What if Microsoft abandoned the console wars and nobody seemed to notice?

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bigsocrates

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Edited By bigsocrates  Online

Microsoft had an event today for ID@Xbox. They showed off a bunch of games, some good looking and some not so good looking, some new and some previously announced, and at the end of it they provided a long list of the games that would be launching day 1 on Game Pass.

Earlier in the month Microsoft closed their acquisition of Bethesda and held a press briefing about it. No new games were announced, but what was announced was a large number of titles coming to Game Pass, many in an enhanced form for the Xbox Series systems.

During the Xbox One generation, Microsoft abandoned console exclusivity for all of its first party games and started launching them day and date on PC. It later announced that all those games would be coming day 1 to Game Pass, and it has stuck to its word. There have been a few Xbox only games, at least for a little while, during the last few years, but the vast majority of games available on the platform have been on PC, and sometimes even other or seemingly competing platforms.

Coincidences do happen in this world, but there's nothing coincidental about any of this.

Microsoft was founded as a software company. It has since pivoted into being a software and services company (including services that aren't really 'software' per se, like its Azure server hosting.) While it has made hardware from time to time, and still does, that's always been an ancillary business for them. If you want to buy a Surface laptop, Microsoft will sell you one, but Windows, Office, and Edge are the actual products. Under Steve Balmer Microsoft tried to go head to head with Apple in the hardware market. That's what got us the Zune. Microsoft isn't interested in reliving that era.

Xbox has always been the exception. Microsoft got into the console business as a software maker (the Dreamcast ran a version of Windows) but it stayed as a hardware maker. Unlike Microsoft's other forays into hardware the Xbox brand was somewhat successful, and emerged as a strong #3 in the console market, sometimes making it to #2 when Sony or Nintendo were having bad years.

The Xbox was intended in part as a way to get Microsoft software into what looked like a large growing market for living room PCs and home entertainment boxes. That, in part, explains the name, which could mean anything and doesn't actually reference games in any way. Xbox was the first console to really push a service alongside it, Xbox Live, and Xbox Live has continued to be a major part of Xbox's marketing pitch up until a few days ago when it changed the name to Xbox Network. Subsequent system names like 360 and One continued this theme, intended to give the impression of an all in one system for your entertainment needs. By the time the Xbox One actually launched it had realized Microsoft's ambitions. It was a system that could do video and other applications just as easily as it could games, and made for a heck of an all in one entertainment box. Unfortunately this turned out not to be much of a selling point, because the living room PC idea was hopelessly outdated in the age of the smartphone. Some generals are always fighting the last war, and Don Matrick and Steve Balmer are exactly those kinds of generals.

The Xbox One wasn't just pitched as an all in one living room box, though. It was also pitched as a box that focused on services. The original pitch for the Xbox One was a system where your games would live on the Internet and could be downloaded to the box, but ownership would be tied to an account and could be shared with friends electronically rather than physically. It was a daring pitch, and Don Matrick absolutely bungled it, angering gamers and causing a PR nightmare that, along with Kinect, tanked the system before it launched. Phil Harrison was involved, and he used the same reverse Midas touch that he's offered for Stadia, with similar results. Microsoft retreated, told gamers that they were canceling that whole vision, eventually canceled the Kinect itself, and spent that whole generation doing reputation repair and trying to salvage a disaster of a launch.

Don Matrick was replaced by Phil Spencer, a much better salesman and strategic. Spencer knew that unless you're a cable company style monopoly you can't tell customers how it's going to be. They'll just run to the competition. Instead you need to offer them something of value. You need to seduce them. So he set about creating Game Pass, a service that was pitched on a very appealing "all you can play for one monthly price" message. And he set about freeing Game Pass from the Xbox, first by making a PC version and then by expanding to other platforms. He did this all while continuing to offer the core Xbox audience exactly what they were comfortable with. Your favorite franchises? Still being made. Those familiar green DVD cases? Still available at your favorite retailer. All those Xbox games you purchased online? Heck we'll make them backwards compatible and portable. You can play your favorite Xbox games on your brand new system. Nothing has to change!

