The Fall of Microsoft’s Game Business
MAY 16, 2016 • The recent news that Microsoft Corp. was shutting down its highly ambitious Project Spark game/service received only muted attention but it is a sign of how the company is becoming increasingly irrelevant in the game space. Project Spark was a virtual world building game along the lines of Minecraft. It was hampered by a clumsy freemium business model and never could gain much traction even after it went to a pure free model in October of 2015. The game received positive reviews but Microsoft just didn’t know what to do with it. As Microsoft has one failed product after another there is a question of whether they can continue to have a place at the table as a major video game company.
Ten years ago DFC Intelligence was accused of being cheerleaders for Microsoft as we attacked Sony’s plans for the PlayStation 3. Today the reverse is true as DFC has consistently been critical of Microsoft’s game industry strategy. Our only reply is we call them like we see them and right we do not see a good future for Microsoft with games.
Of course, the most recent DFC forecasts lowered our already modest estimates for Xbox One sales, but now the issue is can they meet even significantly lower expectations. On top of that there are increasing concerns about Microsoft’s supposedly renewed efforts in PC games. This was discussed heavily in the new DFC report The Business of Video Games where we analyzed Microsoft’s Unified Windows Platform (UWP). UWP is basically Microsoft’s latest attempt to gain some control of the distribution space, much as Apple has done for its operating system. In the game space UWP is already looking like a non-starter.
A perfect illustration of Microsoft’s recent struggles can be seen in the launch of the major exclusive game Quantum Break in April. Quantum Break was supposed to be a flagship title both for Xbox One and for Microsoft’s PC efforts. This was an epic action-adventure game with cinematic elements. Reviews for the Xbox One version were solid and Microsoft was quick to claim Quantum Break “was now the biggest-selling new Microsoft Studios published IP this generation.” In reality sales could were dismal and Microsoft was able to make that claim simply because there was not many new Microsoft Studios IP for this generation.
Perhaps worse was the criticism piled on the PC version. According to PC World Quantum Break was “a time-bending adventure hobbled by technical mishaps.” PC gamer had this to say “Remedy’s new shooter, Quantum Break, is out today. We don’t have a review for you, because we only received code a few hours before release – rarely a good sign. My suspicions were confirmed this morning when I launched the game and it was running at 10-20 frames per second, even on low settings.”
The idea of taking a game across platform from Xbox to PC has been one Microsoft has been talking about for years. However, when they fail with their own key franchises what does that say for the potential of third party publishers? To address some of these criticisms Microsoft released a massive 27 GB patch for the PC version in May. The problem is in the entertainment business, unlike with business software, things are expected to work out of the gate and you usually only get one chance.
The challenge Microsoft has faced is that at a corporate level they simply do not understand the entertainment business in general and that of course applies to games. Driven by first-person shooter fans they had some initial success with the Xbox brand but they simply could not take it to the next level despite years of trying and many failed initiatives. At the same time Xbox drove Microsoft from its leadership position in the PC game space and the last ten years have seen the rise of Valve’s Steam service as well as robust game services that stretch across PC and mobile platforms. Microsoft has been remarkably absent from almost all growth in mobile and PC in the past decade.
The question now is can Microsoft turn the ship around? In the past decade the company has had trouble attracting and retaining top entertainment talent because the stock price had flatlined and it was hard to offer incentives. The good news is the past few years have seen strong Microsoft stock movement and that could translate into being able to offer incentives even as it is no longer for a general Microsoft employee to retire to a comfortable life at the age of 40.
The bad news is that Microsoft has boosted performance by cutting costs across the board. This includes slashing development and marketing budgets for games. Where Microsoft was once a hungry and aggressive company they have become more of cost conscious factory and that does not bode well for competing against the like of Sony or Nintendo let alone Google and Apple.
Unfortunately the issue with Microsoft is institutional in nature. Overall Microsoft is focused on stock price (as they should be) and this makes it hard to justify investing significantly in a hard charging games division. Marketing has never been Microsoft’s strong suit and without the proper marketing budget the Xbox brand is going to find it hard to compete. On top of that for the Xbox One they went with largely PC components as did Sony for the PlayStation 4. This resulted in a situation where the two systems had many of the same components but the PS4 was seen as a slightly more powerful system at a lower price. This created a situation where price drops became too little, too late.
Overall times are looking tough for Microsoft and its game business. It is probably too late for the Xbox One and the company clearly needs not only a new strategy but the means to execute on that strategy. Microsoft’s overall position in the game industry is on a major decline but the company’s sheer size, position and desire to be a market player always makes them a company to watch. Clearly they need to make some bold moves so we can only wait and see what comes next.