Xbox boss Phil Spencer on the future of gaming: ‘The business isn’t how many consoles you sell’

Vjeran Pavic / The Verge

The head of Xbox just unveiled a new console, but Phil Spencer isn’t too worried about selling you one. “I don’t need to sell any specific version of the console in order for us to reach our business goals,” he told me in an interview yesterday, the day after Microsoft held its annual E3 keynote.

There’s plenty going on with Xbox and gaming at Microsoft. In addition to a big lineup of games, at E3, Microsoft officially unveiled Project Scarlett, its next-generation console that launches next year, and provided a bit of detail on its xCloud streaming service, which will debut in October. Just ahead of the show, the company also brought its Game Pass subscription to PC, furthering its foray into services.

I had the chance to chat briefly with Spencer about all of the major announcements. We talked a bit about the future of consoles, the importance of the cloud, the impending ubiquity of subscription services, and why he doesn’t care what kind of Xbox you buy.

This interview has been edited and condensed for clarity.

With Scarlett, can you talk a bit about the strategy of announcing a console so early? It reminds me a lot of Scorpio. Was there something about the experience with Scorpio that made you think, “This is how we should do it”?

I definitely think doing the announcement of Project Scorpio 18 months-ish before we launched X was good learning and background for us this year. I think that’s definitely true. I think that gave us some confidence that we could keep buzz. We also know that we’re going to have dev kits out, developers building games, and I’d rather not have to pretend that something is not happening when everybody knows it is happening.

So it puts you in this position of people asking you, “What’s the name?” and I say, “We don’t have the name yet.” They ask me about price points and everything else, so you’re in this position of talking about the things that you set. Most importantly, you’re going to talk about what your goals are for the platform. Give people something to look to, so when they hear there’s a game in development that’s launching at a certain date, is it going to support X? And I think our experience with Scorpio gave us the confidence to talk about Scarlett on Sunday.

The Xbox One X came out not that long ago, and you call it the most powerful console. How do you know when to release something that’s even more powerful? It’s not a huge gap in time between the two.

We did the same thing with X where we set a design goal for ourselves. In the case of X, it was about a 4K console. We looked at: could we do a 4K console a year earlier? We didn’t think we could. So we waited a year after the competitors did their thing because we felt we could give a true 4K console with the Xbox One X. I think the end result is a device that, if a developer so chooses, they can do so.

With Scarlett, our goal was to increase the visual fidelity of the games. But equally or even more over what we have today was the feel of the games. Can we really start to get to frame rates where the visuals that are great on-screen are matched by the way the game feels and how smooth it plays? Which was really looking at CPU performance and the growth in CPU and what we could put in. Traditionally, consoles have been heavy GPU, very light CPU. So we were working with AMD on technologies and what their CPU road map looked like. You can see this on X and even S, experimenting with variable refresh rates. So much of your refresh rate, your game loop, and having this synchronization between those things really helps create buttery controls in a game.

Working with AMD, we were able to hit CPU, memory, bandwidth, and even SSD that was going to allow us to stream data fast enough to get to frame rates where we felt like the increased visual fidelity would be matched by the feel that we would be able to bring. And that was a design goal that we set for ourselves with Scarlett.

So is Scarlett one console? Or is it like the Xbox One where you have a high-end, a middle class, and a cheaper one?

The video that we showed is talking about Project Scarlett. That’s the focus that we have, on that console and hitting that specification. That’s the console that we’re talking about.

Right now, there are only a few variations of the Xbox One, and now Scarlett is coming. As you have more of these devices, does it make it harder to hit your goal of having games that work across everything?

Not really. If you think about games that are in development today, most of the studios out there are using engines that span multiple platforms, whether it’s Unreal or Unity. Many of the games are using engines that are on multiple platforms. You’re probably shipping your game on four or five platforms if you’re trying to reach as many customers as possible anyway. You’re going to ship on PC, which means multiple GPUs. You’re obviously going to ship on PlayStation, you’re going to ship on Xbox, you’re going to ship on Switch.

So I think the developer pipeline today has figured out how to build highly immersive, great games on different specs and different platforms. Frankly, the highest fidelity game that we usually find today is on PC, which is the most variable of platforms. But when you think about buying a greatly tuned game on PC, it usually has more resolution options and more frame rate options than any other ecosystem. It’s the ecosystem that has the most CPU and GPU options than anything. This has just become a skill that studios have.

So you don’t see it as being similar to smartphones where, a couple of years later, your phone can’t play new games?