But Xbox is changing. It's becoming even more of a service. The Xbox Series X is a fine piece of hardware, but it's like the Microsoft Surface. It's just an option if you want to play Game Pass games. You can also play them on your PC. Or your phone. Or anything with a compatible Internet browser. The Xbox is not the product, it's just a way for you to get the product. Like the Surface is. Your Microsoft Surface is also another place you can play Game Pass games.

Of course Microsoft will stay in the traditional games business for a while. Maybe indefinitely. You don't want to play Gears of War on Game Pass? You'd rather buy a physical copy? Fine. Why should Microsoft care? There are Netflix shows you can buy on DVD. Phil Spencer isn't interested in telling you what to do with your money. He's interested in taking as much of it as he can from you, in whatever way he can, preferably in a way that leaves you feeling happy so you'll want to give him more in the future. You want to buy packaged games? Okay. Want to keep playing games on your Xbox One? Microsoft will keep supporting it as long as possible. You want a new, premium, console to stick next to the TV? Can do. You want to play games on your phone or your PC? Have fun, buddy!

The Xbox brand started competing for a set top box market that never came into being. Microsoft isn't fighting that battle anymore. The console business has long been about selling boxes to people and then making money off licensing software for those boxes, but Microsoft is not a company that makes its money selling boxes and it doesn't think that boxes are the future of the business. Instead it thinks the future is content. In 2021 you don't want to be the TV maker, you want to be the company making content for that TV, and Microsoft is positioning itself to get you content via subscription in whatever way you want. Consoles will eventually die, just like the VCR and the DVD player did, and Microsoft doesn't want to be a DVD player maker in a streaming world.

What does this mean for gamers? Nothing, as of yet. The Xbox will be supported as you'd expect this generation. If you subscribe to Game Pass you'll get a lot of very good games for very cheap as Microsoft continues building that brand and business model. If you don't then you'll still have a good console and all the third party releases, and packaged and digital games to buy etc... Phil Spencer wants you as a customer, not an angry ex-customer who doesn't like Game Pass but isn't being offered anything else. He hopes that over time you'll come around to want Game Pass and become a subscriber. And if you won't then he'll try to make money off of you the old fashioned way.

But in understanding why Microsoft does what it does you can't look at this as a console war anymore. Sony is still interested in selling boxes and games. Its subscription service is kind of an afterthought. Microsoft would put Game Pass on PlayStation tomorrow if it could and if the economics were right. It doesn't care how many Xboxes it sells if Game Pass is still growing. Buying Bethesda wasn't about using Elder Scrolls VI to push Xboxes. If it was then Microsoft would have announced something about upcoming games in the press conference. Instead it's about using Bethesda's games, past, present, and future, as content for Game Pass and to push people into that ecosystem. It will sell you copies of the games on Xbox and Windows because it doesn't want to alienate people, but what it really wants you to do is subscribe.

I grew up during the console wars of the 80s and 90s, when Nintendo and Sega both wanted to be the box under your TV. Now all three companies are doing something different. Sony still wants to be that box. Nintendo wants to sell you a handheld that you can plug into the TV if you want, and it is also in the software business, selling tens of millions of copies of its games at full price while Microsoft's are all on a subscription and Sony mostly uses them to get people to buy its hardware. Microsoft is moving to the subscription business. They're all different models.

But looking at Microsoft's moves through the lens of Xbox doesn't really work anymore. They're still tied to the model for now and they will leverage the brand and use the hardware as a way to attract players, but it's not where their future lies. They're a services company. Subscriptions are available for as low as $10 a month!

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mellotronrules

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#1  Edited By mellotronrules

yeah- it really will be an impressive business achievement if things go philly spence's way and he's able to get GAMERZ on the recurrent revenue IV-drip that satya nadella's new microsoft is hellbent on. and that change doesn't necessarily mean it's a negative...to the contrary if you're looking for quantity of content it's almost guaranteed to be a fantastic value to the consumer.

but speaking personally- i have netflix and hbo subs, and i feel like i'm watching less tv and film content than ever. that might just be a me-problem, though.

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Yes, Microsoft appears to be implementing the Xbox strategy they've been saying they were going to implement for at least a couple of years now.

