Why Xbox Abandoning The Traditional Console Business Model, Makes Business Sense

[admin]

WARNING: LONG READ.

...also I spent all afternoon typing this so there may be a typo here or there :/

...ALSO I might do something like this for Sony/PlayStation, but from a different angle: what they could/should do to solidify and grow the brand while maximizing the traditional console business model. Maybe next weekend.

*For those who just want to quickly scroll through, I tried bolding all of the most critical points in this write-up that form the fundamental core of my perspective on the macro aspects of this topic. You might need to read some of the surrounding parts to get fuller context but that shouldn't be necessary all of the time.
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Okay, so we all know about the rumors. No need to repeat them here. However, my own perspective on them...actually on Xbox and Microsoft's gaming division as a whole well before these rumors came about, was that at this point their gaming aspirations are probably much better served by getting out of the traditional console business model.

What is the "traditional console business model", you ask? Well, it consists of the following:

1: Intensive R&D (upwards half a billion dollars if not more) on prototyping, architecting, design, QA testing and refining of embedded system specs targeting a specific TDP profile
2: Manufacturing finalized hardware designs at mass scale (multi-millions per fiscal quarter) which includes, among other things, securing a large volume of wafers for chip production
3: Selling the hardware at a set MSRP and taking a direct loss on the hardware being sold (aka hardware subsidization) in order to aggressively push install base size
4: Recouping losses on hardware with a combination of B2P software, add-on content, subscription and peripheral sales (peripherals are often sold at for-profit prices)
5: Designing elaborate marketing campaigns to draw in enough customers at scale to justify the rate of hardware production (these can cost hundreds of millions of dollars, in phases)
6: Develop lots of exclusive gaming content (combination of 1P and 3P) to draw customers to the platform compared to direct rivals
7: Create a virtuous cycle where the preceding six elements can generate enough revenue and profit to create a feedback loop positively reinforcing them (lowering of production costs, lower MSRPs, encouragement of bigger budgets for exclusive content, more ROI per advertising dollar, etc.)

Now, I'm not in the gaming industry, and I've not designed a console nor managed a console platform brand. However, I've been a fan of and learned enough about aspects of the industry (past and present) to have a somewhat solid idea of how the traditional console business model works. There might be nuances I am missing in the above, but the seven points listed should give a good idea of how it works.

So the question in context of this discussion becomes, how has the traditional console business model benefited Microsoft? Well, quite frankly, it hasn't. At least, not for a very long time. The last time in which it could be said to have benefited them was during the Xbox 360 era, which is now two generations removed from today. Microsoft did a lot of things right with the 360, but they also made a good number of mistakes that would be foreshadowing of bigger mistakes to come. Quickly, let's break down the good and the bad.

