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

Speaker 2: Have a great rest of your day. Say hello to Will for us, and we'll talk to you later. Cheers. Goodbye. Let me tell you about Cisco. Critical infrastructure for the AI era unlocks seamless real time experiences and new value with Cisco. Our next guest is Ben Thompson, the founder of Strathecory. He's been on an absolute tear during a slow news cycle. Does it feel like a slow news cycle to you?

Speaker 9: I don't know. It it and the summer is always slow. Yeah. I, you know, I take a couple days. Alright. I slow down a little bit myself.

Speaker 2: I feel like you've done a good job of, like, providing really insightful and interesting pieces during a slow time where I didn't know that I wanted I'm doing you a favor. Yeah. You are. Is that what I'm hearing from I didn't know I wanted you to adopt the voice of Mark Zuckerberg for twenty minutes and and go on a tear but it's not like that was driven by, like, a specific okay. There's a Wall Street Journal article where, like, Bloomberg has a scoop and, like, we need to know this. It's more just, like, resetting on the metanarrative. I wanna talk about the metanarrative, but can we start with Xbox?

Speaker 9: Sure.

Speaker 2: I want to know first, let's go back in time a little bit, and I want you to reality check me on the the the story I tell myself about how Microsoft wound up in the situation it wound up in with Xbox. And I think it stems with DirectX. The it's the graphics layer that allowed games to be run on multiple graphics cards. So that was a Microsoft licensed piece of property. So you this is why we don't have the Chromebox. You wanna go you wanna go really far far back. Like like, because we do we didn't get an Amazon gaming console. We didn't get a

Speaker 9: a Google gaming console. Right? Right. Like, why why is that so? So you well, you go back way back. I mean, can go really far back. Please. I mean, back in the day, the main technology for doing three d when it was coming along was OpenGL. And OpenGL had various plus or minuses. It was, you know, we're way back in history. But the way this is the origin of the NVIDIA story. Yeah. Making cards to do three d graphics. You had, like, the Riva, the one twenty eight, then the TNT. Yeah. Then you get the GeForce, and, like, we're talking back in the nineties when I was, you know, your guys' age or whatever it was in college. And, you know, making the first, you know, Quake comes out, like, the real first three d games, you know. There's actually a really interesting Twitter back and forth with the old id people talking about Quake and how basically they obliterated the company by burning everyone out by launching it. Woah. But super fun super fun back and forth. But Microsoft comes out with Direct three d as an alternative to OpenGL. Mhmm. That was, I think and this is a little out of my area of expertise, but I think it was a little easier to use, had more niceties, was more tied into the platform. But this is all sort of PC gaming. Yeah. The Xbox, the way I think about it, and a lot of gamers kinda get annoyed and write about the gaming stuff because I don't really care about the game part of it. I'm more interested like the the strategy and how that fits in the overall What is your review? Yeah. Can we get a GTA six review? No. Well, I feel I feel compelled number one, I feel Rockstar, I think, is charging way too little for this game. They're charging, what, $80? Yes. Like, this is a game. This is you're gonna get canceled for this. This is a nuclear take. No. They should be charging like $200 for this animation. I know. GTA six is like the last great game. Yeah. Like, you think about every it was built boastably all made pre AI. Yeah. Like, it is the pinnacle of this triple a Yeah. Craftsmanship years and years and years of blood and sweat and tears. Yeah. To the extent where you have, like, the Twitter analyst, like, counting cigarette butts outside of the offices to see, like, how much crunch are they in right now? I don't even he's trading the stock. I don't even think he's trading the stock. I think he just wants to know what GTA six. The love of the game. Literally, the game. The the GTA six. Are insane. Insane. I always tread in this water, like, very, very carefully. But no. So I feel compelled to buy GTA six Yes. Just in honor of it existing I like that. Even if I don't know if I'm ever gonna play it. So I'm definitely gonna do that, and I'd be happy to pay yes. I have $200. Like, $80 is ridiculous. They should charge more. Anyhow.