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Calling Microsoft a "software company" is a bit misleading. First, you have to point out that their Surface line of laptops and tablets are here to stay despite initial skepticism. With the Surface Duo, they are getting back into the mobile market, albeit only tangentially. Likewise, Azure and cloud computing requires a monstrous amount of hardware. They continue to invest millions into infrastructure and even support other companies in hardware.

I think what all of this points to is the model set forward by Google when they introduced the Chrome browser. Tech companies are moving away from the hardware versus software schism and are instead recognizing technology has always been a hybrid of both. In the end, that synergy is likely what Microsoft wants out of their consoles both now and in the future.

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Maybe i missed it, but what about this all is something that nobody seemed to notice? Haven't we've been talking about this all for over a year now?

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#5  Edited By DinosaurCanada

It was the right move. Considering the PS5 seems to be doing great, they realized it was probably more lucrative to focus on selling their games which is where the money is anyway.

@mellotronrules said:

but speaking personally- i have netflix and hbo subs, and i feel like i'm watching less tv and film content than ever. that might just be a me-problem, though.

You aren't alone in this. I've heard and read this from a lot of people. The quantity eventually drowns you and eventually nothing sticks out and you get burnt out, and only resub for a month to watch the new show everyone talks about.

I think Game Pass is great and I subscribe to it, but I already feel it turning into a GameFly-style "regret I still have this" thing, considering I play one game a month on it if that. From a personal standpoint, I can play Octopath Traveler the day it comes out on PC, and I excitedly downloaded it, but I think I would be more inclined to play it and appreciate it more if I just bought it full price. Turns out having a ton of shit isn't actually better than having a few things you will actually enjoy. I thought I learned my lesson with Steam sales.

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bigsocrates

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#6 bigsocrates  Online

@zombiepie: I said they started as a software company and pivoted over time to services in general (specifically mentioning Azure.) While they do make consumer hardware, it's a small part of their business. Here's a breakdown of their revenue for Q4 Fiscal Year 2020

No Caption Provided

As you can see, devices is only about half the size of gaming and under 5% of the overall number.

They're a huge conglomerate in a lot of businesses (technically they also make apparel!) but they are dominated by software and services. That's their strength.

Obviously Microsoft isn't fully out of the hardware business, and won't be. But the hardware business is meant to support and enhance the other businesses rather than being a core focus of what they do. Microsoft Surface exists because Windows and Office exist, and it makes sense for them to also produce a flagship piece of hardware to go with them. Likewise, assuming Xbox continues to exist as a hardware product (and I think it will for awhile, maybe a decade or more) it'll be because it makes sense within the context of the overall strategy, which is selling/renting content.

This is different from the old model, which was based around selling the hardware and then licensing access to it in order to capture a piece of every game sold. Microsoft will continue doing that too (though I could see them dropping the licensing fees lower at some point) but they didn't buy Bethesda to move black obelisks. They did it primarily to drive subscriptions. And they've shown that with their messaging and marketing around the acquisition and other elements of their business.

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#7 bigsocrates  Online

@onemanarmyy: Some people have certainly been talking about it, I'm not claiming to have a scoop here or anything, but if you look at forum threads or discussion about the Bethesda purchase or other Microsoft moves, a lot of people are analyzing them through the lens of Xbox vs PlayStation console sale. Microsoft stopped reporting console sales a while back and is focused on other engagement measures but many people seem to think that's just PR spin because they know they're way behind Sony. It's certainly that in part, but I also think it's based on their actual internal focus.

A lot of people are still looking at things through the older paradigm and I've had limited success arguing this in other threads so I got frustrated and decided to write it up as a more focused stand alone argument.

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#8  Edited By GTxForza

The console/platform wars, in general, are not good at all so we rather avoid them.

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#9  Edited By omatictoast

Good read. I very much agree with this. Microsoft is a service based company (I don't consider Azure as hardware , Microsoft isn't selling rack space, they're selling the functionality of the cloud software that runs on those machines). They see how well the movie streaming business is doing and they are slowly but surely moving in the direction of a Games as a Service model.And a service isn't worth its pot unless it runs on everything. I still don't quite understand how devs make their money off of Game Pass but it must be worth it, as Game Pass is growing.

