Inside Xbox's executive shakeup

19:18Tom Warren:So they've had those issues with Game Pass. And ultimately, I think the strategy was to respond to try and get that growth, right? To try and scale up this idea of... And the way they put it was free billion gamers, right? That was the launch of xCloud. And remember xCloud, and now it's called Xbox Cloud Gaming, was originally a mobile play. So it was literally to try and get people into the idea of playing, streaming on mobile with these attachments to your phone, essentially.

19:48Phil Spencer:It's worth noting that they ran into Apple's App Store rules. Exactly. And they were not able to do this in a way that actually worked.

19:54Tom Warren:Exactly. So they hit a bunch of regulatory hurdles. they had to launch it as a xbox.com forward slash play in your browser. You couldn't get an app or anything like that. So that completely knocked them back, right? Even when they were trying to play test it, Apple were like on the test flight saying, no, you have to change this. You know, like it was very, yeah, they were very restricted in what they could do. So that kind of put their strategy back. Now, who you blame for that?

20:23Phil Spencer:I think you can blame Apple in a very significant way. There's like pretty major antitrust ramifications of that, that Apple is still feeling.

20:31Tom Warren:And then fast forward from that point, from launching xCloud and having all those issues to a couple of years ago, they're still trying to get that resolved. They're still trying to push for this app. They're still trying to get a store in there now. Essentially, it's the idea they're going to have an Xbox mobile store. So we've moved on from having an Xbox cloud gaming app. It's more ambitious now. We want to do a store. We want to sell content in there directly to people. and there was the promise that that was going to arrive from both Phil and Sarah to be fair but then Sarah then promised it was going to launch in a month in an interview and that was two years ago and it hasn't happened.

21:09Tom Warren:A lot of that idea of going for mobile recently and trying to do this cloud store thing has just been over promising and under delivering and relying on regulatory change that just hasn't come. Or it's come and whoever's, you know, whether it be Google or Apple, they've appealed, right? We've pushed it down so many months. So yeah, so they've had all these hurdles with this strategy. But I think ultimately Game Pass has a problem where it fundamentally will eat into those margins of studios. And it's like, how do they, if they can't scale it up, then they have to increase the cost of it. So again, we saw that last year.

21:55Tom Warren:They've been up like 50 % Game Pass Ultimate. So they've been doing all these things where they respond to this strategy with a goal of either increasing the revenues or scaling it up. And it just hasn't been going smoothly, let's be honest, especially over the past couple of years.

22:12Phil Spencer:So it's really funny. So when Phil Spencer was on the show in 2022, I asked him about this vision that the future of Xbox is Netflix. Here's what he had to say. Then there's the other part, which is, man, it would be really cool if everyone just paid us 15 bucks a month all the time. And the games came out and everyone was just happy and that base of revenue was recurring and it was a little more stable than hits, than console generations. Is that the move? Because 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's paying us$15 a month.

22:48Sarah Bond:We think the subscription is an interesting business model for certain kinds of games and for certain customers. But I really see it as diversifying the way people build their library of games or creators can reach the customers that they want to reach with the content that they build. But it will always be part of the business in my view. I think people buying their games and owning their games will be an important part of the business for years and years to come.

23:11Phil Spencer: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. Now I feel like we're hearing it from the games industry. Is that just the point on the curve that you're at is some people are going to buy it and some people are going to stream and we're going to one day five years from now wake up and it's all streaming and subscriptions or is it now games are fundamentally

23:32Sarah Bond:different. And I'm definitely not smarter than people who did music subscriptions or video subscriptions. I just think the fundamentals of gaming are different, such that subscriptions will be part of the solution, but not the only solution.