Speaker 1: Yeah. We had one of the youngest person on our team was commenting on people online complaining about the price and said something like, you didn't have you had ten years, you couldn't save up $80? I know. Seriously. It's like Whoever

Speaker 9: whoever you are, like, but like, I know kids that do lemonade stands and they clear, like, a $100. Yeah. You know? Oh, absolutely. I want you know, the old $20, I'll keep the change. Nothing will make a kid's day better than that. Exactly. Although, unfortunately, with inflation, I think now it's sort of like expected. It's unbelievable how expensive things are. It's bad. It's bad. Anyhow, I my GTA six. But we're we're back oh, so the the the console the console. So the way I think about Xbox Yeah. Is you go back to Microsoft, and Microsoft had this whole thing. This is pre iPhone. Mhmm. This is idea of their corporate strategy was three screens in the cloud. Mhmm. And the idea that we're going to we already own the desk Mhmm. Via the PC. We're going to own the Pocket via the phone. Mhmm. And people always used say Microsoft missed mobile. Microsoft did not miss mobile. They, like, they came out with a Windows CE in, like, 1999. Like, they were in mobile. They just had the totally wrong conceptual model because they were basing it around, you know, as an extension of the PC. Yeah. But then the third screen was the living room. How do we get in the living room? Well, people have consoles plugged in their TVs. If we can get in and own the console, we can own sort of the gateway to the living room, and we need to earn permission to be in the living room. We will do that by creating a the Xbox, the game console. And what's interesting about this is this is a strategy that totally failed. And it failed for a kind of an obvious reason in retrospect, which is first and foremost, people buy consoles to play games, not to have a portal to the Internet in their living room. Yeah. And so you're selling a multi $100 sort of console to people who want to play games, but people who don't want to play games aren't gonna randomly start buying consoles. What actually ended up taking it over was things like the Fire Stick or, you know, Apple TV beta played this. I still think it's, like, probably the the best solution, but it's way too expensive. Now the Apple TV's poor price got jacked to the moon with this recent memory increase. But the Fire Stick is probably a big one. You had the Chromecast. You had Roku TV. Yeah. You had, you know, these which ended up being it's not that it's a classic Microsoft thing. They were actually right. There was this new front page to online services to be built. They just took totally the wrong approach with Xbox. And what's funny is that this approach actually became this uberose of self mutilation because the Xbox didn't succeed in achieving this because the games console is way too expensive to achieve this. But then also, they killed the Xbox where Xbox three sixty was pretty competitive. Yeah. And it's that generation is actually the most interesting console generation. I'm happy to expound on that if you want to. But they come out after that with the Xbox one, I think. Yes. Which was super expensive because it had the Kinect built in that sort of like wave your hands around sort of thing. And it had all much more like restrictive DRM things. It's gonna be more digital. It was basically that console was designed around we're gonna realize our vision and own the living room. And gamers hated it. So they rejected it. So their vision, which they didn't achieve, also killed their console. And so and the so my I wrote over a decade ago. And the whole Xbox saga is filled with regrets, I think. First and foremost, for Microsoft, but also for me, because I, from the beginning, is like, they need to kill this program or they need spin it out or get rid of it. Mhmm. The stated goals, which made sense from a corporate perspective Yep. Were not achieved, and it is continuing to exist because it exists. Yeah. And I was actually sympathetic to that. I worked at Microsoft from from 2011, 2013 when Microsoft was in the dumps. And, you know, they were still had a great business, but their stock had been, like, $40 for, like, a decade. And and the one thing the employees has, like, well, least we have Xbox, all the cool kids over there. Like, it was such a important thing to corporate culture to have Xbox. Mhmm. Even though this was a totally failed division in terms of achieving corporate goals and also was sort of self immolating because it was trying to achieve corporate goals that it was not going to achieve. Yeah.