I do think — and, again, we can use PC as an example — at some point, what we find, is usually driven by player behavior. You end up with a platform that doesn’t have enough activity on it for developers to focus on it because there aren’t enough players there. It’s really a business decision. I was looking at the stats last week, and we still have millions of players on Xbox 360 — which is surprising to me, but they’re still playing. They log in, they play World of Tanks. They love it. You don’t find any new games coming to 360 anymore. It’s not like the developer community is still there, but we like that people still love to play. As long as you’re playing, I’m happy.

When I think about where platforms go, I think, at some point, platforms lose enough player interest that studios will probably move on. But I’d rather not have that dictated by decisions that we make. I’d rather that be driven by player behavior.

Do you think you can release these too quickly? If the Xbox One X is the most powerful console, and then, two years later, there’s a new more powerful console, doesn’t that diminish what that means?

What I want you to think about in this is the players, not the specific version of a console they have. I think the question there is, “Is there a customer for the highest performing console, and are there enough customers where that makes sense?” If somebody bought an Xbox One X yesterday, I want them to feel completely that they can have a great experience for years and years. I also want to be as transparent as I can with them about the road map. So if somebody is sitting on the original Xbox One now, and they’re thinking about an X, they can make their own decision about what platform they want to have.

I don’t need to sell any specific version of the console in order for us to reach our business goals. The business isn’t how many consoles you sell. The business is how many players are playing the games that they buy, how they play. So if somebody bought an original Xbox One from us on launch day, and they’re buying and playing games, I don’t need to sell them an S. I don’t need to sell them an X. If they want to stay on the Xbox One they have and stay as a great member of our community or subscribe to Game Pass, that’s a great business for us.

I think it’s easy from the outside to judge the health of our business around how many consoles any company sells. In the end, how many subscribers you have to something like Game Pass, how many games people are buying, those are much better metrics on the health of the business.

Photo by Nick Statt / The Verge

Can you explain in simple terms what xCloud is? There seems to be some confusion around it and how it’s split into different parts with streaming and Remote Play-like functionality.

There are two things we’ll talk about: console streaming and xCloud. xCloud is us putting Xbox motherboards, in an Azure data center, and allowing you to connect to those motherboards and play games on hardware that is ours. So if you don’t own an Xbox or your Xbox isn’t available, you can connect to xCloud and play those games. xCloud is us putting Xboxes in the cloud, and you’re accessing those through a phone, which is our first focus. That allows you to take the gaming experience wherever you are. That’s xCloud.

Now if you already own an Xbox One, you’ve already effectively bought the same hardware that we’re putting in the cloud. So we challenged ourselves and said, “Well, can we allow you to turn your Xbox into your own data center, your own xCloud.” So then you can stream the games you own from the console that you already bought to your phone for free. So that’s what console streaming is. It is streaming from your console out of your home, the games that you own to your phone.

In the end, how you play is going to be the same. You’re going to be sitting there on a phone, you’re going to have a controller in your hand, and you’ll be able to play those games. Console streaming means the source of those games is your Xbox at home; for xCloud, the source of those games is us. The end user experience, I want to be the same. I want to connect to Xbox Live, the games that I have access to, my friends, and I want to play wherever I go.

So game streaming is free...

Yes.

And xCloud is a subscription?

We haven’t talked about the business model yet. We’re here with the public preview to let people try it out, which is cool. It’s the first time we’ve had a hands-on for people who don’t work at Microsoft, so we’re learning a lot and listening a lot. We announced a date for when it’s coming, and we will be talking about a business model before it comes so people know what to do to sign up.

As you think about a subscription like Game Pass, I do think the idea of Game Pass and an xCloud-like subscription makes a ton of sense. Think about what the convergence of those two things looks like. I think it’s smart to think about. We haven’t announced anything there, but I’d say that idea makes a ton of sense. How do I build my library? Game Pass is a great way for you to secure a bunch of content. Then, how do I get access to that library wherever I go? Do I use hardware that’s Microsoft’s or hardware that’s my own in my home?

I’m mostly curious about the subscription idea because it feels like, and not just in games, there’s now an overwhelming number of content subscriptions either out there now or coming soon. You just announced Game Pass on PC, Ubisoft announced its subscription service. How do you think about that when you’re creating these services?