23:45Phil Spencer:Even as Phil was saying that to me, I was thinking, I don't believe you, but you've gone all in on all of these moves to get recurring revenue. And we were having that conversation in the context of them buying Activision and Candy Crush is the most stable recurring revenue you can get. It's endless downloadable content. It's endless power-ups. It's people paying money to literally play the game every day did you have the same reaction to them saying their goal was not to get to 15 a

24:13Tom Warren:month from every single xbox gamer the interesting thing is when was that that was in 2022 that you

24:17Phil Spencer:spoke to yeah it was just it was right around yeah 22 right around the activation that year

24:21Tom Warren:was quite pivotal internally so i think that was when they kind of realized that game pass wasn't gonna do the number like they'd hit a ceiling on console and they didn't have this mobile growth that they were expecting. And like internally at that time, I think it was 2021 or 2022, but they did a slide deck with the hardware gaming team which leaked in the FTC trial. And it was like the ambition was 100 million people on Game Pass by 2030. And a lot of that growth was through Series S and X. That was the desire, right? But some of it was also cloud and mobile, right? Like a chunk of it. And obviously that's not going to happen unless something crazy happens in the next four years, right?

25:07Tom Warren:Like that growth is just not there for them at the moment. I think the last time they reported it was 34 million. So the messaging changed in 2022, basically, from like Game Pass is our thing to like, well, it's going to be like 20 % of Xbox content and services revenue. We don't see it being much bigger than that.

25:23Phil Spencer:And that's when they bought Activision, right? That interview was right after they'd announced the deal. It was before it closed regulatory approval and everything. But their thesis for buying Activision was we need to be a bigger player in mobile because that's where the new gamers are. And Activision has all these mobile games. And actually Call of Duty, which is what everyone is focused on, is the least of our concerns here. What we're after is king. We're after Candy Crush and all of the mobile IP that Activision has to offer us. I'm looking at it from a pretty outsider perspective. I don't think this has worked out.

25:58Phil Spencer:I don't think this has played out well for them. What do you think?

26:00Tom Warren:It's still early days, and they've consumed it in a way that it's hard to tell, right? This is the classic thing with Microsoft Financials. Every quarter, they hide something else that's not quite working. Like they've done Surface devices. They used to do Surface revenue. Now it's Windows and OEM and devices. So they bundle that stuff when it's not quite working. So I think we'll know if it's not quite working when they start doing tricks like that. but at the moment it's still too early to say but I mean the mobile side like I said with the Xbox mobile store earlier I think the King stuff would have definitely played heavily into that like they could have sold exclusive content in that store and not have to pay 30 % cut to Apple, Google, Valve etc.

26:47Tom Warren:So I think there was a vision for that to be additive to the business and the growth and everything um but yeah i mean the mobile stuff is still i don't know their mobile strategy really actually

27:01Phil Spencer:phil was clearest about this when he was on in in 2022 let's play that clip because i'm curious to see your reaction to this in the context of the news today in terms of the activision

27:11Sarah Bond:opportunity um and 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 and in a funny way the smallest screen that we play on is actually the biggest screen when you think about install base in phone. And that's just a place where if we don't gain relevancy as a gaming brand, and I think other, we're not alone in seeing this, over time, the business will become kind of untenable for any of us. That if we don't, if we're not able to find customers on phones, on any screen that somebody wants to play on that you really are going to get segmented to a niche part of gaming that running a global business will become very challenging.

27:58Phil Spencer:So I listened to that and I think, well, Nintendo exists. They seem to be doing just fine without being on phones. Sony is running what seems like a fine business in the PlayStation without running on phones. And then right next to all of this, arguably the most interesting category of gaming devices in the past five years is Steam Decks and Steam Deck-alikes, which are all running Windows games better on Linux than on Windows.

28:23Tom Warren:Yeah.

28:23Phil Spencer:And I'm actually kind of at a loss here, right? There's this desire to put mobile games on Apple's platforms, on Apple's terms, and this very clear statement that if they don't do that, over time the business will become untenable, and then the rest of the industry is not doing that at all, and they seem to be fine. How do you reconcile those ideas?

