Thursday , January 28 2021

Microsoft’s Phil Spencer on launching the new Xbox and the future of games

The holiday season is always huge for gaming, but this year, it’s even bigger: a new console generation has arrived with Microsoft’s new Xbox Series X / S and the Sony PS5, and gaming itself has gotten even more enmeshed in mainstream culture during the pandemic. It also feels like we’ve reached an inflection point for game streaming: Google, Amazon, and Microsoft all have services that allow you to play games on any device by streaming them over the internet — a plan that has led to controversy and conflict with Apple, which has put up roadblocks for these services in the iOS App Store.

On this week’s episode of Decoder with Nilay Patel, I interviewed Phil Spencer, the executive vice president of gaming at Microsoft — or, more simply, the guy in charge of Xbox. We had a lot to talk about: how much the pandemic has accelerated trends in gaming, why he chose to launch two next-gen consoles at the same time, the issues with preorders and supply he’s seeing, and how he sees Xbox growing over time. And we talked about game streaming, where it is now, where it might go, and how it’s going with Apple and Google to get his streaming service in their app stores. We also talked about the community and culture of gaming, which Phil is very passionate about. He told me he thinks game developers need to be actively engaged in creating safe and inclusive environments all the time.

This transcript has been lightly edited for clarity.

You’re a Microsoft lifer: you started as an intern in 1988 screwing around in video games. You’re now the executive vice president of gaming — I think you report to the CEO now.

I do, yeah.

That’s quite a rise.

This moment seems like a particularly gigantic inflection point in gaming. We’re talking about the entire architecture of games moving to streaming. You’ve got two big consoles. [Gaming] has exploded in the mainstream culture. Is this what you expected? When you were an intern in 1988, does this look like your wildest dreams, or is it meaningfully different? What’s your view on where we are right now?

Definitely not what I expected as an intern. I mean, just from both my own career, if we’re going into my side of it… I’ve never been one with a huge career roadmap. I follow my passion and what I’m passionate about, teams I get to work with. In terms of where we are in gaming, I think it’s somewhat regretful, but it’s also nice to see that during this time of social distancing and disconnect from our friends and our family, that gaming is really pushed to the forefront as a real communal way for people to connect. I think the world needs more of that.

I’ve been on my “gaming as a connective tissue opportunity for people of different backgrounds, different beliefs coming together” — during the C-19 pandemic, people staying at home, we’ve really seen a rise in gaming. I think we’ve seen the acceleration of some of the timelines and trends in gaming over the last six months. We’ve definitely accelerated maybe a year or two in terms of adoption of some of this. I think gaming has always been building towards this moment of being a real unifier.

It’s interesting you said a year or two. I’ve heard e-commerce is a five-year acceleration because of the pandemic. Streaming — cable television is falling apart, and everyone moving to streaming services way faster than people thought was going to happen. You’re thinking with games, it’s only a year acceleration?

It could be longer. I think gaming was further along some of those communal aspects of our art form than some of those other … When I’m watching streaming video services, I don’t know that I feel connected to anybody that’s not in the room while I’m doing that. Some of the shopping stuff, maybe in different parts of the world. Sitting in Seattle, we see a lot of online shopping and delivery, we just always have. Maybe it’s different …

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[Laughs] Is there a company in Seattle that does online shopping?

[Laughs] Yeah, there’s a few of them now. It’s funny. We used to be like the sole outpost here at Microsoft, but everybody’s around here now.

For gaming though, I think with… you’ve seen Twitch, you’ve seen the power of gaming on YouTube. You’ve seen Discord and other places where people come together to talk about games, watch games, watch others play games. I say the acceleration — and I don’t know if I’m accurate in my timeline — but I feel like it’s a little more gradual for us in gaming because we’ve already been so far along using community and virality as a way for people to get into gaming. But we’ve definitely seen a surge. And I don’t think it’s something that’s going to reverse. I think we’ve just become more and more a part of the way people entertain and connect.

Anything about that surge surprising to you? Or is this just, what I thought was going to happen in 2024 and it’s happening in 2020?

It’s been cool to see some of the genres and stuff that have really popped to the front in gaming. When I think about things like Among Us and Fall Guys and stuff, really finding an audience — Animal Crossing, which has always been big. You get people like Gary Whitta doing his talk show inside of Animal Crossing and it almost seems normal in this time, that that would be happening.

Gaming in certain times gets really hyperfocused on realism and grit and it’s nice to see that during these times, you’ve got a breadth of things that are really finding large audiences and large viewers. Not that I’d say that’s a surprise, but nice to see.

The other thing I would just say — and it’s something that I think is special about the games space — is that everybody can be a creator. Whether you’re someone on YouTube, or somebody building a social following on TikTok or on Twitter or whatever, or you’re someone building games, we’ve really democratized people’s ability to create their own content and get that to millions of customers fairly easily. The consoles all support that now, obviously Steam has supported that for a long time. You’ve got these social platforms that are out there letting people build the audience.

Also you’re seeing the rise of creators, and creators can be of different types. And that’s something that I think really provides longevity to what gaming is about as well, that you have so many people that are both consumers of gaming content and frankly now creators of gaming content.

I want to get into that for sure, but on the zoom-out level, you’ve been at Microsoft for a long time. You’ve seen three different CEOs; there have been three very different styles of how to run that organization. There have probably been even more versions of Microsoft itself under Gates, Ballmer, Nadella. What have you pulled into your decision making style?

I haven’t really talked about this. I love the question.

When I started, it was obviously all Bill G. Bill had such a presence in the company, both from a technical standpoint and a leadership standpoint. And I learned the value in people believing in the direction that an organization is going in, and having a leader in Bill at the time that was just so maniacally consistent in the things that he would focus on and push us.

I was a developer at the time. Sometimes the wrath of Bill, when my code was being used, checked in, or whatever, wasn’t always the easiest. He was very consistent in the things that he cared about. Even today, I review my gaming business with Bill probably two, three times a year and he’s still remarkably consistent in the things that he will push on. I think that consistency for a large team as the company grows is very valuable. The teams can predict how you’re going to respond or react or the things that you’re going to focus on as opposed to being moody or random. I found real value in that from Bill.