Speaker 2: What do you think the naming scheme says about that project? I always found it very odd that they went from Xbox to Xbox three sixty. That sounds like the third. It's actually the second. Then Xbox one is the third, but it's one. And then now they're on series x, which feels like the tenth, but it's the fourth. And then they have a bunch of subnames. It feels like they just didn't they never leaned into just like Xbox two, Xbox three, Xbox four. Yeah. Well, you're ask I mean, maybe it shows I worked at Microsoft. You're asking the wrong guy about naming things, I think. But yeah. Total mess. They called it the three sixty because it was coming out the same generation as the PlayStation three. And they wanted to jump wanted to well, they wanted to be on the same level. Like, we both answered them a three and a name. Yeah. So what's interesting about the PlayStation three is the PlayStation three was Sony's

Speaker 9: big misstep in terms of the whole PlayStation era. What they they had this crazy processor called the cell processor that had all these capabilities, and they had up to that point, consoles were differentiated by hardware. Mhmm. And so Sony famously helped one of the reasons they beat Nintendo was they had discs so they could have much larger, like, media and things along those lines. And whereas Nintendo was sticking with cartridges. And there was, like, other like, they were much more favorable to third party developers. Just in general, they they they had sort of taken over in PlayStation one and two. PlayStation three comes along. They produce this oh, they wanted to get Blu ray off. Blu ray. That's another example of consoles getting screwed up by trying to attempt to other corporate priorities. They it worked. Yeah. Well, didn't they win? And and didn't Xbox go with HD DVD and they lost? They did. But at the end of the day, what happened was the PlayStation three was way too expensive. I think it ran super hot if I remember. Yeah. And all these extra capabilities were not used. Mhmm. And the reason they weren't used is that was the first HD generation. Mhmm. And you had this shift to three d games and high definition graphics. And what happened was it used to be games differentiate themselves by how well they wrote the game. Like, how did it perform on your Super Nintendo, on your Nintendo? Now we move to a world of actually all the actual game was offloaded to engines, game engines. Like, you know, it had one. Unreal obviously, these were epic. Got super big with the the Unreal Engine. And so you no longer did that. What a game company did was actually design the game and then asset creation. And asset creation at HD was way more difficult, way more expensive than it was for for standard definition TVs. And so the economic imperative for developers came, we can't just be on PlayStation. We need to be on everything. And so that was the ultimate generation, and almost every game was made to run everywhere. Run on PS three, run on Xbox three sixty, and run on the PC. And that was also the Xbox three sixty's best best generation. Yeah. That was the one they're most competitive on because they had all the games, because all developers were making them sort of run everywhere. Sure. They had a very simple to develop for architecture. The three sixty was very PC like, even more so than the one sort of previously. And that was their best generation. And then they come back the the next generation shoving Kinect down people's throats. We're gonna own the TV. And meanwhile, Sony learned their lesson. They're like, okay. We can't differentiate on hardware. We need to create sort of generic hardware that is easy to develop for, and the way we will differentiate is through exclusives. Mhmm. They bought a bunch of small studios in contrast, like, buying Activision. Yeah. Because we can get to a little bit. Yeah. Yeah. They bought a bunch of small studios and pushed all those studios to developing killer games for the upcoming PS four. And so you got things like like the Spider Man, like Yep. That was a huge game. Naughty Dog, Last of Us, that type of stuff. Exactly. Yep. I mean and so the PS four was an unbelievable generation. Yep. And in in a lot of the reasons unbelievable was because it had these exclusive games Mhmm. And they just crushed Microsoft. Because for all the cross platform games, the Call of Duties, the Madden's, things like that, those are always ran everywhere. And so what you do is you limit the economic potential of your studios because you're only building for your platform, and you make it back by all the licensing fees you get off the EAs of the world and the Activision's of the world because 80% of gamers are on your console, not on the other guy's console. Mhmm. And so they just wiped out Microsoft in that generation, and that really just continued to the PS five. And this is where we sort of get to the the the Game Pass disaster.

Speaker 2: Okay. Yes. So, yeah, I wanna yeah. Let's just jump forward to that.

