Ben Thompson Explains the XBOX Disaster

0:00Ben Thompson, the founder of Stratechery. He's been on an absolute tear during a slow news cycle. Does it feel like a slow news cycle to you?

0:10Ben Thompson:I don't know. This summer is always slow. I, you know, I take a couple days or I slow down a little bit myself. I feel like you've done a good job of like providing really insightful and interesting pieces during a slow time where I didn't know that I wanted to hear you. I was going to say I'm doing you a favor. Yeah, you are. I didn't know I wanted you to adopt the voice of Mark Zuckerberg for 20 minutes and go on a tear. But it's not like that was driven by a specific, okay, there's a Wall Street Journal article where Bloomberg has a scoop and we need to know this. It's more just resetting on the meta narrative.

0:45I want to talk about the meta narrative, but can we start with Xbox? Sure. I want to know, first, let's go back in time a little bit. And I want you to reality check me on the story I tell myself about how Microsoft wound up in the situation it wound up in with Xbox. And I think it stems with DirectX. It's the graphics layer that allowed games to be run on multiple graphics cards. So that was a Microsoft licensed piece of property. So this is why we don't have the Chrome box.

1:20Ben Thompson:You ought to go really far back. Like, because we didn't get an Amazon gaming console. We didn't get a Google gaming console, right? Right. Like, why X-Box? Yeah, well, DirectX is interesting. So, when you go back, way back, I mean, we can go really far back. I mean, back in the day, the main technology for doing 3D when it was coming along was OpenGL. And OpenGL had various pluses or minuses. It was, you know, we're way back in history. But this is the origin of the NVIDIA story. making cards to do 3D graphics. You had the Riva, the 128, then you had the TNT, then you had the GeForce, and we're talking back in the 90s when I was your guys' age or whatever it was in college.

2:07Ben Thompson:And making the first, Quake comes out, like the real first 3D game. There's actually a really interesting Twitter back and forth with the old id people talking about Quake and how basically they obliterated the company by burning everyone out by watching it. but um super fun super fun back and forth but uh microsoft comes out with direct 3d as an alternative to open gl that was i think and this is a little out of my area of expertise but i think was a little easier to use had more niceties was more tied into the platform but this is all sort of pc gaming yeah uh the xbox the way i think about it and a lot of gamers kind of get annoyed about the gaming stuff because i don't really care about the game part of it i'm more interested like the strategy uh uh in how that fits in the overall what is your review yeah can we get a gta 6 review no well i feel i feel compelled number one i feel uh rockstar i think is charging way too little for this game they're charging what 80 yes like this is you're gonna get canceled for this this is a nuclear take no they should be charging like 200 i know i know gta 6 is like the last great game.

3:16Ben Thompson:Like you think about everything, it was mostly all made pre-AI, like it is the pinnacle of this AAA craftsmanship, years and years and years of blood and sweat and tears to the extent where you have like the Twitter analysts like counting cigarette butts outside of the offices to see like how much crunch are they in right now. I don't even think he's trading the stock. I think he just wants to know in GTA the love of the game literally the game the gamers are insane so I always tread in this water like very very carefully but no so I feel compelled to buy GTA 6 just in honor of it existing like even if I don't know if I'm ever gonna play it so I'd be happy to pay yes I'm$200 like$80 is ridiculous they should charge more anyhow yeah we had what the youngest person on our team was commenting on people online complaining about the price and said something like, you didn't have, you had 10 years, you couldn't save up 80 bucks.

4:18I know, seriously. It's like, whoever you are, like, I know kids that do lemonade stands and they clear like a hundred bucks, you know?

4:27Ben Thompson:Oh, absolutely. I want, you know, the old$20, I'll keep the change. Nothing will make a kid's day better than that. Although, unfortunately, with inflation, I think now it's sort of like expected. It's unbelievable how expensive things are these days. It's bad. So anyhow, I got to talk about GTA 6. Xbox. Oh, so the console era. So the way I think about Xbox is you go back to Microsoft, and Microsoft had this whole thing. This is pre-iPhone. This is idea of their corporate strategy was three screens in the cloud. And the idea that we're going to, we already own the desk via the PC. We're going to own the pocket via the phone.

5:06Ben Thompson:and people always used to say Microsoft missed mobile. Microsoft did not miss mobile. They came out with a Windows CE in like 1999. Like they were in mobile. They just had the totally wrong conceptual model because they were basing it around, you know, as an extension of the PC. But then the third screen was the living room. How do we get in the living room? Well, people have consoles plugged in their TVs. If we can get in and own the console, we can own sort of the gateway to the living room and we need to earn permission to be in the living room. we will do that by creating the Xbox, the game console.