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[GOOD]
1: PRICING: Microsoft kept a smart & sensible pricing strategy for 360 that didn't deviate too much from the prior generation. The cheapest SKU at launch being $299 made it $200 cheaper than the most affordable PlayStation 3 model at that system's launch
2: SOFTWARE: Microsoft and 3P did well to build up a solid library of core-orientate exclusives within the first year that demonstrated the 360's value both in terms of exclusivity and showing the hardware's power compared to other systems on the market. Kameo, Condemned, Bullet Witch, Lost Planet, Dead Rising, Project Gotham Racing 3, Perfect Dark Zero, Chromehounds, Blue Dragon, Lost Odyssey, and Gears of War are just some of many examples.
3: MARKETING: The Xbox 360 had a very slick marketing campaign, including a chic MTV reveal. This did well to appeal the product towards a demographic the brand was already building with the original Xbox, and expanding the appeal to prospective PlayStation gamers wanting to jump into the next generation early. Microsoft also went very bold in securing 3P exclusives, full and timed, and getting once-PlayStation and Nintendo-exclusive franchises (often defacto exclusives due to lack of market presence for the OG Xbox comparatively) to finally come to Xbox, such as Final Fantasy (XIII), Virtua Fighter, Katamari Damacy, and more. They also pushed hard for exclusivity deals with Western 3P, such as for the Mass Effect franchise and Gears of War.
4: UNIFIED RAM: More a spec benefit, the 360 being one of the first systems to have a unified memory pool (IIRC only the N64 prior to it had a unified memory pool, but I'm blanking on if the 3DO and Jaguar had it as well) was able to take advantage of memory operations most other systems, including even the PS3, weren't, due to those systems having split memory. This made programming much easier for developers, which ties into...
5: DEVELOPER FRINDLINESS: The combination of unified RAM, 10 MB EDRAM as a framebuffer, a more straightforward (but still somewhat forward-thinking, WRT being multi-core) CPU, unified shaders on the GPU (something PS3 and Wii lacked), streamlined & lightweight APIs, and solid technical support, helped make the 360 a much preferred platform for most 3P developers in terms of HD game development for the 7th gen. It took the PS3 many years to feel as inviting and familiar for devs, as the 360 was able to provide more or less from Day 1.
[BAD]
1: NON-GLOBAL FOCUS: The vast majority of the 360's sales focus were on the US and UK gaming markets. Together, these markets accounted for slightly over half of all 83 million Xbox 360s sold during the 7th generation! The US in particular, was a stronghold for the platform, doing very respectable versus the phenomenon that was the Wii, and decimating its closest direct rival, the PlayStation 3, even as Sony drastically improved their system's market performance in the back half of that generation.
However, this also showed a masjor flaw in Microsoft's strategy, and one Sony would wisely avoid: Microsoft gave little effort to regions beyond the US and UK. While they dominated Sony in these markets with 360, the PS3 having an actual presence in all of the major and even a lot of the minor global markets ensured that it outsold the 360 from Day 1 when launch-aligned. However, it also allowed Sony to build a bigger advantage, one they benefit a lot from today: market cache at a global scale.
Microsoft was unable to curate market tastes for very specific regions around the globe and this problem only worsened with the Xbox one, the 360's successor. This also meant that things like manual translations, game translations and the like, were often very poor for 360 and its games in non-US and UK markets. In turn this would help alienate gamers in those regions and drive them towards Nintendo and especially Sony, who had already built up a lot of advantages in this area from the PS2 and PS1 generations.
The only foreign market the 360 had some semblance of presence in was Japan. The system managed to sell 1.6 million units in this country, which was a massive boost over the original Xbox (~ 200K - 250K lifetime), though a far cry from the PlayStation 3 (~ 10.5 million) and Wii (12 million). Microsoft's Japanese efforts during this era also included getting JRPG exclusives like Blue Dragon and Lost Odyssey, plus 360 versions of games like Final Fantasy XIII, all of which helped increase the brand's appeal in the market. However, Microsoft would undo all of these gains with the 360's follow-up, the Xbox One, by deeming Japan a "secondary market" and alienating a significant portion of their Japanese 360 customers. This has led to Xbox Series Japanese sales languishing, barely double the original Xbox's in the territory and pacing terribly (a good week for Xbox Series sales in the country is ~ 3,000 units)
2: FUTURE-PROOFING: While the 360 had some obvious advantages over the PS3 in certain technical areas, arguably many of those came at the expense of others. For example, the 360 still used a DVD-ROM disc drive, which meant that latter games in generation came on multiple discs vs. the single Blu-Ray disc PlayStation 3 games used. This is because the maximum capacity for DVD discs was ~ 9.4 GB, vs. the 50 GB capacity limit of Blu-Ray discs at the time. Blu-Ray also had faster read speeds, meaning for any game not running from the HDD, PS3 would be able to stream the data faster.
The 360 also cut many corners in other areas. For example, the original models came with no built-in WiFi. While the launch 20 GB PS3 also lacked built-in WiFi, the 60 GB model did have it, and adding a WiFi module to the higher-end launch 360 inevitably increased the overall cost. In its effort to compete with the then-relevant format wars, Microsoft made an HD-DVD add-on for the 360. With this, it allowed the higher-end 360 to functionally stand toe-to-toe with the higher-SKU'd PS3...but at an extra $199 cost. This would have made an equivalent 360 + HD-DVD combo at launch no cheaper than the $599 PS3 (though not losing the surplus of money on hardware the PS3 was costing Sony).
3: RROD: This isn't 100% a problem of Microsoft's doing, as it had a lot to do with the technology chip manufacturers were using during the mid-'00s with the bumps in their chip packages, also called "bumpgate", and you can watch this excellent documentary that delves deep into both RROD and YLOD (it's less pervasive, but still present, twin sister on the PlayStation 3 side of things). However, that isn't to say Microsoft weren't aware of a potential problem that affected early 360s; they were aware something was wrong.
Rather than taking the time to thoroughly test out the problem, though, they rushed to get the 360 to market by late 2005, cutting a critical part of the QA testing time down to 9 months, versus the ~2 years academic researchers figured would have been required to discover the issue with the GPU bumps causing chip failures (and leading to the RROD). This wasn't helped by the way Microsoft initially designed the cooling of the 360 and compacting so many power-hungry components so close to each other, a major reason why RROD was so much more present than the equivalent YLOD. This whole debacle gave some insight into Microsoft's console design process of the time, that perhaps they weren't always fully considering the longer-term implications of at-the-time reasonable decisions which helped get the product to market ASAP.
While this helped them to avoid any future RROD catastrophes, it can arguably be said that other aspects of the design process have exhibited this type of "oversight" tendency with Microsoft consoles. The design shortcomings of the XBO relative its competitor the PS4, and various aspects of both the Xbox Series X and S that have in ways bottlenecked performance of various games for those platforms compared to the PS5. In both cases, these types of issues can be attributed to lack of design clarity and foresight on behalf of the engineering teams and visionary leaders thereof.
4: SOFTWARE: While the 360 started out with a great deal of varied exclusive software offerings, near the last years of its existence (once the Kinect became a massive hit), this variety gradually tapered off. On the 1P front, it meant Microsoft scaling back on its varied software offerings and turning to just a few key franchises, namely Halo, Gears, and Forza (creating the meme). 3P exclusives with the 360 also became less and less, as they had seemingly achieved their goal of getting mostly 3P parity with Sony in software releases.
However, this all led to a weakened focus of core-orientated software exclusives in the last 3 years of 360's commercial run, just as Sony were building a strong library of system exclusives for the PS3 with titles like Uncharted 2 & 3, Killzone 3, the Resistance sequels, SOCOM, TLOU, Beyond: Two Souls, Demon's Souls, Gran Turismo 6, Motorstorm: Apocalypse, Puppeteer, GOW 3 and more. This had the effect of lessening the Xbox brand's direct appeal to hardcore and core enthusiast gamers, who would otherwise be among the vast bulk of early adopters for the then-new 8th generation console systems.
To Microsoft's credit, the XBO had a good slate of launch period exclusives, arguably stronger than the PS4's first year or two in terms of exclusives, but this did not last. Moreover, it wasn't enough to give them a commanding lead; at best it was enough to keep them relatively close in the stronghold US & UK markets, but by 2016 it was clear XBO was losing significant ground in that generation and would not make a recovery. That said, the absolute most critical mistake, like with the last years of 360, was MS not focusing on core-orientated exclusives to build back genuine enthusiasm with the brand among core gamers. The last years of XBO were rife with game cancellations, mediocre offerings (Crackdown 3, ReCore to an extent, State of Decay 2 & Sea of Thieves at their launches, Halo 5 etc.), at-best serviceable offerings (Gears 5), good offerings that were otherwise too niche or too disconnected from the console brand to make a difference (Cuphead, Ori 2, Forza Horizon 4, Forza Motorsport 7), and a services push that meant little without new content to genuinely back it (BC program, Game Pass).
To then launch the then-new Xbox Series consoles with no new 1P exclusives, when a direct competitor who spent the last years of their 8th gen putting out massive AAA hits (HZD, Uncharted 4, GOW 2018, Spiderman, TLOU Part 2, Ghosts of Tsushima, Death Stranding, etc.) but also made sure to launch their new 9th-gen system with major core gamer-appealing exclusives (Demon's Souls Remake, etc.), showed a staggering lack of effort on Microsoft's part and probably a harbinger of what was to come.

