How Xbox outgrew the console: inside Phil Spencer’s multi-billion dollar gamble

Phil Spencer knows the price of the smallest decisions.

It’s 2017, and the head of Xbox is in a design meeting for the Xbox One X. He’s deliberating on a motorised button. It rotates so the Xbox logo stays the right way up whether the console is sitting vertically or horizontally. The designers love it. The brand bods love it. “They never like our logo sitting sideways,” he tells us, chuckling.

The price of that little button? A single solitary buck.

“You're thinking, like, ‘it's just a dollar, of course you would do that,’” he says.

Someone else pipes up: “there's a world where we sell a hundred million of these.”

Suddenly, that’s a hundred million dollar decision.

In the end, the rotating button – described by Spencer as “just another thing that could fail” – wasn’t worth the potential cost. But 'risk averse' is perhaps the least appropriate label for the guy who started his career helming the development of the Encarta CD-ROM encyclopedia.

Throughout his seven-year tenure in charge of Xbox, Spencer has made some of the biggest moves not just in gaming but entertainment at large. Under his leadership, Xbox’s list of total first-party studios has increased dramatically, from five to 23. The spend exceeds $10 billion. That includes buying indie block-builder Minecraft for $2.5bn in 2014. And purchasing Skyrim and Fallout creators, Bethesda, for a record-breaking $7.5bn last year. He’s also overseen the creation of Game Pass – the first Netflix-esque subscription service for video games – and doubled down on game streaming technology despite having seen several competitors elsewhere flame out in ignominy. All of these monumental calls came in the wake of his inheriting 2013’s Xbox One, a console with a famously disastrous start to life.

Most of those decisions don’t weigh much on his shoulders (“I’m not much of a keep-me-up-at-night guy,” he tells me) but delaying Halo Infinite, the flagship launch game for last year’s new Xbox Series consoles, still sits heavy in his heart. “I don’t like how we did it,” he admits. “I don’t like that we showed the game, talked about it launching at the launch of the consoles. And then within a month we had moved it.”

Infinite was the big tentpole release for Microsoft’s comeback console. In Spencer’s eyes, Series X and S needed it: the original Halo defined the original Xbox in 2001. Pairing them together for another launch? Poetry. But Xbox pushed it to 2021 after reception to a gameplay showcase, just four months before its initial release, went viral. And not in a good way. As a result, Xbox launched with no major exclusive game to speak of. It was a major shortcoming compared to Sony, which launched its PlayStation 5 with no fewer than three exclusive blockbuster games. “We should have known before and just been honest with ourselves,” Spencer says. “We were there not out of deception, but more out of... hope. And I don't think hope is a great development strategy.”

Spencer’s ability to make fast, seismic calls without being paralysed is clear. He has a confidence and clarity of vision about what the future of Xbox – and the future of gaming – can and should be. What it will be, even. Between our time with him, we also spoke with Liz Hamren, head of hardware; Kareem Choudhry, head of cloud gaming; Sarah Bond, head of gaming ecosystems; Todd Howard, game director at Bethesda Game Studios; and Craig Duncan, studio head at Rare. And the common theme was trust. The trust in each other. The trust in a shared mission. The trust in Phil. It was all pivotal to bringing Xbox back from the brink. 

Eight years ago, Xbox One put the company in a hole. It was an even greater failure than the Xbox 360’s “Red Ring of Death” – a hardware recall debacle in 2006 that cost a billion dollars to fix. But the problem with the Xbox One was different. It was existential. Microsoft created a machine that was more of an ‘entertainment’ hub than it was a games console. There was a huge backlash that the device could never quite recover from. Previous leader Don Mattrick left the company within two months of its unveiling. Eventually, the Xbox One would sell 51 million consoles over its lifetime, less than half the 116 million PS4s that Sony did.

This crisis proved to be Spencer’s opportunity. He was, as Microsoft saw it, the perfect fit to spearhead Xbox through one generation and into the next; repackaging and reinvigorating an existing team with newfound confidence and purpose. But it wasn’t an easy transition. “I felt completely underprepared and out of my element,” Spencer reveals. “Impostor syndrome is a real thing for many people. I don’t know if I could say I earned it… I happened to be there as probably the most senior person that was still left.”

