By Nilay Patel / @reckless
Phil Spencer, CEO of Microsoft Gaming, is in charge of Xbox and all the game studios that Microsoft has acquired over the years, like Mojang Studios, the makers of Minecraft, and ZeniMax, which makes The Elder Scrolls and Fallout among others.
Phil came to talk to us hours before the European Commission announced an in-depth investigation into Microsoft’s proposed $68.7 billion acquisition of Activision Blizzard, which makes the enormous Call of Duty series as well as Candy Crush on phones.
So I had the chance to ask Phil: will he make the concessions that regulators want in order to close this deal? And is the deal really just about Call of Duty or something else? Is Microsoft committed to keeping Call of Duty available on PlayStation?
Phil’s a candid guy. He’s been on Decoder before. I always enjoy talking to him, and this was a fun one.
The following transcript has been lightly edited for clarity.
Phil Spencer, you are the CEO of Microsoft Gaming. Welcome to Decoder.
Thanks for having me. It’s great to be here.
My list of questions is a mile long, so I’m just telling you right now that you will have to talk fast.
I’m known for long answers. That’s my strategy. It’s my delay tactic. No, I’m happy to hit it. Let’s go.
There is a lot going on. The last time you were on the show was 2020, as one of our very first guests. At that time, you were the executive vice president of gaming at Microsoft. Now, you are the CEO of Microsoft Gaming, which is a big change. You have a new organization under you, so congratulations. What is the difference between being the executive vice president of Gaming and the CEO of Microsoft Gaming?
I would say the day-to-day job is mostly the same. I think it’s really about a recognition inside of Microsoft that we run gaming in a different way than some of the other divisions. We are our own business — we have our own marketing team and our own P&L, for those who care about that.
That’s the show. I care about that a lot. Okay, so you have your own P&L.
Yes, we run it end to end. There are other CEOs. Ryan Roslansky, who runs LinkedIn at Microsoft, is also a CEO. It’s really just a recognition of the way that we structure gaming inside of the company. I would just say it’s an honor to be a part of it and to lead the team.
As you know, we talk a lot about decisions on the show. How did that decision get made? Did you have to sit down and write a memo? Were you like, “All right, I have to convince Satya [Nadella, Microsoft CEO] to make me the CEO of Microsoft Gaming”? Was it a committee decision? How did it work?
It was all Satya’s decision. It wasn’t something that I had pushed for. It was a decision that my boss just let me know about one day as we were going through our discussions with the board about the Activision acquisition, our future ambitions in gaming, and where we’re going. I don’t know what his process was behind the scenes to make that happen, but no, it wasn’t a situation where I put a proposition across the table. It was something that was brought down from upon high.
Well, next time Satya is on the show, we will ask him about that. I’m very curious, because that’s one of those decisions no one ever gets insight into. You mentioned the Activision acquisition. We’re obviously going to talk about that a bunch. Microsoft is restructuring itself, there is now a division called Microsoft Gaming, and you are the CEO. That was tied to acquiring this gigantic company. Does this work if you don’t acquire Activision Blizzard? Are you still the CEO of Microsoft Gaming? Do you have to give it back if the deal doesn’t go through?
I don’t think so. I didn’t see that in the paperwork — well, there was no paperwork, to be clear. I think it sticks with me. I do think it’s a recognition of what our ambition is in the gaming space, and I think we’re kind of over that hump a little bit.
Early on in my tenure at Microsoft, people would ask, “Is Microsoft really serious about being in the gaming business?” I think we’re kind of past that.
I will say, early on in my tenure at Microsoft, most podcasts I went on would ask questions like, “Is Microsoft really serious about being in the gaming business? Are you in it for the long run? What are your motivations?” In a nice way, I think we’re kind of past that. Most of the discussions are about what our ambition is, what we’re trying to do, and what our worldview is on the gaming business. That’s just up to all the work that the teams have done and the progress that we have made. I think it’s a fantastic recognition of what the org has been about over the last six, seven, eight years.
I think that’s a positive case. That does seem to be the shape of it from what I’ve heard from other executives in Microsoft. “This is a real business, not a hobby. It’s not something that we accidented into.” The flip side of that is as you make it more independent, as it becomes Microsoft Gaming with a CEO, it’s also easier to pull out even farther. It’s the first step towards pulling it out of the core of Microsoft. You could spin out, you could do all kinds of things once it’s more independent. Is that a potential future here? Or is it just that you need more independence from LinkedIn and Azure or whatever else?
I wouldn’t say it’s the first step. I never really think about Xbox outside of Microsoft. I don’t think the gaming business has ever been more integrated into what Microsoft all-up is about. We’re the largest consumer business in the company. That wasn’t always true, but with the progress that we’ve made as gaming overall has continued to grow, it’s a consumer category where Microsoft has relevance. We have brands, we have customers, which is the most important thing, and we have teams, which are critically important as well.
A lot of our big tech competitors have made forays into gaming, and they might have their own consumer businesses where Microsoft doesn’t have a lot of success or even capability, but gaming is a space where Microsoft has decades of experience. I really see this as recognition from the company that gaming is a place we’re going to continue to invest, make progress, and have a perspective on where this industry is going that’s shaped by our discussions with unique partners and creators. We’re in it for the long run. My title isn’t honestly something I think about much. I still kind of consider myself a software development engineer, which is where I was when I started.
That’s dangerous for the CEO. Be careful.
No, I enjoy building products. I spend most of my time in the office going to studios and talking about the games and products we’re building. It’s kind of where my heart is, and frankly, where my capability is. I’m not a master of business and I’m not a master of strategy, but I do love this category of video games. It’s something I’ve done for an awfully long time. It’s what I love doing.