Steve [Ballmer] was just so focused on customers and selling. I thought for me, as a developer, it was a great way to learn. Under Steve, they sent me overseas. I worked in the UK for a while. It was the company’s effort to expand the perspective of some of the leaders, to get out of Redmond. What is it like to work for Microsoft when you’re not in our zip code and in the same time zone? That was all really the push that Steve had at the time of, let’s get very close to our customer and our selling, what we do in selling our products, how our customers perceive our products.

Not just how we built something or even why we built it, but what did they, our customers, feel about what we built. Then moving on to Satya [Nadella], he’s just such an empathetic leader, somebody who’s connected to feelings and motivations. Like when he says, we’re here to empower every person and organization on the planet to achieve more, which is the mission statement of the company, he truly believes that. It’s amazing to see him talk about that in our leadership meetings like, “Okay, how is this going to touch 7 billion people on the planet?”

When you’re a company with the market cap that we have and the capacity that we have, that’s the scale we should be working at. Satya just raises us to that every moment. You see us standing up for climate change, you see us stand up for representation in our senior ranks and making public statements that, frankly, we don’t exactly know how we’re going to achieve. There’s no math today that says how we get to all of our carbon-neutral and carbon-negative goals, but being bold to stand up and be accounted for in the public eye, I think, is just an incredibly, incredibly a great learning opportunity for me and I value it.

Thinking about those decision-making styles and frameworks and what you picked up, walk me through a decision leading up to the launch of this new Xbox, where you pulled from that, where that decision could have gone a different way. Do you put on your Ballmer hat and be like, we have to be focused on sales here. It’s time. Or is it, Sony is launching a console too, I’m going to put on my Gates hat. We’re going to have to crush the competition.

I didn’t say that about Bill. [Laughs]

I think he’s said that about himself. I feel comfortable with that one.

Just thinking real-time, the decision to ship two consoles at the same time is probably one that’s worth pushing on. Because we’ve never done that before with the differences that we have between Series S and Series X. I can’t think of other console launches that have had that delta in the products that have come out at day one. That was really a decision that, clearly, you could have made a different decision. Clearly, you could have shipped only one of those two SKUs at launch, [and it] would have made some of the supply chain and other things easier. Naming, and other things.

We started from a point of view [that] gaming should be growing, going back to our first point as an industry. Microsoft should be growing as part of that industry. I want to grow faster than the industry is growing, but I want to be part of a growing industry.

It was really this inclusion: how do we include more people in the launch euphoria and hype and everything that happens, and make it as accessible to [as many] more people as possible. Going to that how do you really build things that can get to true scale and influence everybody and impact everybody on the planet?

There’s more with xCloud and Game Pass that we can talk about. The decision to do hardware SKUs was really centered on that. $499 in the US for the Series X — that’s a lot of money during a time of economic uncertainty and everything else. Now we didn’t know when we made those plans that we’d be sitting here, [but] even regardless of COVID, $499 is a lot of money. Can we build an accessible console that will deliver a great next-gen experience, clearly different, but a next-gen experience at a more accessible price point?

It really centered on that. How many people can we impact with everything that we do? That decision wasn’t easy, and was questioned a number of times internally. We feel really good about where we are, now that we’ve launched and we see the result, but that was a good tough decision.

What was the best argument against doing two consoles?

Just complexity in the market, I would say.

The way I would frame it, the best argument against doing it was Sony. We didn’t think that they were going to do it. I’ve said it before, I have a ton of respect for what Sony does. It’s not to say what they’re doing is wrong. [But] if it’s, we’re going to go compete with one hardware competitor and we just want to make it as easy as possible to compare our one product to their one product, that was the thought process that would have you push to say, no, just do one thing.

When we think about where gaming is going, you go into maybe the Ballmer framing of it. You’ve got a business that’s growing and you want to grow as fast as you can. You want to grow in a healthy way. You’re either going to grow by making more from the customers that you have now, or finding new customers.

I’d say in the console space over the last four or five years, most of the growth that the industry has realized has been growth per user, not growing the number of console users that are out there. It’s actually been a fairly fixed number over the last decade.

Which for us, [people] that love console gaming like we do, should be a sign of, hey, we don’t want to be about raising the price on retail products because you have a fixed number of customers and you just want to figure out “how do I get 10 more bucks from them?” We want to think about how we bring more people into the gaming funnel, have more people experience this art form that we love. The pushback against [doing one console] was always, but we want to grow, we want to find new customers.

Because it can’t just be a fight over the same customers that we’ve all seen every year — your average age of your [customer] goes up by one year every year, because it’s the exact same demographic that’s just moving with you. All of those things were important when we thought about the decision on [Series] S, and like I said, about xCloud and Game Pass. It’s, can we create a platform that’s more inviting to more people, including the hardware that we build? Even how we sell it with things like Xbox All Access, allowing people to buy the hardware on a monthly basis as opposed to one fixed fee. It’s all about how we bring more people in.

You just said a lot of names of a lot of products. There’s a lot of X’s and series and games in Mad Libs order. Is it playing out? Do people understand what the difference between the Series S and the Series X and Game Pass Ultimate and xCloud is?

On the hardware side, it is. I think sometimes inside of the industry, we want to be poking at ourselves. We can look at Series S and Series X, even the enunciation of S and X isn’t the easiest to differentiate. For most consumers, they walk in and one’s $500 and one’s $300. That’s the difference. Not to make everything about the iPhone, but if you asked me to explain the iPhone lineup, I can’t really do it, but when I walk in the store, it’s pretty clear. One’s big, one’s not, one’s $1,000, one’s $800, whatever.

They differentiate based on normal people’s vocabulary of how much does it cost and what does it do. From that perspective, we’re very happy with the early results on both consoles. A lot of new people to Xbox are coming in through Series S, which is what we would have expected. It’s lower-price. There’s Game Pass there. They will get a bunch of games. X is our power play. It’s the thing. It’s the most powerful console. If you want the highest fidelity, the highest experience, we want it there.