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#10 bigsocrates  Online

@omatictoast: From what I've seen, there are three models by which Microsoft acquires the rights to put games on Game Pass. The first is just a lump sum payment. For an indie dev this could cover a large chunk or all of the development costs. So you get 80% (or whatever) of your dev costs off Game Pass and then make up the rest, and profit, by selling the game on Switch/Steam/PlayStation or whatever.

The other models are paying per download or paying per unit of playtime. So you get $1 per 250 downloads (totally made up number) or $1 per 250 hours players put into your game or whatever. If you have a catalog title that isn't selling anymore this could be an attractive offer.

Every Game Pass deal is apparently negotiated separately (though I'm sure some companies have the same deal across their games) but they seem to be paying quite well.

The company that's not making money off Game Pass right now is Microsoft. It seems pretty clear that they are treating this like an internal start up. Just like Amazon lost money for a long time, and Uber still loses money, and a lot of these big tech start ups lose money for years or even a decade, Microsoft is willing to float the costs of Game Pass while it is still growing in the hopes that it turns into something big. It's basically internal venture capitalism. MS takes the risk and eats the cost but if it works out then they don't have to buy it for $10 billion like they are trying to do with Discord, they already own it.

This is also why the Bethesda acquisition makes a lot of sense. Instead of giving some number of billions to Bethesda for access to all their games, Microsoft bought out the whole company, and if Game Pass takes off they get them in perpetuity, but if it doesn't then they didn't pour all that money down the drain, they still own that content and those studios and they can pivot back to Xbox if they want, or just become a third party and sell their games across all platforms. Buying a studio gives them more flexibility and a much longer time horizon than paying huge amounts for temporary licenses, which is why they will probably continue making acquisitions.

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senorsucks2suck

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#11  Edited By senorsucks2suck

Without reading all that. With the shipping issues going on now is absolutely the time to get out the hardware market. This might be what breaks Sony. Ratchet and Clank is not going to have a 1:1 attach rate. I cant imagine there are more than 5 million PS5s in the world right now. The size of the box alone means a shipping container moored on the Sues Canal that could hold 10,000 PS4s might only hold 8,000 PS5s. We really have the means to stream via our tablets and chromecasts to play games so why spend $500 to do something that you are already doing. Even Jefff called out Brad on the Bombcast for saying Killer Instinct was showing its age. Jeff wasn’t having that and Brad defaulted to particle effects. If we are still getting excited about particle effects in 2021 then you completely missed the point in gaming.

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#12  Edited By SethMode

@senorsucks2suck: "Without reading all that".... Perhaps then instead of weighing in you could just, not?

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I feel like this is just an argument over a slight semantic shift. The 'console' war has just become the 'platform' wars. None of these companies have ever been out here trying to make money on console sales. They've been trying to be the middle man you need give money to access the software. Different name, functionally the same.

In the platform wars Microsoft is fighting it harder than any company ever has the console war. The acquisitions are still 100% about removing that software from the competition to get people on your platform. Gamepass on PC is about siphoning money away from Steam and the Epic Store and getting it into MS pockets. They want to take as much of it as they can get. They would take all of it if they could and put both services out of business.

They same would apply if Sony or Nintendo allowed Gamepass on their consoles it would take money from them that would hurt if not outright kill their business to the benefit of MS. It would benefit the consumer in the short run.

But to date none of these massive loss leading living on venture capital models have ever turned the corner and found that theoretical value. Until that happens it is only a matter of time until investors run fleeing from the model and we will see what kind of aftermath that leaves. MS has made it so games will be a part of that fall as well.

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#14 bigsocrates  Online

@ryuku_ryosake: The whole point is that MS is NOT fighting a platform war. It is platform agnostic at this point. You can play games on Xbox, PC (via direct download or streaming) and even mobile. They would be happy to get on any other platform they could. Obviously Sony won't let Game Pass on to PlayStation (I could imagine Nintendo and MS striking some kind of limited streaming deal for games not on the Switch in the future some day) but that's a Sony thing, not a Microsoft thing.

Saying that MS is trying to siphon money from Steam and Epic is a little strange since a LOT of first party games are on Steam. Forza Horizon 4 is just the latest example. Obviously to some extent they are competition, but I'm sure future Bethesda games will be on Steam too, and Microsoft has proved willing to sell stuff through the Steam store when it suits them.