I think you will find that the things that get to scale and offer the most value early will be the long-term players. I don’t think there’s one, but I also don’t think there are 100 different subscriptions [that will be successful]. One of the reasons we launched Game Pass two years ago, and we now have millions of subscribers, is we grow that so that we are getting great games, so that, as creators, you look at this community of people playing and say, “If I put my game on to Game Pass, I instantly know that millions of people will be able to play it.” As it rises in popularity on streaming sites and on things like Xbox Live, it’s going to get more exposure and more people will go buy the game.

I agree with you. I don’t think we’re going to end up with 100 successful subscriptions out there. I think, as a platform holder, we’re in a unique position where we can offer a subscription like Game Pass Ultimate that gives you access to both Xbox Live Gold and Game Pass on PC and console. So for one subscription, you’ve effectively built your library on console and PC. And we think, as Microsoft, as Xbox, we’re uniquely positioned to do that since we are the Xbox company and Windows company.

So xCloud sounds like a pretty big deal for you, and it’s coming soon. Is there a reason it was such a small part of your E3 presentation?

It was more about showing than telling on this one. I can do fancy videos or something, or I could just put it on the show floor and let thousands of people try it and then write what they feel. It’s a hard thing because the skepticism is: “How is it going to feel to play these games streamed from a data center?” How a game feels is a difficult thing for me to portray onstage.

I will also say, others out there might be trying to tell you that streaming is the solution to all gaming ills today. We look at xCloud as a long-term solution. Today, it’s really going to be: when you’re not in front of your console or Windows PC and you want to play those games, it gives you the ability and freedom to play games when you’re away. It’s really about choice and convenience. It’s not about replacing what you do today. I don’t need to create more hype around what it is. I’d rather just put it in your hands and have you experience it. If it’s something that fits in your lifestyle, that’s great.

I do think as we look at the next decade of gaming, as we think about reaching the over 2 billion people on the planet who play games, many of those people won’t be buying consoles and gaming PCs. It’s going to be an important technology. But that’s years of investment on our part to enable the infrastructure to get there. The most important thing for us is going to be listening to our customers and what they want, and not saying, “We know what you want, and here it is.”

Photo by Nick Statt / The Verge

You mentioned cloud gaming with Scarlett. How do those two things connect?

Today, what we’re doing is those Xboxes that sit in the Azure data centers are Xbox Ones. As we look to define Project Scarlett, we said we know that cloud usage is going to grow, so let’s define the core architecture and plan for this platform knowing that it’s going to be a hybrid gaming / cloud scenario where there will be millions of consoles in homes and millions of motherboards sitting in the cloud. Let’s make sure the common architecture is really built for that. The biggest strength we have in cloud today are the thousands of things that already run on that platform and the thousands in development.

What’s your philosophy when it comes to all of the game studio acquisitions you’ve been making? A studio like Ninja Theory is going to make Xbox games no matter what, so what’s the benefit of having them under the Microsoft Game Studios umbrella?

We think about the talent in a studio, the track record of a studio in building great games over time. Honestly, we think a lot about if we can add value to the studio that helps them be the best version of the studio they can be. That’s always a very good discussion with the founders and the people running the studios. Ninja Theory is a good example. They posted a video at the time of the acquisition, talking about, when you’re running a small, midsized, or really any size studio independently, you’re always doing multiple jobs. One is making games, the other is drumming up business for the next thing that’s going to happen, and then building some kind of buffer in case bad things happen.

When we can come in and provide financial stability to these studios that have a track record of creating high-quality games, give them the freedom to focus on the games that they’re creating today and in the future, and take away that need to figure out what work-for-hire work they need to do, that’s been the most liberating thing that we add to the equation. So I think we will end up with better games and better output from these studios, just from the stability that we’re able to bring. If we can’t do that, it’s not a relationship we should be in.

In terms of how they help us, we think having a great flow of games coming to Game Pass is really important. We think having first-party teams building games to make that service continue to grow is an important part of our future. So it’s great that we’ve been able to invest.

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Comments

The business isn’t how many consoles you sell

That’s what a loser would say.

No, that’s the same logic that has made Office 365 ultra successful huge for Microsoft. This way of thinking is why Microsoft has the highest maker cap of any company.

No business prides themselves on selling less of anything. They only time they do that is when they pivot. They made a business decision to stop caring about consoles because people aren’t buying their console as much as the competition.

No business prides themselves on selling less of anything.

Yea, everyone loves to make console hardware, the margins are razer thin (or sell at a loss) and they cost the earth to develop and produce. Financial performance takes a nosedive for every hardware iteration console manufacturers have to endure..

But hell, lets make more consoles because the fanboy says selling less consoles is bad.