On Game Pass, it’s a good question. I went back and forth, and I still sometimes … I really want it to all just be about Xbox. I want people to get into this feeling of, I can be a member of Xbox regardless of whether I own the console. I’m still a member of the community. I might play on PC, I might play streaming on my phone, I might own a console, but I’m always a member of Xbox. The Xbox Game Pass was an attempt to make sure it tied back to, yeah, I’m just a member of Xbox. Even the Xbox Series S, Xbox Series X was to bring it all back to, yeah, I’m just Xbox. Like “Where do you play? I play on Xbox.”

That doesn’t necessarily mean one piece of hardware. It could mean many different things, but I agree. It’s a journey for us in going from one console that has one name and one price point to something that’s a little more expansive.

Do you know that Microsoft people always say things are a journey and Google people always say things are early days?

Is that true? [Laughs]

It’s a very clear tell of like, we’re going to figure it out, just give us a minute. Every company has its own vocabulary.

I do want to talk about the notion of gaming shifting away from the hardware. You launched some hardware. You’re going to ship a lot [of hardware]. When do you make the decision to say, the development of the console is done, we’re moving on to figuring out how to manufacture a million of them and put them in stores and ship them?

It feels like it all happened yesterday, but that clearly isn’t the case.

No, no, no. We started manufacturing late summer. We were a little bit later than the competition, because we were waiting for some specific AMD technology in our chip. We were a little bit behind where they were, where Sony was, in terms of building units. We started in late summer. When you do that, then you have to ship them to all the right retailers and distributors. There’s a time lag, even when you start and even when they’re coming off the assembly line, [until they’re] sitting at retail shelves.

We’re building at full capacity for now, a few months. And we continue to. Units continue to hit the shelves. Demand is just incredibly high right now. The biggest disappointment for me in this launch — but I’m also happy with it — is people love the product. The demand is high, such that when you’re going to see product hit the shelf, it goes very quickly. If you want one, I sound like a salesman now, but I’d recommend picking one up when you see it.

Because we’re going to be in this situation, probably into the spring, maybe not as tight as it is now, but demand is just really high, and we’re building. We start the supply chain back in the summer. We’re building, we’re building. There’s just physics in how many lines at the fab you can put in the assembly lines. You can build as many as you can build, and that’s what we’ve been doing. There are decisions around mix, like how many of the S and the X do you build. You have to make decisions on that.

Have you shifted that since you started?

No. We knew that… “no” is probably overstating our level of insight. Which I’d say, we’re at the starting line. Was that the Google line?

Early days, that’s the Google line.

Early days, sorry. Got to get it right.

We figured that our first holiday, and probably our second holiday, you would see more of the higher end SKU, the Series X sold. We built more Series Xs than we did Series Ss. I think when we go into spring and summer, we’ll probably moderate that a bit. Over the long run, in most cases, price wins out. If you just go back and look at previous generations and when console generations hit the real sweet spot of sales, which is one of the reasons we like having that, that’s the Series S at its price point.

Then when we go back into next holiday, which we’re already thinking about with supply chain and build, we’re already in that framing, trying to look at what we think our ratio should be between the two. The chips are very different in size — this is a little bit in the weeds — we can actually build more of the Series S [chips] in the same [chip] die space as we can the Series X. Right now, demand for the Series X is higher, which is what we expected.

It seems like there’s still hiccups with the retailers. I would love to just tell Walmart or Best Buy, “I want one. Here’s some money, just send [it] when you get it.” That’s not the way the preorders have gone. It’s just hard to buy either one. It’s hard to buy the PS5 too. It’s weird, because we’re fully in the age of e-commerce. Do you ever think about just doing more of it yourself?

Well, I think our retail relationships are important. We do think about solving or at least helping with the issue that you talk about. We’ve had real discussions internally about, should I be able to reserve my slot? I’ll put some money down, I know my machine’s getting built January 20th, and I’ll get it on February 1st. We have customers that would do that today.

Dude, I’ll mail you a check for $500 right now. I’ll do it in cash.

[Laughs] This is a good discussion about what you talked about before, with staying at home and the transformation of the retail channel. For day one, November 10th, we’re going [to stand in] lines. We do our preorders six to eight weeks before that, and we tell the retailers what percent of their allocation we want them to [make available for] preorders. [Otherwise] the retailers would sell them all, not because they’re evil, but if you’ve got demand, why wouldn’t you take the money? We’re like, no, we actually want November 10th to be a moment.

We want people to feel like there’s some consoles to go buy, and it’s not just the day where everybody gets to go pick up their console. I don’t know if that’s the right decision in today’s world. That’s very old world thinking, people are going to go line up outside of a store, kind of last decade thinking. I think we should challenge ourselves on that. Is that really the supply chain through the consumer that we’re talking about, that is a reality? We talked to our retail partners about this as well.

I do think this business is going through, both for us and Sony — Jim Ryan [at Sony], I have a lot of respect for him, we both have lamented how these preorders have gone and what problem are we really solving when we seem to still have as many upset customers as we have, because they can’t get our product. I do think it’s going to push us to think about new models. It could be, reserve your slot. It could be doing things more direct with the customer. Still could have the retailer fulfill the order, but just so people can have more clarity on when they can get a console. It’s something we’re working on.

You mentioned people lining up. There’s all these cultural things that happen at a console launch. People line up, and then there’s waves of unboxings. Then one thing that just mystifies me is there’s a wave of people who run over the new Xbox with their car and smash it with a hammer.

What goes through your head when the inevitable “people smashing my new console” is happening and you next phone call is with your retail partners to figure out how you can get them more?

To be honest, I love the industry I’m in. This is the job I love. My wife will tell me it’s the only job I’m qualified for, but this is definitely the job I love. But that tribalism in the industry, if there was anything that would ever drive me out of the industry, it’s actually that, what you’re talking about.

I look at shipping a product, shipping a game, as one of the bravest things a team can do. You put your product out there, it gets analyzed and prodded and reviewed. It can’t defend itself. It’s an inanimate object. You can’t go on the internet and defend it. We’ve seen that way too many times. That never works.

When a team releases something into the market for the world to tear it apart on the internet — it’s just such a brave thing for a team to do. I’m never going to vote against any creative team or any product team to do poorly because I have a competitive product. It’s not in me. I don’t actually think it helps us in the long run in the industry.