Have you changed the structure of how the games division works now that it’s more independent and you’re the CEO?
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I would say the biggest move we made around the same time was with the marketing team, which had sat more centrally inside of the company. It was moved into the gaming business and led by Jerret West. I can’t say that there was anything broken about Jerret sitting in the central marketing team inside of Microsoft. But I do think in terms of the charter, some of the customers we engage with know that Xbox is part of Microsoft. Frankly, there’s also a contingent of our customers that don’t know that, and that’s okay. People play video games on consoles, on PCs, or on their phones, and there are brands associated with those things.
That was the only structural move that we made at the time. The company has always given, at least to me in this role, a lot of autonomy in thinking about the decisions that we need to make, how we approach our customers, and the things we do that might be slightly different than what the rest of the company does. That’s been energizing for the team, to feel like they have both the authority and the responsibility to engage with our customers and creators in the way that we need to.
Last time you were on the show, I asked you the classic Decoder question about how you make decisions. You went through the CEOs that you worked for and how they influenced your decision-making process. Now you are the CEO. Has the way you’ve made decisions changed? Have you focused it down? How do you make decisions?
The thing that year in and year out remains to be true, especially in the entertainment and gaming business, is the only grader of your decision that matters is your customer. We are definitely in a want-to-do activity, not a have-to-do activity. We are entertainment. We’re kind of an at-will activity. When people decide to spend their most precious resources — which are obviously their time and their finances — in gaming, and they choose to play a game with us on our platform or one of our first-party games, that is the thing that sits at the center of every decision that we make as a team. “What would our customers think?”
We don’t always get it right. The decisions and things we have tried to do that haven’t landed exactly right are ingrained and chiseled in my brain. The reception we get from our customers and our fans sits front and center in the decisions that we make. That force in our decision-making only goes up, meaning the longer I sit in this job, the more expectation there is that decisions would become more rote and easier based on this body of knowledge — but the space that we sit in is dynamically changing. It is really front and center that we’re making sure we’re listening to the point of views from customers, fans, influencers, and creators in the things that we do as a platform.
There is a tension there that I really want to pull on. In the entertainment business, you said it’s want-to-do, not have-to-do. The games industry, the entertainment industry, is moving from being this hits-driven business where every product lives or dies and makes millions of dollars or doesn’t, to these recurring-revenue models of subscription. We have obviously seen it with television, and we have definitely seen it with music. The last time you and I spoke, we talked about game streaming and game subscriptions a lot.
That is in a very middle state. It hasn’t happened yet, and you are now facing down the holiday quarter. You just made some big decisions. You delayed some big games that were supposed to come out for the holiday, Starfield and Redfall. Those would have been the hits. Talk through making that decision to delay the hits. Then I want to talk about this shift in the industry from being an “all hits all the time” model to this more recurring-revenue subscription model.
I think positioning it as a decision might be slightly wrong, at least for me. It isn’t really a decision to move a game after spending the team’s effort over multiple years just to get to a point where you know you’re not going to deliver the game you want on the date that was promised. Now, it is at some level, because I have shipped games too early. We have experienced shipping games too early.
In hindsight, when you look at a game like Starfield, it’s taken so long and so much investment in new IP from the team. The decision to give the team the time to build the game that they feel they should be building is just the right thing to do. There are financial implications to those decisions. Weighing what is going to happen, whether it’s platform growth, subscriber growth, or frankly, the revenue that you generate when a new game launches, those are business decisions. You definitely have to weigh the outcome of those decisions.
For any game, but definitely for our games Starfield and Redfall — which are our first big Xbox games with ZeniMax coming into the team — I just wanted to make sure those teams felt they had all the support they could get from Xbox, and to maybe feel some of the benefit of being part of a larger organization that has other revenue streams and other helpful things going on. In the end, I believe the quality of the games will be better and customers will find the experience to be more interesting, which will hopefully feel like the right decision in hindsight.
Walk me through how the decision was made. Did those teams come to you? Did you look at the work? How long did it take to make that decision?
This is maybe where some of my experience in the industry comes to play. I know both Todd [Howard, Starfield game director] and Harvey [Smith, director of Arkane Studios] well, and we had a discussion about where those games are.
I’ll focus on Starfield with Todd — he and I have an honest discussion going on, starting from the day the deal closed on the purchase of ZeniMax. “Where are we with the game? What are the risks that we see?” We have some internal teams at Xbox, like our advanced technology group, ATG, which we can deploy to help teams look at where they are with tech challenges and production challenges.
As somebody who has seen a few county fairs here, I might get some gut instinct about where we are, just by the way the teams are talking about their game and where we are in playing builds. One of the things I have learned is that you want teams to feel like they own their dates. They deliver better when they feel like they own their own destiny with their games, so you wait for the real signal from the creative and production teams. It’s an ongoing discussion about where we are. It’s not like one day, all of a sudden, somebody comes in and says, “Okay, our date is going to have to move.” We track and understand the weighted risk on everything that is going on. It’s a fundamental part of the job that [Head of Microsoft Studios] Matt Booty and [CEO, ZeniMax Media] Jamie Leder do in running our first-party studio organizations.
That’s the hits business. “We have to have a hit. We’re going to move the date, because it’s not ready. There’s going to be some risk to, I don’t know, holiday revenue for Microsoft Games.” Then there’s the other side, which is, “Man, it would be really cool if everyone just paid us $15 a month all of the time,” and the games come out and everyone’s happy. That base of revenue is recurring and is a little more stable than hits and console generations. Is that the move? That seems like where you have been building for a long time, but it’s harder to get there than maybe anyone anticipated.
