With due fairness, these are two different sets of leaders and two different strategies.

A lot of the strategy you outlined -- buying all these studios, replicating netflix, giving away day one games, raising game pass -- was a strategy put in place by Phil Spencer. Phil pushed for this investment with the promise it would pay off later for MS. He's talked publicly about having to convince Nadella to put up ungodly amounts of cash for these investments and about how the bar for expected return was very very high. It seems like it clearly hasn't worked out to Microsoft's expectations or they've lost patience for waiting, and Phil has now "retired to spend more time with his family" (i.e. been fired).

Now Asha is here and presumably has a mandate to fix this and get back the profit margins that were expected from xbox. Sarah Bond, the xbox president, has resigned, and with this letter it seems the previous Xbox COO is out too. There is clearly a huge shift in Xbox leadership happening and it shouldn't be surprising that Asha -- who is known as a business-driven executive and not a 'gamer' -- is going to be reverting a lot of previous strategy decisions.

My 2c is that Phil's strategy made sense on paper, but I don't think they were able to manage this many studios in practice: nearly all the studios they bought have failed to produce the number of games expected on time or on budget. It also turned out that overly cheap gamepass would cannibalize their business and overly expensive gamepass turned away subscribers. I think the netflix model isn't something you can speedrun and execution of it turned out to be very hard and expensive. Maybe it would've worked out with more time but it seems Nadella didn't think so anymore.

Xbox around 2021 had around a 12% profit margin and the gaming industry as a whole was around 17-22% . In 2023 the target for the division was put to 30% . We see this new restructuring because the target was put this high. Microsoft really wanted Game Pass to be a steam competitor which is pretty much what everyone in the industry tries to do and fails. The push for Game Pass prices to be higher was to get the 30% margin and that didn't work out. They aren't operating at a loss they are operating at a goal and they failed the goal. From other child comments many studios they bought probably were below average. We can see this restructuring basically is that they failed the target, the old guard went out as the new guard came in.

https://www.bloomberg.com/news/articles/2025-10-23/microsoft...

> - The make around 5 billion in revenue per quarter - The problem according to them is profit margin - around 150-160 million

> So first of all, they are big! Secondly they are not at a loss. They just have a "thin, non-growing margin". So to fix all this they are trimming down, so they can "return to growth" (which I think is ridiculous).

How is that profit margin distributed though? King (Candy Crush etc) and Mojang (Minecraft) are specifically called out as money-makers, it's possible that they're carrying the majority of profits while everything else is a dud:

> We have also learned that we are not the best home for every type of studio; in a typical year, we lost 64 cents for every dollar we invested.

As an example, Double Fine (one of the studios being chopped) has released 2 games since 2021, Keeper (191 peak player count on steam) and Kiln (163 peak players); these would be flops even for a normal indie game, for a studio getting Microsoft salaries those are enormous flops.

Game Pass was never a sustainable business model. People liked it because when a new game came out, they could buy a month of game pass for like $15, play through the game in a couple weeks, and cancel. It was a really good deal because Microsoft has spent the past decade+ trying to recover from their terrible fumble of the Xbox One launch, so they were subsidizing gamers to come back to their platform.

With the money being spent on AAA titles these days, they are not going to make any money without increasing the price of Game Pass majorly. The big price bump they quickly backtracked on was an attempt to make Game Pass somewhere closer to being profitable.

> Then they did not have to give away popular games day one on Game Pass

A company that sells consoles complaining about not having enough games after 25 years in business and acquiring most popular game studios is hilarious.

They keep cutting game studios, killing games and then set ambitious profit margins. At some point you have to question, do the people in charge understand their own business at all?

They just gutted bungee and basically killed Destiny 2, not because the game won’t sell, but because it won’t generate the profits they unrealistically set.

Completely agree. Their problem is that corporate wants more money to funnel back into AI and it is really inconvenient that Xbox provides only a couple billion dollars per month whereas Office and Cloud provide many more billions. What a complete joke.

It comes across to me as a really honest letter. At least they are talking about spinning out studios instead of shutting them down, I think that plays better than previous announcements. (e.g. make a hit game like Hi-Fi Rush and get shut down!)

Compulsively chasing only the highest margins has been toxic for the country as a whole.

Different eras of Xbox, and tech as a whole.

Spencer's strategy for Xbox was very 2010 coded: rely on the billion/trillion dollar company to undercut the competition and gather market share and leverage. Classic embrace, extend, extinguish. That's why they bought a bunch of arthouse studios who don't immediately make money, invested hard in a subscription service that was wildly unprofitable (a strategy that even TV services couldn't make profitable, mind you), and focus on moving software more than hardware.

