The last few years of Xbox have been expensive. Under the leadership of Phil Spencer, Microsoft has spent billions of dollars trying to build an ambitious future for gaming that looks a lot like Netflix. And while its Game Pass subscription service started out as a bargain for gamers (though not so much now), that spending led to disastrous layoffs, studio closings, and confused and inconsistent messaging about what Xbox actually stands for. And with Spencer set to retire as new leadership takes over, the future of Microsoft’s gaming efforts looks increasingly murky.
Spencer announced his retirement last week after more than a decade leading the Xbox division and nearly four at Microsoft. He will be replaced as CEO by Asha Sharma, former president of Microsoft’s CoreAI product, while Xbox Game Studios head Matt Booty has been promoted to EVP and CCO. Xbox President Sarah Bond is leaving Microsoft as part of the restructuring. One of Sharma’s commitments, she wrote in the message, is “the return of Xbox.” But given the brand’s precarious position right now after Spencer’s tenure, what that actually means is anyone’s guess.
Spencer took over the Xbox division in 2014, a year after the launch of the Xbox One. And while he was beloved by fans for being the rare manager who also seemed genuinely passionate about games, his legacy will ultimately hinge on the transformational changes that have occurred around Game Pass and cloud gaming.
Despite being a relative latecomer, Microsoft quickly made inroads in the console race against Sony and Nintendo, thanks in large part to its prescient focus on online gaming through Xbox Live. With the subsequent Xbox 360, Microsoft found itself in close competition with the PS3, but that momentum was lost with its third console, the Xbox One, which never recovered from its chaotic launch and ended up selling less than half of what the PS4 sold.
Around this time, signs pointed to the console paradigm changing, with the cycle of releasing a new device every five years giving way to something more fluid, where hardware was less important and games were ported between devices. Meanwhile, streaming services like Netflix were changing the world of film and television. A service like Game Pass was a chance for Microsoft to get out of its third position by being where the gaming industry is soon he could to be in the lead. At the time, Game Pass was still a nascent but exciting prospect that offered players a wide assortment of games at a reasonable price. But its unproven potential seemed to make Xbox rethink its entire strategy: If it couldn’t compete with console sales, maybe it could win with subscribers?
In fact, as early as 2019, Spencer was telling me that console sales don’t really matter in the long run. “I don’t need to sell any particular version of the console to achieve our business goals,” he said. “Business is not about how many consoles you sell.” That’s a positive spin when you’re not selling many consoles. Instead, we focused on reaching players where they were through Game Pass and the cloud.
But to make that possible, Game Pass needed games, and Microsoft went out and bought as many as they could. First, Microsoft spent $7.5 billion to acquire Bethesda and with it franchises like Fallout and The Elder Scrollsfor the express purpose of getting more exclusives it can offer through Game Pass. It then spent a whopping $68.7 billion on Activision Blizzard, the world’s largest publisher, giving it access to everything from Call of Duty on Candy Crush on World of Warcraft. (These genre-defining franchises never became Xbox exclusives due to antitrust concerns.)
The problem is that even with all of these games, Game Pass has hit the nail on the head; Microsoft announced that it reached 34 million subscribers in 2024, but there has been no update since then. Although the service was offered at a subsidized price that made Game Pass relatively affordable, it turned out that the audience for such a subscription was not as large as Microsoft had assumed. In 2022, Spencer hoped to reach 100 million subscribers by 2030. That now seems increasingly unlikely.
Meanwhile, the acquisition spree had devastating effects. Thousands of people were laid off as part of Activision’s integration into Microsoft, while a pair of Bethesda studios were closed for good. Games have been canceled and successful studios like that too Forza developer Turn 10 was hit hard. Meanwhile, on the business side, the focus on Game Pass has also disrupted one of the most consistent revenue streams in video games: sales Call of Duty every year. The release of the shooter on Game Pass reportedly resulted in a loss of $300 million in revenue. Game Pass is becoming more expensive for consumers, and it’s unclear if it cuts through losses from direct game sales.
This shift also significantly weakened the brand. At first, the selling point for the Xbox was obvious: it was a powerful video game console from Microsoft. But with Game Pass and cloud gaming, messaging has changed. The “This is Xbox” ad campaign tried to position Xbox not as a console, but any device—whether it’s a PC, smart TV, Windows handheld, or your phone—that can play Xbox games. And as those efforts struggled, Microsoft went a step further and made bringing games to competing platforms a pillar of its strategy. It may have bought Activision and Bethesda for exclusivity, but it’s now one of the biggest publishers on PlayStation. Xbox is now a state of mind, it seems.
Sharma has already been criticized because, unlike Spencer, he is not a “gamer” and instead has experience with Microsoft’s AI efforts and at companies like Instacart and Meta. But then again, the current presidents of Nintendo and Sony Interactive Entertainment are also not known as gamers and have managed to stay ahead of Xbox (albeit with their own stumbles). And being a gamer didn’t necessarily help Spencer, who saw where the industry was going but wasn’t able to change the Xbox enough to live up to that moment. Sharma could represent a huge shift in how Microsoft operates in gaming, but it’s also exactly what the company needs right now.
Which means “the return of Xbox” could mean a lot of things, because Xbox means a lot of things now. In his note, Sharma describes it as a “renewed commitment to Xbox starting with console,” while also noting that “as we expand to PC, mobile, and the cloud, Xbox should be seamless, immediate, and worthy of the communities we serve.” Which sounds a lot like the current state of affairs.
We may never find out what Xbox really is.