To succeed, he had to revitalise the people around him. “If they were questioning why we were there, then we had no chance,” he continues. “It wasn’t a PR problem. It wasn’t a business problem. Our opportunity was to re-engage the team. And that was a journey.”

It’s one Spencer embraces. He knows his decisions have consequences. Thanks to teamwork and smart gambles, Xbox is back on the steady. But his largest decisions are still in play. Spencer has taken Microsoft all-in.

Will it pay off?

Craig Duncan wasn’t always convinced. But he had good reason to be hesitant. 

The studio head at Rare has been at Microsoft for ten years. Rare has been with Microsoft for almost double that time since it was acquired for $375m in 2002. Paltry money by today’s standards. Back in the day, Rare took most of the brunt from Xbox’s shift to casual gaming under Don Mattrick. At the start of the 2010s, having developed 1997’s GoldenEye 007 – a Nintendo 64 first-person shooter that was every bit as beloved as Super Mario 64 and The Legend of Zelda: Ocarina of Time – Rare found itself making a brand-new Xbox franchise. The even better news? It would be a game for Xbox 360’s much-hyped peripheral: Kinect.

Although the motion control accessory would eventually die a limp, unloved death, Kinect Sports was envisioned as a rival to Nintendo’s Wii Sports – the most successful single platform game of all time, with more than 80 million copies shipped. Although KinectSports was a departure from Rare’s totemic games, such as Donkey Kong Country and Banjo-Kazooie, it sold more than three million copies. The period left its mark among some gamers, though; there was a pervading feeling that Microsoft didn’t know how to best use its talent. A sentiment echoed by the shuttering of its other big British development institution, Lionhead. The maker of the iconic and recently revived RPG franchise Fable was rendered defunct just a decade after being acquired.

“It was such a weird period,” Duncan reminisces. “I definitely got what Microsoft was trying to do with innovation and trying to grow the market. From a game dev point of view, it was a bunch of really difficult kinds of challenges.” 

Duncan can say hand on heart that he put everything into Kinect, but his team still had eyes on the future. And while motion controls ultimately proved to be a swing and a miss, the same mad creative ethos helped spawn Rare’s next game. Codenamed, very inventively, as “Rare Next,” the team were “squirrelled away” considering the future of multiplayer. The project would turn out to be Sea Of Thieves – a swashbuckling pirate multiplayer game that, at the time, didn’t even feature pirates (“that’s a whole other story for another day,” Duncan says). 

It was to be the major first experiment for Xbox Game Pass, the service that had been in concept as early as 2013. Codenamed Arches, Game Pass started as a rental service for video games, but as Netflix and Spotify proliferated the team settled on a subscription model. It was the answer to a shift in revenue tails in games. “Something like 75 per cent of a game’s revenue used to be made in the first two months of release,” explains Sarah Bond, head of gaming ecosystems. “Nowadays it’s spread over two years.”

Spencer and his team saw an opportunity.

They went out to publishers, but the idea was met with staunch resistance. “They were like, ‘no way, [Game Pass] is going to devalue games,’” Bond continues. Xbox asked instead to experiment with their older games, where the risk was low. Engagement surpassed all estimates, so a potentially even more audacious play came to life. Xbox would release one of its own exclusive first-party games onto Game Pass, on the same day it hit shops. Sea Of Thieves was first to leap over the barricades. It was a big point of differentiation for Microsoft. PlayStation and Nintendo players still have to spend upwards of £50 on a new title. Here was Xbox giving you its latest, most valuable product, as well as its existing back catalogue, all from £7.99 per month.

Craig Duncan remembers turning to Spencer and asking the big question:

“If every single person plays Sea Of Thieves on Game Pass, and we don’t sell a single copy. Are you kind of cool with that?’”

Spencer was categorical. 

“Absolutely.”