But especially in the console space, there’s like a core of the core, that have, I think, taken it to a destructive level of, “I really want that to fail so the thing that I bought succeeds.” I’m saying on both sides. I’m not saying that it’s all people crushing Xboxes and everybody that loves Xbox is always completely inviting to all the PlayStation stuff. I’ve said before, that I find it distasteful, but maybe that is too light. I just really despise it. I don’t think we have to see others fail in order for us to achieve the goals. That’s not some kind of “kumbaya” thing. It’s actually real. We’re in the entertainment business. The biggest competitor we have is apathy over the products and services [and] games that we build.

We see that today. Everybody is doing well in the industry right now for the most part with the stay-at-home and the surge. That’s what we should be focused on as an industry. We’ve done it with things like cross-play and other things that we focused on breaking some of those tropes. But there is a core that just really hates the other consumer product. Man, that’s just so off-putting to me. Again, maybe that word is probably too light.

To me, it’s one of the worst things about our industry.

I always tell our team that rooting for failure is just a bad place to be. You should root for success. It makes you happier.

I’ve said it before, [it’s] not a “two may enter, one may leave” scenario. Could you imagine if you were the director of a movie and you wanted another movie to be bad so that people would… maybe directors do that, but—

I feel like there are some directors that do that for sure. [Laughs]

Maybe they do. I could see maybe, I don’t know.

In the end, we know there are millions and millions of people that are going to end up with a Switch, a PlayStation, and an Xbox in their home. Those are great customers. They’re going to buy the games that they want on the platforms where their friends are, or where the exclusives are, whatever it is. It’s not a world where in order for us to win, Sony has to lose, or Nintendo has to lose, or Steam has to lose, or something. If it is, it’s not really a Microsoft business.

What I mean by that is, Microsoft has this perspective — I mean, you look at our market cap. You look at the businesses we aspire to go be. I can’t target [Microsoft] and say, “Hey, the board of Microsoft, our enemy is this Sony company. We should go take them out.” It’s not even in our vocabulary to talk about Sony that way. They’re a partner of ours, frankly, in a lot of different places.

Our ambition has to be a global business that’s growing, that’s going through transformation, where Microsoft has some real opportunity to help with that transformation and play an important role. That’s how we frame our opportunity in gaming.

To launch a console, you don’t just need hardware, you obviously need big games. Sony launched the PS5 with Spider-Man: Miles Morales and Astro’s Playroom, which takes full advantage of the advanced haptics on its new controller.

I asked Phil how he’s thinking about the role the titles play in the launch of these systems and how he feels about Halo Infinite being delayed to 2021.

We were very public about Halo Infinite and our desire to have Halo at launch. I do think there’s some great launch games that are there to go play, that maybe get lost in this dialogue about who’s got the better launch lineup, which is a downside. I’m playing a lot of Tetris Effect from my friend, Mizuguchi, and the team, and it’s awesome. We wanted Halo at launch. We thought it would have been a real cultural moment for us as Xbox. Last time we had done that was the original Xbox and Halo: CE.

From a business standpoint, I’m selling every console I can build. It’s hard for me to point out how I would be selling more consoles today. I wouldn’t be. There’s also a fan promise, and that’s not lost on me that people want to see new great games that play on their new platform that they purchase. That’s a commitment that we believe in. We’ve made huge investments in our first party [games], in growing the amount of games that we can build that can be special on Xbox, that can be there for our Xbox fans, so that they feel like they made the right purchase.

[Halo] was a miss on our part. I wouldn’t change the decision based on the right game, [a] healthy situation for the team, and how they’re working. Absolutely, it’s something that we had planned for, Bonnie Ross who runs the studio and I, to have Halo there. In the long run, I think what’s going to happen is we’re going to get a better Halo game at a good time when people can actually get a console. I feel good about that. I think the game will be better for the time that we’re giving it. I’m incredibly excited about the lineup, not only of Xbox Game Studios, but we’ve obviously also announced our intent to acquire ZeniMax and Starfield and great games that Todd [Howard] and the team are working on, that people are going to go play on their Xbox.

I feel good, really good, the best I’ve ever felt about our roadmap. But yeah, it would have been really great to have Halo at launch.

That’s all wrapped up into the idea of game streaming.

Just to lay a foundation, and feel free to disagree with me if I’m getting this wrong, but there’s a part of me that says, this is the last generation of hardcore game consoles that you’re going to buy at this moment, and the future is streaming games over the internet to all kinds of devices in your house. You’ve launched a service like that, Google has a service like that called Stadia.

We see it from a lot of different directions that the game code will actually run in the cloud. You’ll never really know where those computers are, and then you’ll just stream them. I think people call that Netflix for games: you’re going to pay a monthly fee to Microsoft, or Amazon, or Google, or whoever [you] have access to.

Well, you’re shipping two pieces of hardware. We’ve talked a lot about the nuts and bolts of your hardware so far. Do you think that shift to game streaming will be the inflection point? Do you think that these are the last big pieces of hardware you’re going to ship?

I don’t think these will be the last big pieces of hardware that we ship

I totally understand the logic flow that you’re running through. It makes sense. Obviously, I don’t know. I’m learning every day. We react to what our fans and our customers want, not what we need to have happen. It’s funny, because I’m sitting here and I look to my right and here’s my Sonos speaker, a Sonos Move, which is a big piece of hardware [that’s] well-done. The advent of streaming audio has not caused me to buy fewer audio devices in my home. If anything, it’s actually increased the number. They’re not like $2 little speakers, this is real money spent on real devices.

I’d say streaming video is the same way. If anything, I’m spending more on my TVs than I ever have. Because I care about the quality and does it have HDR, and all of these things. I don’t know that it’s inevitable that streaming games means that there’s no local [computing] capability that I want in my house. In fact, that’s not what we’re building toward.

When we think about xCloud, which is our version of Stadia or Luna, I think what it needs to evolve to are games that actually run between a hybrid environment of the cloud and the local compute capability, and that they can actually take full advantage of the cloud that’s there and that’s available, but also full advantage of my edge compute capability that I have in my home in the console. It’s really a hybrid between both of those.