That strategy shifted dramatically between rising interest rates, a cooling consumer market, business uncertainties, and companies simply wanted to throw any excess fat into the AI rat race. So those art house studios were removed, Gamepass needs to enshittify pre-maturely,production needs to slow from a variety of offerings to the usual safe and sure releases. And of course, the biggest expense needs to be trimmed down on: because no one is stopping them from doing it in the US.

The number will still go up, but in different ways. They aren't doing this because they are in the red, they are doing it because they want all the money instead of a lot of it.

Well this is the new Xbox boss, Aska Sharma trying to course correct her own actions after pushing out Phil Spencer (and team). Phil had a deep understanding of the game world about profit margins and how the Xbox is essentially a stake in keeping Microsoft in the minds of consumers, a place in the home. Aska has a shallow understanding and sees only the financials and wanted to increase profits. Now she is burning it all down to try and “reset” and replace people with LLMs to increase profit margins. I imagine she will be pushed out herself end of year or next Spring (2027) once her naïve plan back fires.

To me, the graphics abilities have been there for a decade... what we need are better games and gameplay. More fun games without gotcha, pay to win, loot box efforts. Too much effort is going for dazzling graphics at the expense of overall gameplay. How many people are still playing CoD, WoW and so many other games from over a decade ago? How many refreshes of Final Fantasy have we seen?

The graphics can only carry you so far. There's indy adventure games with SNES level graphics that have millions of daily users.

The pandemic and scalpers really destroyed peoples apetite for the "new thing" when this generation came out, and with that boost missing studios saw little point in going exclusive perpetuating the vicious cycle, it's just in the past few years that there's really been exclusives for this generation that didn't also support older consoles.

And even then, already the PS4/XbOne generation added stratification making it more "PC-like" with the XbOne-X having heftier hardware (not to mention it being PC-like compared to PS1/PS2/PS3/Xbox360), that then continued with the Xbox-series-X and Xbox-series-S.

Consoles aren't specialized hardware for "magic experiences" and everyone knows this, it's just another "device" that happens to be connected to a TV with a controller where people are gatekeeping software availability.

I had the sinking feeling from the start, that a total stranger was brought in to do a butcher's job.

> And between graphics almost certainly at the point of diminishing returns, and hardware prices like they are right now, I can't imagine there's a market to sell something more capable than current gen consoles.

I haven't bought a console since the Xbox360 and Wii. But I have a friend who still games pretty heavily and is low income. He can not afford the latest PS5 and is still on a PS4. We were talking the other day and he said "I love consoles because they are simpler and cheaper than a PC but now I can't afford either. The graphics aren't getting much better so what am I paying for? What happened to $400-$500 consoles? Remember when consoles were 200-300?" Of course those last few prices were 90/00's but I agree, the cost of a new console is quite insane for not much gain.

Don't forget gifting of translucent Xbox.

When she was announced it was broadly assumed that she was being brought in to kill the division.

But then she did some minor, pandering actions and suddenly everyone was "oh boy! A new era of xbox!" Only it was all a ruse to ensure people didn't jump ship too quickly and make the bleeding too heavy. They want people to keep pumping money into a platform heading to the graveyard.

Yes, but only because the bar is so low. "We can't commodotize innovation" is not an especially subtle insight, and pretty much everyone other than executives at companies like this understand it without having to spend billions to try it out.

I have no idea why they didn’t realize that earlier, or if there is any insider dealing involved, from my cynical thoughts.

...more like

> We can't afford it, and it's a bad investment anyway

My kids begged for me to buy Tomodachi Life and Pokemon Pokopia and they’ve been absolute smash hits in the house. Pokemon got me hooked for a month or two until I mostly beat it, and the kids play Tomodachi Life every day and have funny little stories to tell. So many modern games just aren’t fun, it doesn’t matter what the graphics look like if the game is boring.

To some extent - but you can't get away with Hollywood Accounting Practices in the same way.

Also one must consider the likes of Hideo Kojima who can sell ~7 million copies of a new IP that is effectively a cinematic Walking Simulator as an Auteur acrimoniously splitting from the traditional studio system.

Clair Obscur: Expedition 33 also shipped over 5.4 million copies as a AA, in what is also arguably an interactive cinematic on-rails RPG.

I'll personally take spirals, ups and downs of the whole industry over Nintendo selling yet another Mario, Zelda and Pokemon for 40 years straight.