5:40Ben Thompson:And what's interesting about this is this is a strategy that totally failed. And it failed for kind of an obvious reason in retrospect, which is first and foremost, people buy consoles to play games, not to have a portal to the Internet in their living room. And so you're selling a multi-hundred-dollar sort of console to people who want to play games, but people who don't want to play games aren't going to randomly start buying consoles. What actually ended up taking that over was things like the Fire Stick or Apple TV made a play of this. I still think it's probably the best solution, but it's way too expensive.

6:17Ben Thompson:Now, the Apple TV's poor price got jacked to the moon with this recent memory increase. But the Fire Stick is probably a big one. You had the Chromecast. You had Roku TV. You had these, which ended up being... it's not that it's a classic Microsoft thing they were actually right there was this new front page to online services to be built they just took totally the wrong approach with Xbox and what's funny is that this approach actually became this uberos of self mutilation mutilation because the Xbox didn't succeed in achieving this because the games console is way too expensive to achieve this but then also they killed the Xbox where Xbox 360 was pretty competitive and it's that generation is actually the most interesting console generation i'm happy to expound on that if you want to but they come out after that with the xbox one i think which was super expensive because it had the connect built in that sort of like wave your hands around sort of thing and it had all much more like restrictive drm things it's gonna be more digital it was basically that console was designed around we're gonna realize our vision and own the living room and gamers hated it so they rejected it so their vision which they didn't achieve also killed their console and so and the so my i wrote over a decade ago and the whole xbox saga is filled with regrets i think first and foremost for microsoft but also for me because i from the beginning is like they need to kill this program or they just spin it out or get rid of it the stated goals which made sense from a corporate perspective were not achieved and it is continuing to exist because it exists yeah and i was actually sympathetic to that i worked at microsoft from from 2011 2013 when microsoft was in the dumps and you know they weren't still had a great business but their stock had been like 40 for like a decade and uh and the one thing the employees has like well we still have Xbox all the cool kids over there like it was such a important thing to corporate culture to have Xbox even though this was a totally failed division in terms of achieving corporate goals and also was sort of self-immolating because it was trying to achieve corporate goals that it was not going to achieve yeah what do you think the naming scheme says about that project I always found it very odd that they went from Xbox to Xbox 360 that sounds like the third it's actually the second then Xbox one is the third but it's one and then now they're on series X which feels like the tenth but it's the fourth and then they have a bunch of sub names it feels like they just didn't they never leaned into just like Xbox to Xbox three Xbox yeah well you're asked I mean maybe it shows that worked at Microsoft you're asking the wrong guy about naming things I think but yeah total mess they call it the 360 because it was coming out the same generation as the PlayStation 3 and they And so they wanted to be on the same level.

9:20Ben Thompson:We both have sort of a three in our name. So what's interesting about the PlayStation 3 is the PlayStation 3 was Sony's big misstep in terms of the whole PlayStation era. They had this crazy processor called the Cell Processor that had all these capabilities. And they had, up to that point, consoles were differentiated by hardware. And so Sony famously helped, one of the reasons they beat Nintendo was they had discs, so they could have much larger media and things along those lines. And whereas Nintendo was sticking with cartridges. And there was other, they were much more favorable to third party developers.

9:57Ben Thompson:Just in general, they had sort of taken over in PlayStation 1 and 2. PlayStation 3 comes along, they produced this, oh, they wanted to get Blu-ray off the ground. That's another example of consoles getting screwed up by trying to attempt to other corporate priorities. It worked. Yeah, it worked. Didn't they win? And didn't Xbox go with HD DVD and they lost? They did. But at the end of the day, what happened was the PlayStation 3 was way too expensive. I think it ran super hot, if I remember. And all these extra capabilities were not used. And the reason they weren't used is that was the first HD generation.

10:33Ben Thompson:And you had this shift to 3D games and high-definition graphics. And what happened was it used to be games differentiated themselves by how well they wrote the game. Like, how did it perform on your Super Nintendo, on your Nintendo? Now we move to a world of actually all the actual game was offloaded to engines, game engines. Like, you know, it had one, obviously these were epic, got super big with the Unreal engine. And so you no longer did that. What a game company did was actually design the game and then asset creation. And asset creation at HD was way more difficult, way more expensive than it was for standard-deficient TVs.