That’s, I think, the compute model that most people are going to move to with most app development, a hybrid model between edge and the cloud where things that — either from a security, or latency, or even cost and bandwidth standpoint — can be done locally, should be done locally, and things that really could use the scale that you can get through cloud, and be able to light up multiple blades to deliver whatever experience you want to deliver to somebody, would use the power of the cloud.

Now, if your local device has almost no compute capability relative to games, obviously, we’ll move almost everything to the cloud. If I have a device that’s very capable in my home, we should use some of that. We shouldn’t ignore it. I think it will change.

I definitely think your point about inflection point is right. I don’t think the outcome is by definition going to be, “everything becomes terminal-server in my home and all my games are just running completely in the cloud.” When we think about the evolution of our game platform, it’s really more of a hybrid game platform between edge and cloud that we’re shooting for.

The Sonos speaker is a really good example. Because I can concoct the same example that proves a different point: 10 years ago, if I wanted to get satellite television, I needed dedicated satellite television hardware in my house. If I wanted to get Sirius radio, I needed dedicated Sirius radio equipment in my house. If I wanted to record anything, I needed a dedicated piece of hardware to record it. All of that has converged. All of it is delivered over the internet to a single, relatively high-performance computer, whether that’s a Sonos Move, or Apple TV, or Xbox. Or in many cases, the television itself is just a giant tablet that we call a TV. It’s got an ARM processor, and it runs Linux and we’re off to the races.

What’s stopping you from saying, okay, Xbox is an app, it has minimum hardware specs, and we’re just going to run it on a smart TV?

I think you’re going to see that in the next 12 months. I don’t think anything is going to stop us from doing that. I thought what you said about the TV was spot on. What we used to call a TV was a CRT that’s just throwing an image on the back of a piece of glass that I’m looking at. Now, as you said, a TV is really more of a game console stuffed behind a screen that has an app platform and a Bluetooth stack and a streaming capability. Is it really a TV anymore or is it just the form and function of the devices that we used to have around our TV, consolidated into the one big screen that I’m looking at?

I do think you’re going to see hardware change. Frankly, even on the console, we see this. One of the primary things that people do on game consoles is watch video; they watch Netflix and Disney Plus and Hulu and everything else. What it’s meant is we actually have to build out an app platform inside of a game console so that these providers can go and build their Spotify app and the different things that run. There’s real hours and hours of usage on these things, which — my N64 didn’t do that. The first Xbox didn’t do that.

I think you’re absolutely right, there will be winners and losers and things that evolve and get combined together. What I’m saying is the amount of compute capability in my home has increased with the number of streaming signals that have come in, not decreased. I think gaming will be one of those things as well.

Let’s take a scenario of, my kids want to play the same game on multiple televisions. Is there going to be something that keeps all of the local inputs for low latency and other things in my house, and maybe even I want that from a safety and security standpoint, so only the kids in the house can get on Xbox Live, and it’s not out on the open Xbox Live? Those kids will still want to go play games together on their own screen and other things. I think we’re going to stay eyes open on what scenarios evolve.

I just push back a little bit on — this is not exactly what you said — that when streaming comes, all the consoles go away, or all my local devices that play video games go away. I’m not quite as sold on that. I think we just have to be nimble and watching what players want.

One of the larger challenges with streaming writ large is that the two phone platforms are owned by companies that are very interested in competing with the major game vendors.

And they’re not Microsoft.

And they’re not Microsoft.

I won’t say anything about Microsoft and phones, I promise. That conversation is dead and over. It’s Apple and Google. Apple, obviously, it’s embroiled in a lot of different controversies with various game makers. I think Fortnite is just at the top of the list. Right now, if you wanted to put xCloud onto the iPhone, Apple won’t let you do a storefront. They’ve come up with all these rules.

We’ve seen Amazon, and I think to some extent, Microsoft, [say], screw it, we’re just going to go through the browser. What is that conversation with Apple like right now? Is it just whatever, Safari is open, we’re not going to deal with your app store?

No, they actually remain open to the user experience we would like people to see. But we have this avenue of a browser that works for us that we will go and build out, which gives us access, frankly, to a lot of devices.

If the device is capable of running a capable web browser, we’re going to be able to bring games to it, which is pretty cool. You’ll be able to bring all of your saved games and your friends and everything comes with you. It’s just Xbox on this new screen with the games. Apple does remain open in the conversations that we have on this topic.

I can understand their perspective from their position. I don’t say I agree with it, but they have a competitive product in Apple Arcade that is competitive with Xbox Game Pass. I’m sure they like having Apple Arcade as the only game content subscription on their phone. We want access to at-scale compute devices that we think should have open access to services customers want. We’re willing to work with them on safety and other things that people have come up with. We run a platform that takes safety and security very carefully. It is very important to us on Xbox, so that topic is not something that’s foreign to us.

It’s one of the things that we navigate. We’re on Android today. I think going with the web solution gives us a lot of opportunity on a lot of different devices.

This is in the realm of conspiracy theory, but I’ve heard it from other developers, that Safari is limited in what you’re able to accomplish, in order to push developers to the App Store and Apple’s fee system.

We have not seen that to date, just like we haven’t on Chrome. I will say that maybe more Chrome — just because I happen to be an Android user, but Google’s good at advertising their first-party services through their platform.

There’s a capability of, can our service run on Safari or Chrome? Then there’s also just the promotion capability that those platforms have. Anytime I try to go to Game Pass, do I end up at Stadia? Those are things that aren’t happening today, I’m not accusing anybody of things. That’s just one of the positions we’re in, not being a platform holder.

Windows is open. Things like Steam were created on Windows, because Gabe and the team could go build an app on Windows products. They didn’t have to come through Microsoft. They had open access to the SDK and the users. As a platform holder, you have to be diligent in how you manage that. Frankly, Chrome was built on Windows. I think when computing platforms really get to scale, like an Android, or an iOS, or Windows, there’s a responsibility for us to keep those open and allow for competition on them. I do fundamentally believe that. I’ve seen it work on Windows—

What’s interesting about that is, when you go and push Apple and Google on their platform and how they run it, their first response is, well, Xbox and PS5 have the same fees. Do you think that’s a fair comparison?