28:43Tom Warren:Obviously with Nintendo, though they have a strong collection of ip right that they can leverage and they can be exclusive and they're always putting out great content that people buy the hardware for they don't have a problem there microsoft gaming output over the last decade hasn't been the strongest right recently it's got a lot better but they don't have the respect of the industry for their content either like they just don't do the sort of storytelling that sony does with playstation games they don't do that sort of content so they've had a content problem which is hence all the acquisitions right um but i think with the with the mobile stuff it's like what what essentially phil is saying here is that we need all this content to pull eyes away from tiktok right because no one is buying our console of a certain age right and they're worried that people my age, like 30s, 40s, they're the people that are keeping the consoles, but no one in their 20s right now is buying a console anymore.

29:45Tom Warren:That's their worry. And then the next generation is not going to buy consoles. That's starting to impact Sony as well. It's not a unique thing to Microsoft. I don't know so much about Nintendo because they are very unique, definitely, with the Switch. But I think that's their worry. And that's driven this whole thing for content. we need content we need a way to get people on mobile, we need to meet people where they are this whole thing of play across different devices on TV and all this sort of stuff Xbox Cloud Gaming but the reality of it is that where they're at now with Xbox Cloud Gaming it's their vehicle for cross platform no doubt is that mobile is a small percentage of people who actually play on it and originally it launched as mobile It was only mobile.

30:33Tom Warren:That was their play. Most people that play on Xbox Cloud Gaming are playing on an Xbox One or an Xbox Series S or X. An Xbox One is because they can't play the games because they're exclusive to Series S and X now. So I think their problem is they're stuck with that amount of loyal customers. It's not a problem because it's good to have loyal customers, right? But they want that growth. They've acquired all these companies. They were expecting to be better at mobile, better at cloud. but Apple or Google have not allowed them to do that. We all know why they won't open up their stores because if they did, Microsoft and Sony would completely dominate, right?

31:10Tom Warren:And they wouldn't have a store for one of the most lucrative revenue streams on the App Store. So I think that's the key thing is that they can't get to mobile easily and they've been playing around trying to work around it and they've done cloud gaming and all that sort of stuff But ultimately, they do need an app in the App Store like everyone else that allows you just to easily buy a game and stream it. Like that's their goal. That's what they want. They're nearly there on Android. We say it a lot, but it's always worth pointing out again, that Apple services revenue is not severance.

31:47Phil Spencer:It's not Ted Lasso. It's 30 % of in-app purchases in games. By far, the biggest chunk of Apple's fast-growing services revenue is in-app purchases and games, and they are never going to give that up unless literally the governments of the world demand that they give it up.

32:05Tom Warren:It's going to be a really messy fight for them to give that up. But for some reason, Microsoft keeps thinking that they're going to do it. Some regulatory change. Well, look, I get it.

32:15Phil Spencer:If you can buy King and you get Candy Crush, and then you can lawyer your way into immediate 30 % margin growth. Like, that's a good play. It just seems like they couldn't pull it off.

32:27Tom Warren:They've seen there was some regulatory pressure recently, but it's not enough to what they want to do.

32:33Phil Spencer:We've talked about Phil as the CEO of Microsoft Gaming, and it's easy and tempting to collapse that to just the Xbox. We've talked about how it's important now, especially that the Activision deal is closed, that they run a bunch of mobile games too. They're making some money in mobile. It's hard to know how much. Right next to that is Windows Gaming, right? And maybe now the Rampocalypse means there won't be gaming PCs anymore. And the idea that NVIDIA is going to sell every GPU in the world to Sam Altman means there won't be gaming PCs anymore. But that was more than a flicker during all of this, right?

33:05Phil Spencer:People buying gaming PCs, playing Windows games, eventually buying Steam decks. Just our own audience, every time we covered a Steam Deck or something that looked like a Steam Deck, we could tell people really liked these things. Why did they ignore that opportunity? Because it seems like it was right there for them the entire time.