Speaker 1: How is the disaster? I didn't wanna ramble too long. Was gonna give you a chance to jump Let's go. We love it. I have other bunch questions not related to gaming, but I I like I I love this experience. The the console history is fascinating. It's really interesting how sort of because it tracks technological change to such a large extent, and it totally shifted sort of strategies. So And, yeah, I think you can draw I think you can draw a lot of real parallels even just model releases over the last couple years how, you know,

Speaker 9: certain decisions around one model sets you back a certain numb you know, they're they're iterating a lot faster. Yeah. But I'm I'm seeing parallel. Yeah. The the sort of develop of the yeah. It's interesting. You can always just sort of draw draw draw lessons. So you get to Microsoft at this point again, I think I wrote at the time, oh, wait. Time to give up. Like, I wrote multiple times of the years. They should give up on Xbox. And at this point, Microsoft stops being an option after

Speaker 2: they bought Activision just to make Call of Duty a console exclusive or would that have been an f FTC problem?

Speaker 9: Well, we we we'll get to that because that's part of the story. Yeah. So Microsoft decides, okay, what we we're gonna actually try a new business model. It's true Xbox sort of selling a console Mhmm. Selling, you know, licensing it. We kinda do that, but we're actually moving to being a services company. The stock's doing much better now. You know, like, we have Azure, all the all these things. What we need to do and the way we compete with Sony is we need to have the exact opposite of the Sony strategy, and we need to lean into services, lean into subscriptions. We're gonna do Xbox Game Pass. Yeah. And the idea of Xbox Game Pass is instead of buying every individual game for $60, $70, $80 gaming pricing, by the way, really has stayed suppressed probably far longer than it should have been, particularly for the AAA games, but we already got to that with Rockstar. Mhmm. So they're they're they're like, you pay one price per month, and you get access to all the games and game pass. Well, of course, no publisher wants to partake in this. Mhmm. Because they make all their money upfront by selling games to their biggest fans. You you know, it's kinda like the movie model. You make a bunch of money upfront. And yet, in the long looking at, like, at at what happened to the music industry as an example of saying, like, yeah, it's cool to make your product more accessible. You get, you know, more listeners by bundling the streaming. That was the bet. You had to make it up in volume. Right? And so this old this why the series s came about, there's the series x and the series s. Mhmm. The series s was a more underpowered but much cheaper model. I think it launched at $300 versus the x was, I think, $600 or maybe 500. And that was also a problem because you're kind of neutering the x because developers build to the lowest common denominator. That's that's sort the highest one. So that was one problem. But the idea was we're gonna expand the market. And they have these package deals where you get an s and you get Game Pass for a year. Mhmm. And it's this sort of thing. And we will make it up and the problem is no no independent developer is gonna go for that. Mhmm. So they had some of their own games, but they went out and started buying a bunch of developers. So they bought Bethesda, which included, I think, it at that point and and Xenimax. I I the

Speaker 2: Yeah. They bought Xenimax. It's like they have a bunch of, like, great idea like the Activision deal. Those but those developers just aren't releasing, like, incredible titles annually except for Activision, which does Well, have so release game. Exactly. And so the issue so the issue with buying these companies is their what you're paying for is you're paying for their existing business plus the premium. Mhmm. And their existing business was selling

Speaker 9: single copies of games Mhmm. To all platforms. Mhmm. And what they were saying is we're going to basically force all these studios to take a bath, to lose a ton of money by putting all their games on Game Pass. We'll still sell on PlayStation because we have to because that's a lot of money. It'd be massively economically destructive not to. Mhmm. But what we think is gonna happen is gamers are gonna realize I could be paying $70 a pop on PlayStation. Mhmm. Or I could go to Xbox and I could pay $20 a month, and I can get all these games, and that's it. What a better deal. And by the way, we'll get new gamers. People are gonna come in and and realize, wow. I can get all these games for $20 a month. None of that happened. 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 to pay these games, and Microsoft ate it. Yeah. And they I think they, you know, the recent reporting was 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. It's not going up. And so it's just been and so that that that's sort of the context of what's happened here. Yeah. Phil Spencer got retired, which if you retire at that level of a company, you're probably canned. Probably too late. The whole strategy of disaster. They brought in new leadership. Yep. And now there's sort of like a reset going on. They're they're laying off few thousand people. Yeah. They they say all games production are gonna continue, but there's a real sort of critical decision here. What do we do? Because we ended up getting stuck in the middle. Like and we're just this doesn't work. Mhmm. What,