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This all leads to the Xbox Series, and the reality that Microsoft's inability to properly satisfy all seven of the points listed above for the traditional console business model, has caused the latest generation of hardware, and the console brand itself, to ultimately fail in delivering on their wider market goals. However, what exactly were these goals? Well, ultimately, one would assume them to be the following, specific to the Series consoles and generation:

1: Help significantly grow the subscriber base for Game Pass
2: In achieving (1), being able to present a business model appealing to 3P publishers of AAA content to want to put their games into the service Day 1
3: In achieving (1) and (2), leverage the revenue, profit margins, and visibility of both to dictate more terms within the console market beneficial to the brand, grow the hardware install base, and therein grow the subscription base creating an ever-more attractive model for 3P to willingly invest in. This creates a circular feedback loop, a virtuous cycle.

However, Microsoft seemingly forgot, or at least underestimated, that a major component to all of this was having critical 1P software exclusives to drive demand for the service itself. While they eventually got to new releases developed with the Series in mind such as Halo Infinite, many of these games either underperformed, or in the case of titles like Crossfire X & RedFall, were outright failures. In being unable to show the benefits of this model with their own software offerings, Microsoft were unable to naturally attract 3P to commit to the very same model, putting them in a position where it seemed the only way to both get that software and address/mask development woes with various XGS projects BTS, was to outright acquire massive 3P publishers.

Which in fact, may have accelerated things to a new business model altogether, but that can be discussed later. While Xbox Series has ultimately failed to deliver on the core points of the traditional business model, some have speculated that Microsoft could "double down", as it were, and give a major push this year to change things around. Lock down as many 1P as exclusive as possible, push Game Pass perks as much as possible, get super-aggressive on marketing for games like COD.

The question becomes though...is it ultimately worth the sunk costs for what only gives a low probability in turning things around for their console side of the gaming business? These actions alone will cumulatively cost hundreds of millions, and sacrifice potential hundreds of millions in additional revenue & profits, for a division that has already spent over $80 billion in the span of just 3 years on major gaming M&As. Do they add a couple more potential billions on top of that giving it the "good old college try" to turn things around so that Xbox on the current business model, maybe starts pulling in a couple billion dollars of net profit in a give FY? Increasingly, the answer seems to be showing "absolutely not".

