard, Fries and Bach clashed about shipping Halo 2 with the launch of the Xbox 360. It didn’t happen, as Fries was adamant it needed time to cook. He got his way but then he left as the internecine warfare became too much. He had chosen the path of getting a Halo game out once every few years, rather than going down the path of getting games out on a faster timetable.

But the Xbox 360 was rushed out too fast, as many consoles suffered from the “red ring of death” thanks to lead-free solder breaking loose on the boards. That resulted in a billion-dollar write-off, and effectively wrapping another $100 around every console it sold.

We’ll skip the forgettable Xbox One era, where Sony pulled away further in its lead over Microsoft, and Nintendo hijacked the market with the success of the Wii. During this era, Microsoft had grown its game workforce to thousands of developers. But Sony had thousands more, and Nintendo was just better. Sony started pulling away with amazing games from God of War to The Last of Us.

I bring up all of this to say that the console business is never easy. It has cycles that are unpredictable and so aren’t really cycles at all. Navigating through these obstacles has been harder in the past. After all, it’s worth noting that Microsoft is now making billions of dollars in profit on its game business.

What emerged through this crucible was that Phil Spencer came into his own as a leader. He was elevated to run the game business and he had all of the elements in one — a business guy, an authentic gamer, a trusted game developer advocate, and someone who could convince his bosses that Microsoft belonged in games — all inside the same guy. As both a suit and a dev, Spencer could have arguments with himself all day long. But the result strategy was one that could be trusted by a boss like Satya Nadella, Microsoft CEO, who opened his checkbook to Spencer.

Spencer started spending and he brought upward lieutenants like Matt Booty and Sarah Bond. They came up with the Xbox Game Pass scheme for a subscription service, and they went on a buying spree that Robbie Bach never got to do. They started small with deals like Brian Fargo’s InXile Entertainment. They picked up Bethesda for $7.5 billion. And they got the biggest fish of all, Activision Blizzard.

But the new troubles began with the Federal Trade Commission’s concern that owning Call of Duty and other important titles would give Microsoft an unfair advantage in games.

Microsoft unveil its $68.7 billion deal to buy Activision Blizzard in January 2022. The FTC was so concerned that it delayed the deal and fought in the courts. Microsoft won and closed the deal after 21 months of waiting. In that time, the game market shifted, and Microsoft was stuck waiting for the deal to close.

The pandemic gains for gaming started to fall apart. New consoles weren’t selling at first because of shortages and then because consumers were shell shocked. By the time the deal was done, the value of the assets probably wasn’t as high. But the deal couldn’t have been redone without further delay. So Microsoft took the plunge and found that it had to eliminate as many jobs as it could to be ready for more rainy days. As Matthew Ball noted, a complex set of forces put many game jobs in jeopardy, and Microsoft was just one of numerous companies that had guessed wrong about upward growth.

And then it had to shift resources around behind the highest-priority games. That resulted in even more layoffs. In fact, the fact that it only reassigned one studio and closed multiple studios mean that it was in a kind of panic or rush.

The upshot of all of this was that Microsoft put fans into a state of panic based on its hints about doing fewer exclusives and more cross-platform plays, layoffs at some very talented studios and then its decision to hold back game announcements until its showcase. For sure, some of this was self inflicted.

But Microsoft came through in the clutch at its event in Hollywood. It has more than 30 studios and tens of thousands of people in games. It showed it has a wide variety of blockbuster games coming — Gears, Call of Duty, Doom and Indiana Jones — and some serious expansions. It has brand new intellectual properties like South of Midnight and Mixtape in the works. It’s got one of the highest potential Call of Duty games on the way. And it’s not getting out of the business. Rather, it’s stepping up and saying to Sony and Nintendo, “What you got to show?”

So ye of little faith, what do you say now?