This is all a huge shift in terms of how platforms are conceived. Microsoft's strategy really is different, even if Sony is starting to experiment with selling PC ports more than it used to.

Some of the streaming services have turned the corner and made a profit. Netflix is, in fact, profitable. There's a reason all these media companies are jumping into streaming. Of course MS doesn't actually have to worry about venture capital investors to keep its games division afloat because the main company is one of the biggest in the world and is massively profitable. Investors in Microsoft proper don't really care about the games division much, though I suppose if it was floating in a sea of red they could pressure for it to be closed. Regardless, Game Pass is very well capitalized compared to an actual start up.

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@bigsocrates: My argument it's it's still a platform war. Game Pass is a platform where users pay money to play games. Playstation Network is a platform where a user pays money to play games. Just because one thinks of itself differently and has more accessibility doesn't make them competition any less than when it was Atari vs Intellivision.

Game Pass is music streaming and Sony and Nintendo are digital music sales. Digital music sales have cratered with the rise of music streaming because they are direct competitors. Netflix is a direct competitor with rental stores, physical media sales, movie theaters, and TV subscription services. One of those markets was killed by Netflix and two others have lost significant ground.

The Steam stuff I feel is not really that material overall. It's MS being very careful with the PC space. The PC audience is very specifically a fickle crowd. Plus Gabe was out there immediately beating the drum monopoly and antitrust when MS introduced the Windows store. They need to be incredibly careful with appearances here as MS has a past with losing antitrust lawsuits on the PC. Plus I believe they are still using the game for windows file format for Game Pass which atrocious and if the next Bethesda game only came out in that format it would an incredible headache to mod it like people expect. But still every game you play on Game Pass is money in MS pocket and not Steam's or Epic's so still direct competition.

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bigsocrates

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#16 bigsocrates  Online

@ryuku_ryosake: I never said that Microsoft wasn't competing with Sony, Nintendo, or Valve. Obviously they are. But it's not a CONSOLE war anymore. They've moved on to a different type of competition. You compared it to the shift from digital music sales to streaming. But if a company did that and someone said that company was no longer focusing on their digital music sales business that would be correct. They've changed their business model.

Microsoft's business is no longer primarily about selling Xbox consoles. That's a big shift! I never said they were getting out of the video game business or the video game distribution business. That would be a silly claim given the purchase of Bethesda. But the change in business model explains a lot of their actions that wouldn't necessarily make sense if it were still about selling consoles.

It's actually a really big change from a model based on selling consoles and making money off licensing fees to distribute software on those consoles to a model based on selling content subscriptions, based on content you produce yourself or license. They're both the video game distribution business, but they're very different approaches within that space.

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Calling healthy competition "a war" has always been a bit childish, but Microsoft are in the competition whether they like it or not. For example Nissan can't suddenly decide that they're no longer competing with Toyota. As long as consumers are debating which one to buy, there's competition.

I've talked about Game Pass on this site before, I don't think it's as good of a deal as everybody make it out to be, but I won't go on that subject again. But I certainly don't think that it's something that's going to end the competition in on itself. And Microsoft has historically been all over the place with their gaming, remember Games for Windows Live? When Halo and Halo 2 originally came out on PC, and then Microsoft buried all evidence of those games and never ported Halo 3? I think the failure of the Xbox One has given Phil Spencer a lot of leeway to do what he wants, but that doesn't last forever. At some point soon the shareholders are going to start asking questions and demanding to see some numbers. And that could once again send Microsoft going into a completely different direction.

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Did Microsoft abandon the console war... or did they launch the first pre-emptive strike in the "platform" war that is to come?

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Really great post that summarizes what I've been trying to tell people for the last few years. You can see Spencer's strategy pretty clearly at this point. They are also banking on the rollout of 5G to make it feasible to stream a game wherever you want.

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#20  Edited By Haz_Kaj

@dinosaurcanada:

Gamepss isn't about playing games you plan to buy and play anyway. It's about trying out the games you wouldn't buy and end up buying because you like it.

Netflix is different.