That said, there are other goals, pertaining to the Xbox brand itself, that Microsoft have effectively accomplished. Many of these stem back to the original purposes for Xbox, although some were accomplished not through Microsoft, but other companies shifting market dynamics in totally new directions. Let's see what those other goals were, and how they were accomplished:

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[GOALS]
1: Establish DirectX as the main 3D gaming SDK & API suite for PC game developers
2: Leverage (1) to push DirectX as a central 3D gaming SDK & API suite in the console game market
3: Establish (2) due to fears of Sony PlayStation both making the PC market insignificant (and thus making Windows insignificant) & using the living room to do so

Those were the three chief goals of Xbox as a gaming device/brand. And, I would say all of these goals were accomplished. However, Microsoft did not stop PlayStation from "taking over the living room" with their own efforts. Rather, it was the smartphone revolution driven by rival Apple, and later still the social media revolution driven by rivals such as Youtube (Google/Alphabet), Facebook (Meta) and Twitter, plus the streaming revolution driven by Netflix, that actually took away from PlayStation becoming the go-to platform of entertainment content in all forms.

Ironically, all three revolutions shifted the focal point of entertainment away from the living room space, something the Xbox was chiefly designed for as it was made to primarily be a PlayStation competitor. Microsoft tried to awkwardly find a balance with the Xbox One, but ended up alienating many on both sides in doing so in a poorly-conceived and executed fashion. More critically, all three were revolutions in which Microsoft were too distracted from capitalizing on when they were relatively "blue oceans". Even by the late '00s/early '10s, console gaming was seen largely as a "red ocean", outside of the breakout hit of the Wii (which both Microsoft and Sony tried capitalizing on in their own ways). Especially today, the market of "high-powered", core-orientated traditional gaming consoles is seen as a red ocean with a realized top-end cap in terms of install base growth (though not necessarily revenue and profits, which have seen increases on all fronts...though costs have, as well).

If Microsoft, who are served the least by the traditional console business model by far out of the Big Three, were to guarantee (or at least maximize) its chances of growth in gaming while not missing out on emerging sectors and related markets while doing so, it is very fair to say that shedding Xbox, and their larger Microsoft Gaming division, of the traditional console business model, is the best means of mitigating the presence of a "distraction" and enabling fuller focus on areas that better mesh with corporate synergies. So, what does that fully entail? Well, I will break it down in terms of software, services, and hardware, then look at the way these changes would have impacts on some business synergies and other divisions within the company, mainly positively.

[...CON'T IN PART 2 BELOW...]

 

[admin]

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[SOFTWARE]

In the traditional console business model, Microsoft has had to always prioritize software exclusivity for platforms in their hardware ecosystem, which nowadays mainly means wherever Game Pass exists. That effectively means Xbox consoles and PC. This would normally make sense; however in Microsoft's case it has not proven to be very fruitful. One reason could be argued as related to the perceived quality of many of their exclusive offerings, though this is ultimately subjective. Another reason could be attributable to the lack of mainstream genre appeal in some or many of their offerings, which can be somewhat objectively measured in some aspects such as the Ori games (being 2D platformers, not a very "in-demand" genre these days outside of Mario & Sonic titles).

Yet another reason could be attributable to the lack of big brand-name IP among many of their offerings, either in terms of transmedia-friendly IP or just well-known brands in the gaming space. While titles like Halo and Gears should technically have made this a moot point, both IP have arguably declined in innovations and/or quality with more recent installments. Meanwhile, Microsoft have generally lacked big mainstream IP on the scale of Spiderman, though that has changed to a degree with recent M&As giving them IP such as The Elder Scrolls, DOOM, and COD.

However, this ties into another problematic area for Microsoft: traditionally, even with owning IP like Minecraft, or having marketing rights to games like Cuphead, these IP...have not been associated whatsoever with Xbox as a console brand. This is due in large part to their multiplatform status, but the nature of some of these games effectively guarantees a requirement of being multiplatform. This has made it very hard for the Xbox console brand to benefit in optic & messaging synergies with such IP, thereby not providing the console platform with a boost in visibility for having them, as they cannot be marketed as exclusive offerings.

Although...that also presents yet another problem in this regard: in my opinion, Microsoft have for almost a decade undermined the role of exclusivity in their console business model by making all of their offerings Day 1 on the PC platform. Now on some level this makes sense: Microsoft do own the PC OS with the overwhelming market share, Windows. However, they have had to give up PC game exclusivity of offerings from their own storefront, and rely heavily on Valve's Steam for the vast majority of their PC gaming revenue. Regardless, Day 1 PC availability has, IMO, caused a gradual onset of console brand decline in demand and value perception, as well as identity, for many core gamers. As core gamers (hardcore and core enthusiasts) make up the vast majority of early adopters, they in turn help set the initial momentum of platform install base growth and appeal that spreads out towards the larger-populated mainstream and casual customer markets, who tend to buy into a generation in the latter years (as prices come down).

