Xbox, Microsoft, Gaming, and AI: Part 1 - Getting to Grips with the current state of Xbox

Xbox, technology, and short-term profit

The year is 2013. E3 is about to happen and your eyes are glued to the internet, ready to absorb every drop of gaming media that is about to be published. Every moment grips your attention and you look for every release date available so you can start budgeting. The next year of games is looking good. You are an Xbox Live subscriber.

There is a moment that's different about this particular show, a moment made for you. At this show, Xbox announces its Games with Gold platform. If you subscribe to the Xbox Live Gold tier, every month you would get free games to claim. This goes for Xbox 360, Xbox One, hell, even whatever might be next. Your $60 a year is no longer just to access the network; it is now an asset. Sure, the games might be a little older, but they're often pretty solid, and they're yours as long as you have an Xbox membership. For the price of one AAA game, you just got a year full of dozens of other games, from classics to somewhat modern hits. This did follow PlayStation as their regular PlayStation Plus games started a year prior, but your faction took care of you.

Time would go on, and eventually PlayStation started capturing more and more of the market. Xbox didn't keep up with exclusives, preferring a more open approach. The more players, the better. This would be a guiding line for Xbox for many years. That wouldn't hold up forever, as it eventually became part of their downfall, as many commonly argue. Xbox's Phil Spencer admitted that they lost the most important generation, the one where people built their digital libraries.

This Games with Gold program is important to where Xbox finds themself today; that is, desperately trying to claw for an audience that was always just out of reach. To make a long story short, Xbox always ran a little behind with the Games with Gold program; they didn't offer as many high-quality exclusives that people found compelling, so there was not as much reason for people to buy their console, and while a performant console, PlayStation generally had more interesting hardware and was doing a much better job of trying to push things forward, giving a compelling narrative. There are many, many reasons that people will weigh differently as to why the switch occurred, but in the end, Xbox just wasn't the choice for most.

If you aren't moving enough consoles, there needs to be something to build an audience who is not interested in spending over half a grand to unlock something they can go play on another device. Enter Xbox Game Pass in 2017. Instead of buying all your games, shelling out for each of them, just subscribe to this massive collection that you can access for a low cost. Promotions were run where you could get Game Pass for a dollar if you kept buying Pringles or whatever sponsored product was available at a store near you. If Xbox Live Gold was worth the $10/month or $60/year, then Game Pass could sell for at least that much, if not more. Double it even if people are used to it. Surely, nothing can go wrong.

This was successful for a time, converting players over and giving many people large libraries, saving avid gamers money in many cases. Eventually, you can even save the money on the console, as in 2020, Xbox Play Anywhere/Xbox Cloud Streaming/XCloud became a massive push. No hardware necessary, no pre-built game library necessary, just enjoy the full experience. All for one low monthly fee.

Looking at the strong preference for the Series S over the Series X console at the time, it showed that affordability will always be the way things work out. Much like how you can pay for virtually any purchase on credit, most people would rather have the lower up-front cost.

This is actually a pretty solid strategy if you are falling leagues behind. Consumer friendly? Not a chance. But clever business? Certainly. A format that people are more willing to pay over time, huge libraries, and no special hardware needed. All you need is a device with internet to play almost any game you want. If removing all those barriers wasn't a good idea, then it's hard to say one existed for Xbox. It even has the nefarious condition in that one must never unsubscribe, or be okay with losing everything they've been pouring money into for years. Players are practically hostages fish in a barrel.

Despite this, the program has not been able to meet expectations. Despite projections to reach 77 million players, the service has presently only been able to reach 30 million. This is a massive loss of income to meet licensing deals, justify server costs, recoup development and publisher investments, and everything else Xbox does.

Not only that, but for years we've seen Microsoft lead massive rounds of firings to free up more money for AI. While many reports focus on Asha Sharma's two rounds of 1,600 layoffs, one recent and the other forthcoming, any framing of her as responsible for this would be incorrect. Asha is someone who was put into a position to do their best (whatever that may mean), under the direction of Satya Nadella, Microsoft's CEO. In comparison to 2025's layoff of 6,000 employees at once and other incidents along the way, it is clear that this was a fixed trajectory. Satya Nadella mentioned that "YouTube monetizes Xbox better than we do," showing that the Xbox division is looked upon poorly from a business standpoint.

