The general consensus on Asha Sharma’s first 100 days as Xbox CEO has been largely positive. She has certainly confounded the fears of early detractors who took one look at her background in the company’s Core AI division and decried her appointment to Xbox as a death knell. The primary fear seemed to be that she would turn Microsoft’s gaming division into another trojan horse for getting Copilot onto everyone’s devices; instead, last month she announced the cancellation of the Copilot project for consoles that had started before she arrived.
Overall, Sharma has struck all the right notes at the right moments. Some of it is window dressing, admittedly – changing the branding to use an all-caps “XBOX” was something that got a baffling amount of attention – but there have been meaningful decisions in the mix as well. Cutting the price of Game Pass reversed one of the most unpopular decisions of recent years; pledging to shift the focus of the division back to the Xbox console and even to rethink the complete abandonment of exclusive first-party titles are both big decisions that represent a major break with the previous strategy.
While the positioning has been deft and well-balanced, though, it’s not unfair to point out that most of what Sharma has had to do so far has been more about striking the right tone and less about making impactful decisions – at least from the external perspective of consumers or the rest of the industry. The real tests are yet to come, with some very major ones looming ever closer.
How Microsoft navigates its next-gen console, Project Helix, through an incredibly difficult set of market conditions is one of those tests. Xbox chief strategy officer Matthew Ball suggested recently that the company is rethinking its strategy for the new device – which is the first direct suggestion that there’s a significant pivot underway from how the high-end console was being positioned under Phil Spencer’s leadership. Ball emphasised the need for it to be affordable, a major challenge given soaring component prices. Sharma, though, has reiterated claims that it will be a “leading-end performance” device that plays PC games as well as having backwards compatibility.
Ball and Sharma are part of the same leadership team and speaking about the same project, which makes the tension between their statements curious. It’s hard to see how a device can hit both of those marks – a high-end device for PC gaming that’s also going to be affordable and flexible. I do wonder if what’s being hinted at here is an attempt to bypass the hardware affordability problem with a shift in business model – I can imagine a scenario where Helix is available by signing up for a multi-year Game Pass subscription with a hardware surcharge on it, much like a carrier contract for a new smartphone. Now that the company has lifted the lid on Helix’s existence, it will have to start firming up some details in the relatively near future; the console’s specs, positioning and strategy will be make-or-break for many Xbox fans feeling uncertain about the brand’s future.
Getting Helix right, though, isn’t the biggest challenge Sharma is going to have to tackle in the coming months. Looming over everything is the blunt reality that the Xbox division isn’t doing well financially. In a post this week, Sharma alluded to Xbox’s “accountability margin” being 3%, and while Microsoft has denied reports that the company is pushing for the division to lift that to 30%, the fact that the accountability margin numbers have come so sharply into focus speaks to a simple reality: the numbers aren’t good, and Microsoft’s upper management is getting antsy about it.
It’s worth noting that an “accountability margin” is an internal measure Microsoft uses for its various divisions, and while many people have tried to roughly compare it to figures like operating profit at other companies, it’s not entirely clear what is or isn’t included in the calculation. Given the proclivity often seen in the games business for excluding some quite surprising items (like development costs) from profit calculations, it’s fairly likely that an “accountability margin” of 3% actually translates to a significant splash of red ink in real accounting figures. Sharma’s statement also seems to hint at that, noting that the division’s revenues (not including Activision Blizzard King) have dropped by half a billion dollars over the past five years in spite of $20 billion being invested across software, hardware, and services, and bluntly concluding that “this cannot continue.”
The decision to carve out Activision Blizzard revenues from the rest of the Xbox division here is interesting. Activision Blizzard was a solidly profitable business pre-acquisition, and it immediately added billions of dollars to the gaming division’s annual revenues once the acquisition completed. Excluding it from the financial discussion probably suggests that Activision Blizzard is still doing just fine in that regard, and indeed has probably become a major load-bearing pillar for Microsoft’s games business; their profitability has likely given Xbox some breathing room as it tries to figure out the strategic shifts that would return it to a growth path.
The oxygen in that breathing room may be running out. Major cuts (and hence layoffs) seem to be on the horizon at Xbox as the company tries to turn itself into a more focused business. Talk of layoffs is an ever-tolling bell in the industry in recent years, but the framing of these decisions at Xbox does at least suggest that Microsoft wants to refocus investment into key franchises and platform development. Sharma openly says that the company has under-funded some of its biggest IPs, and decries the accumulation of technical debt and over-use of third party vendors for Xbox platform technologies. This seems to suggest, at least, that even as Xbox trims some parts of its operation, it intends to increase investment elsewhere.
That refocusing makes sense. I can understand why there’s frustration at Microsoft over $20 billion being invested in Xbox over the past five years only resulting in declining revenues, because my immediate reaction to reading that $20 billion figure was: “Where?!” Not even the most ardent Xbox fan could claim that there’s been $20 billion of value evident in the past five years of the division’s operations. What has been evident, however, is some incredibly wasteful spending, including multiple major games that were cancelled after years and years of full-scale development work – not prototypes or concepts dropped before going into full production, but games which had large teams working on them for years and were then shut down with nothing to show for it. That’s the kind of thing that could eat a pretty hefty chunk out of $20 billion.
Even as these very tough decisions loom – and no matter how cuts at the Xbox division are handled, some of them are inevitably going to be deeply unpopular – Sharma’s messaging is still setting the right tone. It’s refreshing that she’s quite open about the division’s business not being in a healthy state right now, and talking about redirecting investment to put proper resources behind major franchises and rebuild in-house platform engineering know-how. Those sound like the right kind of moves for the division.
Nonetheless, we shouldn’t underestimate how little room to manoeuvre Sharma actually has on a lot of these questions. She’s boxed in by economic realities both around the Xbox platform and the market more broadly. Component prices limit the options for Project Helix, of course, although they may open up new options for Microsoft’s ambitions in the game streaming space, with the economics of that thin-client model finally starting to add up if prices for consumer hardware remain sky-high. On the software side, meanwhile, the Xbox’s relatively low installed base puts serious limits on how aggressive the company can be with exclusive software.
“She’s boxed in by economic realities both around the Xbox platform and the market more broadly”
That’s a big deal, because Sharma seems to be very much sold on the idea that Xbox needs exclusives if it’s going to rebuild itself in the market (a judgement with which I wholeheartedly agree). She’s started to cautiously move back in that direction; a PS5 version of the upcoming Gears of War title has been dropped, marking the first big reversal of the strategy of making all Xbox titles multiplatform. Some of the other crown jewels, though, including Halo, are still PS5-bound. It’s a Catch-22; for these games to contribute meaningfully to the division’s profitability, they need to be on the most popular console platform, but for them to contribute meaningfully to rebuilding the Xbox platform, they need to be exclusive. How Xbox navigates that tricky dilemma in the coming years will be one of its biggest strategic challenges.
Asha Sharma was greeted with suspicion and hostility from many quarters when she replaced Phil Spencer, but her first 100 days in the job have almost completely reversed those snap judgements. That’s impressive in itself – but it doesn’t change the nature of the crisis at Xbox which she inherited when she took on the role. The messaging has been great, but the real challenge always lies in execution. We know now that Sharma can talk the talk; in the coming months, she’ll have to show that she can walk the walk.