11:09Ben Thompson:And so the economic imperative for developers came, we can't just be on PlayStation. We need to be on everything. And so that was the ultimate generation in almost every game was made to run everywhere. Run on PS3, run on Xbox 360, and run on the PC. And that was also the Xbox 360's best generation. That was the one they were the most competitive on because they had all the games, because all developers were making them sort of run everywhere. They had a very simple to develop for architecture. The 360 was very PC-like, even more so than the one sort of previously. And that was their best generation.

11:45Ben Thompson:And then they come back the next generation shoving Kinect down people's throats. We're going to own the TV. And meanwhile, Sony learned their lesson. They're like, okay, we can't differentiate on hardware. We need to create sort of generic hardware that is easy to develop for. And the way we will differentiate is through exclusives. They bought a bunch of small studios, in contrast to buying Activision, which we can get to a little bit. They bought a bunch of small studios and pushed all those studios to developing killer games for the upcoming PS4. And so you got things like the Spider-Man, that was a huge game.

12:22Naughty Dog, Last of Us, that type of stuff. Exactly.

12:25Ben Thompson:And so the PS4 was an unbelievable generation. And a lot of the reasons it was unbelievable was because it had these exclusive games, and they just crushed Microsoft. Because for all the cross-platform games, the Call of Duties, the Maddens, things like that, those always ran everywhere. And so what you do is you limit the economic potential of your studios because you're only building for your platform. And you make it back by all the licensing fees you get off the EAs of the world and the Activisions of the world. because 80 % of gamers are on your console, not on the other guy's console. And so they just wiped out Microsoft in that generation.

13:04Ben Thompson:And that really just continued to the PS5. And this is where we sort of get to the Game Pass disaster. Okay. Yes. So, yeah, I want to, yeah, let's just jump forward to that. How is it? I didn't want to ramble too long. That's going to give you a chance. No, we love it. We love it. I have a bunch of other questions not related to gaming, but I love this history. Oh, I think the console history is fascinating. It's really interesting how sort of, because it tracks technological change to such a large extent, and it totally shifted sort of strategies. And I think you can draw a lot of real parallels, even just model releases over the last couple of years, how certain decisions around one model sets you back a certain number.

13:47They're iterating a lot faster, but I'm seeing parallels.

13:51Ben Thompson:Yeah, the sort of development of, yeah, it's interesting. You can always just sort of draw lessons. So you get to Microsoft at this point, again, I think I wrote at the time, okay, time to give up. I wrote multiple times through the years they should give up on Xbox. And at this point, Microsoft stocks do much better. Was there ever an option after they bought Activision just to make Call of Duty a console exclusive, or would that have been an FTC problem? Well, we'll get to that because that's part of the story here. So Microsoft decides, okay, we're going to actually try a new business model.

14:26Ben Thompson:It's true Xbox sort of selling a console, selling, you know, licensing it. We kind of do that, but we're actually moving to being a services company. The stock's doing much better now. You know, like we have Azure, all these things. What we need to do and the way we compete with Sony is we need to have the exact opposite of the Sony strategy. and we need to lean into services, lean into subscriptions, we're going to do Xbox Game Pass. And the idea of Xbox Game Pass is instead of buying every individual game for$60,$70,$80, gaming pricing, by the way, really has stayed suppressed probably far longer than it should have been, particularly for the AAA games, but we already got to that with Rockstar.

15:08Ben Thompson:So they're like, you pay one price per month and you get access to all the games and Game Pass. Well, of course, no publisher wants to partake in this because they make all their money up front by selling games to their biggest fans. You know, it's kind of like the movie model. You make a bunch of money up front. And yet, in the long run. Were they looking at what happened to the music industry as an example of saying, like, yeah, it's cool to make your product more accessible. You get more listeners by bundling and streaming. That was the bet. You had to make it up in volume. Right. And so this is why the Series S came about.

15:44Ben Thompson:There's the Series X and the Series S. The Series S was a more underpowered but much cheaper model. I think it launched at$300 versus the X was, I think,$600 or maybe$500. And that was also a problem because you're kind of neutering the X because developers build to the lowest common denominator. That's sort of the highest one. So that was one problem. But the idea was we're going to expand the market. And they have these package deals where you get an S and you get Game Pass for a year and it's this sort of thing. And we will make it up. And the problem is no independent developer is going to go for that.