Further, this flies in the face of targets and capability. Around the 2025 layoff of 6,000 employees, an impossible target was set for Xbox: a 30% profitability margin. As the chart in the article shows, this is almost double the industry average. Now, Xbox has had better days, but it is rather important to note a recent memo that states they are currently projected to end the year with a "3% accountability margin." This number is used to measure profitability and has largely been interpreted to mean just that. What the actual number is is a little vague to judge its direct meaning, so whether you take that to be a direct indicator of profit or not is beyond me. They also state that the margin has been in decline year-over-year.

A moment to look at some of the layoffs (not comprehensive)
Jan 18, 2023: 10,000 people
Jan 25, 2024: 1,900 people
Sept 12, 2024: 650 people
May 13, 2025: 6,000 people
I also want to link to some articles from PC Gamer, as they did a lot of heavy lifting in aggregating this layoff information (1, 2, 3, 4, 5, 6)
Many of these layoffs are also primarily focused on Xbox, affecting them much more heavily than Microsoft as a whole.
For industry-wide layoffs, a fairly up-to-date estimated count is run here.

These layoffs are largely affected by entire studio closures such as:
- Arkane Austin (Closed)
- Alpha Dog Studios (Closed)
- Tango Gameworks (Closed, but then Saved/Bought by Krafton)
- Roundhouse Games (Staff Reassigned to ZeniMax Online Studios)
- The Initiative (Closed)
- Undead Labs (Sold)
- Ninja Theory (Sold)
- Double Fine (Became Independent)
- Compulsion Games (Became Independent)

Now, to circle back around to the diverging priorities as staff is fired, yet they are told to make more money, there is little argument that Microsoft sees Xbox as having value. It may see it as having earnings potential, but little in the way of value since there is minimal profit. I can't speak for Nadella, but the way he acts is almost as if he would not mind if Xbox wasn't part of Microsoft at all (and recent reports of the possibility that Xbox spins off into a more independent subsidiary would make sense. 1,2). It seems gone are the days of a diversified portfolio, or seeing all that much value in the equity of keeping a company running well. Anyone who's taken a high school finance course should be familiar with the concept of a Blue-chip stock; one that grows minimally year to year, mostly keeping above inflation. These are often large established companies like Coca-Cola, Walmart, and... oh, Microsoft. Interesting.

In terms of where the cuts are, it's largely smaller or medium-sized studios. This is because smaller games have higher risk, as it's unlikely that people will be as compelled to play it or that it's worth the marketing as a large AAA title. For every Meccha Chameleon, YapYap, Celeste, Hollow Knight, MegaBonk Schedule 1, Pico Park, Limbo, Thomas was Alone, Risk of Rain, Lethal Company, Raft... what was I doing again? That's right. For every indie mega-hit, there are often literal thousands of others that go almost entirely unnoticed. It might reap huge rewards to invest in these projects, but the Accounting Department says it's not worth it. If you are Xbox and you have an established franchise like Doom, Elder Scrolls, Halo, and others, there are going to be millions of built-in sales you can practically guarantee. It then becomes more worth it to build out these franchises, as well as organizationally more efficient to focus energy on fewer projects rather than doing a full publishing stack for many. Games Journalism legend, Jason Schreier, talks about this "go big or go home" strategy on his YouTube channel, which I highly recommend (and almost always includes Bloomberg gift links)

Now there is an interesting gap that I'll leave for a different article, but one may notice a bit of a fallacy with this "it takes a lot of luck" strategy. While I don't have the numbers to prove it, though I would be interested in doing some future research on the topic, one would argue that a well-known publisher, especially one with a following, especially especially one that is one of the largest in the industry and controls a large fraction of the market, could maybe do a little bit of cost-free marketing on their platforms, from self-hosted game shows to the in-console advertizing, to make sure that the cost is recouped. But that's a topic for another day.