In the end, Sea Of Thieves had a great launch, people still bought it and it was heralded as Rare’s return to form. But more importantly, it proved Game Pass could work. The economics were “100 per cent a success,” says Bond. Xbox’s business model transformed. Since then, every single Xbox Game Studios game, no matter the size or budget, has been released, day one, onto the service. Major publishers such as Electronic Arts, makers of FIFA, have partnered with Xbox Game Pass too. The 18 million subscribers spend 50 per cent more than non-subscribers. A game’s average engagement goes up eight times when added to Game Pass. And player experimentation within genres dramatically increases. Three years after release, Sea Of Thieves just passed 25 million players, and that continues to grow. 

“Even today,” Duncan says, smiling. 

Phil Spencer is a Microsoft lifer. At 53-years-old, he’s walked through the same office doors for 33 of them. Even throughout Covid-19, which dramatically reshaped how the entire Xbox team functions, Spencer has been going into the office wherever possible. “I don't work well from home,” he tells me from his wife’s study. She’s out of town, and he doesn’t have his own workspace in the house. He’s never needed it. Their two kids, now adults, are out too. It’s just Spencer and his two dogs on this Monday morning in Seattle. 

It doesn’t take long after meeting him to clock that this is a man who is never happier than when he’s playing. “My wife likes to tease me that I found the one job on the planet that maybe I’m qualified for,” he says, laughing. He’s also a huge comic book and sci-fi fan. Especially Dune. “For me, that’s one of those seminal sci-fi series,” he says, getting sidetracked by Denis Villeneuve’s new film. “More than The Lord Of The Rings. More than even Star Wars. I don’t know if it’s because it was written here in the Northwest – Frank Herbert was in Oregon – but it just always resonated with me.”

While Spencer is open about getting sidetracked while WFH, there hasn’t been too much time for distractions since early 2020. Having had best-laid plans for a new console generation launch later that year, Covid-19 obliterated them. This was a nightmare shared by the entire team, including Liz Hamren, Xbox’s hardware lead, who oversaw the development of the Series X and S, launching them globally in the middle of a pandemic. She hadn’t once even seen a Series S come off the factory line. “We just right away said, ‘Hey, everything’s different, what do we have to change?’” she says. Like the rotating button, hundreds of small decisions go into making a console. Countless codenames. White and black colourways for Xbox Series X. Little nods to Xbox history, like green fans and vents. This was all done remotely. 

While processes and ways of working were adapted, the biggest change from the ill-fated Xbox One was rediscovering the philosophy of Xbox. “We can’t get confused that our primary responsibility is to bring the joy and community of gaming to every one of our customers,” Spencer says. “Are people going to watch YouTube on an Xbox, or are they going to watch Dune on HBO? Yes. But we needed to be a great gaming platform.”

To do that the team created the most powerful console ever, the Xbox Series X. But they did something perhaps even more significant: a more affordable, digital little brother, the Series S. Coupled with a Game Pass subscription you had unbeatable value at two price points. At £249.99, the Series S is the most affordable next-generation console by some margin. Combined, the Xbox Series consoles became the fastest-selling in their maker’s history, selling eight million units, even with Covid-19-induced supply problems. The mess of 2013 seems a long time ago.

Horizon one, two, and three. That’s how Phil Spencer and his team views the future. 

The things that are happening today. Horizon One. 

The projects happening in a year or three. Horizon Two. 

And the big ideas that might not happen for five, even ten years. That’s Horizon Three. 

These are the bets that, Spencer says, “probably won’t work”.

Kareem Choudhry, the man leading Xbox’s cloud-gaming efforts, is never more excited when he’s making Spencer uncomfortable with Horizon Three plays. This process is how some of Xbox’s linchpin features such as Game Pass and Xbox Cloud Gaming ended up becoming a reality. The first “disruptive innovation”, as Choudhry calls it, was with backwards compatibility. “After the Xbox One launched, I went to Phil,” he says. “I’m like, ‘I’ve been thinking, we don’t have the ability to play old games on Xbox One. I want to take a team of about 30 of our smartest people. And we’re gonna go work on it for a year, and only at the end of the year will I then tell you whether or not it’s going to work.’”

