After Microsoft announced a 3% global layoff in May this year, with the gaming department becoming one of the hardest hit areas, and canceled many games in development, the market generally believed that the Xbox brand was in some kind of crisis.Bloomberg NewsIt is alleged that the root of the problem may be that Microsoft executives have set "unrealistic" profit targets for its gaming division in recent years.
The 30% target far exceeds industry standards, and "accountable profit margin" becomes an internal pressure.
Citing anonymous sources, the report stated that Microsoft, led by Chief Financial Officer Amy Hood, implemented an "across-the-board goal" for the Xbox division in the fall of 2023, requiring it to achieve a 30% profit margin. The source stated that Microsoft internally referred to this as "accountability margins," meaning that the relevant department would be held accountable for failing to achieve the profit margin target.
Bloomberg News reporter Jason Schreier pointed out that this 30% profit margin target is significantly higher than the recent average profit margin for the gaming industry, which is between 17% and 22%, as reported by S&P Global Market Intelligence. Schreier further noted that the Xbox division's own average profit margin over the past six years has only been between 10% and 20%.
According to S&P Global analyst Neil Barbour, the 30% profit margin target is usually only achievable by "truly top-performing publishers," and the Xbox gaming division had a profit margin of only 12% in the first nine months of 2022, which means that setting a 30% profit margin target actually puts tremendous pressure on the Xbox division.
Profit pressure after large acquisitions
It’s worth noting that this new high-profit target was proposed in 2023, when Microsoft had just completed its $687 billion acquisition of Activision Blizzard and incorporated heavyweight gaming assets such as Call of Duty and Diablo.
In 2020, Microsoft also acquired Bethesda's parent company ZeniMax, and incorporated game series such as "The Elder Scrolls" and "Fallout" into the Xbox brand.
Obviously, after investing huge amounts of money in expansion, Microsoft's top management has also put forward higher requirements for the financial returns of the gaming department.
Will the Game Pass model impact profitability? Will the future favor lower-cost projects?
Since 2018, Microsoft has been adding all of its first-party games to its Game Pass subscription service on the first day of release. However, Bloomberg News has learned that this model has made it difficult for some games to reach their 30% profit margin target.
While Xbox offers developers an internal points system called "member-weighted value," which factors in factors like the total number of hours Game Pass subscribers spend in-game, this formula tends to favor multiplayer games.
Sources also revealed that Microsoft may be more inclined to fund projects with "lower development costs" and "proven to generate revenue" in the future, rather than innovative projects that carry higher risks. This means that high profit margin targets may lead to a readjustment of Microsoft's internal game development strategy and may even affect the development strategy of the Game Pass service.
Microsoft's response and recent strategic adjustments
In response to this report, a Microsoft spokesperson told Bloomberg News that the company defines success differently for different games and projects, and sometimes has to make difficult decisions, including halting game development in order to shift resources to projects that are "better aligned with the company's direction and priorities."
In addition to possible internal strategic shifts, some recent public actions by Xbox also seem to be related to the pursuit of higher profits. This includes porting some first-party games, such as "Forza Horizon 5" and "Indiana Jones and the Great Circle", to the consoles of its main competitor Sony.PlayStation 5 platform.
In addition, after raising the price of Xbox consoles in the United States last month (the second time this year), Microsoft also lowered the subscription fee for Game Pass Ultimate in early October.A substantial increase of 50%Microsoft recently increased the price of Xbox development kits by $500. These measures may be paving the way for achieving a high profit target of 30%.