16:19Ben Thompson:So they had some of their own games, but they went out and started buying a bunch of developers. So they bought Bethesda, which included, I think, it at that point. And ZeniMax. Yeah, Elder Scrolls. They have a bunch of great IP libraries. But those developers just aren't releasing incredible titles annually, except for Activision, which does have a new release date. Exactly. So the issue with buying these companies is what you're paying for is you're paying for their existing business plus the premium. And their existing business was selling single copies of games to all platforms. And what they were saying is we're going to basically force all these studios to take a bath, to lose a ton of money by putting all their games on Game Pass.

17:11Ben Thompson:We'll still sell on PlayStation because we have to because that's a lot of money. It would be massively economically destructive not to. But what we think is going to happen is gamers are going to realize I could be paying$70 a pop on PlayStation. or I could go to Xbox and I could pay$20 a month and I can get all these games and that's it. What a better deal. And by the way, we'll get new gamers. People are going to come in and realize, wow, I can get all these games for$20 a month. None of that happened. All they did was cannibalize their existing business. They didn't expand the market for console gamers.

17:47Ben Thompson:All they did was have gamers who would have paid way more to play these games, pay way less to pay these games, and Microsoft ate it. And I think the recent reporting was they expected to have 75 million Game Pass subscribers by this year. They have like 30 million, and that number is actually decreasing. It's not going up. And so it's just been – and so that's sort of the context of what's happened here. Phil Spencer got retired, which if you retire at that level of a company, you're probably canned. Probably too late. the whole strategy of disaster they brought in new leadership and now there's sort of like a reset going on they're they're laying off a few thousand people they they say all games production to continue but there's a real sort of critical decision here what do we do because we ended up getting stuck in the middle like and we're just it this doesn't work what uh what did you read into their approach of laying off 1600 people now and keeping a 1600 person riff I mean it's a terrible idea like everyone there for the rest of the year is like like every VC would tell you to like just cut hard cut deep and then move forward with the team if you're on the ship we're going to Valhalla together I think I do have some sympathy because the reality is I appreciated the note because they are in big trouble.

19:21Ben Thompson:And there's an aspect of just stating it clearly. We're not sugarcoating it. And if they laid out how much trouble they were in and then only cut 1 ,600 people, then everyone kind of knows they're going to be cutting more people. Right. So I think there is a bad spot. So, of course, it's not great. It's going to destroy morale. It's going to destroy everything for the next year because everyone's waiting to get fired. But there's a bit of they did, I think, tear the bandaid off to the extent they could. And now there's just a now they can be very overt. They can go through and actually talk to employees about what are you working on?

19:56Ben Thompson:Why should you still be here? And it's a reflection of the employment climate. Like people in general are more they're just not going to bail. Microsoft, you know, they're going to want to keep their job. and so they can probably hopefully fingers crossed do better cuts by virtue of doing them in the open um but i don't know i mean i don't envy i don't envy xbox's leadership at all it's going to be a very tough thing but i i i can totally understand how they are where they are probability of a spin out i mean i think it i think it needs to happen like i i but you know this is again the regret is this was my take for years and years and years like okay fine xbox game pass that kind of seems kind of interesting let's go for it it should have stuck to my guns they're like no stop this is going to be a disaster um i think yeah i don't i i don't get it um i just don't i didn't see it before the thing that got me to say okay let's give it a chance didn't work i don't see it now i mean i think it does give me pause they hired matthew ball who i've had on strategy multiple times uh as their chief strategy officer i have a lot of respect for you know his takes so i'm curious what he's thinking about this gets to the question before is there a bit where they just write off these acquisitions and say actually all this stuff's going to be exclusive now we're like call of duty buy an xbox uh like basically giving into the ftc's worst fears which uh but they those fears didn't make sense at the time in the context uh because it's by What's funny is that we lost billions and billions of dollars.

21:35Yeah, and it would be a good pricing test for the power of a AAA game to say, okay, you can only get Call of Duty on Xbox now, and you would see how many incremental Xbox sales do you get. Because that means the real value of the game is actually in the hundreds of dollars if people have a PlayStation, and then they'll try something new. Switching gears a little bit, we keep having this experience where there's a company, you know, an AI company, let's say an application layer company that is, or lab that is, you know, hot, but then you don't hear very much for a few months and you write them off and then they come out and they've like added hundreds of millions of dollars in revenue and are doing a crazy up round.