This size-based strategy does mean that with ballooning budgets as games cost multiple hundreds of millions of dollars, it does almost inherently become a blue-chip approach. While the organization may be leaner, its opportunity for disproportionate profit generation is limited. Fewer swings, higher costs, more predictable outcomes. (Also, is anyone really asking for another Gears of War, or trusting 343 to make another Halo game at this point? Never mind the potentially over $400mil that the new Gears of War is taking, as mentioned by Tom Henderson)

This investment strategy also brings up an interesting predicament. If Xbox Game Pass continues to exist and games continue to be licensed for it, as there is a paying customer base, then what do you do when you get rid of all the studios that filled out your catalogue? This has been brought up many times, one notable voice being Ralph from SkillUp, who has mentioned this on multiple occasions. Even if they were to put games from more external developers on Game Pass to balance the catalogue, Xbox has done a historic job at mismanagement given their attempt at day-1 game access. While there are many individual accounts, I'll leave it at some small studios found it gave a safety net when they weren't planning on selling well, while others found their sales hampered since they didn't get nearly as much money from Game Pass as their box sale projection could have netted them. That said, there is one critical flop that Xbox wasted potentially nearly a billion dollars on. Call of Duty was coming to Game Pass as part of Xbox/Microsoft's acquisition of Activision-Blizzard-King. In the series, Call of Duty's 2015 release cost $450+ million, 2019 was $640+ million, and 2020 was $700+ million. This game would be included at no additional cost to Game Pass subscribers, effectively putting hundreds of millions of dollars in the hole to try to drive subscribers up; however, again, if you only play CoD, then it's cheaper just to get that game than to subscribe, but even in hopes that there would be an increase in subscribers, Xbox still ended up far behind expectations, as previously covered. No amount of subscribers could make up for the lost sales, as the series relatively consistently sells in the tens of millions of copies, where revenue can be in the billions, even before microtransactions that have been in the game for years.

Game Pass prices are left high (even if Asha did reduce them slightly from $30/month to $23/month) and with a potentially worse value, as there are fewer new games to play from. When the publisher only has a few major AAA releases a year, or even notable droughts at times. At that point, it may just be better to save your dollars, given that the average person who plays games only buys 1-2 games a year, if that, as shown by Circana Industry Analyst Mat Piscatella. This does have the effect of driving people away potentially, or just upsetting them, given that you don't own your games anymore. The second you unsubscribe from Game Pass, you must now purchase that game you wanted to play regularly. Again, fish in a barrel. (Also, speaking from experience, I really hope that you don't get stuck in account recovery talking to tech support, and then during the email exchange they gut staff and switch the process to AI, your account isn't recovered, and you lose your entire library anyway because you don't own anything and Microsoft is an AI company now.)

Now, obviously, if you get games included with your Games with Gold, Game Pass, PlayStation Plus, Epic Games' free bi-weekly games, or others, these numbers from Circana have room to skew. There is likely also nuance to be added around purchasing a game or making in-game purchases, or other things that may contribute to rather interpretive results as to what the real-life implications are. Video Games Chronicle points this out, citing data from Comscore's 2024 survey saying that 82% of people spent money on in-game purchases, showing that game-buyers and game-spenders are not the same thing.

Referring back to Xbox's position with Game Pass, this strategy is likely one of the ways that they aim to increase their daily users to 1 billion (because every new manager loves a good Key Performance Indicator, and everything has to be in billions). While Game Pass is not a main reliance, it's definitely an area they would like to see growth in, given that they cut costs to increase adoption of the service.
Side note: The 1 billion users relates to Microsoft properties as a whole across mediums. This includes media like the Fallout TV show and the like, where viewers are counted towards that goal.

The other area is using Minecraft, and following the Roblox and Fortnite strategy of free-to-play with microtransactions, though Minecraft is so ubiquitous, they get the entry fee on top as icing (speaking of hit indie games...). To this point, Minecraft increasingly relies on User-Generated Content (UGC) not only to lower production costs, but to make money off of the content players create. The playability across virtually all devices is key to their plan, and Minecraft is so critical that they now report to Asha Sharma directly and said as much. (If you like Minecraft, but it's getting a little crowded with microtransactions, or you aren't loving Microsoft these days, try Luanti! It's virtually the same and free!)

If you'd like the quick scoop on how UGC platforms like Roblox cause as much harm as they do profit, I highly recommend People Makes Game's two investigations into Roblox here (Part 1, Part 2). This should raise some alarm bells when it comes to Minecraft wanting to take the UGC throne.