It has become exceedingly challenging to be a fan of Xbox, particularly in the last year. Studio closures, mass layoffs, game cancellations, raising the price of their consoles twice, to higher prices than they launched at five years ago, all while being outsold at least 2.5:1 by the PlayStation 5 and now, not only raising the price of Game Pass for the second time, but by a whopping 50% for the Ultimate version, while throwing in some token gestures like old Ubisoft games and battle passses for Epic's Garbage Battle Royale for Babies (tm). Cripes guys, you could have at least made DLC for Game Pass titles part of the deal, no? Did I mention that mere hours before they anounced this, Xbox's President and Chief of Foot-In-Mouth Disease Sarah Bond said the service was healthy and profitable? While I always knew that Game Pass' launch price was too good to be true and would eventually rise as these types of things always do, I never expected this.
These moves would be S-tier greedy by even the standards of modern business for a brand in a solid lead, but for one that's losing by a ratio comparable to the Sega Saturn? I don't think the word suicidal is that out on a limb. It's easy to look at these moves and go "Do you guys want to lose?!" I actually prefer Xbox over PlayStation as a console and have had Game Pass since launch, often calling it one of the best values in gaming. As someone who plays a large variety of titles, it's actually still a great deal for me, even at the increased price, though definitely less of one. Thing is, I'm a weirdo edge case and I totally understand the apparent legion of people who have been cancelling.
I've spent several days thinking about why they could possibly be doing this and why they haven't even offered a token olive branch, much less walked any of this back given that so many have been cancelling that it crashed the site you do it on at one point. The backlash to this is one that would often warrant a crisis-level PR response, yet they've been largely silent and steadfast. Also telling was that Phil Spencer, CEO of Xbox and normally the enthusiastic public face of the brand has been staying out of the limelight, sending underlings out to announce all this bad news, when they even bother to do more than a press release. Reading between the lines, this tells me that these aren't decisions he wants to make, but rather ones has to and doesn't want to attach himself to more than necessary. He may be CEO of Xbox, but he still reports to people and I think this destruction of Xbox's good will is being driven from above by one thing.
That thing is Microsoft's obsession with AI and the bubble that industry is in.
I've known that AI is in a bubble for a long-time now and it's become so obvious that even its simps in the tech and finance press can't ignore it anymore. I had planned a post explaining it, but many others have now said what I was going to and there isn't much point. If you can handle his way too verbose and often caustic style, I recommend Ed Zitron's Where's Your Ed At for deep dive explanations of why the industry's in a bubble and the economic reckoning that's coming soon when it pops.
So what does that have to do with Microsoft? One of Ed's major points it that AI hype has been driven in part by big companies who have long run out of innovative ideas and need it as a shiny new thing to keep investors from realizing that. AI is a business in search of a model. Every AI company is not only losing obscene amounts of money, but those losses are skyrocketing exponentionally because as AI advances, its costs go up, not down like most industries do as they scale. Literally the only company profiting from AI is NVIDIA and they need the bubble just as much because their near monopoly on the type of GPUs needed for it are what made them the world's most valuable company in less than a year. AI is definitely not going anywhere, but the dot com bubble was still a thing even though the Internet continued to exist. Something can be a bubble and still have long-term viability in a reduced form.
Microsoft invested in AI early by buying a big chunk of OpenAI for $13 billion and more than that, selling them the biblical amounts of Azure computing infrastructure they use at cost. Since then, they've continued to pour billions upon billions upon billions into this insatiable money furnace, even though few use or want Copilot and most people find the injection of it into every bloody Microsoft product a frustration. I use it in my job sometimes and for the occasional image here, but not very often because even when it saves time, it makes a ton of mistakes that I have to clean up. It's barely making Microsoft couch cushion revenue, amounts that at nearly any other time would not remotely justify this kind of investment, but they continue nonetheless. Why? Because no one in this obscene hubristic drag race wants to be the first one to blink and risk getting left behind.
It's not an exaggeration to say that Microsoft CEO Satya Nadella has staked his entire career and legacy on AI. He made an enormous bet and has to find a way to make it pay off, even though like the rest of the industry, he doesn't know what that looks like yet. You don't spend that much of your investor's money without generating a return and get out alive. At the same time, he's still running one of the world's largest companies and the sociopathy of the market demands that the line go up every quarter, regardless of how much is spent on this ludicrous endeavour. How do you do that? Cut, cut, cut!