“We don’t have this vision of everybody paying us $15 a month.”
We don’t have this vision of everybody paying us $15 a month. We think the subscription is an interesting business model for certain kinds of games and for certain customers. I really see it as diversifying how people build their library of games or how creators reach the customers they want to reach with the content that they build. It will always be part of the business, in my view. I think people buying and owning their games will be an important part of the business for years and years to come.
Free-to-play games with post-sale monetization, add-ons, and battle passes that those teams have figured out will be a significant, probably majority of the business for a decade plus. Subscription will augment that. Really, that’s the extent of it. We are not building towards a world where subscription is in any way dominant or predominant on our platform. We think for certain customers in certain markets with certain economic livelihoods, where they are managing their cash flows, subscriptions can be very valuable.
But having our customers choose the way they decide to play and how they play is really fundamental when going back to how we make decisions. It’s why you don’t see us doing exclusive games in the subscription or trying to drive people away from purchasing games. We love it when people purchase their games. It’s fantastic. We also like it when people subscribe. The thing that we’re really looking at is if we can just get more people to play more games and make it easy for every player who wants to play.
To be fair, I heard that line at the beginning of the streaming transition in music, very famously from Steve Jobs, actually. “People like to own their music,” is a thing that he used to run around saying all the time. We heard it from the movie industry, and now I feel like we’re hearing it from the games industry. Is that just the point on the curve that you’re at? One day five years from now, are we just going to wake up and it’s all going to be streaming and/or subscriptions? Is this a permanent state of affairs?
No.
“Games are fundamentally different… Games have a business model unto themselves.”
Games are fundamentally different — and we play, so we know this. Games have a business model unto themselves. Songs don’t. If you want access to the song, the decision is, “Do I pay for the whole album, do I pay for the track, or do I subscribe?” If you think of almost any game in the market today, it has a business model unto itself that should be sustainable and profitable for the creator of the content. That’s not true of movies, that’s not true of music, and that’s not true of books. I think games are just fundamentally different that way.
That’s why free-to-play is such a big model in video games, because if you can get people to play and you can compel them to continue to play, you can build a business around that. Obviously, there’s a massive amount of free-to-play games across all platforms right now that we could look at as an example of that. To use that extreme, free-to-play and a subscription is a little bit of an anomaly. “Why would I ever pay a subscription to play a free-to-play game?” Now we’ll do some things around perks and other things to maybe make it feel like you’re a special part of that free-to-play community if you’re a subscriber, but in the end, free-to-play is a great way of finding millions and millions of customers who will forever exist in video games.
I remember the time when people thought free-to-play was blasphemy. “How can you let people play for free?” Then people figured out, “Hey, this can actually work.” I think that is the fundamental difference. I’m definitely not smarter than people who did music subscriptions or video subscriptions. I just think the fundamentals of gaming are different, so subscriptions will be part of the solution but not the only solution.
The fact that you can shop in a video game and you probably shouldn’t shop during a movie —
Or while listening to a song.
It might be under-remarked upon in general when people talk about it. Are you still selling the Xbox consoles, the Series S and Series X, as fast as you can make them?
Series S you can find in the market, which I think is a good thing. We have inventory on shelves, ready for the holiday season. It’s something we have been building towards. X is still a little more difficult to find. I mean, obviously our goal would be that you would have great weeks on hand. In this job, I’ve learned about how much inventory retailers have. You want to have those products on the shelf so when customers spend their time to find your consoles, whether they’re doing it in person or online, they can find your consoles.
X will be difficult to find, especially through the holiday, but I feel good about S. I think it’s a positive that it’s available in the market for families who want to come in and maybe add a video game console to their household.
Are you seeing the demand for the consoles slow down as the economy is doing whatever it’s doing?
We are clearly in the entertainment space. We are not food, we are not shelter. As families are going through economic constriction and managing their cash flow, we are one of the activities that at some point has to fall out of the question, “What am I going to pay for this month?” And that’s right. If we just think about the world’s economic situation, as people are managing energy costs and with the other things that are happening, I think it’s natural that could have an impact on anything that’s not a must-have opportunity.
Games have tended to be a little more resilient and weather these times better than some other segments, because we’re good value for the dollar. Just think about the games or consoles that you already own. You have the ability to sit down and play as a family, to give your family things to do, and there is also the expense-per-hour-entertained. That’s not a ratio we track, but maybe some families are thinking about that. We absolutely have our eyes on what’s going on in the world economic situation. We understand what video games are and that at some point families might have to make decisions away from video games. We’re not really seeing that yet. There is a little bit of slow down in certain spots, but overall, gaming activity seems to continue to be strong.
Well, you said certain spots. Is it worse in Europe? Europe seems to be where it’s hitting the hardest right now, economically.
I think what we’re seeing as we’re doing some research is that people are valuing… This sounds like an ad, but you asked the question, so I’ll just go here.
That’s why we’re here.
You’re not here for an ad. The fact that we do have an S console that is less expensive than our X console is helpful to families. The fact that we do have a subscription means I don’t have to pay $70 for every one of my video games, and I can build my library in a different way. Again, I apologize for it sounding like an Xbox ad, but it is what we have. We are definitely hearing from customers that those things are valuable ways to manage their flow.
So are games coming out on both platforms, though I know there’s another side of that that certain people dislike. If I have a PS4 and I want to play God of War, I’m going to be able to do that without going out and spending $500 on a new console. People should play God of War. It’s great. That is our industry recognizing where our customers are, providing them value where they are, and providing them benefits if they do want to go buy a new console to see great games on new hardware. That is also an advantage.
