Beyond the console: Xbox leaders detail Microsoft’s gaming future, led by xCloud streaming service

Phil Spencer, head of gaming at Microsoft. (GeekWire Photo / Nat Levy)

The days of the Xbox console as the primary focus of Microsoft’s gaming division are numbered.

Microsoft has spent the last few years refocusing its gaming strategy, expanding the Xbox brand beyond the console as the centerpiece of the division to a push to reach gamers playing on virtually every device around the world. The tech giant is plowing resources into developing an ambitious game streaming service powered by its cloud computing division, and beefing up its library of homegrown titles. Microsoft aims to let people play its games not just on Xbox devices and Windows PCs, but also smartphones and tablets, and eventually, rival consoles.

Game subscription services have been around for decades. But with the Project xCloud service it announced last year, Microsoft is betting that it can take games like Halo, which have always required powerful consoles, and move all that processing to the cloud, allowing users to play these games on their phones. If it can pull that off, the tech giant could open itself up to a huge new audience and usher in a tectonic shift in the gaming industry.

Microsoft laid out this strategy on a tour of its gaming facilities at its Redmond, Wash., home base this week. Executives steadily repeated a key number: 2 billion. That’s the number of gamers in the world, by Microsoft’s estimates, and many of these players live in parts of the world where console gaming isn’t feasible.

“We know we aren’t going to sell 2 billion consoles, and there are a lot of markets around the world where a console is not necessarily part of the lifestyle,” said Kareem Choudhry, corporate vice president of gaming cloud for Microsoft.

(GeekWire Photo / Nat Levy)

The new Microsoft approach

The shift in the gaming teams’ focus fits with Microsoft’s overall evolution. Under CEO Satya Nadella, Microsoft wants to bring its services and apps to as many people as possible, regardless of what devices they use.

In some cases, this means working with competitors that make devices rivaling some of Microsoft’s own gadgets. Gaming appears to be no exception, as Microsoft is expected to unveil the extension of Xbox Live compatibility to several additional platforms, including Android and iOS mobile devices and the Nintendo Switch, at the Game Developers Conference later this month.

Microsoft executives demurred when asked specifically about this plan, but Phil Spencer, head of gaming, wasn’t shy about the company’s cross-device ambitions. That push is embodied by Project xCloud, but the company also wants to expand its Game Pass subscription service as well.

“We want to bring Game Pass to any device that somebody wants to play on,” Spencer said. “Not just because it’s our business, but really because the business model allows for people to consume and find games that they wouldn’t have played in any other space.”

Xbox One X. (GeekWire Photo)

Microsoft’s gaming division is going strong, at the moment. It just capped its first ever $10 billion year.

Executives brushed off concerns that its emphasis on bringing content to more devices would cannibalize console sales and hurt the company’s financial results.

“That is not where you make money,” Spencer said of consoles. “The business inside of games is really selling games, and selling access to games and content in means like that is the fundamental business. So if you open it up, the more often people can play, the more they’re enjoying the art form. It increases the size of the business.”

Microsoft doesn’t break out how much revenue consoles bring in versus software and services. However, the broad trends are visible in its latest quarterly report: Xbox hardware revenue declined 19 percent in the last quarter, compared to a banner holiday quarter the year before, led by the release of Xbox One X. Meanwhile, revenue from Xbox software and services rose 32 percent over the year before.

Even with its shifting focus, consoles remain an important part of the company’s strategy. Microsoft is reportedly working on a couple new Xbox consoles, including a lower-cost device without a disc drive, and may give more details at the big E3 conference in June.

Streaming challenges

Streaming has become the norm throughout much of entertainment, from movies and TV shows to live sports. But video games differ from other forms of entertainment and could create some unique challenges for aspiring streaming companies. Choudhry called streaming a video games a “tremendous technical challenge” because they aren’t static, they are interactive.

Another challenge is getting game publishers on board. As Axios notes, the economics in some ways don’t make sense for big publishers like an Electronic Arts or Activision to license their games to a company like Microsoft, giving up a cut of their revenues. Microsoft recently doubled the number of studios under its roof, so if big publishers are skittish about joining the tech giant’s game streaming service, the company can beef up the service with its own games.

Spencer has heard criticism of the model from developers and studio heads alike that “you’re lessening the value of content when it’s sitting inside a subscription.” But he says that subscription services will ultimately help game publishers because they bring a new audience of people who might be willing to try a game, but don’t want to invest the money upfront to buy one.

“Not all of those players are going to want to pay $60 to go play something that they haven’t heard of before,” Spencer said. “And I see that model as being something that can really help us as an industry grow.”

Unknowns abound about the xCloud service, including a start date and how much it will cost. Spencer acknowledged that Microsoft itself is still figuring things out, saying “you’re watching us make soup here.” Microsoft has said it will begin “public trials” of the service later this year.

The service connects gamers on their phones with specially designed servers built from Xbox components. Right now, the xCloud demos are running out of a data center in Quincy, Wash.

All the processing is done in the cloud, so if users have enough bandwidth to stream videos, they can play Xbox games on their phone. That means the service could work on a variety of phones, beyond just the newest models with the most processing power.

Competition coming

If and when it does roll out xCloud, Microsoft will face plenty of competition. Apple, Amazon and Google are all reportedly working on game streaming services.

Microsoft, though, is the only contender with its own cloud computing arm, console lineup, existing gaming ecosystem and big lineup of original games to build on. Each of these competitors checks a couple of those boxes and has its own advantages.

Amazon in particular could become a significant competitor, as it has the leading cloud provider in Amazon Web Services. It also has a dedicated gaming unit, Amazon Game Studios, and owns the top game streaming service in Twitch.

Executive after executive dodged questions about competition. But Spencer, without mentioning names, said it takes time to break into the industry and form relationships with publishers.

“This team has been in the video game business for some of them three decades. And we’ve been building games for many years,” Spencer said. “We’ve been partners to the video game companies for years and years. For many of our publishing partners, we’re one of their top global retail partners in them selling games. Video games is not a business that you come into quickly, and there is a form to building games. There are relationships that are built.”