By lacking in genuine console exclusives, especially at the early points of the generation, Microsoft have significantly reduced the appeal of Xbox consoles for a good majority of hardcore & core enthusiasts, which in turn has hampered early momentum in install base growth with the console hardware, in turn hampering adoption among the larger-populated mainstream and casual customer bases. The idea that this strategy (or even a minimum-delayed window buffer strategy between console & PC, something rival Sony have been entertaining with some of their PC ports, mainly of the non-GaaS variety) does not produce conflict with the console's selling ability, appeal, or identity, is false. The sheer amount of once-console exclusive (or once console-first) 3P devs and pubs now bringing their games to PC storefronts like Steam (often Day 1), shows there is considerably more crossover of customer demographics with at least hardcore and core gaming enthusiasts (who are usually the highest ARPU customers in any given gaming product ecosystem) than many want to acknowledge. This in turn makes PC more of a competitor with consoles than it ever was in the past, such as in the '90s or '00s.

While in theory, Microsoft could adjust their strategy to "double down" on console by removing their Day 1 initiative for all games, this would actually make them look incredibly hypocritical to regulators and the gaming community alike. It would jeopardize reputation in an ecosystem that contributes a significant amount to their gaming revenue, as well as weaken the appeal of Windows as the OS of choice for PC gamers (potentially ceding more ground to Valve, who are interested in decoupling PC gaming from Windows with the combined push of Linux & Steam OS, plus devices like the Steam Deck). It is, arguably, too late to make such a drastic move, especially one that still only guarantees a very low probability in returns.

This is why I think Microsoft do much better in being a fully multiplatform publisher, which runs counter to the traditional business model. This approach produces much great chances of maximizing software revenue and profits, and also plays nicely with the wider corporation's platform-agnostic software availability approach. As Game Pass is fueled by software, it also benefits that service's prospects of adoption on a wider array of platforms, changes aside. And, again, that ties into the wider corporation's push for platform-agnostic software and services, including on would-be competitor platforms. Given the larger corporate philosophy around software & services, if Microsoft have no issues with providing all of Azure services, Office, Outlook etc. on Apple & Google platforms, why would they have issue with providing all gaming software (and likely, services) on Sony and Nintendo platforms?

My idea is that Microsoft as a whole, don't mind that at all. But there are old guards in the gaming division, who very much do mind it, because they are thinking of the traditional console business model and what that requires. However as I've been outlining so far, pursuing such a model doesn't make sense for the gaming division or Microsoft as a whole financially any longer. Full multiplatform support of present and future titles would still require some degree of exclusivity in some areas (for example, a future Flight Simulator might have technical reasons requiring timed PC exclusivity, and maybe it can't get a native version scaled down onto the Switch 2 and mobile platforms anyway, so they'd get cloud versions instead), which might be of some solace to diehard fans of the Xbox console platform, depending on how Microsoft handles hardware going forward.

Otherwise, such things would no longer need to be done, and this frees up a lot of content availability on not just other 'traditional' gaming platforms, but also platforms like mobile, where Microsoft have expressed they're interested in growing.

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[SERVICES]

Game Pass is Microsoft's primary gaming service. Its business model revolves around providing Day 1 access to all Microsoft 1P gaming content, for a small recurring subscription fee. With this, the subscriber also gets access to a large catalog of older titles, plus various 3P titles Day 1. Over the years, Game Pass became Microsoft's central cornerstone in their gaming strategy, positioning it as a major value proposition for the new Series consoles. In practice, it hasn't been so smooth-going; what was intended to help propel console sales forward has instead become a growth-stagnated service which has not officially updated a message on subscriber counts in over two years. The last reported numbers, being at 25 million subscribers. Even with the supposed growth on the PC platform, subscription install base appears to be relatively the same, meaning there is likely a lot of heavy churn, and the service's domain being exclusive console-wise to Xbox does it no favors.

Getting Game Pass onto other platforms, such as PlayStation and Switch, would be an obvious goal of Microsoft's and a major win, but as long as they still run the gaming business on the traditional business model, it will never happen. Sony, for example, will not accept a subscription service with games that are not natively available for purchase on their own platform, and this likely goes similar for Nintendo (though they may be willing to have exceptions). Both would also not be keen on a Game Pass that offers 3P content, perhaps even a Game Pass that otherwise still does so on Xbox consoles, not to mention could be adverse to the idea of a subscription that promotes same-day availability of big new releases; even if Microsoft were to enter a revenue-sharing model for subscriptions off the PlayStation & Nintendo platforms, that would not make up for the potential loss in 30% revenue cuts from B2P sales, which could be reduced due to Game Pass availability on their systems.

Therein, I suspect some large changes would come to the current Game Pass model, in order to make it both possible and palatable for other platforms. The first of these changes is that, as software would become full available natively on once-competitor platforms, the door for Game Pass on said platforms opens considerably. The second change, is that Microsoft would disband availability of 3P content in the service; since they are no longer in direct competition with a platform such as PlayStation, they don't need to use 3P games in the service to bolster a competitive advantage for their console. Ironically, this would lead to two direct benefits: one, being a lowering of the licensing costs spent in 3P content securement annually, and two, being a lowering of the subscription prices.