33:23Tom Warren:God, this could be another podcast episode. They have a history of Windows failures, which is why Steam is the most popular now. But I think they've never really got Windows gaming and PC gaming right. I don't think they've had the right expertise in there. They've done console. Their console platform's great. But yeah, there is a big opportunity on PC. And I think that's kind of what they're seeing right now. So now it's like the reality scene of mobile and cloud isn't ready for them to get that growth. So now they're like, okay, PC. So the next gen Xbox is a PC. It's going to be a PC, right?

34:03Tom Warren:It virtually is now. It's running a custom version of Windows, very stripped down. Like, you know, there's no start menu inside. But the next one, their bet is that they can essentially convince PC OEMs to build Xboxes, right? Which then boot up into their own interface, which then they can say, subscribe to Game Pass. Buy our games in the store. But is the reality that those people are just going to buy them and just use Steam? Yeah. That's their problem. And this is like the very big question of the next gen Xbox. whatever Asher does with that work that's going on at the moment and what this next strategy is going to be.

34:47Tom Warren:Because that is, yeah, that's kind of a big question.

34:53Phil Spencer:We have to take another quick break. We'll be back in just a moment.

35:04Nilay Patel:Support for this show comes from Doppel. Maybe that ping you just got is an urgent message from your CEO. Or maybe it's a deepfake trying to target your business. Doppel is the AI-native social engineering defense platform fighting back against impersonation and manipulation. As attackers turn to AI to power increasingly sophisticated strikes, Doppel uses it to fight back. Their digital risk management dismantles attacker infrastructure, while human risk management builds team resilience through simulation and training. With automated takedowns, multi-channel coverage, and AI defenses that build intelligence with every fight, Doppel works relentlessly to protect people, brands, and trust.

35:45Nilay Patel:Doppel, outpacing what's next in social engineering. Learn more at doppel.com. That's D-O-P-P-E-L dot com. Support for Decoder comes from Granola. You know the struggle of having back-to-back meetings throughout the day? You're nodding along, contributing, trying to stay present, but in the back of your mind, you're secretly stress-scrolling your memory for what was just said. Meetings are a mess. Granola wants to fix that. Granola is an AI-powered notepad built for the way real people actually meet. You simply take rough notes like you normally would, and in the background, Granola securely transcribes the meeting.

36:30Nilay Patel:Then it turns everything into clean, structured, actually useful notes when the meeting ends. And you want to know the best part? Granola works through your device's audio, which means it integrates seamlessly into the video conferencing tools you already use. No setup, no awkward bots. So if meetings are eating up your day, Granola is a no-brainer. You could try it totally free for three months. Just head to granola.ai slash decoder. That's granola.ai slash decoder to get your time back. Get three free months at granola.ai slash decoder. Support for this show comes from LinkedIn ads. Sometimes even the strongest B2B marketing ends up in front of the wrong audience.

37:21Nilay Patel:If someone's seeing ads for high-end cookware but can barely make instant ramen, that's a sign your strategy needs a reset. So when you're ready to reach the right professionals, you should check out LinkedIn ads. LinkedIn has grown to a network of over 1 billion professionals, including 130 million decision makers. And that's where it stands apart from other ad buys. You could target your buyers by job title, industry, company, role, seniority, skills, and company revenue. So you can stop wasting budget on the wrong audience. It's why LinkedIn ads generates the highest B2B return on ad spend of all major ad networks.

38:02Nilay Patel:Seriously, all of them. If B2B growth is the goal, LinkedIn ads is one of the most efficient ways to put your message in front of the people who can actually say yes. Spend$250 on your first campaign on LinkedIn ads and get a$250 credit for the next one. Just go to LinkedIn.com slash decoder. That's linkedin.com slash decoder. Terms and conditions apply.

