Phil Spencer delivered the ultimate pitch for Xbox’s future

Xbox boss Phil Spencer sets the stage

Microsoft has an ambitious plan to grow its gaming business from primarily Xbox consoles to cloud services, subscription platforms, and screens of all sizes. And if the Game Pass platform is the engine to make it happen, the acquisition of Activision Blizzard is a major source of fuel.

On Wednesday, Xbox boss Phil Spencer took the stage at the WSJ Tech Live conference where he made news on a series of strategic areas for Microsoft, including Game Pass, cloud streaming, and the company’s approach to pricing. Spencer, a master of blending off-the-cuff demeanor with especially astute interview answers, made clear that while regulators are concerned over its nearly $70 billion Activision bid, the company is relentlessly focused on growing its audience beyond the stagnant console market.

Spencer came prepared to make news. Speaking to reporter Sarah Needleman, Spencer doled out some key figures and announcements around areas Microsoft is particularly focused on in gaming.

• He disclosed that Game Pass is in fact profitable and accounts for at most 15% of the Xbox business’ content and services division, which would give Game Pass annual revenue of around $1.9 billion .
• “Game Pass as an overall part of our content and services revenue is probably 15%,” Spencer said, as transcribed by The Verge . “I don’t think it gets bigger than that. I think the overall revenue grows, so 15% of a bigger number, but we don’t have this future where I think 50-70% of our revenue comes from subscriptions.”
• Spencer has tempered his language around Game Pass, clarifying more recently that while Microsoft would like an Xbox app on every device, it will also more realistically need to rely on a diverse revenue stream. In other words: It’s not putting all its eggs in the Game Pass basket.
• Spencer also said Game Pass growth is slowing on console, “mainly because at some point you’ve reached everybody on console that wants to subscribe,” Spencer said, while growth on PC has been “incredible.”
• On prices, Spencer said Microsoft is keeping them at current levels through the holiday season, but that it expects it will have to raise console, game, and subscription prices.
• “We’ve held price on our console, we’ve held price on games … and our subscription. I don’t think we’ll be able to do that forever,” he said. “I do think at some point we’ll have to raise some prices on certain things.”

Spencer was speaking to players, but also to Sony and regulators, too. The most formidable critic right now to Microsoft’s acquisition of Activision Blizzard is the U.K.’s Competition and Markets Authority, which has expressed concern that Microsoft will use the deal to harm PlayStation.

• But in his comments Wednesday, Spencer tried to make clear that he's not so much interested in snatching away Sony customers. Instead, the Xbox boss wants to further unshackle Microsoft’s business from the console market and grow beyond it — primarily to mobile.
• “This opportunity is really about mobile for us,” Spencer said of the Activision deal. “When you think about 3 billion people playing video games, there's only about 200 million households on console."
• “It’s definitely true today that the largest gaming platform on the planet, which is a mobile phone, is controlled by two companies: Google and Apple,” he added. “It’s imperative for our business. There’s no way that you succeed as a gaming company without access to mobile players.”
• “In developing markets like Latin America and Southeast Asia, mobile represents access to a wide audience, especially consumers who don’t have the ability to buy a console or PC or don’t have access to stable bandwidth,” Dennis Yeh, gaming insights lead at analytics firm Sensor Tower, told me.
• “I also still believe that cloud gaming is in the cards for the future, even with the recent shutdown of Google Stadia, and accessibility in developing markets will be a key aspect for potential viability,” Yeh added.

The growth of Game Pass depends on big acquisitions. While Microsoft has a pipeline of games coming from its internal studios, many of its biggest upcoming releases are games from companies it acquired, including Bethesda’s Starfield, Arkane’s Redfall, and an upcoming Elder Scrolls installment.

• In regulatory filings and public statements , Microsoft and Spencer have stressed the importance of using content acquisitions to make Game Pass more appealing and to help it compete better with market leader Sony, which has more than twice the install base of the Xbox platform.
• “By delivering even more value to players, we hope to continue growing Game Pass, extending its appeal to mobile phones and any connected device,” Spencer wrote in a public plea to regulators last month.
• Additionally, Activision Blizzard operates a number of hugely successful mobile games, including Call of Duty Mobile, Candy Crush, and Diablo Immortal. In a response to U.K. regulators, Microsoft characterized its position in the mobile market — the largest sector of the global games industry by a wide margin — as “nowhere.”
• “Mobile expertise in a rapidly changing environment is invaluable,” Yeh said. “With King, Microsoft obtains a premier gamemaker with extensive experience in live ops and free-to-play monetization, as well as the data that comes with it.”
• “We have to break that duopoly of only two storefronts on the largest platforms. We’ve also invested a lot in our cloud streaming,” Spencer said at WSJ Live. “But if you take a long-term bet, which we’re doing, that we will be able to get access to players on the largest platforms players play on … we want to be in a position with content, players, and storefront capability to take advantage of it.”

Sony and regulators aren’t Microsoft’s only concern. The Xbox business faces a number of key challenges to achieving Spencer’s dream of putting Microsoft games on as many platforms as possible.

• For one, with Game Pass user acquisition approaching the ceiling on consoles, Microsoft is missing its targets.
• The company grew the service in fiscal 2022, which ended in June, by 28%. That fell far short of the 73% goal that dictates company executive performance bonuses, as reported by Axios yesterday . That’s the second year in a row that Game Pass has missed its growth target.
• One obvious culprit is major game delays. Earlier this year, Microsoft delayed Bethesda's Starfield and other exclusives to 2023. These delays contribute to subscriber churn as Game Pass members decide to let their subscriptions lapse until the catalog improves in the future.
• Part of Microsoft’s ambition to grow Game Pass beyond Xbox is cloud streaming, but the company put a streaming hardware product on ice earlier this year and decided to partner instead with Samsung for a smart TV app.
• “Keystone was the codename of something we were incubating internally, which was ... a streaming console, so there’s no local gameplay, low-cost, plug it into a TV, and you’d be able to stream Xbox games,” Spencer said at WSJ Live. “Will we do a streaming device at some point? I suspect we will, but I think it’s years away.”
• Without dedicated streaming hardware, Microsoft has to rely on devices controlled by the very duopoly Spencer said his company is trying to break, and Apple has only grown bolder in recent months with regard to collecting its App Store fees from developers despite mounting regulatory pressure.

Spencer covered a staggering amount of ground in a single interview, and it’s clear Microsoft sees clear benefits in having the most high-profile public face of Xbox reiterate the company’s gaming positions amid a fierce regulatory battle.

It makes sense: If Game Pass is profitable and yet growth is slowing, perhaps regulators may see more credibility in Microsoft’s argument that it needs fresh content to expand. And if mobile is truly the next frontier for Xbox, and not just the stale console market, then Microsoft may seem less like a multitrillion-dollar tech titan bullying the competition and more like an underdog trying to play catch-up against incumbents.

It is, in some ways, a matter of perspective. But Spencer’s savvy contextualizing of the gaming business is all about ensuring that Microsoft’s point of view looks as convincing as it can be.

— Nick Statt

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