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Microsoft Xbox Loses Its Way as ‘Halo’ Stumbles

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Xbox Woes. Hi everyone. While investors today are mostly focused on
Microsoft
‘s cloud slowdown, another important part of the business is weakening: its gaming unit.

This month, there’s been increasing evidence the technology giant has problems inside its Xbox division. A serious restructuring may be needed.

First, the numbers.
Microsoft’s
(ticker: MSFT) December quarter performance for gaming was disappointing, with every segment down by a double-digit percentage. Overall gaming revenue fell 13% year-over-year, including a 13% decline for Xbox hardware.

The lack of hardware sales growth is especially noteworthy and a surprising development for Xbox, just two years into the life cycle of its Series X and S consoles. In contrast, Microsoft’s main competitor in console gaming—
Sony
(SONY) PlayStation—is thriving.
Sony
recently said that December was its best sales month ever for the PlayStation 5, noting that it had sold more than 30 million PS5 consoles to date, implying a significant ramp in growth over the second half of last year.

Since the Xbox Series X/S console release in 2020, Microsoft’s internal gaming studios have stumbled with delays and a lack of output. Xbox went all of last year without any major exclusive game launches.

Meanwhile, Microsoft’s flagship gaming franchise Halo has struggled and hasn’t been able to retain its audience. Halo Infinite—made by the company’s 343 Industries studio—missed key milestones for promised features and delivered lackluster content updates. Player interest has fallen with the PC user base on the Steam platform down to just a few thousand players per day.

Last week, Microsoft announced it would cut 10,000 jobs across the company to reduce costs in response to the deteriorating demand environment. It was later revealed that several Xbox studios were affected with the 343 studio among the hardest hit.

The cutbacks are a watershed moment for Microsoft. Gaming has been one of the primary growth areas prioritized by the company. For years, it seemed the Xbox division had limitless resources to hire and buy publishers—including a $7.5 billion acquisition of ZeniMax Media and the pending $69 billion deal for
Activision Blizzard
(
ATVI
), which is currently undergoing regulatory review. But the layoffs show the freewheeling days of spending could be over and indicate the company is no longer pursuing growth-at-all-costs—even gaming must make money or get rationalized for the bottom line.

Many game developers have criticized Microsoft’s decision making, even at the risk of their future careers.

“The layoffs at 343 shouldn’t have happened and Halo Infinite should be in a better state,” former senior multiplayer Halo designer Patrick Wren posted last Wednesday. “The reason for both of those things is incompetent leadership up top.”

Well-known game designer David Jaffe has said Xbox needs to make changes across its management team.

Xbox has often had a problem retaining and shepherding its creative talent. Storied studio names like Bungie, Lionhead, and Ensemble have either been shuttered or have gone independent. This month, several lead developers at Microsoft-owned Playground Games left to form their own studio.

I expect to see further cost-cutting measures ahead. Man perks for gamers may disappear. For years, Microsoft has offered a hidden loophole that allowed gamers to convert their cheaper multiyear Xbox Live Gold subscriptions to Game Pass Ultimate. It effectively let users get Xbox’s top tier $15 a month service for a fraction of the cost, enabling the company to gain market share and boost its Game Pass membership. But I wouldn’t be surprised if that loophole gets closed in a move to more belt-tightening.

When asked for comment about the future of the Game Pass promotion and Microsoft’s gaming studio job cuts, the company pointed to CEO Satya Nadella’s blog post on the layoffs.

“We will continue to invest in strategic areas for our future, meaning we are allocating both our capital and talent to areas of secular growth and long-term competitiveness for the company,” Nadella wrote in the post.

Microsoft’s top gaming executive Phil Spencer once said the company’s gaming business would be in trouble if its Halo franchise faltered.

“If we lose our way with Halo, we lose our way with Xbox,” he said roughly a decade ago.

That unfortunate scenario could now be coming true.

This Week in Barron’s Tech Coverage

Write to Tae Kim at tae.kim@barrons.com or follow him on Twitter at @firstadopter


Credit: marketwatch.com

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