38:35Phil Spencer:We're back with Verge senior reporter Tom Warren. Before the break, Tom is explaining the recent history of Xbox's struggles. But now I want to look ahead to current Microsoft Gaming CEO Asha Sharma, her previous role in AI, and how this leadership change could affect the future of the Xbox. The new head of Xbox is Asha Sharma, CEO of Microsoft Gaming. She does not appear to have any gaming background. I mean, she's out there posting on social media, like, what game should I play? She's making overtures to this audience. But before this, she led Core AI at Microsoft. She was a VP of product at Meta.

39:08Phil Spencer:She was a CEO of Instacart. She's got a corporate operator background. She's been at the big company. She's run big projects. She's faced the pressure. She's handled it. But she's not a gamer. and Phil very famously is a gamer. I would point out that Nintendo is not run by gamers. No. Sony is not run by gamers. They're actually arguably more successful. Maybe this is actually the thing you need. This is what you need, yeah. Distance from this audience.

39:32Tom Warren:Yeah.

39:32Phil Spencer:What do you think she's going to do with this strategy now?

39:35Tom Warren:I still think that they will pursue exports everywhere, right? But not in the sort of way, not in the sort of over-promising, under-delivering scenario, I hope, because that was just a mess. And I do think she's kind of signaled in her memo of a return to Xbox. We don't really know exactly what that means because, let's be honest, what does Xbox mean at the moment? Also, Phil's been there the entire time.

40:02Phil Spencer:How do you return to the thing the guy who made it is leaving?

40:05Tom Warren:I think she's kind of signaling there that consoles can be a little bit more of a priority than perhaps it has been over the last couple of years. But who knows? We'll have to see when she talks more broadly about that. I know the reaction to her in particular has been around questions around AI, right? Because she's been at core AI at Microsoft for a couple of years. I don't necessarily get the impression that she's coming into suddenly, you know, AI everything at Microsoft Gaming. I think she, I mean, they're just naturally going to do that anyway because it's Microsoft and Microsoft is heavily invested in AI.

40:39Tom Warren:So I think that's no, there's no question that's going to happen there anyway. But I think her background, if you actually look at Core AI, she was more about platform scaling there with the Foundry business at Microsoft AI, Core AI. And that's kind of what she did at Instacart as well, platform scaling and then user acquisition at Meta. So I think if you look into what she's actually done and what she has expertise in, it's exactly what exports kind of needs, right? They need someone who can get teams executing and get that user acquisition, the platform scaling, the stuff that they need to build and get ready to actually see this vision through.

41:18Tom Warren:Because the Xbox Everywhere vision I don't think is terrible, but I think it's just trying to execute on certain parts of it that they've been really sloppy with it and just a little bit too early. So I don't think the strategy is going to change dramatically, but I think the next-gen console and the PC stuff and where they try and push that way is going to be the cover for the strategy they originally wanted to do. But yeah, I don't think she's like some AI plant. I just don't get that impression.

41:45Phil Spencer:Let me ask you this big, big question. You've done a lot of reporting over the last year and a half about this new console and it being a PC and this strategy and whether or not it's organized or disorganized. organized. I think what I'm hearing you say is she's going to execute it, right? Like there's execution problems here. Maybe the company did not trust Sarah Bond to execute this strategy after Phil left. Maybe we need to reset it all. And so Asha is just going to execute that well. That's one approach. We can see if that's what she actually wants to do. Then there's what I hear a lot of people saying, especially gamers who are prone to hyperbole, that her job is to just shut it down.

42:21Right?

42:21Phil Spencer:It's just bring this to an end because Activision didn't work. Bethesda didn't work. All Satya Nadella cares about is replacing all of us with AI agents that are using Excel or whatever he cares about. It's Microsoft just wants to wash its hands of this business. And she's just going to trim it down to sell it to whoever wants to buy it. Do you think that's true?

