Ben Thompson on Xbox's twenty-year strategic failure and why a spinout is now inevitable

Xbox's twenty-year strategic failure

Ben Thompson's diagnosis of Xbox is blunt: it was never really a gaming business. It was a corporate land-grab for the living room that failed on its own terms, then spent two decades failing to admit it.

The original logic, Thompson explains, came from Microsoft's pre-iPhone "three screens and the cloud" strategy. Microsoft already owned the desk via the PC. It wanted the pocket via mobile and the living room via a console. The Xbox was the instrument for the third screen. The flaw was structural from day one: people buy consoles to play games, not to hand a tech company a portal into their home. The households Microsoft wanted to reach weren't going to buy a several-hundred-dollar gaming box. What actually won the living room were $30 Roku sticks and Fire Sticks.

The Xbox 360 generation

The Xbox 360 was, ironically, Xbox's competitive peak, and it happened almost by accident. The PlayStation 3 launched as Sony's attempt to differentiate on hardware through the Cell processor and to push Blu-ray as a format. The console ran hot, cost too much, and its unique capabilities went largely unused. Meanwhile, the shift to high-definition 3D games made asset creation so expensive that developers could no longer afford to build for a single platform. Almost every major release had to run on PS3, Xbox 360, and PC. That multi-platform imperative gave the 360, with its PC-like architecture, a clean generation. Developers built for it easily, and every cross-platform title landed on it.

“All they did was cannibalize their existing business. They didn't expand the market for console gamers. All they did was have gamers who would have paid way more to play these games, pay way less, and Microsoft ate it. They expected to have 75,000,000 Game Pass subscribers by this year. They have like 30,000,000, and that number is actually decreasing. Phil Spencer got retired, which if you retire at that level of a company, you're probably canned.”

Sony's PS4 counter and the Game Pass gamble

Sony learned the lesson and went the other direction. It built generic, developer-friendly hardware for the PS4 and then bought smaller studios, pushing them hard toward first-party exclusives. The result was Spider-Man, The Last of Us, and a library that made the PS4 the dominant generation. Microsoft, meanwhile, doubled down on its corporate strategy failure by inventing a new one.

The Game Pass thesis was that Microsoft could win by not competing on exclusives at all. Instead of selling games at $70 a pop, it would charge roughly $20 a month for access to everything, expand the market, and pull gamers off PlayStation. To fill the catalog, it bought Bethesda and Activision. The problem was that every studio it acquired had built its business selling individual game copies at full price across all platforms. Forcing those games into a subscription meant cannibalizing revenue the studios would otherwise have collected, with no guarantee of the subscriber growth needed to offset it. Publishers had no incentive to participate voluntarily.

The subscriber numbers reflect the outcome. Microsoft projected 75 million Game Pass subscribers by this year. The current figure is roughly 30 million, and Thompson notes it is declining, not growing. Phil Spencer was pushed out. New leadership came in. Microsoft is now partway through a restructuring that has already included a 1,600-person layoff, with Thompson suggesting more cuts are likely given how candidly leadership described the scale of the problem.

The spinout argument

Thompson says he argued for killing or spinning out Xbox for years, then gave the Game Pass strategy the benefit of the doubt. He regrets it. The conditions that made him soften his view didn't materialize. He thinks a spinout is now the logical conclusion, though he acknowledges some pause given that Microsoft hired Matthew Ball as chief strategy officer.

One scenario on the table, at least conceptually, is reversing course entirely: writing off the acquisitions and making Call of Duty and other titles Xbox exclusives, essentially validating the FTC's original concern about the Activision deal. The irony is that doing so would require admitting the entire acquisition rationale was wrong. It would also function as a live pricing test for how much console-switching power a single franchise actually has.

Twenty years of strategic drift, two failed platform visions, and a subscription business that missed its subscriber target by more than half. The new leadership's most consequential decision is whether Xbox continues inside Microsoft at all.