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How Microsoft is abandoning the war for video game consoles

In mid-2014, Satya Nadella, who had just become CEO of Microsoft, brought the heads of the company’s gaming division into her fifth-floor office in Redmond, Wash.

Executives wanted Mr. Nadella to write a check for $ 2.5 billion to buy Mojang, a Swedish company that produced a pixelated block game called Minecraft. Mr. Nadella asked why Microsoft, which has been consistently overtaken by Sony in the console industry, should continue to invest in video games. How, he said, matched his vision for a more user-friendly face that would appeal to more consumers?

Next, Phil Spencer, the new director of Xbox, spoke to Mr. Nadella about the vast world of Minecraft where millions of people could socialize and where teens were encouraged to learn math and science skills. A deal would be the first step in a “bold enough vision” to transform Microsoft’s gaming business into one focused on a larger audience, rather than just console gamers, Spencer said.

Mr. Nadella agreed and closed the deal. What followed, according to interviews with more than 20 Microsoft executives, game developers, industry analysts and gamers, was a change of several years. Instead of competing primarily with rival Sony to sell more consoles, Microsoft bought 15 more game studios and invested in new technology, like a Netflix-style game subscription service and a mobile tool known as cloud gaming.

Now, as Microsoft prepares to present new offerings at the annual E3 gaming convention this weekend, its video game business is very different. The company is still known for the Xbox, a new version of which was released in November. Despite this, it has branched out beyond boxy hardware to provide a new range of services.

“Their strategy has diverged quite significantly from a traditional console approach,” said Piers Harding-Rolls, game researcher at analytics firm Ampere Analysis.

With the changes, Microsoft is betting that the future of gaming will be a post-hardware world where people may not want to spend hundreds of dollars on a console, executives and analysts said. Eventually, they said, people might no longer be tied to specific devices to play games, and instead care about software and services.

While Xbox consoles still generate a lot of revenue – in January, Microsoft first reported $ 5 billion in quarterly gaming revenue, bolstered by the release of the Xbox Series X – the company has stopped disclosing its sales of consoles in 2014. The majority of gaming revenue comes from content and services, rather than Xbox hardware sales, said Tim Stuart, Xbox CFO.

Her gaming business still faces hurdles, including shaking gamers’ perception that she doesn’t have their best interests at heart. This loathing stems from an email failure in 2013, when Microsoft introduced its new Xbox One console as an entertainment device that people could use to stream music and movies. In response, the players revolted.

The Xbox One still sold around 50 million units, analysts said. But it was far surpassed by Sony’s PlayStation 4, which was also introduced in 2013 and sold 116 million units.

“We lost our share of what the players wanted,” said Stuart.

After the backlash, Microsoft shifted gears. Mr. Nadella had just taken over and wanted the company to move from focusing on software to cloud computing and subscription services.

Mr. Spencer has ensured that the evolution of the games division reflects these goals. He persuaded Mr. Nadella to buy Mojang in September 2014, which was the new CEO’s first acquisition.

“Gaming is much more central to Microsoft today than it has ever been in our history,” Nadella said in an interview last week.

In 2017, Microsoft released the Xbox Game Pass. For $ 10 or $ 15 per month, subscribers could play a specific set of games for as long as they remained on the service. It turned the traditional model upside down, where people paid $ 60 for games like Call of Duty and owned them forever.

To persuade game publishers to put their titles on Game Pass, Xbox executives traveled the world to meet with developers and proselytize their vision of an industry where video games were cheap and easily accessible.

Initially, developers were “wary,” worried about losing money on the service, said Sarah Bond, Microsoft’s vice president who heads the gaming ecosystems organization.

So she decided to study how Game Pass affected player behavior. Microsoft said Thursday it found that users of the service spend 50% more money on games and play 40% more games than non-subscribers.

Mike Blank, senior vice president of Electronic Arts, which put its games, like the Madden NFL and FIFA football franchises, on Game Pass in 2020, said there was initially “concern” about the services of the player. ‘subscription. But the company is happy with the results and “the players are reacting favorably,” he said.

Microsoft has also invested heavily in game development to expand the Game Pass offering, buying studios, including a $ 7.5 billion acquisition of ZeniMax Media in September, and adding hundreds of games to the service. This year, he also considered purchasing the Discord messaging app, which gamers use to chat while playing.

Diversification continued in late 2019, when Microsoft launched a cloud gaming service, in which games are hosted in a company’s data centers and streamed to devices. The service, Xbox Cloud Gaming or xCloud, means people don’t have to install games or use expensive hardware.

The idea of ​​a cloud gaming service had crystallized for Mr Spencer earlier that year, while he was on a bus in Nairobi, Kenya, and connected to Wi-Fi. that he could stream a game from Microsoft’s data center in London to his phone.

“It was literally the same saved game I had sat in Redmond, Wash.,” He said. “It really shows how you can make the game truly global. “

Microsoft said on Thursday it was working with TV makers to put its games in TVs without the need for an Xbox. He added that he would bring cloud streaming to the console soon.

For now, cloud gaming is still bogged down by glitchy gameplay and requires a solid internet connection. Xbox Cloud Gaming is still in testing, and Apple has banned the app from iPhones because it includes a catalog of games, and Apple requires separate apps for each game as part of its app review process.

At the same time, Xbox continues to follow Sony’s PlayStation. In April, Sony said it sold 7.8 million new PlayStation 5s between November and March, while analysts estimated Microsoft had sold more than four million new Xboxes during the same period. Sony declined to comment.

Some gamers have said that Microsoft failed to convince them because it still lags behind Sony in exclusive and quality games.

“I always felt the PlayStation was better,” said Natalia Mogollon, a player known as Alinity who broadcasts her game on the Twitch site to 1.3 million subscribers.

Yet when Microsoft grabs exclusive content, it can backfire. In 2015, when game publisher Square Enix first released a popular game on Xbox, gamers were furious that Microsoft was limiting access to the title. The reaction was similar when he considered purchasing Discord and when it was announced last month that an upcoming ZeniMax game would be exclusive to Xbox.

“It might sound like a big company just messing up and screwing up their favorite game developer,” said Rod Breslau, video game consultant.

As Microsoft has moved away from the console war, Mr. Spencer’s own tone has softened as well. In an interview with the New York Times in 2014, he said he would not back down against Sony. “I’m here to win,” he said.

In an interview last month, he took a different approach. “We’re not looking at Nintendo and Sony and saying this company has to lose so that we can win,” he said.

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