42:40Tom Warren:Is there a risk there? A few years ago, Nadella thought about spinning off Xbox, right? But instead, Phil convinced him to do all these acquisitions and do ABK. So he invested obviously heavily. That's Microsoft's biggest acquisitions. I don't think shareholders are going to like them just writing off Activision Blizzard. I can't see them running into the ground. And I think some of the people that have been coming up with this theory, and one of them is obviously an Xbox co-founder, which is interesting. Um, but I think it's rooted in the idea that Nadella doesn't want hardware, right? Which notoriously Windows Phone, um, you know.

43:23Phil Spencer:Yeah. You talk about writing an acquisition. Don't get me started. Nadella came in as the CEO, the new CEO and his first job was to write down the Nokia deal and get rid of it. And so you're like, maybe he can just do it again.

43:36Tom Warren:Yeah, maybe. But this time he was there when the Activision deal went down. But yeah, I can't see them running the console into the ground. I think there is a realisation over the past couple of years, the reaction to them putting games on PlayStation and Switch and them really devaluing the console and their core. This is their only remaining consumer brand that's successful. And all right, we can't really call it successful right now. Perhaps, I don't know, it's in a weird spot, right? But it's still a respected brand, a known brand across the world. whereas Windows is in a weird spot Surface is pretty much spanned towards commercial really and yeah this is the last one if they mess this up then they don't have that inroads to consumer which also punishes them in AI as well so I think there's a realisation of that so I just can't see that they would completely exit out of the base of what's known as Xbox and I think if they were going to do that Asher's not the person for that I think the person to do that would be Matt Booty you'd promote him and then just focus on shipping games and selling.

44:43Tom Warren:He's the content officer. Yeah. So I think you do that if you're in a dead end and that's what you truly wanted. You just wanted to do content and just be a third party publisher, which is what everyone kind of thinks Xbox is going to do.

44:56Phil Spencer:Yeah. Or you just keep collecting your 30 % of Candy Crush revenue and you just don't talk about it in earnings reports and it'll be fine. Yeah.

45:03Tom Warren:Candy Crush and Minecraft are like, yeah. Right.

45:05Phil Spencer:You can just print that money and keep those things going and not talk about it and hope no one notices and then spend your time trying to increase co-pilot adoption with consumers or whatever they think they're going to do. But it sounds to me like you're saying we should watch out for actual moves to make Xbox more relevant.

45:21Tom Warren:There seems to be what Ash is trying to signal in her memo. Like that whole return to Xbox is kind of, it's very vague, but it's very interesting at the same time as well. I mean, if they want to keep this Game Pass revenue going, they can't ignore that base, right? And it's a nice bit of revenue.

45:38Phil Spencer:All right, Tom, I'm going to let you go back to that baby of yours. Thank you so much for jumping on and explaining all your reporting to us. I hope Microsoft can keep things chill until you're officially back from leave. But I make no promises on behalf of such an adult.

45:51Tom Warren:No, I thought February was a good time. You know, it's quiet.

45:55Phil Spencer:Very good. Thanks so much, Tom.

45:57Tom Warren:All right. Thank you.

46:00Phil Spencer:I'd like to thank Tom Warren for taking a break from his parental leave to join me on Decoder today. And thank you for listening. I hope you enjoyed it. If you'd like to let us know what you thought about this episode or really anything else at all, drop us a line. You can email us at decoderattheverge.com. We really do read all the emails. Or you can hit me up directly on Threads or Blue Sky. We're also on YouTube. You can watch full episodes at DecoderPod. We also have a TikTok and an Instagram. They're at DecoderPod as well. They're a lot of fun. If you like Decoder, please share it with your friends and subscribe wherever you get your podcasts.

46:25Phil Spencer:If you really like the show, hit us with that five-star review. Decoder is a production of The Verge and part of the Vox Media Podcast Network. The show is produced by Kate Cox and Nick Stat. It's edited by Ursa Wright. Our editorial director is Kevin McShane. The Decoder music is by Breakmaster Cylinder. We'll see you next time.