I don’t.

If I can put Game Pass on iOS … if you just look at the scale, there are a billion mobile phones on the planet. Those are general compute platforms. A game console does one thing really; it plays video games. It’s sold, for us, at a loss. Then you make money back by selling content and services on top. The model is just very, very different from something [on] the scale of Windows, or iOS, or Android.

I think there are 200 million game consoles that are sold in a generation across all of our platforms. That’s less than a year of phone sales. It’s just not even close. People say, well, the scale shouldn’t matter. It actually does. When you start looking at how we look at open platforms and access, those things do matter. From a legal perspective, they matter. We know that at Microsoft. We had our DOJ time. I think as platforms get to scale, there’s a responsibility there, absolutely.

Microsoft has bought a lot of games studios over the past few years, but the biggest acquisition yet has been ZeniMax Media, which brings huge titles like Fallout, Elder Scrolls, and Doom under the Microsoft umbrella.

I asked Phil if the thinking behind buying all of those studios was an attempt to have a full library of first-party content to start the engine of Microsoft’s Game Pass subscription service.

Yeah, it is.

Game Pass relies on third-party content. I want it to be that way. I want our third parties to have success. One of the things, going back to previous CEOs, Bill always had this good point of view that you’re not really a platform until other developers make more on your platform than you do. That’s one of the fundamental definitions of a platform. I think it’s very smart to look that way. I think about Game Pass as a platform. It’s not just a subscription on a platform.

I want third parties to see the distribution and monetization capability of Game Pass as something that is accretive to their business and important to them. I, obviously, as the owner of Game Pass, [will] invest earlier than third parties will, both when I put games on the service, and the number of games that I need in order to create the flywheel that gets it to scale. We’re investing in content because we’re early in Game Pass, and frankly, in xCloud. I need to have great content as an attractor to customers into Game Pass and xCloud and our consoles as well.

When I play it out, I want to get to the world — you’ve seen developers, it’s been great as Game Pass has grown, start to come out and say, look, Game Pass is actually a critical part of the discovery process of my game. It’s actually created business opportunity for me. Which isn’t true in video and music today. Because when certain people try to call Game Pass the Netflix of, or the Spotify of, there is a fundamental difference that …

I was seconds away from doing it. I’m excited for this answer.

Yeah. These games are all for sale. What we’ve seen because, one, some games have a business model inside of themselves and there’s retail availability at the same time, and all these other platforms that games are on. One of the big issues that some of the mid-tier and smaller games deal with is, how do I just get known? How do I actually create either that Twitch moment that you see with something like Fall Guys, or just that it’s live on so many people’s social graph, because people are playing that, people just see it.

Game Pass has been a real avenue for that, because we have over 15 million subscribers and a very consumptive base of players. Everybody sees what everybody is playing on Xbox Live. When a game hits in this curated marketplace of Game Pass, it becomes more discovered on the network, which is just such huge viral marketing for the game that’s out there. That’s what I need to get to with Game Pass. We invest in first-party, and we’re seeing it. We’re right at the inflection point of that really being true. It’s definitely true for a lot of developers already.

We invest in our first-party [games] as a catalyst for growth. In the end, I do know that most of the games, just like most of the games that are played on an Xbox, should be third parties. Those third parties have to build a healthy business on Game Pass. Otherwise, it doesn’t work.

Let me make the Netflix comparison just to have done it, just to check the box.

The Netflix business model started with a bunch of third-party content. They were licensing TV shows from networks that had no streaming capability of their own. It was just free money because it was on this thing called Netflix. Then TV networks realized, “Oh crap, they’re eating our lunch,” and Netflix started pouring money into originals to increase and maintain the value proposition of your Netflix subscription. They’re still spending a lot of money, when the TV networks are saying, “we’re all going to build our own streaming platforms now.”

You’re describing the opposite of that. You’re saying, “I’m going to spend all the money upfront to make people come onto the service. Then the game developers who are not going to build their own subscription bundles, they’re going to come on to Game Pass and make a lot of money.”

That’s our goal. That’s absolutely our goal. We see it, and not in all cases. This is all learning every day, but we see it. Even things like EA Play coming on to Game Pass was us working with our partners at EA to say, it’s not about a per-title thing, let’s actually bring the channel that you guys want to go drive and grow value in, called EA Play. Let’s bring that to Game Pass on console and PC, so you see growth in people’s attachment to your service through the distribution power of Game Pass. That’s real strength for them.

Actually, for a content partner like EA or someone else, it helps them create the kind of moat around their content that says, “No, this EA Play thing has value.” We love that.

Now that’s at a portfolio level. There are certain teams that are just, let’s do that with our game. If I think about Studio Wildcard with ARK, a game that does really, really well in Game Pass, it’s a good example. If they’ve got a whole ecosystem around what it means to be in ARK and the business model behind that, they can use Game Pass as a great way for them to grow and find new customers who might not choose the game just on an open marketplace, or might never find it.

We can actually raise the visibility of the content. That’s just not true in the video space. There’s definitely some third-party series that I’ve found season 1 and 2 on Netflix. Then I’ll go to watch [it] on the studio’s service or even on broadcast, if it’s something that’s on broadcast. I just don’t think the video companies were there to catch that growth in Friends. You think about something like The Office or Friends or these things that were critical parts of Netflix growing, I think the opportunity that was missed there, and I’m not disparaging anybody, but if you’re going to grow a bunch of interest in Friends because it hit Netflix, what do you do with people’s interest when they get to the last episode that’s on Netflix?

Gaming knows how to do that. Our gaming partners, whether it’s an annualized franchise that comes out so you’re building an audience for the next release, or it’s an ongoing perpetual game, [like] Destiny 2 is in Game Pass right now. Those developers know how to continue to manage and grow communities. That’s what I would say in the video space. If you want to use Netflix for distribution, absolutely, but make sure you know how to catch the signal of fans for you as the content creator when it comes out.