That said, a lowering of the subscription prices would also come about thanks to another change: ceasing of Day 1 service availability. At least for full games, outside of perhaps smaller niche 1P offerings (think titles like Pentiment), which would likely still benefit from being Day 1 in the service. Microsoft's best pivot in this scenario would be to adapt Sony & EA's timed demo approach, with higher tiers netting both longer demos and possibly also retaining the discount offering towards purchases of the games on the service, when buying the native version on the respective platform the service is being accessed through.

This could tie in to platform-agnostic subscriber benefits; however, platform-agnostic cross-buy would not be possible, since that would require companies like Sony and Nintendo to agree on a customer from one buying a Microsoft game to then play it on the other without paying again. Such just isn't feasible, though I expect Microsoft themselves will keep cross-buy for any given relative platform and a PC/Windows Store equivalent (and cloud option) of that same game (so for example, PlayStation/Windows Store/cloud option cross-buy of Microsoft games, Nintendo/Windows Store/cloud option crossbuy of Microsoft games, etc.). Although, the option of cross-buy itself could be removed for Microsoft games unless the buyer has an active Game Pass subscription (as a gesture of goodwill they could grandfather in Xbox Series X and S console buyers before a set-upon cutoff date to get free cross-buy of Microsoft games as long as the system was purchased 'New').

I can see some other changes as well. For example, Microsoft could open a means for cloud-based emulation of 1P XBO, 360, OG Xbox and older Windows & DOS games for the service. They may also change Game Pass Core into an ad-supported free tier, but one which'd have the shortest demo time for new releases and maybe not as much of the 1P back catalog as the other paid tiers. This also opens up the path for sensibly adding ABK titles to the service: while customers may not get the full game Day 1 (I do think F2P games would be exempt from this, but only really beneficial for those accessing cloud versions on a platform that doesn't natively have the game, such as mobile), but they get a timed demo/trail of anywhere from say 30 minutes/1 hour to upwards 6-10 hours (depends on the game, obviously), more than enough to decide if the game is one they want to then purchase.

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[HARDWARE]

This is probably the one with the biggest ramifications in terms of potential upfront changes. On the traditional business model, console platform holders sink in a lot of R&D (usually nowadays costing multiple hundreds of millions of dollars) in designing a console specification meant to last for several years with little in the room for scalability aside from things like storage capacities and, generally, cost reduction on various components (such as merging several disparate ICs into a single chip). The spec determined during the R&D stages generally becomes the baseline, with direct competitors aiming to be at least roughly equal to each other, but also desiring to be a bit better, so as to have the competitive advantage.

Many things surrounding the platform, such as SDK & API changes, SKU variations (if any), logistics surrounding packaging & distribution, contracts with retailers for hardware, peripherals, and software, and more, all have to be taken care of in time of launch. To get good economies of scale, platform holders generally manufacture many millions of systems in a given fiscal year, to ensure they have enough supply to meet demand. Part of the factor driving demand is often the price: for the performance on offer, consoles traditionally have the best price-to-performance ratio of any product capable of playing video games, as consoles are purpose-built for the task.

This also means, that platform holders usually heavily subsidize the upfront costs of the hardware, to recoup on it and make their profits on the B2P software, content add-ons, subscription service fees, and for-profit peripherals, in what's been referred to as the "razor-and-razor blades" model. Traditional consoles are uniquely able to do this model because they have what's called a "closed garden" or closed ecosystem; outside of the software content and services 3P developers & publishers provide, the platform holder retains almost all control of the hardware and software in a vertical flow. While this may limit some choices for customers, it also helps with aspects of quality control and product synergies within the market, for the parties involved. Over the course of the generation, console hardware typically reduces in production costs, which in turn reduces the purchasing price for customers. This opens up the general buying market from mostly smaller-population hardcore & core enthusiasts gamers, to include more higher-population mainstream & casual gamers (as most of the hardcore and core gamers buy in within the first 2-3 years of the generation).

For the Xbox Series, Microsoft made some "changes" to this approach, which have frankly not panned out too well. For starters, they decided on a dual-SKU strategy where one of the systems, Series S, was notably weaker than the other offering, Series X, but in turn was designed to play all Series X games feature-complete at only a lower resolution of roughly 1440p, and/or while maintaining 60 FPS options. This decision was made, likely for two reasons. One Microsoft themselves have stated, being the idea that chip prices and production would not lower as much going forward as it has in previous generations (this is true). The other, my own speculation, being that they were impressed with the reception to the One S and One X, and decided to replicate that strategy from the get-go this generation. A third reason feeds into the typical buying patterns of a console generation: Microsoft wanted more of the casual & mainstream gamers who tend to wait for cheaper console prices to emerge, to buy in within the first years of the cycle, rather than wait until the end. The supposed value of Game Pass was meant to be the big draw in achieving this.

