Microsoft has spent years subsidizing Xbox rather than profiting from it, CEO Satya Nadella acknowledged this week, as he addressed the gaming division’s need for a new approach.
His comments came during a Wednesday evening taping of the The New York Times’ “Hard Fork” podcast, released Friday. Hosts Kevin Roose and Casey Newton pressed Nadella on the future of Xbox a few hours after the division’s leadership signaled an upcoming reset.
“No one can accuse Microsoft of not having invested for the last 25 years,” Nadella said of the Xbox and games business. “And now we have to turn this into a sustainable business.”
For all the entertainment value Xbox provides, he said, Microsoft hasn’t been monetizing the entertainment, but has actually been subsidizing it. He added with a chuckle, “In fact, there’s more monetization of Xbox games happening on YouTube than at Microsoft.”
Earlier in the day, Xbox CEO Asha Sharma had told employees in a memo that the division’s heavy spending and declining revenue cannot continue. Sharma, about 100 days into the job, said Xbox will finish the fiscal year at roughly a 3% margin by an internal Microsoft measure, after the company spent more than $20 billion over five years even as annual revenue fell.
Bloomberg News reported that the division is planning major job cuts next month.
On the podcast, Nadella described two pressures on the business. One is temporary: a run-up in prices driven by the shortage of semiconductors and memory, which is squeezing PCs, phones and other consumer electronics, and which he said Microsoft will get through.
The other is lasting — the question of what the Xbox business model should be going forward.
“I think we have to find ways to deliver the games in which it’s economically relevant for the customer and for us,” Nadella said when Newton asked whether he could offer any sort of “carrot” for gamers, or whether consoles and games would simply get more expensive.
Nadella didn’t detail what the new model would look like. Sharma said in her memo that she’ll spend the next 100 days taking what she called a fresh look at the business.
The Information reported Friday that Microsoft hasn’t ruled out restructuring Xbox — potentially as a wholly owned subsidiary, a joint venture, or a spin-off — though it has no imminent plans to do so. The outlet, citing three people with direct knowledge, said Sharma plans to pair layoffs with heavier investment in big franchises like Halo and Fallout, a plan Nadella and CFO Amy Hood have signed off on.
See above for the full conversation, which otherwise focuses largely on artificial intelligence, including the AI backlash over data centers, AI’s impact on jobs, whether the U.S. government should take stakes in AI companies, and how much he buys the idea that AI is about to automate entire jobs.
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