We enable that. We’ve got a storefront. We’ve got discoverability you can bring. You can have your social, whether it’s Uplay, or EA, or other things on our platform. You’re building a direct-to-consumer relationship for you as a publisher. Those are all critical, critical components of Game Pass. Even more important with xCloud is, we start taking this content to a device that’s never seen your game in a part of the world that’s never going to own a game console or a gaming PC, how do you, as a publisher, build that strong, direct-relationship customer, either around your portfolio or around your game?

Does a subscription model change the kind of games you’re commissioning or that developers are making? One of the things we’ve heard from Apple Arcade developers, for example, is Apple’s pushing for engagement time. They want people to play the games for longer so you feel like you’re getting every ounce of value out of the money you’re spending on the subscription.

I buy Madden every year. I just pay the $65. I know I’m going to get my money out of it. When you’re paying that monthly fee, you always need some novelty or you need to come back to a game over and over again. Is it changing how you’re thinking about how a game should be made and developed over time?

I’d say for us, the biggest change has been just expanding the creative chances we will take, because we know we have 15 million subscribers, players who will try something. The marginal cost of trying the next new thing is, today, a download. With xCloud, we’ll just be opening a stream and giving it a try. We’re doing more episodic things, even games like Flight Sim come back because we know we have millions and millions of customers who will give it a try. I don’t know how many of those people would have paid 60 bucks for that game.

The business model allows us to try new delivery methods, whether [it’s] episodic, or new themes. It doesn’t all have to be the known genres; let’s go push on some genres that have either fallen by the wayside, or people are making new things. Those are the areas where I see us unlocking capability. I will say, and this is a healthy thing for Game Pass — it’s true, it sounds like, of Apple Arcade as well — the No. 1 metric that we see that drives success of Game Pass is hours played. It’s not catalog size.

It’s not actually even the retail price of the games that are included in the subscription. We’ve run the math from all different angles. I love the fact that if people’s happiness with the subscription is in line with how often they use it and play it, that seems like a pretty good thing to me.

How do you pay out developers? I’m a developer, I make a game, I say I’m going to put it in Game Pass, a customer pays [you] $14.99 a month. How do you decide how much to pay me, the developer?

Our deals are, I’ll say, all over the place. That sounds unmanaged, but it’s really based on the developer’s need. One of the things that’s been cool to see is a developer, usually a smaller to mid-sized developer, might be starting a game and say, “hey, we’re willing to put this in Game Pass on our launch day if you guys will give us X dollars now.” What we can go do is, we’ll create a floor for them in terms of the success of their game. They know they’re going to get this return.

[In] certain cases, we’ll pay for the full production cost of the game. Then they get all the retail opportunity on top of Game Pass. They can go sell it on PlayStation, on Steam, and on Xbox, and on Switch. For them, they’ve protected themselves from any downside risk. The game is going to get made. Then they have all the retail upside, we have the opportunity for day and date. That would be a flat fee payment to a developer. Sometimes the developer’s more done with the game and it’s more just a transaction of, “Hey, we’ll put it in Game Pass if you’ll pay us this amount of money.”

Others want [agreements] more based on usage and monetization in whether it’s a store monetization that gets created through transactions, or usage. We’re open [to] experimenting with many different partners, because we don’t think we have it figured out. When we started, we had a model that was all based on usage. Most of the partners said, “Yeah, yeah, we understand that, but we don’t believe it, so just give us the money upfront.”

If you look at every other model [like that], Spotify is always in a fight with the [music] industry. [The usage] model makes a lot of logical sense — we’ll pay you based on if people use it — but it seems to lead to an enormous amount of conflict down the line.

My hope is we will get there, and maybe not 100 percent, maybe some hybrid model, which I think could work. We already have a revshare relationship with most of the content creators because we have a store, a digital store on our Xbox, which is basically a usage-based thing if you think about it. I buy the game, we take a cut, they take a cut, and we build success together. I’m hoping we can get to a model, where as we see upside, they see upside. There’s some downside risks that we can help cover which gives us certain capability with the content, but also helps them go do some things that maybe they couldn’t get greenlit on a pure retail model.

The thing that’s been heartwarming to me, as somebody who’s been building games for so long, is to see games come to the service that wouldn’t have been built if there wasn’t this engine called Game Pass that allows us to go off and help fund a certain game to go build. When the team, if they’re just out there pitching the publishers on a retail game, if it doesn’t fit into some Excel spreadsheet that tells you what the retail outcome will be, then it doesn’t get green-lit. You see this in things like Netflix. There are clearly shows on Netflix that would have never been greenlit by NBC or CBS, or ABC in the old model, and frankly, can have real success. And my hope is that Game Pass can get to that same level.

We’ve been talking a lot about Game Pass and streaming, being on lots of devices. A thing about this console generation, in particular, is that Sony took a leap forward with the actual controller. They were able to do something because they built haptics into their controller. It’s tightly integrated into their system. They have a few titles at launch that really take advantage of it. How are you thinking about that split? There’s something you can do if you own the whole stack over here, and then there’s this massive inflection point and opportunity to be everywhere if you commoditize a little bit more.

But they were able to take another leap with their controller, because they control the hardware stack.

I applaud what they did with the controller, not actually for — well, I shouldn’t say not for the specifics of the controller, but more than just the specifics of the controller. I think for all of us in the industry, we should learn from each other and the innovation that we all push on, whether it’s distribution of business model like Game Pass, or controller tech, or the Wii back in the day, which clearly had an impact on us when we went off and did Kinect and Sony did the Move.

I think all of that innovation is something that we should all be looking at and learning and growing and saying, “Okay, what’s really going to break out and become a common part of a platform that developers and players are going to look for?” Or, “What is more vertical around a specific scenario on a specific piece of hardware?” We’re trying to be eyes open on that. For any technology, whether it’s a controller, or any VR, or anything else…

Yeah, but I look at that controller and I say, there’s no way you could execute that unless you have a box right there. You couldn’t abstract the PlayStation platform to every phone in the world and then support haptics without any latency. You think you could?

Yeah, you could create as part of the API that we have with direct input, or with Apple and Android, which is where our controller works. We could clearly add API calls for rumble, which we already do in certain cases, or haptic triggers. It’s stuff that we’ve looked at.