Unfortunately for Microsoft, the former of those has proven to be a dubious belief, as Sony have proven the ability to effectively scale down production costs for the PlayStation 5, thereby increasing their profit margins on the hardware (or at least reducing upfront losses), being able to scale production more efficiently and expediently, and be more agile on pricing to customers when the need calls for it. The latter of the two main points mentioned in the prior paragraph, has created several issues with perception and consistency in marketing, messaging and optics for the console brand, and also led to performance issues in various titles. For example, Baldur's Gate 3 reneged on feature parity between the Series X and S versions in order to have a release on Microsoft's platform before the close of 2023, and it's been speculated that games such as Halo Infinite did away with split-screen coop due to inadequate processing ability of the Series S. The third point, has proven to not be a major draw as it appears a lot of mainstream and casual gamers are not as price-sensitive as Microsoft were betting them to be, plus Game Pass itself failing to act as a big draw for those customers anyway.

In trying to compete on hardware within the bounds of the traditional console business model, Xbox Series S & X have been performing worst than the previous Xbox One when launch-aligned, and this past year, barely managed to outsell the original Xbox's 6.2 million sold-through unit count for its third calendar year (CY) on the market. Estimates put the Series systems as having moved roughly 7 million units in the entirety of 2023, and as of EOY 2023, being between 24 - 25 million in sold-through for the generation so far. To put that into perspective, Sony sold over 20 million PlayStation 5s last year, most likely sold around 7 million units in the last calendar quarter alone, and are more than 2:1 over Xbox in console install base numbers (~ 52 - 53 million estimate as of EOY 2023 vs Xbox Series's ~ 24-25 million in the same time frame).

Keep in mind, the Xbox numbers are also factoring in aggressive pricing discounts & promotions, particularly in Q4 of 2023, meant to push hardware sales up. With Series X units in select locations going for as low as $349, and Series S units going for as low as $199, these particular pricing examples may not have been pervasive the entire quarter or in all locations, but signaled an aggressive promotion that only resulted in a hardware gain of 3% (within a margin of error) at the last investor's call. To put it frankly, Xbox's sales in hardware last year were abysmal for what's meant to be a mainstream gaming console competing with the likes of Sony and Nintendo's offerings, which were both able to move at least > 2x (Nintendo), and in one case 3x (Sony) that volume of hardware in the same calendar year. And, with much healthier profit margins on the hardware than Microsoft, to boot.

So where does Microsoft go from here? Well, with numbers and a dropping trajectory as described above, why do they need to continue with the traditional console business model? The answer is that they don't, nor should they IMHO. This is not me saying that Microsoft have to, or should, get out of gaming hardware altogether: their peripherals seem to do well, and they can still leverage advantages in the PC space combined with their console hardware experience to do something new with gaming hardware going forward. But the specific means of doing gaming as a console just does not seem sustainable for them any longer.

I don't know a lot on the following, but apparently, Microsoft's Surface division has lost a good deal of their own momentum these days. A lot of that is probably due to lockdown ending, and more business professionals returning to the office, but it still isn't great news for Microsoft I'm sure. Part of me feels the reason they kept Xbox around as long as they did was because it was one of the only hardware products they had that was relatively successful (by Microsoft's standards) and in the consumer electronics space. However, if forced to choose between Xbox and Surface, for the potential of what areas of leverage it could bring, I'd think Microsoft would much rather choose to keep Surface going. However, if they could fold the Xbox hardware team into the Surface one, it could potentially give a new lease of life on both. And, coupling that with Windows, itself could probably do with a boost, would synergize the strengths of all three divisions into a singular entity worth more than the sum of its parts.

What would that entail? Well, I feel it would mean having the merged Xbox hardware/Surface hardware teams develop a new range of Microsoft gaming hardware that can compete in markets like PC NUCs, laptops, tablets, transformables etc. as gaming-orientated products. Console-like R&D experience could be used to develop a standardized specification blueprint for the hardware (CPU/GPU/APU, motherboard, southbridge, RAM, storage, wifi, ethernet, I/O, user upgradability and customizable aspects for scalability), OS/kernel (whatever latest Windows is present), and GUI (options for regular Windows environments suitable to the device type, and an Xbox-like UI frontend purely for gaming and some multimedia, basically like what the current consoles provide but hopefully more refined & with more features).

From there, Microsoft could fully optimize the spec, and then provide it as a license for 3P OEM system builders (Asus, Intel, Lenovo, Dell, Acer, HP etc.) to build customized gaming devices out of. Meanwhile, Microsoft develops their own devices from the same spec, and maybe every two years the baseline spec gets an upgrade and various changes, which can lead to new models being manufactured. However, if manufacturers want to do product refreshes with upgrades mainly in other areas, such as the display or form factor, they can do so. It'd be on Microsoft to design a blueprint specification standard appealing enough to 3P OEMs to license out from them, although that wouldn't necessarily be required, consider it more of a bonus. Think of it as similar to what they originally did with the Surface product line.

