Xbox One's resurgence is great for the industry
As Microsoft turns even more sharply towards enterprise, the console's bullish performance helps to secure its future within the company
Microsoft has taken something of a battering in financial circles this week after the announcement of its largest ever quarterly loss, recording a $3.2 billion loss in the three months to the end of June. Shares in the company didn't tank as hard as might be expected, since the scale of the loss was already expected - it's largely made up of charges and layoffs in the divisions acquired from Nokia a few years ago - but the headline is damaging and some commentators are posing tough questions about the nitty gritty of the results, especially the performance of the firm's all-important enterprise divisions.
One section of the giant company whose results were entirely positive is the Xbox division, where revenues grew by 27 per cent year on year. The fourth quarter, encompassing April, May and June, is traditionally a pretty quiet one for the games business, so it's not unfair to assume that this represents a rise in the baseline sales of Xbox One, which should translate even more strongly once we hit the holiday season. The rise is even more impressive when you consider that the average selling price of an Xbox One console has fallen by over 20 per cen year on year, and that the same quarter last year included the large sales bump from the unbundling of Kinect in June 2014 (and consequent $100 price cut). 27 per cent is the dollar figure; the number of Xbox Ones sold wasn't announced, but the bump is likely to be much higher than 27 per cent.
This doesn't mean that Xbox One is out of the woods, as the console still trails the PS4 by a huge margin in most global markets; Sony's success means that the ongoing turnaround of Xbox One's fortunes isn't even beginning to close the gap in terms of installed base, merely slowing the pace at which that gap is growing. Getting out of second place, although not beyond the realms of possibility, remains a multi-year project for Microsoft and will require truly remarkable execution in terms of hardware, pricing, marketing and, crucially, exclusive software; even at that, the ten million unit head start Sony presently enjoys is going to be tough to overcome.
"This industry is at its best when Sony, Microsoft and Nintendo are all firing on all cylinders, and only stands to lose out from the total dominance of one platform holder"
The recovery of the Xbox One under the guidance of Phil Spencer is impressive nonetheless, and ought to come as a huge relief to anyone with an interest in the games business - consumers, creators and publishers alike. Sony has created a great console and done a fantastic job of launching, promoting and supporting it, but for that console's success to go unopposed would not be in anyone's best interest. Competition is healthy; it drives innovation and creativity, forces companies to work harder to engage and delight their consumers, and makes gaming both exciting and affordable. Of course, today's consoles face more competition than ever before in some regards; mobile phones, tablets and the resurgent PC gaming market are all challenges to the home console market.
Internal competition is also vital, though, because without it there will always be a temptation to focus increasingly tightly on the console equivalent of "whales" - high-spending core gamers willing to pay large amounts of money on a regular basis for a fairly fixed type of entertainment. These consumers are a good market, but they're not the whole market and they're not a growth market; if companies are forced to fight for their attention and cannot rely consistently on their spending, it will also encourage them to look beyond that group to other markets and potential audiences, rather than backing themselves slowly into a shrinking but highly profitable niche.
That's why it's great to see the Xbox One finding its feet again, and even to see games like Splatoon helping the Wii U into the latter stages of its slightly curtailed lifespan looking healthier and more attractive than ever before; this industry is at its best when Sony, Microsoft and Nintendo are all firing on all cylinders, and only stands to lose out from the total dominance of one platform holder. It's also worth acknowledging that Microsoft, as the only American company to succeed as a platform holder in recent decades, has brought something new and noteworthy to the culture of games consoles; it may not be to the tastes of all gamers, but the Xbox had a different approach and a different cultural background to PlayStation or a Nintendo device, and that variety has absolutely deepened and enlivened the console game space. It would be a terrible shame to lose it.
Losing Xbox entirely, after all, has been an unlikely but not impossible prospect for several years. The Microsoft which happily threw money after the loss-making original Xbox (estimated at something like $4 billion down the drain in the final analysis) is long-gone. The Microsoft which wrote off a billion dollars to handle the Xbox 360's Red Ring of Death manufacturing problems died the moment Satya Nadella walked through the CEO's door. Xbox remains a peculiar remnant of an era when Microsoft saw itself as a consumer and media company with a device on your desk, a device under your TV, a device in your pocket and all your entertainment in its cloud; that vision is all but dead, replaced by a deeper engagement with the enterprise and cloud services space that Nadella considers to be the company's future. That no deal was eventually struck, or no serious suitor found, does not change the significance of the company's reliably reported exploratory talks around finding a buyer for the Xbox division; it's an increasingly tough fit for the future Microsoft envisions.
"[Xbox is] not a core business any longer and must stand on its own, or find itself divested or written down"
Now it seems that Xbox' future within Microsoft is secure - it is, after all, doing well and earning lots of revenue. It may be an odd fit with the firm's strategy, but it's a division in far better health than it was a year ago, and vastly different from the disastrous mess it found itself in two years ago. Executing well and making money, Xbox is stable and secure within Microsoft. The risk now, the question worth asking as a what-if, is that Xbox stumbles again; because I don't think the new Microsoft is going to be so happy to throw money at the division or bail it out, as it did with original Xbox or with the Xbox 360 RRoD. From now on, my bet is that Xbox needs to stand on its own feet; Microsoft's billions will back it up, but will not be there as a safety net should the division falter again. Two lives down; one life left.
We've just seen, after all, how the new Microsoft deals with divisions that are outside the core strategy and failing to pay for themselves; the Nokia charges and layoffs saw the company willing to record over $8 billion in losses and write-downs just in order to be rid of exactly such a division. Nokia's smartphone division was only purchased a few short years ago; now it's outside the firm's core strategy, not doing well, and boom, it's gone, no matter what the cost or the damage to the bottom line. Anyone who imagines that a faltering Xbox division would be immune from precisely the same harsh corporate logic is either naive or hopelessly optimistic; it's not a core business any longer and must stand on its own, or find itself divested or written down.
This may sound like a negative note to strike, and in a sense, it absolutely is - but I have great confidence in the ability of Spencer and his team to continue their turnaround, and huge hopes for the future of the Xbox One and beyond. If anything, I think the removal of the safety net might be a powerful incentive for the division; stay focused, keep your consumers happy and loyal, grow the business through calculated creative risk-taking and innovation, not through ill-advised lurches into new sectors (like the Xbox One's bizarre original positioning as a cable TV device) or abandonment of your core audience for wild stabs at new demographics. Keep the quality high, the message clear, the games amazing. All of these things are well within the abilities of the Xbox team; this week's Microsoft results show just how well Xbox can do when its team executes at its best, while also providing a stark reminder of the stakes for which the console is now playing.