Microsoft’s quarterly figures made for sober reading.
After laying off thousands of people, Microsoft announced its earnings for the fourth quarter of 2022 to investors yesterday, which are broadly in line with forecasts and warnings from previous quarters.
Backed by accurate forecasts, Microsoft’s stock price rose 5% in after-hours trading on the results as the company outlined a tight 2023 of “modest” growth amid a turbulent global economic environment. Inflation is rampant and Russia’s war of aggression in Ukraine is disrupting energy markets and distribution. Changing business and consumer habits with the end of the pandemic has resulted in a sharp drop in Windows and PC sales as virtually everyone who needs a laptop now has one as a result of the shift to, and now away from, the Work-from-home culture.
Microsoft saw growth with Office and Azure, as expected, but a key area where Microsoft saw a decline is Xbox.
It wasn’t all bad news for Xbox, however. CVP of Comms Frank Shaw announced that monthly active Xbox users hit a record 120 million, with Xbox Game Pass subscribers hitting new milestones. However, the specifics of the YoY decline show how important it is for Microsoft to address one of Xbox’s biggest weaknesses.
Value is the best Xbox exclusive right now…
In this generation, Microsoft has seen a lot of success in prioritizing “value” in its offering to consumers, and that has been unequivocally and absolutely right for a number of reasons. The obvious thing is that consumers adorable, especially in our current economic climate. Additionally, they offered tough differentiation over the PlayStation 5 in the form of the 1080p-focused Xbox Series S. For those who don’t have the means or desire to upgrade to a 4K TV, some of the value of the PS5 and Xbox Series X is probably shrunk. For teenagers, college students, or even people who just want to save a little money, the $300 Xbox Series S is arguably a better buy for many people. However, the Xbox Series S is only one aspect.
Arguably the best Xbox exclusive to date is Xbox Game Pass. Xbox Game Pass has made waves in the industry due to the value it offers to users but also to developers. In exchange for a lump sum, developers who join Xbox Game Pass can effectively instantly gain an audience who will further market the game through word of mouth. Microsoft also reportedly offers bonuses for engagement milestones, so popular games coming to Xbox Game Pass have seen huge returns from both Microsoft and other platforms, and boosted retail sales as well.
As for consumers, the Xbox Game Pass list is absolutely jam-packed with AAA games, indie favorites, and other perks and bonuses. For $15 a month, you get essentially thousands of dollars worth of content, including games from EA, content from Riot titles like League of Legends, and of course all the important Xbox exclusives. Microsoft has also expanded Xbox horizontally, introducing new platforms like TVs and smartphones with Xbox Cloud Gaming, a service that’s gradually improving until it’s a fully viable alternative to physical Xbox games. It’s also part of the $15 bundle and gives you instant access to games like Fortnite, Elder Scrolls, Fallout, and more on virtually any device with WiFi.
Microsoft’s main competitors, namely Sony PlayStation and Nintendo, do not offer this value. Both PlayStation and Nintendo have subscription services, but they don’t offer the same wealth of quality content, nor do they deliver on the promise of day-one platform exclusives. If you want to snag a God of War or a Super Mario, you’ll need to purchase them at full retail price, regardless of which subscription tier you choose on Nintendo Switch or PlayStation 5.
Despite that generous offer and cheaper hardware, Microsoft has lagged behind Sony and Nintendo in the ongoing console war. The reasons for this are pretty obvious.
… But it’s not enough.
For now, I would assume Xbox has a wish problem. Recently, there was a trend on social media that emphasized this in a weird way, with influencers posting selfies and saying “do you want me or the PS5?”. There were few people who said “do you want me or an Xbox” unless they were being ironic. the post Office which spawned the latest incarnation of the trend has 8.4 million views on Twitter. And sure, it’s not quantitative, but it at least illustrates how Xbox’s brand power has waned with the mainstream in recent years.