I wouldn’t say it’s geographic where we’re hearing things. Different families in different situations are valuing choice and the option to play where they are instead of having to buy new hardware, which is definitely a benefit for many people.
We have heard that the chip shortage is actually slowing down, especially in GPUs — GPU supply is there. Is that true for you as well? Is that what you’re experiencing as you try to have inventory for the holiday season?
We are seeing supply strengthen for us, and demand has not really weakened. All along, while we focused a lot on the supply chain during those first two years of the console generation for us, demand has never been higher for us on Xbox. If we go back to the original Xbox, Xbox 360 and Xbox One, we’re selling more consoles than we have ever sold at this point in a generation.
A lot of the discussion, because of COVID-19 and other things, has been on global supply chain and supply. Clearly, if we had more supply, we could meet more demand. I would say our stock situation has been driven as much by demand as it has been supply. That demand doesn’t really seem to be slowing down much. The fact that we’re starting to see more supply come in is why I said you’re still going to see X vacate the shelves pretty quickly. We are definitely seeing supply ease up. I suspect as we get into 2023, touch wood, you will see consoles on the shelf when you walk in the store.
All right. This brings me to the $68 billion gorilla in the room, which is the Activision acquisition. Regulators around the world are looking at it. The reason I think this is a segue to it is because you’re saying, “We’re selling all the Xboxes we can make. There’s more demand for Xboxes than ever before in our history.” As regulators look at the deal, Microsoft is arguing to European regulators, “Hey, we need this to even compete.” The quote is, “Xbox is the last place in console, where it’s seventh place in PC,” — this is a quote from Microsoft — “and nowhere in mobile game distribution globally. So we have to be able to buy Activision to even be competitive.”
At the same time, you’re on this show saying, “There’s more demand for Xbox than ever. We have this amazing suite of products that can meet people at all of their price points and economic conditions.” How do I reconcile those two things?
Well, on console, I think you could admit that both can be true. We can be in third place and have more demand than we’ve ever had. That’s completely possible, because I think the other console manufacturers are also seeing more demand than they’ve ever had. I don’t think anybody needs that quote from us to understand how irrelevant we are at mobile. Right? Anybody who picks up their phone and decides to play a game would see that on their own. For PC as well — our trials and tribulations over the last five, six years in PC gaming are well-documented, and we continue to work at it. I love the work that the Xbox app team and our PC studio have been doing, but it takes time. I think one is just an accurate snapshot of where we are.
In terms of the Activision opportunity — I keep saying this over and over, and it is true — it definitely starts with a view that people want to play games on every device that they have. In a funny way, the smallest screen that we play on is actually the biggest screen when you think about the install base in a phone.
Mobile is a place where if we don’t gain relevancy as a gaming brand, over time the business will become untenable.
That’s just a place where if we don’t gain relevancy as a gaming brand, over time the business will become untenable. We’re not alone in seeing this; this is true for any of us. If you’re not able to find customers on phones, or on any screen that somebody wants to play on, then you really are going to get segmented to a niche part of gaming where running a global business will become very challenging.
Let me push on that a little bit. Draw that out. So you’re saying if you don’t initiate customers on their iPhones or their Androids and they’re not playing there, then eventually the Xbox becomes a niche part of gaming that is not globally sustainable?
Well, let’s just start with console all-up, and maybe this is vocabulary but it’s how I think about it. Let’s say the gaming industry right now is $200 billion, and maybe growing by 9 or 10 percent. That is probably a 2021 number, but let’s just use that. If console as a business is flat, and PC is basically flat, yet it’s still growing at 9 or 10 percent, that means all of the growth is happening in mobile.
This has been true if anybody looks at the numbers for five or six years; all of the growth in gaming has actually come on mobile phones. As a percent of the overall gaming business, console business is shrinking, because the overall business is growing while console stays relatively flat, as does PC.
Then when you look at the largest gaming companies out there, Tencent being the biggest gaming company in the world, so much of their revenue comes from mobile. They put their business success that they have earned through their work into the market, acquiring other studios at a very fast rate. It puts a lot of us out there, who are maybe traditionally segmented to one screen and one device, in a position of, “Okay, if you play this out over 10 years, if console itself will not grow, PC will grow in certain years and not others, and mobile will continue to grow, how do you continue to run the business and stay competitive with others that are out there acquiring talent and building new business models, new distribution, and new franchises?” It’s critical that if you’re trying to run an at-scale global gaming business, you meet your customers where they want to play, and mobile is more and more that place.
Now, in addition to that, there’s also creative capability around social, casual free-to-play on mobile. I also think our studio organizations need to be great at building many different kinds of games that many different kinds of players play. Not to downplay the great success that we’ve had over the years with the games that we love to build, but in running a business like Xbox, you need to be globally relevant to anybody who wants to go play.
“Candy Crush makes more than Activision and Blizzard.”
I’m looking at the Activision Blizzard numbers. They are structured pretty independently. There’s Activision, there’s Blizzard, and then there’s King, which is the division that makes Candy Crush. I just saw their earnings. King makes more than Activision and Blizzard. Candy Crush makes more than Activision and Blizzard.
Are you surprised by that?
I’m not. I think our listeners are probably going to be surprised by that.
But that’s not new.
You’re buying the Candy Crush company. People think about it as Call of Duty or whatever, but you’re buying Candy Crush.