Speaker 1: what did you read into their approach of laying off 1,600 people now and keeping

Speaker 9: a 1,600 person rift? I mean, it's a terrible idea because, like, there for the rest of the year is terrible. I know, like,

Speaker 2: VC would tell you to, like, cut hard, cut deep. And then move forward with the team. If you're on the ship, we're going to Yeah. Valhalla together or something. I I do have some sympathy because

Speaker 9: the reality is I appreciated the note because they are in big trouble. And there's an there's an aspect of just stating it clearly. We're not sugarcoating it. And if they laid out how much trouble they were in and then only cut 1,600 people, then everyone kinda knows they're gonna be cutting more people. Right? So I think they're just in a bad spot. So, of course, it's not great. It's gonna destroy morale. It's gonna destroy everything for the next year because everyone's waiting to get fired. But there's a bit of they did, I think, tear the Band Aid off to the extent they could. And now there's just a now they can be very overt. They could go through and actually talk to employees about what are you working on? Why should you still be here? And, it's a reflection of the employment climate, but, like, people in general are more they're just not gonna bail. Microsoft, you know, they're gonna want to keep their job. And so they can probably, hopefully, fingers crossed, do better cuts by virtue of doing them in the open. Mhmm. But I don't know. I mean, I don't envy I don't envy Xbox's leadership at all. It's gonna be a very tough thing, but I I I can totally understand how they are where they are. Probability of a spinout. I mean, I think it I think it needs to happen. Like, I I but, you know, this is again, the regret is this was my take for years and years and years. I'm like, okay. Fine. Xbox Game Pass. That kind of seems kinda interesting. Let's go for it. It should've stuck to my guns. They're like, no. Stop. This is gonna be a disaster. I think, yeah, I don't I I I don't get it. I just don't I didn't see it before. The thing that got me to say, okay, let's give it a chance didn't work. Mhmm. I don't see it now. I mean, I think it does give me pause. They hired Matthew Ball who had Valens Retecery multiple Yeah. As their chief strategy officer, have a lot of respect for, you know, his takes. So I'm curious what he's thinking about. Yeah. This gets to the question before. Is there a bit where they just write off these acquisitions Mhmm. And say, actually, all this stuff's gonna be exclusive now. We're like Call of Duty, buy an Xbox. Wow. Like, basically giving into the FTC's worst fears, which, but they those fears didn't make sense at the time in the context, because it's

Speaker 1: by writing off What's funny what's funny is that we lost billions and billions of dollars. Yeah. And it would it would test. It it would be a good pricing test for the power of a triple a game to say, okay, you can only get Call of Duty on Xbox now. And you would see, like, how, like, how many incremental Xbox sales do you get? Because that means the real value of the game is actually in the hundreds of dollars if people have PlayStation. Yep. And then they'll try something new. Switching gears a little bit. We keep having this experience where there's a company, you know, an AI company, let's say an application layer company that is or lab that is, you know, hot but then you don't hear very much for a few months and you write them off and then they come out and they've like added hundreds of millions of dollars in revenue and are doing a crazy up round. And it's this weird thing where, like, even, you know, historically, you know so there's power laws everywhere. But I feel like in this moment, we're seeing more and more examples where, like, the tenth best company in the category is still having the financial performance that a company that would have been the leading company in their category five years ago. What do you make it what do you make of that? This is just a thing in tech in general that that is always sort of stuck out at me. I mean, I I think I Has it been has it been though, but like like CRM, for example. Like, if you go back to, like, 02/2015

