In mid-2014, Satya Nadella, who had just become Microsoft’s CEO, moved the heads of the company’s games division into her fifth-floor office in Redmond, Wash.
The executives wanted Mr. Nadella to write a check for $2.5 billion to buy Mojang, a Swedish company that makes a block game called Minecraft. Mr. Nadella asked why Microsoft, which has always been surpassed by Sony in the game console business, should continue to invest in video games. Does that align with your vision of a company with a friendlier face that appeals to more consumers, he said?
Then Phil Spencer, the new head of Xbox, told Nadella about the vast world of Minecraft, where millions of people can socialize and where teenagers are encouraged to learn math and science skills. A deal would be the first step of “a rather bold vision” to transform Microsoft’s games business into one that’s focused on more than just console gamers, Spencer said.
Mr. Nadella agreed and executed the agreement. According to interviews with more than 20 Microsoft executives, game developers, industry analysts, and gamers, what follows is a multi-year shift. Instead of competing primarily with rival Sony to sell more consoles, Microsoft bought 15 other game studios and invested in new technologies, like a Netflix-style game subscription service and a mobile tool. called a cloud game.
Now, as Microsoft prepares to introduce new products at its annual E3 gaming conference this weekend, its video game business looks very different. The company is still known for its Xbox, a new version released in November. It has diversified beyond boxy hardware to offer a host of new services, though.
“Their strategy has been significantly different from the traditional console approach,” said Piers Harding-Rolls, game researcher at analytics firm Ampere Analysis.
With these 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 single console, executives, and distributors. tit said. Ultimately, they said, people may no longer be tied to specific devices for playing games, and will instead be more interested in software and services.
While Xbox consoles still generate a lot of revenue – in January, Microsoft first reported $5 billion in quarterly gaming revenue, backed by the release of Xbox Series X – the company stopped disclosing console sales in 2014. Much of the revenue from games, said Tim Stuart, Xbox chief financial officer, came from content and services, not Xbox hardware sales.
Their gaming business still faces obstacles, including shaking gamers’ perception that it’s not in their best interests. That annoyance stems from a messaging problem 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 gamers revolted.
Analysts estimate the Xbox One still sells around 50 million units. But it was far behind Sony’s PlayStation 4, which was also introduced in 2013 and has sold 116 million units.
“We’ve lost what gamers want,” Stuart said.
After the backlash, Microsoft transformed. Mr. Nadella has just taken over and wants the company to move from focusing on software to cloud computing and subscription services.
Mr. Spencer ensured that the development of the games division reflected those goals. He convinced Mr. Nadella to buy Mojang in September 2014, which was the new chief executive’s first acquisition.
“Games are 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 a month, subscribers can play a specific set of games as long as they stay on the service. That doesn’t sit well with the traditional model, where people pay $60 for games like Call of Duty and own them forever.
To convince game publishers to put their titles on Game Pass, Xbox executives flew around the world to meet developers and popularize their vision for an industry where gaming cheap and easily accessible electronics.
Sarah Bond, Microsoft vice president who leads the game ecosystem organization, said that at first, the developers were “lazy”, worried that they would lose money on the service.
So she decided to research how Game Pass affects gamer behavior. Microsoft said on Thursday that it found that people using the service spent 50% more money overall on games and played 40% more games than those who didn’t sign up.
Mike Blank, senior vice president of Electronic Arts, the company that brought its games, like the Madden NFL and FIFA football franchises, to Game Pass in 2020, said there was “anxiety” around it at first. around subscription services. But the company was happy with the results, and “players are responding favorably,” he said.
Microsoft is also spending heavily on game development to expand its Game Pass offerings, buying studios including its $7.5 billion acquisition of ZeniMax Media in September, and adding hundreds of games to its lineup. this service. This year, they are also considering buying the messaging app Discord, which gamers use to chat while playing.
The diversification continued into late 2019, when Microsoft released a cloud gaming service, in which games are stored in the company’s data centers and broadcast to devices. The Xbox Cloud Gaming or xCloud service means that people don’t need to install games or use expensive hardware.
The idea for a cloud gaming service came to Mr. Spencer earlier that year, while he was on a bus in Nairobi, Kenya, and connected to Wi-Fi. He found that he could stream a game from Microsoft’s data center in London to his phone.
“It was actually the saved game I sat in in Redmond, Wash,” he said. “It really just advances the way you can make the game truly global.”
On Thursday, Microsoft said it was working with TV manufacturers to bring their games to TVs without Xbox. It added that it will also bring cloud streaming to the console soon.
Currently, the cloud game is still bogged down by glitchy gameplay and requires a strong Internet connection. Xbox Cloud Gaming is still in beta and Apple has banned the app from the iPhone because it includes a category of games, and Apple requires separate apps for each game as part of the app review process. their use.
At the same time, Xbox continues to follow Sony’s PlayStation. In April, Sony said it sold 7.8 million new PlayStation 5s units between November and March, while analysts estimate Microsoft sold more than 4 million new Xbox units in the same period. period. Sony declined to comment.
Some gamers say Microsoft hasn’t been able to win them over because they still lose to Sony in quality, exclusive games.
“I was always under the impression that PlayStation was better,” said Natalia Mogollon, a gamer known by her nickname Alinity, who has been streaming her game on Twitch to her 1.3 million followers.
However, when Microsoft takes exclusive content, it can backfire. In 2015, when game publisher Square Enix released the first popular game on Xbox, gamers were furious that Microsoft would restrict access to the title. The reaction was similar when they considered buying Discord and when it was reported last month that an upcoming ZeniMax game would be exclusive to Xbox.
“It can look like a big corporation coming to screw up their favorite game developer,” said Rod Breslau, a video game consultant.
As Microsoft has left the console wars, Mr. Spencer’s tone has softened as well. In an interview with The New York Times in 2014, he signaled that he would not back down from Sony. “I entered this match to win,” he said.
In an interview last month, he took a different approach. “We don’t look at Nintendo and Sony and say the company has to lose for us to win,” he said.