Absolutely. In addition, the number that’s not in the Candy Crush/King number is Call of Duty: Mobile and Diablo mobile, which are big franchises that exist in that Activision and Blizzard bucket that are also major players on phones. Yes, the idea that Activision is all about Call of Duty on console is a construct that might get created by our console competitor and maybe some players out there.
You mean Sony, by the way. You don’t mean Nintendo. You mean Sony.
I haven’t heard Nintendo sending in any complaints about the deal. If you look at the totality of what Activision/Blizzard/King does, where their customers come from, and where they make money, the stats that you put out are not new. This has been many, many years.
It’s the same reason that Take-Two looks at Zynga and says, “Okay, we have to build out our mobile capability.” I would say Activision/Blizzard/King did a better job of doing that earlier, and definitely better than we did. They are now in a position where they have great PC franchises, great console franchises, and great mobile franchises.
The real differentiation that Activision adds for us is their mobile capability.
The real differentiation that they add for us is their mobile capability.
I was looking at some reporting yesterday to prepare for this interview. It sounds like the Activision side of this deal is saying, “Just do whatever the regulators want and close this deal so we can get paid out and go away.” The regulators are saying, “We want to impose all these conditions on you.” Most notably, Sony is making a lot of noise about Call of Duty and how long it will stay on the PlayStation. Are you prepared to make the concessions that regulators might want to close the deal?
I have not sat down with a regulator where they have proposed any regulations. I think what people are purporting to report in the press about what’s happening is maybe more rumor and hearsay. I have said, specific to Call of Duty on PlayStation and Switch — because I would love to see them on both, and I don’t want to make this about just one of our console competitors — that it’s something that we want to do. It’s in our models when we think about how this plays out over time. The financials of Activision is that Call of Duty would stay on PlayStation. We are definitely open to discussions with either Sony or regulators about making sure that that continues to happen in a way that they want to see.
I will say, for things like Minecraft — which is my kind of go-to example, because I think we’ve run Minecraft the way that we would run Call of Duty if we were to close this deal — we don’t have a multi-year deal with Sony or Nintendo to put it on those platforms. There seems to be some notion that you have to have some long-term structure in order to continue to support those other platforms. We support Minecraft on those platforms because of how people should analyze this deal, which is about customers.
When I think about where we are in Activision/Blizzard/King and the regulatory work, I think we should be analyzing whether we are going to harm players. Is there a world where players have less choice in the market, or is there some kind of blocking that we do? We are committed to continuing to ship Call of Duty on PlayStation. People are worried about that. We are committed to putting these games in Game Pass, which gives people more options in how they want to go play these games. Nobody has presented to me a case that shows how Game Pass is bad for customers.
From the value of a customer, I have a ton of confidence in how a regulator, or anybody else, looks at this deal and says, “Okay, I have a point of view on how this deal impacts the real important constituents, which are the players.” I don’t think the regulatory view on this deal should be about how we compete with one of our competitors. Almost by definition, there is give and take in market share and other things when we’re competing with other companies. In terms of players, I look at whether we can bring benefit to the players in the gaming market through this deal. I think we can.
You have walked into a major philosophical debate in competition law that we do not have enough time to fully explore. The question there, and the difference between the United States and Europe, is that the United States looks at consumer welfare and Europe looks at the amount of competition in the market. In the United States, the Lina Khan version of the FTC is trying to make the change and say, “Actually measuring competition is better because it has downstream effects on consumers.” Do you see that split? Does it come to you from your legal teams that, “Hey, here’s the US standard, here’s the European standard, and here’s the strategy we have to pursue, because either one of these regulatory regimes could block this deal.”
Anybody who has looked at my resume understands that I’m a guy who wrote code coming out of college and I play a lot of video games. I’m not a lawyer.
You’re just an unfrozen caveman.
That’s right.
Sure. I buy it. You’re the CEO of Microsoft Gaming. I know that you have lawyers.
No, we have lawyers. I will have discussions with them about approaches. I always come back to, “How does this impact our players, our customers, and even customers on other platforms?”
“We’re committing, and I’ll do it publicly. We are going to ship games on PlayStation if that is where the focus is.”
We’re committing, and I’ll do it publicly. We are going to ship games on PlayStation if that is where the focus is. We’re the third-place player in console, and I don’t think anybody can argue that we’re not. We have been third since we started, just in terms of global install base — and that’s like 20-plus years.
I understand a view on how this might impact competitors and I welcome the conversations that any of the regulators are having with other gaming companies. I think it’s a valuable process, and I think we should end up in phase two in whatever that means in all of this. It’s a big deal, and it’s an important category. I understand the discussions that we’re having, and I think they are valuable and useful in terms of the public discourse around video games and acquisitions. No harm there at all. In fact, I enjoy the conversations.
In terms of the impact that we have on competition, I want to be more competitive in gaming, not less competitive. At some level that will mean you have an impact on the other players that are ahead of you in the race. I think that’s almost the definition of competition.
You mentioned not having a contract or a deal for Minecraft. We do have some reporting. Our own reporter, Tom Warren, had it that you promised Sony three years of Call of Duty. Sony said that’s not good enough. You recently have a quote that says, “You will have Call of Duty on PlayStation for as long as there is a PlayStation.” Which is a great quote by the way, because of the implied threat that it contains. I appreciated that.
It’s true. You’re like, “One day there won’t be a PlayStation. I’m coming for you.” I appreciated that about it. Have you made that promise to Sony, that you will ship Call of Duty on PlayStation as long as there is a PlayStation?
I mean, when I’m standing out publicly saying it, I would assume anybody at Sony would see that.
Well, they can’t hold you to that. I mean, they can’t take you to court because you said it. I mean, saying that to me in my show, it’d be great if they filed a lawsuit based on Decoder. That’s a huge win for me, but you have to write it down for them.
