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Microsoft rolls the dice in a huge Xbox gamble

A slump in Xbox hardware sales is to be expected before the One S arrives, but the company's next results will show whether Scorpio has taken a longer-term toll

Microsoft's latest quarterly results paint a picture of the Xbox' status that's not exactly rosy, but certainly not unexpected. Gaming revenue is down by 9%, with small but reasonable rises in software and services revenue being offset by a one-third collapse in hardware revenue. In the absence of decent hardware sales figures, which Microsoft has declined to release for some years, we can only guess at what exactly that means in unit terms, but it's likely that this past quarter has been one of the toughest for Xbox One hardware since the system launched.

That's unsurprising, of course, when you consider that this is a quarter wedged in between the unveiling of not one but two new Xbox hardware platforms, and the availability of the first of those platforms - the 4K-supporting, heavily redesigned Xbox One S, which will be on shelves in a little under a fortnight. The announcement of redesigned hardware naturally depresses sales of the existing hardware until the launch, partially due to anticipation for the new hardware and also partially due to an expectation that the older model will get a price cut once the new model arrives on the scene.

What makes the figures we can glean from Microsoft's financial results interesting, though, is that they're the first variables we're able to plug into an equation that'll eventually give us our first hard data on the change the console industry is forcing itself through at the moment. Both Microsoft and Sony have now committed to upgrading their hardware mid-cycle. In Sony's case, that comes in the form of a moderate power boost, PS4 Neo, which will have full compatibility with the PS4 enforced firmly by the company. Microsoft, however, is pledged to launch both the redesigned Xbox One S and, more dramatically, the upcoming Scorpio console, which will be an entirely new platform with vastly more processing power than the existing Xbox One.

"The redefinition of Xbox as being a part of a much broader ecosystem of services centred on Windows 10 makes the actual success of Xbox hardware, while not unimportant, certainly less of a priority"

This is unknown territory. We know what happens when you launch mid-cycle refreshes of hardware, of course; those have been a staple of successful consoles since the PlayStation (whose adorably cute miniaturisation, the PSone, remains my personal favourite among all the Sony-designed consoles). A hardware refresh dampens sales of the old version, then sees all those "lost" sales picked up at once in a big spike once the new version launches. Overall, a new hardware launch should deliver stronger sales across the launch quarter (with its major spike) and the pre-launch quarter (with its anticipatory slump) than would have been seen over two normal quarters.

What we don't know, and won't know until we have more data, is what on earth consumers will make of being told of a complete hardware refresh coming down the line far sooner than expected, right at the same time that a more normal hardware refresh is being announced. Scorpio changes everything - or perhaps it changes nothing. We won't know for sure until we can put next quarter's results into the equation alongside this quarter's, and see whether the decline in Xbox sales is down to ordinary anticipation for Xbox One S - or a much more long-term strategising by consumers who see Scorpio as a reason to hold off on the existing generation of Xbox One hardware entirely.

Ordinarily, the risk of the latter event would have been enough to prevent Microsoft from even dreaming of announcing Scorpio this year, let alone announcing it alongside a console redesign it would quite like consumers to buy. This is no ordinary generation, though, and especially not for Microsoft, whose Xbox division finds itself dramatically redefining what it does, how it's positioned within the company and how it measures its success, even as it also fights a thus-far losing battle with Sony in the consumer marketplace. The redefinition of Xbox as being a part of a much broader ecosystem of services centred on Windows 10 makes the actual success of Xbox hardware, while not unimportant, certainly less of a priority than it used to be, and allows the company to take a short-term risk with Xbox One S sales in the name of building long-term credibility by placing Scorpio on the horizon, looming over competitors' plans.

This is not to say Xbox One S won't show a sales spike next month - it's an appealing piece of hardware (as someone who hasn't got an Xbox One yet, I certainly want one) and will find an audience, so I'd be stunned if it doesn't enjoy healthy sales in its introduction month. The question will be how that sales spike compares to the 33% revenue slump seen in the previous quarter, and how ongoing sales after the spike recedes compare. If Xbox hardware doesn't make up that ground, the outcome of Microsoft's gamble will be clear; it will have sacrificed consumer faith in its current generation of hardware in the hope of building anticipation for the much more distant Scorpio.