If possible, Microsoft could also handle some portion of manufacturing for licensing 3P OEMs; if all designs are using the same base components, 3P OEMs can just put in requests for those, have some lead time and Microsoft produces boards (handling things like wafer orders and initial assembly themselves) to ship off to the OEMs who then build out the rest of their particular systems and do any customizations as needed that still adhere to the flexible range of the spec (i.e if the motherboard controller can't support system RAM of a certain capacity, then 3P OEM systems can't go beyond that). Licensing OEMs would also of course have a Windows and Xbox-like GUI frontend license included in this (like a package deal); in fact maybe in doing this Microsoft gives them a Windows license discount for whatever other systems the OEM wants to build that aren't based on this standardized spec (those would be your more typical/generic PCs for example).

Since these new "Xboxes" (Microsoft might forego that branding altogether, who knows) would in effect be PCs, they would be priced more like comparable products in their particular niches, such as NUCs, laptops etc. However, a design goal for the baseline spec should be to anticipate roughly what performance tiers upcoming Sony and Nintendo platforms aim to provide, and match those. Microsoft's approach could let them afford and justify volumes of production higher than a typical device in the gaming NUC or laptop market, but not to the massive volumes that Sony and Nintendo typically require for their systems. This should mean overall lower costs on total production spending for Microsoft, while they can benefit from fatter profit margins on upfront hardware device sales thanks to a higher MSRP. Even so, the presence of variant 3P devices based around the spec would help to keep prices competitive within that space.

One way to picture it is, say if the PlayStation 6 is $499 and/or $599, and Microsoft's spec equivalent is roughly equal to it in gaming power/capability, they instead aim for a MSRP of $899 or a bit higher. But, it otherwise has the console hardware footprint, design ethos, some included storage (2 TB or 4 TB SSD), and has additional benefits such as the ability to run regular Windows in a desktop environment as an option, more m.2/USB/Thunderbolt etc. ports than you'd ever realistically get on a console, upgradable system RAM, room for an upgradable low-profile GPU, maybe upgradable CPU (either as a physical upgrade or, more likely, ability to upclock/overclock the embedded CPU (maybe as part of the APU if it's an APU design)), upgradable PSU and cooling, a way for the system to detect upgrades at boot and prevent loading of the OS if upgrades aren't sufficient for proper power voltage and cooling operation (this'd be something handled at the BIOS/UEFI level I guess...incidentally the BIOS/UEFI would be custom and all licensed variants would need to use it, but OEMs could make adjustments and maybe can have hidden settings that auto-enforce regardless while user-side settings could be accessed like in a normal user BIOS/UEFI routine call or load), etc.

Another thing; I saw someone mention that perhaps Microsoft could make these Game Pass pushers. I think that would be a good idea, and could be done by subsidizing a majority of the first year or whatever of a Game Pass subscription in the cost of the box itself. Now, whether Microsoft made 3P OEMs do this is questionable; I suspect they wouldn't, as Game Pass isn't their service and you never know if an EA (or SEGA ) would like to license a spec for their own variants but push their own service with them instead. But Microsoft themselves, could do this with their own systems, and just have it so the user also gets a free year of Game Pass right there upon purchase and activating the system (or activating Game Pass on the machine). They could also mix and match that with preinstalled select free 1P games, if they want to offer cheaper SKUs.

This reformed approach to hardware would also make things like their All-Access program more useful (if that's something they wish to continue), and as already mentioned before, helps unify core strengths of their gaming hardware, Windows, and Surface divisions while minimizing their weaknesses. In honesty, there is very little downside to this approach, and it could also give the hardware team a better chance at branching out into markets like smartphone hardware once more.

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I know this has been a LONG read, but I wanted to offer a comprehensive analysis on what things I feel have contributed to where Xbox is today, and what changes I feel are best for Microsoft's gaming division going forward. A lot of these things I have mentioned here and there in various posts, but this is the first time I've tried tying it all together, and hopefully did so in a successful manner. There will be some who disagree with this analysis and conclusions thereof, I just hope they are not doing so to console war.

Because truthfully, I feel this is perhaps one of the most upfront and honest analysis you're going to get on Xbox as a console, and Microsoft Gaming as a business. Yes, I have had...A LOT of harsh criticism towards various claims about Xbox from Microsoft over the past couple of years, and I still abhor how they turned their push for getting ABK into a political circus that riled up some of their worst diehards (and even more beyond that) to effectively systematically attack other gaming brands (particularly PlayStation) with hate, FUD, and toxicity. The amount of frankly bogus narratives created and propped up over the course of last year was staggering, in the worst sense.

However, it is also fully possible to divorce oneself from that, take a look at these current rumors surrounding the possible future of Microsoft's gaming ventures, and present as neutral a perspective as possible on their rights and their wrongs leading to what could be a seismic shift in their game-plan, and pontificate on what is actually likely best for their specific needs in gaming going forward. I hope that most discussion on the topic is of similar maturity and rationality (but hey, it's gaming, so I know there's gonna be lots of jokes, memes, whatever too. Par for the course TBH).

Also no TL;DR, but someone'll probably feed this to Chat GPT to generate a condensed AI-powered response. Let's see how accurate it can get