No, you don’t. That’s what I’m saying. I support Minecraft. I support the players on PlayStation who want to play our games like Minecraft. We don’t expand Minecraft Dungeons and Minecraft Legends out of any contract we have with Sony, but the contract we have with our customers. That is what’s important.
I understand in the optics of this deal that we might want to make — and I’m totally open to doing this — a contractual commitment to Sony for some number of years that says, “Okay, we’re going to continue to ship Call of Duty on PlayStation.” I’m totally open to that. No issue at all. This idea that we’re going to write a contract that says “forever” doesn’t make sense to any lawyer. There is obviously a business relationship between the royalty exchanges and other things. You’re not going to give up any ability to do what you need to do and the flexibility with the business in the future.
When I’m saying things like, “As long as there is a PlayStation,” there was no implied threat at all. I hope there’s a PlayStation forever. I do. I think PlayStation and Nintendo are great for the gaming industry. Hopefully I have been consistent in saying that. All I mean is that at some point you have to have the ability to run your business, and not just the console business. It’s not about pulling the rug out from underneath the PlayStation 7’s legs at some point, like, “Haha, you just didn’t write the contract long enough!”
There’s no contract that could be written that says “forever.” Our model is we want to be where players are, especially with franchises the size of Minecraft and Call of Duty. I think our Minecraft history is coming up on eight, nine years and it shows in practice how we will support our customers. That’s what I want to do with Call of Duty.
This idea that we would write a contract that says the word “forever” in it is a little bit silly, but to make a longer-term commitment that Sony and regulators would be comfortable with, I have no issue with at all. I do think there’s going to be a time horizon, just like anybody writing a contract would suggest there should be and will be, but it has nothing to do with any kind of “strategery” there. We think Call of Duty will be on PlayStation as long as players want to play Call of Duty on PlayStation. That’s not a competitive threat against PlayStation. That’s just a kind of pragmatic way of looking at it.
This brings me back to game streaming, because that is one way you could get Call of Duty on PlayStation.
“Native Call of Duty on PlayStation, not linked to them having to carry Game Pass or streaming… There’s nothing behind my back.”
Native Call of Duty on PlayStation, not linked to them having to carry Game Pass or streaming. If they want a streaming version of Call of Duty, we could do that as well, just like we do on our own consoles. There’s nothing behind my back. Call of Duty: Modern Warfare 2 is doing great on PlayStation and on Xbox — so will the next game, and the next, and the next. Native on the platform, not having to subscribe to Game Pass. Sony does not have to take Game Pass on their platform to make that happen. There’s nothing hidden. We want to continue to ship Call of Duty on PlayStation without any kind of weird, “Aha! I figured out the gotcha.”
I wasn’t even coming at it that way. I’m glad that you interpreted it that way. I wasn’t even going there.
No, it’s fine. I understand some people’s concerns on this and I’m just trying to be as clear as I can be.
Yeah, someone has sent you the digest of angry tweets about this. I can tell that you’re ready to fight with the people online.
I’m not fighting.
The last time you were on in 2020, we did talk a lot about game streaming and all the places you could put a viable game streaming app. One of them was obviously competitor consoles. That’s a pretty interesting way to do it. You said within a year that, “We’ll have a streaming stick, we’ll just do it and you can plug it into TVs.”
We didn’t do it.
You didn’t do it. Recently you said you were, “years away” from this idea. What happened there?
The console we built, that now people have seen…
Keystone.
Keystone. It was more expensive than we wanted it to be when we actually built it out with the hardware that we had inside. We decided to focus that team’s effort on delivering the smart TV streaming app. It was really just a direction, “Okay, we’re going to focus our effort on our partnership with Samsung and where that app might continue to show up in different places over time.” With Keystone, we’re still focused on it and watching when we can get the right cost.
When you have Series S at $299 — and during the holidays you might see some price promotions — and you obviously have Series X higher, I think in order for a streaming-only box to make sense, the price delta to S has to be pretty significant. I want to be able to include a controller in it when we go do that. It was really just about whether we could build the right product at the right price, or if we couldn’t, how could we focus the team’s effort? We decided to go do the TV app with Samsung, and we’re really happy with the results there.
What’s the right price?
I don’t want to announce pricing specifically, but I think you have to be somewhere around $129, $99 for that to make sense in my view. We just weren’t there with a controller. I love the effort. The reason it’s on my shelf is because the team rolled up their sleeves and in nine months they built that thing. A bunch of us took it home and it worked. It worked really, really well.
When you are building new products, it’s always about, do you have the right design? Do you have the right user interface? Do you have the right customer proposition? That customer proposition includes the price, and I think all of us knew that we were a little out of position on price.
Was the price too high because of the processor or the controller inside? You keep mentioning Samsung TVs. They are not processing powerhouses. Everyone who’s ever used a smart TV knows these things are underpowered out the gate and they feel even more underpowered over time.
This is why we will get there. It’s different when you have your own power source. Not to go into the hardware design, but if this thing is standalone, it’s not living on the power source and the integrated circuits that are already in the TV. You have to do everything bespoke. We made some decisions to make it easy. When it is turned on, it looks like an Xbox with the user interface and everything works. Some of the silicon choices we were making at the time of designing just didn’t let us hit the price point that we wanted.
I love when teams go off; it was kind of like our back-compat team back in the day. I applaud when teams go off and take a crazy mission of, “We’re going to build a streaming console and all try it at home, and the experience will be really good.” I love when teams take risks and deliver. I think it’s fantastic.