To Chouhdry’s glee, Spencer agreed. And it paid off. Backwards compatibility became a big part of Xbox’s strategy in keeping the library of games as broad and appealing as possible. With Choudhry’s scheme, you can play practically any digital version of Xbox, Xbox 360 and Xbox One games on Xbox Series consoles – for free, if you owned them already. You can even play some disc games. Pick up 2002’s The Elder Scrolls III: Morrowind, if you’ve still got it kicking around, and it’ll work. By contrast, Sony’s backward compatibility efforts are still limited, especially for its machines that preceded the PS4. This buy-in to innovative R&D also gave the team further confidence. They were not only seeing Microsoft invest, but also seeing a return. Even if it meant taking a risk and pulling people “off-grid” for five or ten-year projects. By drawing on its past, Xbox had fuelled its future.

“What I’ve learned is it’s also very risky not to do that,” Spencer says. “You have to plant those seeds today. Because they’re not just going to ‘happen’. And you’re not able to buy innovation easily.” This ethos also allowed the creation of peripherals like the Xbox Adaptive Controller, which revolutionised accessibility options for disabled players.

“Microsoft was willing to back accessibility when the industry just started realising its importance,” says Steve Spohn, senior director of development at AbleGamers, an accessibility charity. AbleGamers had created their own accessibility device called the Adroit Switchblade, years before the Xbox Adaptive Controller. Spohn’s team secretly worked with Microsoft for over three years to create an Xbox equivalent. “It took a mainstream juggernaut to get the public behind accessibility,” he continues. “Microsoft showed people with disabilities deserve to have the same shared experiences as the rest of us.”

The final answer on investment comes from Spencer, but it’s his team driving the questions. “When they’re asking themselves those questions and then we can actually put the resources behind it. That’s awesome,” he says. “Because at some point that Horizon Three stuff is going to be the Horizon One stuff. And if you don’t put the investments in place? Man, you’re just running out the clock.”

PlayStation is no longer the competition. After two decades of console wars, Xbox has sacked off the trenches and started the space race. Sony has its console and its dedicated games, playable only on that box, for £70 apiece. It’s a price that Sony Interactive Entertainment CEO Jim Ryan called “fair” last year.

Xbox’s fight is different; with the Apples and the Netflixes of the world, in the battle for time, convenience and mass consumption. Play any game you want, from any generation of Xbox, all in one with Game Pass. But it’s Xbox Cloud Gaming, the biggest Horizon Three yet, that can take that potential to the next level.

The ‘Netflix for Games’ fight has been fought and lost many times, though. Both gamers and fans of much-hyped catastrophes will remember OnLive, Ouya and most recently Google Stadia. Cloud gaming has been a moonshot for a decade.

The premise is simple: stream games on any screen like a movie or TV show. The technology is much harder to realise. All who have come have failed. Even Stadia fizzled out in less than 18 months, despite spending untold millions of dollars on studio start-ups and game deals. But Xbox has done the groundwork that Google did not. Stadia relied on games like Red Dead Redemption 2 selling at full price, a year after its initial release on Xbox and PlayStation. With Game Pass and Xbox Cloud Gaming, Xbox is offering hundreds of games, including new ones, playable anywhere, for a reasonable monthly fee. Bigger risk, bigger reward.

But Microsoft has had its head in the cloud for a while.

Since 2016, at the time Choudhry was developing back compat features. “We enabled people to play a game designed for the 360, without a 360,” he says. “So how do we take that to the next step? I started asking the question of, ‘What does it mean to play a console game without a console?’” His giddy proposition took a similar arc as before. “‘Hey Phil, I’m going to take some people, we’re going to go and start to investigate this and start to explore what I call the feasibility risk,’” he says with a grin. Game Pass was going online at the same time. All the pieces were coming together. And then in 2018, Xbox officially built a cloud team that was initially labelled Project xCloud.