22:19And it's this weird thing where like even, you know, historically, you know, there's power laws everywhere, but I feel like in this moment we're seeing more and more examples where like the 10th best company in the category is still having the financial performance that a company that would have been the leading company in their category five years ago. What do you make it? What do you make of that?

22:42Ben Thompson:This is just a thing in tech in general that is always sort of stuck out at me. I mean, I think I haven't been though, but like, like CRM, for example, like if you go back to like 2000 2015 was like there's a CRM company like no the example I always go back to is I think it was 2014 or so when Apple bought beats and they bought beats for three billion dollars and everyone's going to the tech press is going crazy everyone's writing thought pieces about it and I'm like you know of course writing about it I'm like three billion dollars like Apple is a five hundred billion dollar company what is three billion dollars matter and And what's funny about that take is number one, it was right.

23:23Ben Thompson:Who cares about$3 billion? That's in our couch cushions. Like people were spun up also. They didn't really matter. Number two, Apple is only a$500 billion company. Like the astronomical increase in valuation and numbers around this is absolutely crazy. So to your point, yeah, a 2019 CRM company, number one, there probably wasn't a number 10 even then. But yeah, the numbers are not even remotely tied to like any, I just sort of let them go and be like, I write down the numbers and they don't really mean anything to me. But it's very hard to keep track of. Like the inflation in tech numbers specifically, you know, you think that, what was I complaining about pricing before?

23:59Ben Thompson:Oh, yeah, lemonade stands are bad. The Silicon Valley lemonade stand inflation is absolutely the worst in the world. On mergers and acquisitions, there's this news today about Getty Images calling off Shutterstock deal after UK regulators said that they would have to sell the editorial business for the merger to be approved. And it seemed very odd to me that a merger would be blocked by a regulator when that industry that is consolidating and is maybe becoming more monopolistic is under such insane attack from generative AI. I can't imagine a better defensive move than putting Getty Images and Shutterstock together.

24:42Ben Thompson:This happens every single time. The natural response to your overall category being threatened by an external force is consolidation. It's the only way to defend yourself to get synergies. All these companies are pretty established, so it's actually fairly easy to price. You know exactly what things are. If you have growing companies, you want to merge them or acquire them. It's really unclear because how do you price out the future? These companies are declining, so it's very easy. You could do a discounted cash flow and understand exactly how much they're worth. It's a very straightforward negotiation.

25:18Ben Thompson:It makes total sense for them to consolidate. But precisely because they're knowable and understandable, it's very easy for regulators to block them. And you see this happen again and again. You see pushback on – you saw this with TV and different networks getting together and the various pushbacks that happen to that or in telecoms. Like the this happens. This is a natural pattern. The moment that a company, an industry wants to consolidate, needs to consolidate is the moment regulators are most likely to stop them consolidating. And whereas the actual time when action would matter, like when it's growing and a company is making the right acquisitions to take over an industry, regulators don't do anything.

26:03Ben Thompson:And also rightly don't do anything because you're dealing with the future and it's unknown. You don't want to screw it up. It raises the question of what do regulators sort of do anyway in broad strokes? I used to be, I've sort of, you know, I think that they probably do more harm than good as far as a lot of these sort of blocking mergers and things go. But I don't know. I'm the one that just said maybe Microsoft should take Call of Duty exclusives. So who knows? Maybe I'll have something in your face. We had a funny moment because we were looking. It's a$3.7 billion deal. But I'm like, how is this a$3.7 billion deal?

26:39both these are two 300 million ish market cap companies and it was because they price the deal was like priced back in january of 2025 and so both companies had declined so much combined market over the last 18 months so maybe they shouldn't deal anyway i don't know i mean it could

26:56Ben Thompson:be worse you could be netflix and have the stock market sort of like make a bid for warner brothers that the stock market hates abandon the deal but they already decided you did the deal because you're desperate you're screwed anyway so um yeah they and you don't even get what you bid for so maybe that's what happened here i don't know oh well well thank you so much for taking the time to come chat with us have a uh have a great summer uh enjoy the break and we'll see you soon yeah good luck with the lemonade stands yes try to try to make it through summer you're gonna run up on a kid that has clarina raise some money yeah yeah clarina and a lemonade stand five easy It probably happens in Silicon Valley.

27:36Ben Thompson:It probably happens in Silicon Valley. Interest free. It might. Well, thank you so much and have a great rest of your week. Great to see you. We'll talk to you soon, Ben. Talk to you later. Have a good one.