Xbox is not the only division of Microsoft that has been getting slashed. Nearly every other part of the company (which not for nothing, is still massively profitable) is being forced to tighten their belts several notches to continue to fuel their AI gambles while keeping overall profits growing. Wondering why Windows 11 is getting even more obnoxious with the ad icons and pushing you towards Microsoft accounts lately? That's why. To Nadella, slowing down the cash burn on AI is not an option, but neither is reporting weaker earnings until it pays off (which it won't), so every other division has to suffer. He clearly doesn't care that he's destroying the brand image of Xbox, one that Phil Spencer and company were just starting to make real strides on after the dumpster fire that was Don Mattrick's Xbox One. That's a problem for when they win AI and the many billions that come from that (again, never happening).
I can only imagine the fiery arguments that Phil Spencer and Satya Nadella have had over the last year. Nadella was supportive of Xbox's strategy of aggressive expansion through acquisition, the crown jewel of which was when they spent $68.7 billion on Activision-Blizzard-King, which is more than the Saudis just spent on EA. He had to be for them to be able to spend that kind of money. But it was shortly after that deal was announced that the first public release of ChatGPT kicked off the AI bubble and shifted the entire tech industry's priorities overnight. Suddenly, Xbox not only had to financially justify all those acquisitions, but doing it while also fuelling Microsoft's need to win this AI fight that Nadella threw them into without a real plan. You can't do both at once without trying to squeeze your customers as much as possible and that's what all these moves have been.
Microsoft could have undercut Sony huge on hardware and it wouldn't have amounted to a rounding error on their books. They certainly didn't have to raise the price of Game Pass when it was already profitable. They had the resources to buy their way into the gaming public's good graces. Instead, they've spat in their faces to fuel an AI gamble. I guarantee you that Phil Spencer doesn't want this to happen, which is why he's not doing press tours trying to justify it. I haven't liked everything he's done as the head of Xbox, but unlike many CEOs in this business, he's actually a gamer and he knows this isn't how you win hearts and minds. He has the clout to push back on Satya Nadella and I have no doubt he has, but when your boss ultimately says jump, you jump or you exit.
When (not if) the AI bubble pops, I think there's two possible scenarios. I don't know Phil Spencer but were I to guess, I think he's hoping that Satya Nadella comes to him and says "Phil, help save me!" and lets him get back to what he was trying to do with Xbox, assuming there's any customer good will left by then. I think the other scenario is that Microsoft finally decides it's had enough with its gaming experiment and either spins off the Xbox business or shuts it down and sells off the big studios to foreign buyers like the Saudis or the CCP and just shutters the rest. Xbox has never been a big profit center for Microsoft and in fact, has been a money pit as much as it's been a money maker.
The AI bubble will be a financial broadside to those who overinvested in it and if Nadella has a hope of keeping his job and his legacy, he will have to find a way to make up for that. For Xbox, that will either mean doubling down on the original vision of its leadership or cutting it to try and help right the mothership. Which of these they go with depends on how big the bubble gets before it pops, but the longer it lasts, the worse the end result will be.
The existence and success of Xbox is important to gaming. Their studios put out some fantastic stuff, some of which those very studios claim wouldn't have been possible without Game Pass. A world where only Sony and Nintendo are the console business is bad for gamers. Even if you're a PlayStation or Switch fanboy, you should want Xbox thriving and keeping the other guys honest and innovative. I make a good living and without Game Pass, I would play far fewer games because even with what I make, I can't afford to buy everything I play. What I played and enjoyed on Game Pass put those developers in my sightlines and will ultimately drive more business to them from me. But I also think this is the brand's last gasp.
It infuriates me because it didn't have to be this way and the hard work of so many people from Xbox leadership on down to their most junior developers is being squandered because Microsoft's CEO made a bad bet and it trying to save himself from it. I used to have a lot of respect for Satya Nadella, but I have very little left now. I hope Xbox can come out of this with the drive and resources to save itself and that this damn bubble pops soon before it gets so big that it takes too much else down with it.