That is encouraging, but my stock portfolio paints a different picture. Nintendo is unfortunately doing terribly this year. I still believe in their core mission, even if some of their litigiousness and anti consumer practices have put me off

Things are not that black and white.

Nintendo also shipped Metroid Prime 4, with massive delays and unsatisfied customers, following the same "interactive Hollywood" philosophy which disappointed Metroid fans.

Same thing goes for Star Fox, a remake of a remake of a remake, with poor visual and dialogue choices.

And meanwhile, the same silent push for digital-only, forced upgrades and the like...

I disagree, it wasn’t Phil that dug a hole but Asha who pushed Phil out with no plan. Why is Asha finally revealing her plan years later if she was such a good fit? She came in trying to automate away peoples jobs with AI for the last year or so and that is obviously failing. It wasn’t Phil that invested the entire company’s well being on stochastic parrots.

She has done everything but focus on delivering games (product).

I was always very skeptical of the $300 million figure. It sounded like the same math that the movie industry used for pirating. If I was subscribed to Game Pass I might have downloaded CoD to see what it's about. That doesn't mean I would have paid full price for it.

Microsoft laid off most of its Halo talent in a previous lay off cycle, stripping 343 Industries of most of its staff and rebooting it as Halo Studios as a shell to mostly outsource development to other companies in the way that Call of Duty was built on the game development equivalent of sweat shops. They've already shown that they don't have the guts to make Halo 14-39, they seem to be only doing yet another remake of Halos 1-3 and maybe Reach, this time in Unreal and with "AI" to help "upscale" everything. Just four Halo games endlessly remade until people forget why they were ever originally popular.

I also notice the growing trend to have EM carry individual contributor duties, I thought it was mostly a consequence of using coding agents but perhaps it's not: the EM figure as we know might just be a consequence of the golden zirp times (do you remember the endless technical EM vs non-technical EM debates?)

Isn't this basically the same structure they currently use i.e. individual contributors, managers, and producers?

That messaging is for investors. To a dev's ears, it's a meaningless thing to say.

It reminds me when Elon took over twitter and made a comment to the effect of "we need to rethink the entire tech stack from the ground up". Someone asked Elon what was wrong with the tech stack, and he called them a jackass.

Or... studio publishers may be encouraged to use a proprietary platform specific engine. Trying to dethrone UE5 would be silly. =3

Compulsion Games was also a strange acquisition / team to decide to put $100M + 7 years of trust into. They had two games by that point, neither with amazing reviews.

There's no sourcing for that South of Midnight number. You should treat it as fictional.

Millions of people played South of Midnight even if sales didn't reflect it. Xbox Game Pass has done a lot to make Xbox sales figures hard to compare.

> I think some of these game studios got so content with Microsoft constantly paying that they forgot to make games that would actually sell.

I mean, if you're assuming that Microsoft had a fully hands-off approach to managing these companies after buying them, then sure. It's not clear to me that you can make a compelling claim about whether the issues were from the bottom or the top just by looking at the final outputs.

Michael begging Oscar to tell the shareholders how to save the company.

> Interest in physical media has actually been on the upswing, and, with Sony announcing their plans to abandon physical media, it feels like MS has a chance be the "good guys" like what Sony did to MS when MS threatened to ruin physical media prior to the l One release.

Not only that, but RAM/GPU/SSD prices going up so much recently (which is especially jarring for SSDs, which for like a decade had been getting more affordable; I bought a 120 GB SATA SSD in 2012 for around $100, and I was able to buy a 1 TB m.2 one for around the same price a few years ago) is starting to equalize pricing for PC gaming. In 2022, the initial Steam Deck launched for just $400, and it continued to be offered at that price for a few years, which made it cheaper than the Switch 2 launch price.

I feel like if I were a console manufacturer, I would be trying to figure out a way to take advantage of that. Other than price (previously), the other obvious selling point of PC gaming is more control over your system, so there could be an opening to try to lure away wayward PC gamers with some changes that give them a bit more control on the console. I agree with you that I can't really imagine Microsoft doing this though.

Xbox is ahead of Sony on this path. Their studios often, if not most of the time, release physical games that require a full download to play.

I doubt that they will go back to where Sony are now.

There are approx ~3 billion "gamers" worldwide, why shouldn't Xbox set a goal of 1/3 of them using their platform?

It's in the press release.

> Compulsion Games and Double Fine Productions will return to management and transition to independent studios with their IP, catalog, and runway for their next games. Ninja Theory and Undead Labs have entered terms to join new ownership with funding to complete and grow Senua and State of Decay 3. In France, Arkane’s management is beginning required consultation with its Works Council to review potential strategic options.