(Bloomberg/Jason Schreier and Dina Bass) — Microsoft Corp. is asking its Xbox gaming division to produce profit margins that are well above the industry average, ratcheting up pressure on its video-game makers during a difficult time for the field at large.
Over the past two years, executives at the Seattle-based software giant have set an across-the-board goal of 30% “accountability margins,” a term Microsoft uses in lieu of profit margins, according to people familiar with the business. The gaming division, which includes dozens of studios, has responded by canceling products, raising prices and slashing thousands of jobs, said the people, who asked not to be identified discussing nonpublic information.
The average profit margin in the video-game industry in recent years has ranged between 17% and 22%, according to estimates from S&P Global Market Intelligence, while coming in between 10% and 20% over the past six years at Xbox. Court documents from 2023 revealed that Microsoft’s gaming business had a 12% profit margin for the first nine months of the company’s 2022 fiscal year.
The new goal, which hasn’t been previously reported, is at the outer range of what a gaming studio can typically reach in a boom year, said Neil Barbour, an analyst with S&P Global. “A 30% or better margin is usually reserved for a publisher that is really nailing it,” Barbour said.
In the past, game makers at Xbox weren’t asked to hit specific numerical targets, said the people, and were largely told to focus on making the best games possible without worrying too much about finances. The new target was implemented in fall 2023 by Microsoft Chief Financial Officer Amy Hood, whose team has taken a larger role in the gaming business in recent years.
The change has impacted strategies under Microsoft gaming chief Phil Spencer as the division has looked for new ways to cut costs and boost profits. In 2024, Xbox announced that it would begin releasing the majority of its games on consoles from rivals Nintendo Co. and Sony Group Corp. for the first time. Earlier this year, Xbox decided to cancel a number of costly projects, including Everwild, Perfect Dark and Project Blackbird, all of which had been in development for more than seven years. Not every project is expected to hit the 30% profit threshold, said the people, but many Xbox developers and groups have been presented with the new target.
Moving forward, games that are either cheap to make or deemed more likely to generate significant revenue windfalls may take priority over riskier bets, said the people, while Xbox’s floundering hardware division may face a significant rethinking. In a recent interview with Mashable, Xbox President Sarah Bond said the company’s next console will be “a very premium, very high-end curated experience,” suggesting a departure from previous Xbox iterations.
An Xbox spokesperson said in a statement that they take a long-term view of their business and that success “doesn’t look the same across every project or priority.”
“We look at the business as a whole, balancing creativity, innovation, and sustainability across a diverse portfolio of offerings,” the spokesperson said. “As with any creative business, sometimes that means making hard decisions and stopping work on things that are no longer working for a variety of reasons, and shifting resources toward the projects that are more aligned with our direction and priorities.”
Xbox once dominated the lucrative world of video-game consoles, surpassing Sony and Nintendo in the 2000s with the popular Xbox 360. But a series of strategic mistakes — starting with a troubled launch of the Xbox One in 2013 — led to a significant decline in market share. Microsoft no longer reveals Xbox hardware sales, but analysts estimate that the PlayStation 5 has sold more than twice as many units as the Xbox Series X.
Xbox has struggled to sell consoles largely because it has failed to develop exclusive games on par with Nintendo’s The Legend of Zelda: Breath of the Wild or PlayStation’s God of War, both of which won Game of the Year awards and drove significant console sales.
Xbox’s best hope for a blockbuster game in recent years was 2021’s Halo Infinite, the latest entry in its most vital franchise. Despite some early accolades, the game was ultimately seen as a failure and led to a complete overhaul of the studio behind it. Later this week, Microsoft will announce a new Halo release in an attempt to resuscitate the franchise.
To help bolster its library in the absence of homegrown hits, Xbox has acquired more than a dozen game companies in recent years. In 2020, the company paid $7.5 billion for ZeniMax, the publisher of popular titles such as Fallout and The Elder Scrolls. In 2023, Microsoft completed its $69 billion purchase of Activision Blizzard, the largest gaming acquisition in history.
The shopping spree has led to increased scrutiny on Xbox from Microsoft executives, according to the people familiar with the business, at a time when the tech company has been prioritizing investment in generative AI and may be less interested in supporting a massive gaming division failing to return big profits.
Over the same period, Xbox’s strategy has undergone another major shift. A few years ago, the company started requiring all Xbox games to appear on the company’s subscription service, Xbox Game Pass, on the same day of their arrival in stores. Game Pass allows subscribers to pay $30 a month for access to a catalog of hundreds of games without having to shell out roughly $70 for each new title.
The change has hurt Xbox game sales, according to the people — a continuing challenge that may make it even more difficult for the studios to achieve a 30% profit margin. To account for the lost sales, Xbox offers its developers a credit, which it calls “member-weighted value” and is calculated based on several factors, such as the number of hours that Game Pass players collectively spend on a particular title. The opaque formula seems to favor games in which players can spend the most amount of hours, such as online multiplayer titles, according to people familiar with the calculations.
Since Microsoft began releasing most of its games on Nintendo and PlayStation platforms last year, some Xbox titles have seen early success, such as 2024’s Indiana Jones and the Great Circle, which is estimated to have performed best on the PlayStation 5.
In July, Hood said on a call with investors that operating income in the Xbox division rose 34% for the quarter that ended in June due to “continued prioritization of higher margin opportunities.” The company is due to report earnings again on Oct. 29.
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