Speaker 9: was, like, the 10 best CRM company, like, actually printed it? No. No. The the the the example I always go back to is the the I think it was 2014 or so when Apple bought Beats. And they bought Beats for $3,000,000,000, and everyone's got the tech press is going crazy. Everyone's writing thought pieces about it. And I'm like, you know, of course, writing about it. I'm like, $3,000,000,000. Like, Apple is a $500,000,000,000 company. What does $3,000,000,000 matter? And what's funny about that take is number one, was right. Who cares about $3,000,000,000? That's in our couch cushions. Like, people were spun up also. Didn't really matter. Number two, Apple is only a 500,000,000,000 company. Like, the the astronomical increase in valuation and numbers around this is absolutely crazy. So to your point, yeah, a 2019 CRM company, number one, they probably wasn't a number 10 even then. But, yeah, the numbers are not even remotely tied to, like, any I just sort of let them go and be like, I write down the numbers, and they don't really mean anything to me. But it's very hard to keep track of. Like, the inflation in tech numbers specifically, you know, you think that what was I complaining about pricing before? Oh, yeah. Lemonade stands are bad. The Silicon Valley lemonade stand inflation is absolutely the worst in the world.

Speaker 2: On mergers and acquisitions, there's this news today about Getty Images calling off Shutterstock deal after UK regulators said that they would have to sell the editorial business for the merger to be approved. And it seemed very odd to me that a merger would be blocked by a regulator when that industry that is consolidating and is maybe becoming more monopolistic is under such insane attack from generative AI.

Speaker 9: I can't imagine a better defensive move than putting Getty Images and Shutterstock together. This happens this this is this happens every single time. Like, the the natural response to your overall category being threatened by an external force is consolidation. Like, it's the only way to defend yourself to sort of, you know, you get synergies. Like, even, like, all these companies are pretty established, so it's actually fairly easy to price. You know exactly what things are. It's a much like, if you have growing companies, you wanna merge them or acquire them. It's really unclear because how do you sort of price out the future? These companies are declining. So it's very easy, like, you could do a discounted cash flow and understand exactly how much they're worth. It's a very straightforward negotiation. It makes total sense for them to consolidate date. But precisely because they're knowable and understandable, it's very easy for regulators to block them. And you see this happen again and again. You see, like, pushback on you saw this with TV and, like like, different networks getting together and the various pushbacks happen to that or in telecoms. Like, the this happens this is a natural pattern. The moment that a company, an industry wants to consolidate, needs to consolidate is the moment regulators are most likely to stop them consolidating. And whereas the acts would time when action would matter Yep. Like when it when it's growing and a company is making the right acquisitions to take over an industry Yep. Regulators don't do anything and also rightly don't do anything because you're dealing with the future and it's unknown. You don't wanna screw it up. It raises the question of what you do regulators sort of do anyway. In broad broad strokes, I used to be I've sort of, you know, I think that they probably do more harm than good as far as a lot of these sort of blocking mergers and things go. But I don't know. I'm the one that just said maybe Microsoft should take Call of Duty exclusive. So so who knows? Maybe I'll Yeah. We had a funny moment because we were looking it's a $3,700,000,000

Speaker 1: deal. But I'm like, how is this a $3,700,000,000 deal? Both these are $2,300,000,000 ish market cap companies. And it was because they pry the deal was, like, priced back in January 2025.

Speaker 9: And so both companies had declined so much. Combined market got under 1,000,000,000. Over the last eighteen months. So maybe they should do the deal anyway. Don't know. I mean, it could be worse. You could be Netflix and have the stock market and sort of like make a bid for Warner Brothers that the stock market hates abandoned the deal, but they already decided you did the deal because you're desperate. You're you're screwed anyway. So, yeah, they again, you don't even get what you bid for. So Yeah. Maybe that's what happened here. I don't know. Oh, well. Well, thank you so much for taking the time to come chat with us. Have a have a great summer.

Speaker 2: Enjoy the break, and we'll see you soon. Yeah. Good luck with the lemonade stands. Yes.

Speaker 1: You're

Speaker 9: gonna run up on a kid that has Klarna. You'll raise some money. Yeah. I know exactly. Yeah. Klarna and a lemonade stand. Klarna and a lemonade stand. Five

Speaker 2: easy happens in Silicon Valley. Yeah. Interest free. It might. Well, thank you so much, have a great rest of week. We'll talk to you soon, bud. Talk to later. Have a good one.