Although Cloud Gaming is untested at a mass scale, its appeal is clear. Focusing not on the hundreds of millions of players with a console, but the three billion players on other devices. Bond tells me about a trip to Africa that she and Spencer took, while xCloud was still in the testing phase. “[Phil] was playing on his phone. And everybody in Africa knows brands like Grand Theft Auto. But they can’t necessarily play those things. They don’t own a console, they don’t own a high-end PC.” xCloud has the potential to increase Xbox’s user base tenfold. 

It was only this year that Microsoft began to roll it out to billions of iPhone and Android users across the world. Spencer tells me that they’re doing work with TV manufacturers so that you’ll soon be able to stream games directly from your TV, too, just like Netflix or Disney+. To properly show the proof of concept and break people out of that ownership cycle, though, Xbox needed a killer app. Not hedging his bets, Spencer bought eight.

“It's actually not a very long conversation,” says Spencer. He’s explaining how you ask the board of your publicly listed company for $7.5 billion. “They’re going to do their work and ask hard questions [...] but I think the biggest hurdles are the self-imposed questions. The ‘hole’ in that acquisition was, it’s more ‘core’. It’s more guys in armour, killing aliens or demons.” 

The money was for ZeniMax Media, the parent company of Bethesda Softworks, a massive video game publisher in ownership of eight major league development studios. The deal cost more than Disney paid for Star Wars and every Marvel franchise. Combined. Suddenly, Xbox owned some of the most popular names in video games. 

Dishonored. Doom. Quake. Wolfenstein. 

Fallout. Starfield.

The Elder Scrolls.

Bethesda didn’t just mean big names, but big sales and critical love. Skyrim has to date sold some 30 million copies. The ironically PS5-exclusive Deathloop is one of 2021’s highest-rated games. These aren’t mass mainstream ‘social casual’ games like Candy Crush, Spencer admits, “but we’re going to go do that work as well.”

For Todd Howard, game director at Bethesda Game Studios, the man responsible for directing Skyrim, the acquisition hasn’t changed all that much. At least “so far,” he says. “You don’t know what’s going to change once you start digging in. But we went into it pretty clear-eyed. So did they.” 

For Howard, Game Pass is the biggest change yet to how his team thinks about designing. It's a “creator-driven” platform that gives developers the confidence that whatever game they make is “going to find an audience of some heft. Before [Game Pass] you might want to make this game, and then you’re gonna sit in a lot of forecasting sales meetings, and say, ‘well, I don’t know if we can make that game’,” he says. “Game Pass opens up the creative canvas to many more types of games that may not find an audience in other ways.” 

Microsoft’s acquisition was helped by an unofficial partnership stretching back to 2002. Bethesda develops its games with Xbox as its lead console platform. And by securing such a strong conveyor of new games, Spencer has managed to spread his bets beyond a small but storied cluster of top tier franchises in Halo, Gears of War and Forza. “There was a time when we didn’t have a lot of first-party franchises,” Spencer says, “and now we do. It’s not just four games that we’re kind of alternating every year. And if one of them doesn’t hit, then we’re not like, ‘Boy, what are we doing?’” 

For that reason, exclusivity has been the elephant in the room ever since the buyout. It’s been confirmed that next year’s Starfield, arguably the biggest game of 2022, will be Xbox and PC only. Spencer says he sees the same for The Elder Scrolls VI. In his eyes, Xbox is the whole experience. Xbox Live. Game Pass. Cloud Gaming. Friends lists. Save states. “It’s not about punishing any other platform, like I fundamentally believe all of the platforms can continue to grow,” he says. “But in order to be on Xbox, I want us to be able to bring the full complete package of what we have. And that would be true when I think about Elder Scrolls VI. That would be true when I think about any of our franchises.”

As for what the game is or when we’ll see more, the team is tight-lipped.