Here’s one of the things you’re going to run into in that kind of market. Obviously Samsung has a smart TV platform. They’re pretty dominant, and they sell a lot of TVs. That is a good way to address the customers. If you want to ship that app at scale, you have to build a Roku version, a Google TV version, a webOS version, an Apple version, et cetera. Is that the plan? You’re going to build versions for all these different app stores?
What we did on our tech roadmap, people might have remembered that we started with an app for our streaming when we were early in testing on iOS and Android. We fairly early switched over to building a PWA, a progressive web app, and were available in any kind of Chromium-based web browser.
It gives us a lot of flexibility in terms of where it shows up when you have a PWA in your arsenal and you are accessible via URL on Chromium. As we look at device expansion and where our services might end up, some of it we have nothing to do with it. We’re like, “Hey, if you have a good web browser, you can pin this URL and the experience is pretty good.”
Certain mobile phones won’t let us do that, but there are certain platforms out there where that is an option. The PWA gives us a lot of flexibility, so that we don’t have to port a native app to every one of those ecosystems like you’re talking about. That is kind of where our focus is right now for expansion — on our PWA app experience and on the URL experience. Maybe at some point we’ll get to building more bespoke apps where we need to, but we’re getting pretty good expansion just focusing on URL and PWA.
PWAs are really interesting progressive web apps that load in the browser. One of the reasons you have a PWA is because Apple wouldn’t let you put game streaming in the app store, as it famously came out. There is the Epic Games lawsuit, and Microsoft is supporting Epic’s appeal of that lawsuit. You talked a lot about having to expand in mobile, right? This is why you’re buying Activision — to get that big foothold in mobile. Is Apple still the blocker there?
Well, we also can’t monetize on Android. If you tried any of the games that are in the subscription that have a business model, we have to monetize outside of the app experience for those. Which for some users is no issue, but for other users it is. So I don’t think it’s just one of the duopoly. It’s not just Apple in the mobile space; I think Google constricts it as well.
It’s discoverability, because I think we probably both say these app stores aren’t just about deploying bits, but they are where you go to find things. Anybody who has an iPhone right now can go and type Fortnite in the app store and see what shows up. You don’t get a link to xbox.com/play/Fortnite, I’ll tell you that. You get a link to some things that aren’t Fortnite that are trying to fool you into thinking they are Fortnite, because people use these app stores as discovery.
It’s about discovery of things that you want to play, easy access to those things, deployment, and, in the end, monetization, so that the creators can actually build a business. Mobile is a place that we are really challenged. You’re absolutely right. I think in order to help break that, we need some regulatory help there. Also, having a real footprint with players engaged every day in games that we build can help cross-promote to other things that we’re doing on phones, and can really help us with discoverability. It’s a high-beta bet that you’re actually going to build any kind of monetization on mobile phones outside of Apple and Google today. I like those kinds of bets, and it’s a significant underpinning to our strategic analysis of why Activision/Blizzard/King is interesting for us.
Do you think that products like the Logitech cloud-streaming handheld, the Steam Deck, and other cloud-streaming handhelds provide leverage against Apple?
“Just look at what Apple did to Fortnite, one of the biggest games in the world. When the suit came up against Epic, they just threw the game out of the store.”
No. I mean, I love those devices. I’m traveling right now. I’m in New York City and I have my Logitech with me. I’m playing in the hotel room, and it’s great. But I mean, just look at what Apple did to Fortnite, one of the biggest games in the world. When the suit came up against Epic, they just threw the game out of the store.
Could you imagine a console deciding that, whether it’s us or Sony and Nintendo? “Oh we’re going to just throw one of the biggest games on the platform out of the store.” I mean, our relationship with creators is much more linked to our joint success. It just shows the market power that these companies have on the largest screen — which is the small screen, the phone — that they can just throw big games out. I don’t think Apple or Google feel threatened by Logitech G Cloud, the Razer device, or Steam Deck. I just think that’s a different market.
So we just saw Google shut down Stadia. That was their big bet into game streaming. They made a lot of noise. I don’t know what they were doing, it’s Google, they launch things and shut them down all the time. From your perspective, trying to build a streaming product, having Xbox, seeing a huge competitor come in and then leave, what did you take away from that? What did you learn from that?
I always learn when other teams are building new games, new genres, and new business models. I have a lot of friends that worked on Stadia and were there at the beginning of it. I love the technology investment that they made. I thought they did a good job building out a cloud platform, and the hardware that they had was strong.
To me, I thought the extra step that they could have added would’ve been some form of content subscription. When I thought about a customer base — because we were obviously going through similar math at the same time on how we should go to market — to have the predominant way your business model runs around a streaming subscription be built around the purchase of games early on in the introduction of a new technology… I don’t know if I’m right or wrong, but our view was that’s not how we should start. We should start with something that has a lower marginal cost for a customer. Meaning, “Okay, I paid $10, $15, so I can stream some games. Then I can test to see whether it works for me.”
Also, we added it to console and to PC, so we gave people options in the devices where they already love playing video games. If you don’t want to wait for that game to download on console, just play from the cloud, or you can try to figure it out and make these things available on PC. Not to make it something against console or PC, but to embrace where people love to go play, to extend and give them more options, including the business model of how a customer builds their library.
It’s always easy to say this in hindsight, so I’m not saying I’m smarter than anybody who works there, but to us that was the extra step that you needed to take in order to get people to at least try and stick to the streaming service. We’re seeing that now that we’ve had over 20 million people use xCloud. There are certain markets where a majority of our customers are playing on the cloud on Xbox, and we think it’s great that we can offer that option to people.