Apple attaches great importance to the prestige factor of its devices, be it marketing, inflated price points and so on. Sophisticated marketing campaigns and clever product placements create FOMO around the iPhone and even MacBooks. On paper, both offer less value than competing Windows-based PCs and Android or even Windows phones of yesteryear. Many of these devices come with bigger batteries, better displays, and better cameras, all while costing less. And sure, iPhones have now caught up on the hardware front. However, I would argue that the iPhone’s biggest selling point has long been prestige.
I took the iPhone as an example, but really all brands are trying to do this. FOMO (fear of missing out) is an increasingly powerful marketing tool used in gaming. The whole concept of a limited-time Battle Pass is to incentivize play, as in some cases players will miss out on valuable cosmetics forever if they don’t log in to play. You can debate the morality of artificial scarcity in digital products until the Mooshrooms come home, but one area where it’s certainly less controversial is the power it can have in selling console hardware.
Xbox has only trended up and down since its inception, as you can see from @Welfare_JBP’s chart above, using data Microsoft itself shared, combined with some estimates as we no longer get hardware sales data. In any case, the trends here are what we’re most interested in, exemplified by Microsoft’s 12% year-over-year decline in the gaming division.
Markets reacted strongly to the news as Microsoft’s reporting was broadly in line with investor expectations. The past two years have been record-breaking for Xbox, and a correction was inevitable – investors were clearly anticipating an even deeper contraction.
There are, of course, several factors as to why Microsoft has pulled back a bit this year. School, work and college lockdowns in Microsoft’s key markets are now essentially a thing of the past as fewer hours are invested in gaming as availability decreases. The most notable aspect, however, is Microsoft’s truly anemic 2022 in terms of exclusive content. Last year, Microsoft had launched Halo Infinite, Forza Horizon 5, and Age of Empires IV all in the same quarter – all to great acclaim. I realize that the big green spike you’re seeing in 2021 is a direct result of platform exclusive “system vendor” games. Microsoft enjoys a high average score on Metacritic, but still lacks consistency and cadence when it comes to FOMO-inducing, universally enticing action games like God of Wars and Spidermans of the World.
The good news is that Microsoft knows it and has already made every effort to close the gap.
And Microsoft knows it.
On January 25, 2023, Microsoft is introducing its new showcase format, Developer_Direct, which will offer gamers a more intimate first look at various upcoming Xbox games. This includes action games with wide audience potential, like the multiplayer vampire slay ’em up Redfall, coupled with an accessible but deep Minecraft spin-off called Minecraft Legends. We’re also getting a huge update for the massively multiplayer Elder Scrolls Online, and no doubt a graphical tech showcase for the next Forza Motorsport.
None of this includes even the headline of 2023, which is undoubtedly Starfield. Starfield is the next game from Todd Howard and the team behind Fallout 3 and The Elder Scrolls V: Skyrim, the latter being an institute in its own right. Although Skyrim has been available for over a decade and is single-player only, it still enjoys thousands of daily active players due to the volume of content and modularity of the Todd Howard Bethesda games. I expect Starfield will be a similar “event” in gaming history, where millions of gamers will enjoy space opera for years, maybe even decades.
In terms of quality, too, I already know that Starfield is a “system seller”. Friends and family who previously had no interest in Xbox, or even hostility towards Xbox, are faced with the reality that if they want to play Starfield, the Xbox Series S is the most affordable way to play Starfield natively. This is before Starfield’s marketing has even really ramped up. This is the prestige factor that Todd Howard and Bethesda are bringing to Xbox, which previously declining titles like Halo did, and now Xbox has more franchises like this in its bag after acquiring ZeniMax, including Wolfenstein, DOOM, Fallout, and The Elder Scroll for yourself. Soon, it could even count Activision titles like Diablo, Starcraft, and Call of Duty among those unique value propositions — if it gets the deal to acquire them through the regulatory hell it currently finds itself in.
Either way, Microsoft has a strong list of games on the horizon poised to fill this gap that Xbox fans are all too familiar with. If Starfield, Redfall, and those other broad appeal titles get hit as hard as Microsoft hopes, Xbox should finally be able to generate FOMO of its own.