In mid-2014, Satya Nadella, who had just become chief executive of Microsoft, moved the heads of the company’s gaming division into his fifth-floor office in Redmond, Wash.
Officials wanted Mr. Nadella to write a $2.5 billion check to buy Mojang, a Swedish company that built a blocky, pixelated game called Minecraft. Mr Nadella asked why Microsoft, which was being slyly driven by Sony in the console business, should continue to invest in video games. That said, how does this fit in with his vision for a company with a friendly face that attracts more consumers?
Then new Xbox head Phil Spencer told Mr Nadella about the vast world of Minecraft where millions of people could socialize and where teenagers were encouraged to learn math and science skills. Mr Spencer said a deal would be the first step in “a very bold vision” to transform Microsoft’s gaming business into one focused on a wider audience rather than just console gamers.
Mr. Nadella agreed and made the deal. What followed was a year-long shift, according to interviews with more than 20 Microsoft executives, game developers, industry analysts, and gamers. Instead of competing primarily with rival Sony to sell more consoles, Microsoft bought 15 other game studios and invested in new technologies, such as a Netflix-style game subscription service and a new one known as cloud gaming. mobile tool.
Now, as Microsoft prepares to show off new offerings at the annual gaming convention E3 later this week, its video game business looks very different. The company is still known for the Xbox, a new version of which was released in November. Nevertheless, it has diversified beyond boxy hardware to provide a new range of services.
“Their strategy is quite different from the traditional console approach,” said gaming researcher Piers Harding-Rolls at analytics firm Ampere Analysis.
With the changes, Microsoft is betting that the future of gaming will be a post-hardware world where people won’t want to spend hundreds of dollars for a console, executives and analysts said. Eventually, he said, people may no longer be tied to specific devices to play games, and will instead care more about software and services.
While the Xbox console still generates a lot of revenue — in January, Microsoft reported $5 billion in first-quarter gaming revenue, bolstered by the release of the Xbox Series X — the company stopped disclosing its console sales in 2014. done. The majority of gaming revenue comes from content and services, rather than Xbox hardware sales, said Tim Stuart, Xbox’s chief financial officer.
Its gaming business still faces hurdles, including shaking off a belief among gamers that it doesn’t have their best interests at heart. This distaste stemmed from a messaging failure in 2013, when Microsoft touted its new Xbox One console as an entertainment device that people could use to stream music and movies. In response, gamers revolted.
Analysts estimate that the Xbox One still has about 50 million units sold. But it went far beyond Sony’s PlayStation 4, which was also introduced in 2013 and has sold 116 million units.
“We lost our footing in what gamers wanted,” Mr. Stuart said.
After the backlash, Microsoft shifted gears. Mr Nadella recently took over and wanted the company to shift from software to cloud computing and subscription services.
Mr. Spencer ensured that the development of the sports division reflected those goals. He persuaded Mr. Nadella to buy Mojang in September 2014, which was the new chief executive’s first acquisition.
“Gaming is much more central to Microsoft today than ever before in our history,” Mr. Nadella said in an interview last week.
In 2017, Microsoft released Xbox Game Pass. For $10 or $15 per month, customers could play a specific set of games as long as they remained on the service. It replaced the traditional model, where people paid $60 for games like Call of Duty and owned them forever.
To persuade game publishers to keep their titles on Game Pass, Xbox executives flew around the world to meet with developers and change their vision of an industry where video games were cheap and easily accessible.
In the beginning, developers were “leery” over concerns that they would lose money on the service, said Sarah Bond, a Microsoft vice president who leads the gaming ecosystem organization.
So he decided to study how Game Pass affected gamers’ behavior. Microsoft said Thursday that it found that people using the service spent 50 percent more money on games overall and played 40 percent more games than nonsubscribers.
Mike Blank, a senior vice president at Electronic Arts, which put its games like Madden NFL and FIFA Soccer franchises on Game Pass in 2020, said there was “panic” around subscription services initially. But the company is pleased with the results and “players are responding favorably,” he said.
Microsoft also spent heavily on game development to expand Game Pass offerings, including its $7.5 billion acquisition of ZeniMax Media in September and adding hundreds of games to the service. This year, it also considered buying the messaging app Discord, which is used by gamers to chat while playing.
Diversification continued in late 2019, when Microsoft released a cloud gaming service, in which games are hosted in the company’s data centers and broadcast across 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 crystallized for Mr. Spencer earlier that year, when he was on a bus in Nairobi, Kenya, and connected to Wi-Fi. He found that he could stream games to his phone from Microsoft’s data center in London.
“It was literally the same remaining game I was sitting in Redmond, Wash.,” he said. “It really just pushes how you can make gaming truly global.”
On Thursday, Microsoft said it was working with television makers to put their games inside TVs without the need for an Xbox. It added that it will soon bring cloud streaming to consoles as well.
For now, cloud gaming is still affected by glitchy gameplay and requires a strong internet connection. Xbox Cloud Gaming is still in testing and Apple has banned the app from the iPhone because it includes a list of games, and Apple requires separate apps for each game as part of the app review process. is.
At the same time, Xbox is surpassing Sony’s PlayStation. In April, Sony said it sold 7.8 million new PlayStation 5s between November and March, while analysts estimate Microsoft sold more than four million new Xboxes in the same period. Sony declined to comment.
Some gamers said Microsoft had failed to win them over because it still trails Sony in exclusive, quality games.
“I’ve always been under the impression that the PlayStation is better,” said Natalia Mogollon, a gamer known as Alinity, who streams her game play to 1.3 million followers on the site.
Yet when Microsoft does get hold of specific content, it could backfire. In 2015, when game publisher Square Enix first released a popular game on Xbox, gamers were outraged that Microsoft would limit access to the title. The reaction was similar when it considered buying Discord, and when it was reported last month that the upcoming ZeniMax game would be exclusive to Xbox.
“It may sound like a big corporation is coming to try and screw its favorite game developer,” said Rod Breslau, a video game consultant.
As Microsoft moved away from the console wars, Mr. Spencer’s own tone also softened. In an interview with The New York Times in 2014, he indicated that he would not hold back against Sony. “I’m in this to win,” he said.
In an interview last month, he took a different approach. “We don’t look at Nintendo and Sony and say that the company has to lose in order for us to win,” he said.
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