The company may well be satisfied enough with that outcome, though having its cake and eating it would undoubtedly be preferable. It's telling that the other figure Microsoft provides in its results as a metric for Xbox' performance is "active Live users", which it reports are up by a third year-on-year. "Active Live users" is an interesting statistic, because in many ways it's a reflection of the changing priorities of the division. While Sony's PlayStation Plus numbers may seem like a directly comparable metric, they're not; PlayStation Plus is a service that only has a paid-for tier (so when Sony reports PS Plus numbers, that directly means "people paying us subscription revenue") and is a service that only works on Sony's consoles (so it can also be interpreted as a kind of tie ratio for the consoles).

"Knowing that Xbox Live has 49 million MAUs is all well and good, but without further detail breaking down that number, it's worthless for making business decisions or forecasts around the service on the Windows 10 platform"

Xbox Live is a more complex and nuanced beast, at least in terms of this metric. Although Microsoft pushes the benefits of paid Gold membership hard (and has undoubtedly built up its subscriptions significantly thanks to the major improvements made to Games With Gold), Xbox Live still has a free tier whose members still count towards the monthly active users (MAU) figures being reported. Moreover, Xbox Live is no longer necessarily tied to an Xbox console. It's also a feature of Windows 10, and the company is pushing hard to get more games on Windows 10 to support Xbox Live social features. That means Xbox Live MAU figures don't necessarily reflect subscription revenue, and can't be interpreted as a ratio of Xbox console sales.

The slightly frustrating thing, from an industry perspective, is that this means some genuinely valuable data is being locked up behind that not-terribly-meaningful year-on-year MAU figure. Microsoft is pursuing a number of interesting initiatives with Xbox Live, with the Windows 10 integration being perhaps the most interesting and impactful; but without visibility of any figures on how that integration is proceeding, it's difficult to say whether it's actually making any headway on that platform. Knowing that Xbox Live has 49 million MAUs is all well and good, but without further detail breaking down that number, it's worthless for making business decisions or forecasts around the service on the Windows 10 platform.

The integration of all those numbers isn't just obfuscation on Microsoft's part; it's genuinely an expression, I think, of the company's beliefs about Xbox Live becoming a unifying service between all of its platforms. The firm sees Xbox One and the upcoming Scorpio as merely parts of a family that also includes Windows 10 PCs, Surface tablets and other devices, with Xbox Live as a common bridge between all of them. That's a great vision, and it explains a lot about the company's willingness to make moves that look almost self-sabotaging in the context of its direct market share battle with Sony; but a little more detail about how that vision is progressing and whether it's really taking root across the ecosystem wouldn't go amiss.

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Latest comments (7)

Ben Link Video Game Enthusiast and Graphic Artist 10 months ago
"(as someone who hasn't got an Xbox One yet, I certainly want one)"
Kind of bothers me how the person writing this article doesn't even own an Xbox One....
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James Prendergast Research Chemist 10 months ago
@Ben: Most reporters who write about most things are not or have never been part of what they write. Not all and not all stories but I think those are the minority.

Why does it make a difference? Humans have a huge brain that is good at recognising patterns and thus drawing conclusions and inferences of future behaviour and events based on past and current information.

If none of us were allowed to comment, write or analyse what we are not directly involved with then the world would be a less interesting and, ultimately, poorer place. When the technology industries and boards of directors are talking about diversification of their participants to increase effectiveness why do you think that is?

We live in a current age where we can go either way as a society - we can increase diversity and inclusion or we can descend into cliques: segmenting our lives and living in constant echo chambers of 'same-thought'.

Speaking directly about the article, I see no reason for anyone who is doing market analysis to own one item sold in that market. In fact, if anything, logic dictates that I trust the opinion of someone who has 'no skin in the game'. Now, if we were speaking about a review of the XBO interface and UI then I'd agree that you have a point...