I agree with loxx. Clearly Microsoft has to pivot their stance on console sales because they haven’t been able to match the desire people have had towards owning a Nintendo Switch or PS4.

Do you genuinely think they would be saying this if the roles were reversed & Sony was struggling to move units as fast as Xbox is? I definitely don’t.

Microsoft as a whole has to pivot themselves towards services & software more as in general their hardware sales are lackluster compared to the competition. You DON’T do this when you are "winning" the hardware race.

In the same way Apple doesn’t talk about iPhone sales anymore, they’re on the decline. You think if they were still on the rise they’d stop talking about it? Hell no.

This is typical behavior of a company pivoting. Not that is spells doom & gloom at all, it doesn’t. But it’s clearly a necessary change when the needle is not moving your way in specific areas.

Also Microsoft having always been successful as a software company just makes it make sense that they would pivot the Xbox division this way, as well, following the lackluster sales of XB1. Their sales of hardware have always been middling even if the hardware has been fantastic.

I think your point of its a pivot is fine. Its a pivot. Its probably a pivot based on position but its also a future view point position that also makes sense for them.

They are setup to no longer care about hardware numbers because their services revenue stream is now more important for them. So yes, its a pivot, but a smart pivot that is wild to see done (imo) quite gracefully for such a large company.

I think your point of its a pivot is fine. Its a pivot. Its probably a pivot based on position but its also a future view point position that also makes sense for them.

Its an industry pivot. And ironically, the major competitor isn`t Sony any more. Its Google.

Sony simply doesn`t have the scale or the resources to compete in this new arena of streaming games.

Business is about making money. It doesn’t matter how you make it. Why do you think Sony decided to use Microsoft’s cloud business? If they were dumb and prideful, they would never touch it.

Microsoft knows how to run a business. That’s why they’re worth 1000 billion dollars and Sony is worth $60 billion and Nintendo is worth $43 billion.

Microsoft as a whole has to pivot themselves towards services & software more as in general their hardware sales are lackluster compared to the competition. You DON’T do this when you are "winning" the hardware race.

Thats at odds with whats actually happening. The whole industry is looking towards the streaming model – Microsoft isn’t doing this in isolation.

Selling consoles to make money isnt desirable for all the reasons already explained. If you can get a significant portion of you customer base onto a model which doesn’t require you to sell them a console, your operating model becomes more profitable.

That really is all there is to the current shift in focus from hardware to streaming.

Lots of business pride themselves on selling low volume, high quality products and services. The purpose of business is to maximize profit. High volume sales is one way to do so, but it is not the only way.

Lots of business pride themselves on selling low volume, high quality products and services

That’s not what this is saying. Also Just because it’s high quality doesn’t mean they don’t wanna sell more. If you told any businessman or investor that you sold more that’s always a good thing. Selling less is always a bad thing or else what’s the point?

"Yeah, so i made this game and only sold one, im so happy."

Have you heard of Peter Molyneux? Yeah he’s said crap like that often with games and of course said all kinds of crap to sell his crap (even when it doesn’t exist).

But the sell is not the console it is the software and services. Sony has over twice the consoles. We all know that. It would be great to sell more Xbox consoles. But Phil is right. Selling more doesn’t necessarily tell the story on how much return you get. Engagement of users is. The PS4 with 93+ million consoles versus 43+ million Xboxes Sony only manages to gather 70% more revenue not twice or more from that double population of consoles they have. Sony has a diminishing returns on every console on that all important part that drives revenue after the sale. And that is based on continuous engagement. Microsoft is able to engage its smaller base more efficiently.

So either Sony is doing a piss-poor job on capitalizing on their user base and doing so leaves billions on the table that Microsoft does not with its user base. Or more likely Microsoft egnages its users to invest more after the console sale, keeps them playing so much more that its gap in revenue is not 100% or more but 70%. That is the point. You sell a console is an artificial statement that only fan boys need to here to feel good. I

I am sure Phil and Microsoft would happy selling 40+ million next gen if that capitalization of users takes place from multiple sources for services and software. Areas that would not be counted as a success if you base it just on how many plastic boxes (with razor thin margins) you have sold.

Yoshida (CEO of Sony) pretty much reiterated Phil’s statement about engagement and the need to go beyond the idea of supporting niche (his words) of just console. He and Phil both understand success is the based on engagement afterwards and that takes seeing the borders between the console and the rest of the gaming world removed. That is something Microsoft has been attempting to do last few years.