The Xbox controller has kind of become a default, even outside of gaming scenarios, which is always bizarre to me. I’ll see somebody controlling a robot and they’re using an Xbox controller somewhere in an enterprise scenario.

That’s something where we have to think about superset, subset. Not all of our controllers have all exactly the same capability. The Elite has the buttons on the back and stuff. I don’t think it precludes us. There is something about the common expectation that people have [of] our controller and its ubiquity that’s out there, that I think is a string. It doesn’t keep us from innovating. Clearly, we do have to think about all of the use cases that are out there. We can’t turn the controller inside out because there’s so much expectation about the way it should work now. We can innovate on top of that, and we’re going to look at what any other company does and learn from it, and see if it’s something that we want to apply to what we’re doing.

This comes back to that conversation about what happens in the cloud and what happens on the edge — every time I talk to anybody from Microsoft, I feel like I use the words edge and cloud five times in the conversation.

What I’m describing is, they’ve made a user experience improvement at a very local level. The thing you’re holding in your hand connected to the box, it’s all running on the box. A lot of our conversation so far has been about streaming the platform and putting it everywhere. That level of abstraction usually comes with a commoditization of user experience.

Is a 4K television that different, is HDR and my television that different? I get a 4K HDR signal from Disney Plus that lights up my local hardware capability in a unique way, it’s coming from the cloud. My local edge device, my TV, to use Microsoft vocabulary, knows how to decode that and actually turn on specific hardware capability locally and make that work. I don’t think that the fact that things are coming from the cloud really keeps us from innovating on local hardware, whether it’s input, whether it’s display, whether it’s audio.

You see that with DTS:X and a bunch of other things that are hitting now. Those streams can easily come from the cloud, and light up in interesting ways. It’s something to think about, but we don’t see it blocking us in any way.

We’ve talked a lot about the business of games. We’ve talked a lot about how you architect the consoles, how you make them and get them to people. This is all in the context of what we started with; games are having a moment. It’s an inflection point. They’re more visible than ever. Certainly, I think that started with Fortnite. We’re seeing a Roblox moment, there are concerts happening. This is how people are socializing in the pandemic.

Games have long just been a sideline in the entertainment industry. They were “over there” for a long time. Now they’re just in the middle of everything. Does that change your responsibility? You talked a lot about the parts of the gamer culture you don’t like. Are there parts that you want to enhance, that you want to push forward? There’s a lot of kids learning their social interactions in these spaces. What’s your responsibility? How has it evolved?

I love, love this topic. I absolutely think, as an industry, it’s our responsibility to use both the interactive nature of our medium as well, as you say, the audience that comes into gaming to help build social norms that are durable across the physical and the digital space in gaming and non-gaming scenarios. I think we have that opportunity as an industry. We had tons of learning and growing and mistakes in our past as a company, as an industry. I say “as a company” as in, is Xbox learning on this every day?

I absolutely see the industry — I [went to] Game Developers Conference back when we were having it physically. You see Blacks in gaming, Latinas in gaming, LGBTQIA-plus in gaming events. You see topics around the discourse that should be able to happen in our social gaming networks. You see work on ML, machine learning techniques to detect whether it’s bullying or grooming that happens online, or people that are in social, suicidal stress situations. Can we detect these things?

When it’s the adoption of things like AI or simulated 3D technology, gaming has always been at the forefront of adopting these things and making them mass market into consumers’ hands. I think now what we have, as an industry, is an opportunity, more social and maybe even global issues that we can really lean into. I love the way that the industry itself, and team Xbox has done its share, [is] seeing that opportunity and trying to realize it.

It’s part, who are we as teams? It can’t be a bunch of old white guys like me that are running all of these teams and that’s the only perspective that shows up in the creative, and the business model, and the opportunities. It can’t just be people from North America, Europe, and Japan that are building games. We need to diversify what voices are being heard through the creative and where those creations happen. We need to really build safety and security. Obviously, we have Minecraft. Roblox is on our platform.

We think very, very carefully [about] both the social norms and the safety and security. If I’m a parent and my kid is online, I know that they’re as safe as they are upstairs playing in their bedroom. That’s a goal for us. These are our real opportunities. I could have said challenges, but I see them as opportunities for us, as an industry. I’m actually motivated by the accessibility and all the work that this industry takes on and tries to go tackle. That’s a Sony comment, a Nintendo comment, a Steam comment, an Xbox comment. It’s not a competitive thing. It’s something for us as an industry.

Sorry, I’m a little bit passionate about this one.

When you think about the opportunities there, how active are they? Every platform company that we talk to, we ask them about content moderation. User-generated content comes with a known set of challenges. How active do you need to be in moderating and shaping your community versus putting norms around it and hoping it develops the right way?

Every second. You need to be real-time with your community as it gets to scale, whether you’re an individual developer with one game or a platform. We, as Microsoft, and other companies will do the same, we need to give you the tools to help you as an individual game developer or as a growing platform to help monitor because it’s — one answer is to throw bodies at [it] and say, okay, I’m just going to go hire 1,000 people to manage the community that happens on my game as it gets to scale. That runs out of steam at some point.

Not everybody can go put Azure stacks with reinforcement learning capabilities all over. We have that capability. We’ve built technology through Microsoft Research, whether it’s on the voice side, the tech side, or the image side that can detect certain things. We’ve shared that with other game industry and community companies that are out there. This is an area where Microsoft and Xbox want us to be leaders. Not leaders, again, to the exclusion of other people, but leaders just in helping, because you do need to do it [in] real time.

You can’t put three rules up on the whiteboard and say, okay, well, the rankings will figure it out. Or the good stuff will float to the top. Because regretfully, that doesn’t work. It can work for maybe a short while, but it doesn’t work. We see it as active. We have hundreds of people and a ton of technology that we throw against this problem real-time. I really think it matters. I think it’s a constant opportunity. I see it as an opportunity, because I value what bringing people together in play does.

I see the empathy it builds into that social contact theory that I’m a big believer in, bringing disparate groups together with shared rule sets and understanding, can help build empathy between different groups. With that, comes a responsibility to make sure it’s the right environment for that to happen.

Decoder with Nilay Patel

This Article was first published on theverge.com

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