One thing I’ve heard about Google’s plans for Stadia is they are going to white-label it. They actually now have this ability to say, “Okay, we can run a game engine in the cloud and stream it to you wherever you are.” That’s going to be great for the future of VR. You don’t need all the processing power in the headset and you can make it way thinner and lighter. “We can stream the game engine that is running the metaverse to you. It’s a good thing we built this technology.” Do you see that same opportunity for what you are building with xCloud?
This has nothing to do with us being in or not being in VR. I would say specific to VR, latency frame rate is so critical to comfort for players. We have definitely learned that over the years. I’m not sure I would start with a proposition that my cloud streaming platform was great in that space. I’m not saying it can’t get there eventually.
But giving creators the option of delivering a game instantly to players, whether they are watching YouTube, Twitch, TikTok, or whatever, or as a way of distributing demos or builds to get feedback — I think there is real use for a cloud infrastructure that can allow creators to distribute gameplay to their customers almost instantly. Not to the exclusion of people downloading and playing the games, but as just another option for them. Absolutely, I see that, and I think what Google has built will find real application there. No doubt about that.
Mark Zuckerberg has felt a lot of the same pressures you’re describing from Apple and Google. They are in control of his business and his monetization, and he has just burned money on metaverse devices. I have a Quest Pro and a Quest 2. Quest 2 is actually a pretty good game console, if you think about it as a game console.
Yeah.
As an appliance, it’s a great product. You were recently quoted in The Wall Street Journal as saying, “The metaverse is a bad video game.”
That’s not exactly what I said.
On the margin, that’s what you said. Microsoft just made a big deal with Meta to put Office, Xbox, and all this stuff in Microsoft’s version of metaverse. Where do you see those things colliding? Is it just another bet that Microsoft is making, that you, the CEO of Microsoft Games, are participating in? Or is it, “Oh boy, video game worlds are going to suddenly render all of reality for us. I’d better start inching closer to it.”
“What I meant to say is that we’re early on in metaverse.”
I’m going to start quickly on my quote, because I think what I meant to say is that we’re early on in metaverse. This idea that immersive 3D interaction between players, employees, or customers can be more interesting than 2D interaction has been proven in video games. We have seen it. Most video games today are 3D, and people love getting together in communal games and playing. I think there is a future there. The worlds that people are building today can be a little more imaginative in what they look like, and they can use some of the best tools that are available to video game developers to make those spaces more interesting. I think we’ll get there.
In terms of the interaction with the rest of the company, I’ve used the Quest Pro, and I think it’s a really great piece of hardware. I think Quest 2 is also fantastic. If people ask me today what’s in the market like, “Hey, I’m really interested in VR, what should I get?” I would tell people to get a Quest 2. I love the fact that Sony continues to invest in VR. I think as a games industry, we should always be trying to evolve our creative palette. That doesn’t mean we all have to do exactly the same thing. But as an industry, games have always been one of the early adopters of new technology and new interaction models. I think VR, AR, metaverse is one of those things for us to have a foothold in and to learn.
For us, in terms of the interaction on Quest Pro specifically, that is more of a Microsoft thing than an Xbox thing. Meta had asked, “Hey, we have this PWA architecture and xCloud works, so is it cool if we show it?” They have the Bluetooth binding so the controller works, and we love people playing Xbox games on any screen that they want to play on. We were happy to support them in doing that.
Given the price point and the enterprise focus of that device, It’s a little different than where Microsoft is. I don’t think it’s the last time that you will see something on Xbox show up in a VR or AR space. We have teams that build great VR games. Think about Flight Simulator and the work that some of the Bethesda teams have done. I like to continue to learn and push on things.
We’re focused on our Xbox mission, and we have been pretty deliberate about expanding from console to PC to mobile. VR/AR is not a big focus for us in gaming right now, but it is something that we’ll constantly learn about and track on where other players are.
It seems like the whole tech industry is in a period of retrenchment. We have seen that some companies are starting to do layoffs and that some companies are starting to do hiring freezes. You are headed into a holiday quarter. Even in the games industry, Google said, “You know what? We can’t just keep throwing money at Stadia. We have to walk away from this.” You are saying, “All right, maybe we have to take a pause on this streaming stuff until we hit our price points.” Your last earnings, the Game Pass numbers, were not where you thought they were going to be. It just seems like we are in a big period of retrenchment, waiting for things to break and calm down. How do you see leading Microsoft Games through this period, where it seems like a bunch of things we thought were going to change actually didn’t change as much as we thought they were, and it’s time to focus?
It’s a really thoughtful question and something I think about a lot in my position. I want to run an organization and a product that has a commitment to our customers. We want to have a long-term vision that succeeds from a business perspective, because that means that their experience on Xbox will continue. Same thing for the teams that are working on Xbox and their investment and their own time and energy in the things that we build. I take running a successful business as a very serious part of the job. We’re doing that today. We run a profitable business in Xbox. I love the different ventures that we have doing xCloud, Game Pass, PC app, and mobile.
I think all of that is important to build a long-term business strategy that leads to business success that means customers can bet that Xbox will be here today, it’ll be here tomorrow, and it’ll be here into the future. And that the teams that are working here can understand that they work in a stable place that is a long-term commitment from Microsoft.
I think there is nothing more fundamental to my job than building out a stable business strategy, a people strategy with the people that work on the team, and ensuring that the business strategy leads to financial success, so that we can continue to invest in this category.
Well, Phil, it’s always a pleasure to talk to you. Thank you so much for joining us on Decoder.
Yeah, thanks for having me. It was great.
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