No company ever wants to report a year-on-year decline in revenues in what’s meant to be one of their growth businesses – and when the company in question is a major platform holder and one of the pillars of the whole industry, such a decline is sure to make people nervous.
Microsoft’s announcement this week that its Xbox numbers in the past quarter were down 7% year-on-year, with declines in revenue from both hardware (down 11%) and content and services (down 6%), is by no means in “the sky is falling” territory. Nonetheless, there will be plenty of speculation and concern over the extent to which the issues causing this decline are localised – both in terms of being localised to Microsoft specifically, and to this quarter specifically – versus being a warning sign for the industry’s broader performance in the months to come.
There’s no simple answer to that question because there’s no single factor that can be blamed for the entirety of Microsoft’s growth backtrack in this quarter. Rather, there’s a combination of factors at work here – some of which are indeed localised to one company and one time period, but others of which are a legitimate source of concern for the industry as a whole.
Both Sony and Microsoft’s systems remain incredibly supply-constrained, partially due to global supply chain problems, but also record levels of demand
It’s important therefore to distinguish the different signals in the Xbox numbers in order to get a firmer idea of how both Microsoft and the industry more broadly are likely to perform in upcoming quarters – and to understand how legitimate concerns about the industry’s performance this year actually are.
First, let’s look at the aspects in the report that are least worrying, at least from the perspective of the broader industry.
The good news is that a pretty major part of the decline in Xbox revenues falls under this heading, as it’s largely attributable to economic and supply chain conditions that are global in nature, but also thankfully temporary. The 11% decline in hardware revenues, in particular, is very specific to the current climate, rather than being indicative of a deeper problem, being a consequence of tough comparisons against a pandemic quarter (which will be a running theme throughout this discussion) and also related to ongoing supply constraints.
Both Sony and Microsoft’s flagship systems remain incredibly supply-constrained, which is partially down to the very well documented global supply chain problems that are especially acute in the semiconductor industries, but also reflects record levels of demand for these systems. That’s a notable silver lining here – this generation of Xbox and PlayStation are solidly outselling previous generations despite the supply issues, and if supply were unconstrained, we’d probably be seeing absolutely eye-popping sales figures for both consoles.
Microsoft is a little more exposed to demand-side issues at this point simply because the Xbox Series S has much better availability than the flagship systems, but nonetheless the company’s hardware numbers are generally more connected to supply than to demand at this point. The anticipation that supply issues will even out in the coming months could also be a factor that has dampened demand slightly in this timeframe, as it would push potential Series S buyers to defer their purchase and wait for a Series X instead.
While the supply chain issues remain a source of frustration, then, the fluctuations in hardware revenues due to those issues don’t speak to anything meaningful about current or future demand levels – meaning that there’s nothing in these numbers that should make the industry overall too concerned about its underlying health.
The more concerning numbers, however, are the lower levels of engagement and monetisation Microsoft reported.
Game Pass, at least, is continuing to grow its subscription numbers, which is another silver lining on the figures, but the 6% dip in content and services revenue arguably stands as quantifiable evidence of the common claim that 2022 is simply a weak year for game releases. This is something that many commentators and consumers have been saying since the start of the year, and was amplified further when publisher showcases in late spring confirmed that several more major titles have slipped to 2023.
Seven months in, there’s a fair argument that Elden Ring is the only real blockbuster we’ve had thus far
Microsoft is especially hard-hit by this issue, with the company not having a single major first-party launch in this calendar year – a consequence of the firm’s ongoing struggle to bring its first-party and platform exclusive development pipeline up to scratch after years of neglect. Even so, the general problem is industry-wide, and this drop in engagement is likely to be reflected across 2022’s numbers from many of the industry’s biggest companies.
It’s worth repeating that these figures are coming off the back of some tough comparisons. Engagement during the pandemic was high for the simple reason that people didn’t have a whole lot else to do; there’s only so much sourdough bread one person can bake. We always knew that engagement would drop off once people were able to resume their old activities, which is now more-or-less true in most places.
Microsoft’s year-on-year revenue drop isn’t a surprise in this context, and it won’t be a surprise when other companies post similar results – but equally, the extent of this decline might have been better cushioned by a strong 2022 release slate. Instead, the very sparse release slate – which sees a number of publishers having only one major release this year, or even none at all in some cases – means that we’re going to see a number of companies breaking there fall rather more painfully than they needed to.