Sure I think Microsoft wants to sell more consoles but sees engaging users after the console sale a better metric of success.

93 million PS4s vs 43 million Xboxes doesn’t mean Sony should be making double the profits. The first 20 million or so buyers of a console are seriously hardcore gamers who can’t wait to buy the console and all games. The next 20 million a bit less so. And so on, until you get to the point where (in this case) the PS4 is so ubiquitous that grandparents may pick one up just for when the kids visit, people might buy one for the spare room, and lots of consoles are bought as replacement for broken or "worn" consoles. They are still sales, they add to the gamer pool, they’ll bring in a few games sales, and they bring a nice profit to Sony. But my guess is that the point of dwindling intensity amongst the owner pool is lower than even the 43 million Xbox is at.
And it doesn’t change the fact that the more consoles you sell, the more profits you make and the better your position is.

And it doesn’t change the fact that the more consoles you sell, the more profits you make and the better your position is.

Correction: …the more devices you sell with your platform, the more profits you make and the better your position is.

We often forget that Microsoft also sells the platform most PCs run on, and have been investing heavily in that from a gaming perspective, but also own it from a productivity perspective. Microsoft is also bringing their platform to mobile and Switch. Sony has their console, and that’s the extent of their reach.

Looking at it as a ‘console war’ alone is a very narrow view, IMO.

When we are talking about the success of various consoles, it’s pretty much just the console sections we are looking at.

Then you’re intentionally looking at it with a narrow focus to make a point.

Office 365 isn’t analogous, because Microsoft needs Xbox consoles to sell its Game Pass. Console games depend on proprietary hardware platforms, while the office suite can easily adapt onto multiple chipsets and operating systems. If Microsoft tried to sell their games on a competing platform, they’d just be a third party publisher like Sega. In the game industry you can’t be a platform holder and a third party publisher at the same time.

Game pass is on pc now too plus xcloud looks to be expanding their gaming reach into the mobile space also so the Xbox brand isn’t tied down to specific console architecture anymore

Game pass has a different library of games on PC, that have their own minimum spec standards. It also costs an additional fee. "xcloud" is an entirely separate service. Its supplementary to the core business. "Xbox brand" is just that. A brand. You can sell cereal and call it "Xbox flakes". That doesn’t mean that the gaming business is no longer hardware dependent.

You’re contradicting yourself now.
Stating that Microsoft need to sell xbox to sell game pass is incorrect, different games on pc or no.
Xbox is a brand just as PlayStation however it’s reach is large and expanding. Xcloud is part of that and not reliant on in house hardware, making them both a platform holder and one who offers their wares on 3rd party platform.
They also offer gold back end to other platforms, are offering their games on competing storefronts like steam,switch,mobile(Minecraft) are using their networking experience to help Sony for the future etc etc.
Platform holder or no they are far from reliant on in house hardware sales and that’s only noting the gaming side of their massive corporation

The PC Pass in addition to the Xbox Pass, gives Microsoft a foot in two platforms, but the platforms are still separate. It’s like when Sony would offer "cross buy" on Playstation Vita and PS4. Yes they conceived of a business model to sell two versions of the same game. But the PS4 and Vita had no underlying compatibility. So the Vita died. The same goes for PC gaming as it relates to the Xbox. A Windows tablet or laptop will never run Gears of War 5 natively when its released, because 1. it is incompatible, and 2. the specs can’t handle it.
Case and point is that xCloud uses Xbox One hardware as servers. The entire advantage of xCloud over Google is that it can run the existing Xbox library without developing ports. As soon as games exceed spec requirements Xbox One/Xbox One X offer, that advantage completely goes away.
xCloud as it stands is literally just PS4 Remote Play, with server farms added. Server farms could conceivably reduce latency, but that issue depends as much on internet infrastructure as where your server is located. No video game company can make a country’s internet infrastructure better or worse. If anything, they can broker a deal with ISPs to get a traffic advantage (thanks to the Trump administration eschewing Net Neutrality), but it isn’t xCloud that will get that advantage. It is Google who has more clout.
Bottom line, gaming’s dependency on hardware isn’t about platform having the technology to stream games. It is consumers’ choice to either play natively or replace their hardware with an ISP service. What gamers do you know that will forgo a native HDMI 2.0 connection, in favor of a latency laden experience via the cloud?
If there was an audience for that, Sony would have already had a much greater success with Playstation Now. There is no special sauce in Microsoft’s version of streaming. You’re just eating up their pr bullsh*t. They’re just giving an old concept a new sales pitch.

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