Microsoft’s Console Business: A Question Worth Asking Again

After the recent Xbox Podcast announcement of bringing four older titles to non-Xbox consoles, a question that has been lingering in the minds of many industry observers resurfaced: Why does Microsoft, a software and services company, need a console business? This question was first asked when The Rock announced the original Xbox console in 2001, but the industry has changed significantly since then, making it worth revisiting.

Microsoft’s console business has seen a tumultuous journey, from initially struggling to make an impact with the Xbox to firmly establishing itself as a top player with the Xbox 360. However, it settled for second place with the Xbox One and currently finds itself in a distant third place with the Xbox Series consoles. Despite the changes in the industry, Microsoft has remained committed to its dual strategy of selling consoles and upselling a subscription service filled with games produced at cost by its in-house studios.

However, there’s a significant problem with this strategy: Microsoft doesn’t have the audience.

The pandemic years saw rapid growth of Game Pass, which rose from 10 million subscribers in April 2020 to 25 million in January 2022. Since then, it has added just 9 million subscribers, with the current total standing at 34 million. The caveat to this statistic is that Microsoft rebranded its Xbox Live Gold service, which had 11.7 million subscribers in 2022, to Game Pass Core. The company told The Verge that Core subscribers were included in the 34 million, which suggests the total number of Xbox subscribers has been flat since 2022, although the mix of Ultimate and Core subscribers may be more favorable.

Any thoughts that Game Pass could emulate Netflix’s decade of growth are long gone. Netflix doesn’t try to sell its customers $400 boxes to watch Netflix. Microsoft has struggled with the duality of its gaming strategy: A subscription service requires a constant churn of content to feel worthwhile, but a console requires “system sellers” that attract people to buy it over the competition. Those are very different things, with wildly different budgets and timelines. Game Pass, no matter how attractive, is not a system seller by itself.

While Microsoft has balanced its dual goals of Game Pass growth and console sales, its competitors have stolen its audience. Nintendo and Sony are laser-focused on exclusive experiences for their customers, which they both see as key to selling consoles. Microsoft has once again found its hardware outsold 2:1 by Sony, and the Switch has likely outsold the Xbox One and Xbox Series consoles combined. While Sony is increasingly understanding the power of the PC market, and Nintendo is still maintaining at least a couple of its money-spinning mobile games, there is little chance of either company’s overall console strategy changing.

Microsoft’s pledge to bring four unnamed titles to “other consoles” is intriguing. I, as a Game Pass subscriber, am pleased that more people will get a chance to play Hi-Fi Rush and Pentiment. However, from Microsoft’s perspective, why give potential audience four fewer reasons to buy an Xbox?

Cloud streaming, and the ability to turn any screen into an Xbox, is clearly the long-term plan for Microsoft. There has been some progress in getting its app on more platforms, but few TVs or streaming boxes support Microsoft’s Game Pass app for cloud streaming, and Xbox Cloud still isn’t close enough to local play to be a viable option for many games. More expensive options like GeForce Now show some promise, but it’s clear that cloud gaming is not going to be a viable primary gaming platform for the masses for many years.

Microsoft’s economics of making big games for small audiences are tough. 2024 looks set to be a better year for Microsoft, with first-party titles like Hellblade II, Indiana Jones and the Great Circle, and Avowed on the way. However, even combined, it seems unlikely that these titles will grow Xbox sales or Game Pass subscriptions significantly. Few gamers are willing to commit to a second console, let alone a third.

As a third-tier player in the console market, there’s really no easy road to success. To release AAA titles on PlayStation would increase the sales of Microsoft games massively, but it could also erase the point of owning an Xbox. Microsoft could probably afford to go multiplatform while maintaining a console business if it had some true AAA franchises to hold back, but despite spending $69 billion on Activision Blizzard, it agreed to not make its new-found system seller, Call of Duty, exclusive to Xbox until 2034. Halo and Forza are not enough in 2024.

So, maybe it’s time for Microsoft to stop making consoles and just focus on becoming the biggest company in gaming. I’d almost suggest that was the plan, were it not for Phil Spencer confirming future hardware was on the way. It’s obviously not viable to abandon this console generation, but it’s definitely viable to begin planning for a graceful exit from hardware by developing for rival platforms.

If Microsoft believes in the transition to cloud gaming, it should not be planning to release a next-generation console. Why keep losing a console war you believe is about to end? Stepping back from its competition with Sony and focusing on making the best games for the largest audience would put the Xbox division in the strongest position to capitalize on the post-console future. Publishers like Ubisoft and EA already sell subscriptions on the PlayStation store, and Microsoft could, too — a subscription with every Call of Duty and Bethesda game would probably go down well with PlayStation gamers.

While Microsoft waits for cloud gaming to become viable for the billions of active players around the world, the best place for its games and Game Pass might be PlayStation, Switch, and PC.

Update, February 16, 11:30AM ET: Added detail about Game Pass Core subscribers being included in Xbox’s 34 million figure.

Jessica Conditt contributed to this report.