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“The math on [making] a game has definitely changed,” said Phil Spencer, CEO of Gaming at Microsoft.
Polygon spoke with Spencer during the annual Game Developers Conference, and though the conversation ranged from the possibility of a handheld console to the trouble with closed platforms, one theme was inescapable: What the hell is going on with the games industry? And how will video game makers and publishers — Xbox included — get out of it?
Spencer’s views point to a collision of rising budgets, diversifying business models, and the exceptional financial risk now required to meet the audience expectations of a AAA release. He specifically pointed to the astronomical budgets of big-budget games, which have created a knot of problems that has been a challenge to disentangle. And for Spencer, the path forward is to abandon assumptions about exclusivity and attract new customers who have cooled on the console experience.
But first, for context, Spencer talked about how things used to work when budgeting and greenlighting a video game. The Microsoft exec has been producing games for long enough that he can remember when the financials were relatively straightforward. A publisher could set a sales goal (say, 800,000 units), set an earnout goal (how much money they want to make), and set the price of the game (usually $59.99). From there, a video game’s publisher and/or studio could set a budget.
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However, the financial calculus has changed. In 2024, most games are sold across multiple storefronts, often steeply discounted mere weeks after release or included as part of subscription services on launch day. Plus, the games themselves take many years to create with the help of hundreds, if not thousands, of team members, sometimes spread across the world. All of this adds up, and as Spencer says, it can cost “$300 million to build a video game.”
Spencer explained how this cost forces three substantial problems: one for all big-budget games, one unique to console exclusives, and one that spans the entire industry.
These problems have had a very real, substantial, and immediate human cost. The industry has seen consistent and mounting layoffs, including a particularly rough start to this year. Shortly after Microsoft’s acquisition of Activision Blizzard King, the company announced it would be laying off 1,900 workers from its gaming division.
Polygon asked Spencer if the ABK layoffs were part of this wider trend, or if there was something unique about the layoffs as they pertain to the current Xbox business.
“It’s a little bit of both,” said Spencer. “But I’ll say the thing that has me most concerned for the industry is the lack of growth. And when you have an industry that is projected to be smaller next year in terms of players and dollars, and you get a lot of publicly traded companies that are in the industry that have to show their investors growth — because why else does somebody own a share of someone’s stock if it’s not going to grow? — the side of the business that then gets scrutinized is the cost side. Because if you’re not going to grow the revenue side, then the cost side becomes challenged.
“We’re a business. I’ve said over and over. I don’t get any luxury of not having to run a profitable growing business inside of Microsoft. And we are that today. But just across the industry — you mentioned it, and in sitting here at GDC, I reflect on friends of mine in the industry that have been displaced and lost their jobs and how just, I don’t want this industry to be a place where people can’t, with confidence, build a career. So that’s why I keep pivoting back to: How does this industry get back to growth? But to your question, for us as Xbox or any of the teams that are out there, it is really an outcome of an industry that’s not growing. It can grow and it will grow again. But you see this time right now and the implications have human impact. And we should all reflect on that and think about it.”
As we talked through Microsoft’s plans for growth — both with the company and the wider games space — Spencer continually returned to the idea of exclusivity. This year, Xbox Game Studios Publishing has begun porting more and more former exclusives to other consoles, like Nintendo Switch and PlayStation 5. For Spencer, this is a way to bring more players (and sales) to old games, but it’s also a way to break some old industry habits, like exclusivity, that may be responsible for the stagnation of the console market.
:no_upscale()/cdn.vox-cdn.com/uploads/chorus_asset/file/19526241/xbox_series_x_controller_1920.jpg "Xbox Series X controller")
“[Consider] two years of lack of growth in the gaming industry at the top line. You start to ask yourself, Well, I don’t want to grow at the expense of the industry, I want to grow as part of the industry, and what do we need to do as an industry to get back on the growth path?
“I will say, every decision we make today and tomorrow is for the better of Xbox,” said Spencer. “I know sometimes things get weaponized, that there’s some evil in the background that’s making us do things — ‘Phil hates exclusives and that’s why we’re like PlayStation and Switch now.’ Every decision we make is to make Xbox stronger in the long run. It doesn’t mean everyone’s going to agree with every decision we make. But it is fundamental for how we make decisions.”
For Spencer, moving toward the future is about walking — in some part — away from exclusivity.
“This notion that Xbox can only be this one device that plugs into a television isn’t something we see in the Gen Z research. Because nothing else is like that for them. Some of them will have an iPhone, some will have an Android, but all the games and everything is the same. I can still get to TikTok on both of them, at least for now. All of their stuff is available wherever they want. So for Xbox, our brand pivot — as we attract and maintain relevance with a younger audience — is ‘Xbox is a place where I can find the great games I want to.’”
www.polygon.com
Polygon spoke with Spencer during the annual Game Developers Conference, and though the conversation ranged from the possibility of a handheld console to the trouble with closed platforms, one theme was inescapable: What the hell is going on with the games industry? And how will video game makers and publishers — Xbox included — get out of it?
Spencer’s views point to a collision of rising budgets, diversifying business models, and the exceptional financial risk now required to meet the audience expectations of a AAA release. He specifically pointed to the astronomical budgets of big-budget games, which have created a knot of problems that has been a challenge to disentangle. And for Spencer, the path forward is to abandon assumptions about exclusivity and attract new customers who have cooled on the console experience.