“We’ve been designing,” Howard says offhandedly. Starfield’s technology base has been providing the next-gen features and tech to The Elder Scrolls VI, which, if you do the maths, will arrive some fifteen to seventeen years after Skyrim. Several lifetimes in game dev. Yet the “ultimate goal” for Howard is still the same. “I do this weird exercise that I like,” he explains. “You go back and you read a review of the first Elder Scrolls. And then you read The Elder Scrolls IV: Oblivion's, then you read The Elder Scrolls V: Skyrim's. You black out a couple things. And they read the same. 'You've stepped out and oh my gosh, it feels so real.' People change. Technology changes. But the ultimate goal is still to make it so that, when you boot the game up, you feel like you've been transported.”

Ironically, this month also sees another important Xbox birthday: the tenth anniversary of Skyrim. The game, re-released so many times in the last decade that it’s literally playable via Amazon’s Alexa voice assistant, has an almost undying legacy. It’s this game specifically that amps up the pressure for the sequel. “I think that would drive me crazy to try to say, ‘Okay, this is the thing you have to top,’” Howard says as he considers the game’s long life. “But then you realise, like, The Elder Scrolls VI has got to be a ‘decade game’. How do you make a game where you go into it, like, ‘people have to play it for a decade?’”

That problem is yet to be solved. 

Phil Spencer isn’t done yet. That much is clear. There are still potential acquisitions and other big moves in the works. Halo Infinite will finally be released in less than a month. Spencer is confident that the team at 343 Industries has done its best work. Starfield will be the most-anticipated game of 2022, and Game Pass and xCloud will ensure that more people than ever play this and every other Xbox game to come. And in places they never could before.

Xbox has found a way to bring its games to more gamers, without sacrificing that core joy for unfocused novelties. Boosted, at least a little, by gaming’s boom during the pandemic.

“I’m not going to create this aura of any foresight, but I will say some of the key things that we started investing in five or six years ago that have come to fruition in this time have really helped us,” Spencer says. Game Pass has enabled better access to more games. Back compat has alleviated supply problems so players can play new games on old boxes. xCloud has removed the need for those boxes entirely.

But there’s still more to do.

“I talked a little bit about some of the kind of genre and taste stuff and areas that I think we need to continue to invest in,” he continues. “Doesn’t mean we won’t invest in other stuff if the opportunity comes up… but there's a lot of great conversations happening and I'm encouraged”

While Spencer and his team are celebrating Xbox’s 20th anniversary, he’s aware that the future doesn’t involve him. “Clearly, as somebody who has been here for 33 years, I have more years behind me than ahead of me,” he says. “But the longevity of this team, the sustainability of this team, there’s nothing that’s more important to me right now than that.”

And then there’s succession.

It’s something Spencer is thinking about. Microsoft, in fact, is pushing him to. “You should do it when you think about the long-term health of the team,” he says. To make sure the team is in a good place. That the culture of the company is in a good place. “And that we’re making the right decisions on who to bet on. That has got to outlive me.”

Whether it’s preserving Xbox’s two-decade-long library of games; making a controller specifically for disabled players; creating a subscription for better and more varied experiences; a streaming platform with the potential to work anywhere with an Internet connection; Spencer’s legacy is far-reaching. The recent launch of Forza Horizon 5 – Xbox’s biggest ever – is especially timely. And both he and his team are secure in the knowledge that Microsoft doesn’t view Xbox as a “pawn getting played” on the business board. “We have a financial capability with this company to go and kind of do the things that we feel we need to do,” he says.

But this is video game development. Mistakes, delays, wrong bets – they come at any time. Xbox’s seven-year resuscitation shows that comebacks are neither cheap nor easy nor even guaranteed. And one year on from the beginning of the next console generation, PlayStation 5 still sits ahead of Xbox in terms of sales. The story isn’t over. Which is why the team will do what they’ve always done: take those risks, make those calls, even if it doesn’t turn out to be the right time for them.

“Cloud gaming was an idea that first came about years and years ago. We tried it a couple times, and things weren't ready,” Choudhry concludes. “I have a number of things that we’ve tried in the past and either the industry wasn’t ready, the business wasn’t ready, or consumers weren’t ready. But that’s all just unfinished business. And I don’t give up.”

Unfinished business indeed.

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