OT:
MS is playing a long game and, as always with those sorts of plays, it's incredibly difficult to see how it may play out. In a certain sense, Microsoft is mimicking Nintendo in that it has decided that it doesn't need to compete with Sony at playing the same game and is instead playing it's own variant of the game they know.

I think this is ultimately good for the industry and for the consumers in that they will have three pretty distinct choices to choose from that are related.

Edited 1 times. Last edit by James Prendergast on 23rd July 2016 6:09pm

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John Byrd CEO, Gigantic Software10 months ago
Personally, I've never understood why a mere change in form factor can drive new sales, or second sales to existing customers; but it always has, at least since Nintendo released different color versions of the N64 and probably before then. That said, United States consumers as a whole will not perceive a difference between 1080p and 4k. For engineers the differences are obvious but not so for US customers.... we like BIG screens! Doesn't matter what the resolution is so long as it's BIGLY! Obviously you'll also need to replace your old 1080p screen in order to accommodate 4k, and I claim that US consumers are a bit stingy to get rid of a "perfectly good TV." So the market is mostly for hardcore gamers and first adopters... you can definitely make money selling to them, but the Xbox One S (and its Sony equivalents) won't be a mass-market item for a few years yet. This form factor and new resolution will make more sense once the VR goggles start coming as a high-end pack-in, to make the "Xbox One VR Platinum" package or some such. The marketing script will be all buzzwords: "Play all the games you love in virtual reality ultra high definition platinum woooo!"

Edited 9 times. Last edit by John Byrd on 23rd July 2016 9:47pm

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Show all comments (7)
Klaus Preisinger Freelance Writing 9 months ago
The trailer for the Xbox S, which is heavily marketed with this season's TV buzzwords 4k and HDR, does not come at 4k resolution when you watch it on the Microsoft site / Youtube.

That tells me enough about that stopgap release of a console. If there were raging masses of Xbox One owners out there complaining about a lack of 4k videostreaming, I might think differently about it. Last time I checked, the message was PS4 is thrashing Xone based on games. Again, look at the MIcrosoft site of the Xbox One S, you have to scroll down a lot until the site mentions games.

There is also a lot to be said about people fueling 900p vs 1080p discussions, when most "1080p" TVs sold had panels which natively only supported 1650x1050. To this day most review sites and magazines won't release native resolutions of TV screens, making the discussion about TVs and consoles broken from beginning to end.
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Jeff Kleist Writer, Marketing, Licensing 9 months ago
The OneS is an easy upgrade that cost them essentially nothing to do. They replaced the HDMI HDCP chip with the most current one, they put in a better scaler and tweaked the GPU.

PlayStation 3 was heavily poached by home theater enthusiasts on launch when Blu-Ray players were $800 and up. It was the cheapest and best performing player in the market by $200.

So why shouldn't they chase those people? The OneS isn't a stopgap solution, it's a reduction in costs to stop the hardware bleed we saw in the report, it gives people who have been waiting a reason to buy at a low price, and it gives them something to discount heavy next year when the premium Scorpio arrives. Remember everything they're doing is about getting people in the ecosystem.
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Jordan Lund Columnist 9 months ago
I recently bought a 4K TV (kid went off to college so I gave him the 1080p set), so I'm in the market for a 4K media player. Currently my smart TV can stream 4K Netflix and that's about it.

So you'd think... THINK I would be the prime market for the Xbox One S... the problem is that I would be an absolute moron to buy one now instead of at least waiting for price, date and spec on the Xbox One Scorpio and Playstation 4 Neo.

If I wanted to spend $300 now and another $xxx later I could just as easily buy a 4K Blu Ray player for the same price and get the same functionality with that plus my Xbox One as I would with the Xbox One S alone.

Edited 1 times. Last edit by Jordan Lund on 25th July 2016 4:59pm

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Jeff Kleist Writer, Marketing, Licensing 9 months ago
Many people won't spend over $199-250 on a console. And the 500gb ones will effectively be that this Christmas. Good luck nailin a 4K Blu player under 300 without being tied to a tv purchase.
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