But first, for context, Spencer talked about how things used to work when budgeting and greenlighting a video game. The Microsoft exec has been producing games for long enough that he can remember when the financials were relatively straightforward. A publisher could set a sales goal (say, 800,000 units), set an earnout goal (how much money they want to make), and set the price of the game (usually $59.99). From there, a video game’s publisher and/or studio could set a budget.
However, the financial calculus has changed. In 2024, most games are sold across multiple storefronts, often steeply discounted mere weeks after release or included as part of subscription services on launch day. Plus, the games themselves take many years to create with the help of hundreds, if not thousands, of team members, sometimes spread across the world. All of this adds up, and as Spencer says, it can cost “$300 million to build a video game.”
Spencer explained how this cost forces three substantial problems: one for all big-budget games, one unique to console exclusives, and one that spans the entire industry.
- The cost “really reduces the risk that publishers are willing to take.” Where previous games needed to sell a few hundred thousand units to justify their cost, new games may need to sell many millions of units. “If you’re a publisher, you know that’s a pretty big number in a world that already has a lot of video games coming.” said Spencer. “How are you going to establish this thing? Am I willing to take the red on new IP — on a new kind of game — when the earnout risk is that high? I think it impinges on the creativity of this industry, which I don’t love. Creativity is like the cornerstone of what we should be about in gaming.”
- This cost is particularly prohibitive for exclusives that can only reach so many players. As Spencer explained in our conversation about the perils of exclusivity and walled-garden consoles, these games need to make additional money to justify the console maker subsidizing the cost of the console. As Spencer explained, “[The case for] exclusivity gets pressured as the cost of the game goes up.”
- According to Spencer, the console market has not grown in the past year. Though Xbox, PlayStation, and Nintendo Switch consoles continue to sell, Spencer notes that many console gamers are simply upgrading — or, to put it another way, they’re not new to the market and won’t contribute to growth. And without new customers, “everybody else’s customer is your success state,” said Spencer. “You can’t succeed unless you draw in customers from other publishers and other platforms. And because you’re not finding new customers with the games that you’re building, everybody’s kind of fighting over the same-size pie.”
These problems have had a very real, substantial, and immediate human cost. The industry has seen consistent and mounting layoffs, including a particularly rough start to this year. Shortly after Microsoft’s acquisition of Activision Blizzard King, the company announced it would be laying off 1,900 workers from its gaming division.
Polygon asked Spencer if the ABK layoffs were part of this wider trend, or if there was something unique about the layoffs as they pertain to the current Xbox business.
“It’s a little bit of both,” said Spencer. “But I’ll say the thing that has me most concerned for the industry is the lack of growth. And when you have an industry that is projected to be smaller next year in terms of players and dollars, and you get a lot of publicly traded companies that are in the industry that have to show their investors growth — because why else does somebody own a share of someone’s stock if it’s not going to grow? — the side of the business that then gets scrutinized is the cost side. Because if you’re not going to grow the revenue side, then the cost side becomes challenged.
“We’re a business. I’ve said over and over. I don’t get any luxury of not having to run a profitable growing business inside of Microsoft. And we are that today. But just across the industry — you mentioned it, and in sitting here at GDC, I reflect on friends of mine in the industry that have been displaced and lost their jobs and how just, I don’t want this industry to be a place where people can’t, with confidence, build a career. So that’s why I keep pivoting back to: How does this industry get back to growth? But to your question, for us as Xbox or any of the teams that are out there, it is really an outcome of an industry that’s not growing. It can grow and it will grow again. But you see this time right now and the implications have human impact. And we should all reflect on that and think about it.”
As we talked through Microsoft’s plans for growth — both with the company and the wider games space — Spencer continually returned to the idea of exclusivity. This year, Xbox Game Studios Publishing has begun porting more and more former exclusives to other consoles, like Nintendo Switch and PlayStation 5. For Spencer, this is a way to bring more players (and sales) to old games, but it’s also a way to break some old industry habits, like exclusivity, that may be responsible for the stagnation of the console market.
“[Consider] two years of lack of growth in the gaming industry at the top line. You start to ask yourself, Well, I don’t want to grow at the expense of the industry, I want to grow as part of the industry, and what do we need to do as an industry to get back on the growth path?
“I will say, every decision we make today and tomorrow is for the better of Xbox,” said Spencer. “I know sometimes things get weaponized, that there’s some evil in the background that’s making us do things — ‘Phil hates exclusives and that’s why we’re like PlayStation and Switch now.’ Every decision we make is to make Xbox stronger in the long run. It doesn’t mean everyone’s going to agree with every decision we make. But it is fundamental for how we make decisions.”
For Spencer, moving toward the future is about walking — in some part — away from exclusivity.
“This notion that Xbox can only be this one device that plugs into a television isn’t something we see in the Gen Z research. Because nothing else is like that for them. Some of them will have an iPhone, some will have an Android, but all the games and everything is the same. I can still get to TikTok on both of them, at least for now. All of their stuff is available wherever they want. So for Xbox, our brand pivot — as we attract and maintain relevance with a younger audience — is ‘Xbox is a place where I can find the great games I want to.’”
Phil Spencer on what the hell is happening in the games industry
"The implications have human impact. And we should all reflect on that and think about it"
www.polygon.com