I think it’s actually worth taking a step back and looking at the 2022 release slate, because sitting down to make a list of the headline titles for the year – both those released already and those in the pipeline for the back half – is quite an eye-opening exercise in terms of how few major titles are on that schedule right now.
In first-party terms, leaving remakes and rereleases aside, Microsoft has no major 2022 titles, as I mentioned. Sony has two (Hoizon: Forbidden West in February, and God of War Ragnarok in November; you could perhaps make an argument for Gran Turismo 7 in March also belonging on that list, but that franchise isn’t quite the juggernaut it once was).
Nintendo, with a more mature platform, is doing a little better – it has major Pokémon titles to bookend the year (Arceus in January and Scarlet/Violet in November), and is filling in the months in between with a fair number of platform exclusives – games like Switch Sports, Xenoblade Chronicles 3, Splatoon 3, and Bayonetta 3. None of those are necessarily giant blockbusters, but they should be solid performers, at least, and give the Switch a far better exclusive pipeline than either of the other consoles.
The year will be supported, then, on the back of third-party multiplatform titles – especially for Microsoft, which is relying entirely on those to drive Xbox engagement in 2022. Unfortunately, there’s also a paucity of really bankable headline titles from third-party publishers this year. Seven months in, there’s a fair argument that Elden Ring is the only real blockbuster we’ve had thus far. The back half will include Overwatch 2 and Call of Duty: Modern Warfare 2, both of which should drive high engagement numbers (though as a free-to-play title, Overwatch 2 may take a while to deliver revenue numbers to match), along with a few other games that could go either way in terms of commercial success - superhero licensed titles Midnight Suns and Gotham Knights, and Ubisoft’s new IP, Skull & Bones.
Some of those games may turn out to be great, but this is a thin release schedule by any standards. The reasons are no secret; many of the big games that were meant to come out in 2022 slid into 2023, largely because we’re still feeling knock-on effects from the pandemic across the industry. This likely bodes well for a resurgence in engagement and revenues in 2023, of course, and there’s an argument that the games pushed into 2023 will benefit from more time in development; pandemic issues may have caused some of the slippage, but in truth, publishers eyeing the post-pandemic economic climate and the hardware supply constraints were more willing than usual to see those release dates slip and allow the games to have a little more time in the oven.
That doesn’t change the reality for 2022, though, which is that the industry is going to struggle with engagement numbers. The post-pandemic climate and the tough year-on-year comparisons are a big part of that, but this year’s pipeline of new releases would struggle to maintain engagement even in the best of climates. On Microsoft’s side, at least, the extensive back catalogue of Game Pass is filling in some of this gap, but those returns are already diminishing, and the company can’t afford to lean too hard on the back catalogue aspect of its offering for too long.
There is another silver lining worth mentioning, though, and that’s the opportunity which this relatively weak year offers for smaller publishers and less mainstream games to break through in a big way.
Any publisher still in a position to make the most of the breathing room afforded by the thinner 2022 release schedule would be well advised to do so
Bandai Namco is having a great year, for example, and despite the obvious quality of a game like Elden Ring, I do wonder if it would have been quite so commercially successful in a launch window where it competed against a batch of more accessible and mainstream titles. As it is, it only went up directly against Horizon Forbidden West, and had no direct competitors on non-PlayStation platforms. Equally, the really positive and high profile word of mouth around Stray this month is likely being boosted by the lack of other major releases in the surrounding months; that’s another game that’s (deservedly) getting a ton more attention than it might have in a year with a stronger release pipeline.
Other games in the coming months may also benefit from this situation – especially in the usually crowded end-of-year release window, when new IP titles like Skull & Bones and Callisto Protocol may be able to reach a wider audience simply because consumers aren’t distracted by a massive wave of new games and are more willing to look at new IPs as a consequence.
Microsoft’s numbers do carry a warning for how 2022 is going to shape up. Many companies are going to post tough figures this year – but it’s not all bad news. The lower engagement isn’t universal, and the weak release pipeline creates major opportunities for some publishers and developers to make the most of this situation and punch above their weight.
2023, meanwhile, should be a much stronger year, benefiting both from the wealth of titles pushed back from 2022 and from the first fruits of Microsoft’s investments in first-party development finally starting to appear – but this will also be a much tougher and more competitive climate. Any publisher still in a position to make the most of the breathing room afforded by the thinner 2022 release schedule would be well advised to do so.