Phil Spencer on what the hell is happening in the games industry, exclusives becoming a risky business & lack of growth in industry leading to layoffs

[Puff]

Phil Spencer on what the hell is happening in the games industry

“The implications have human impact. And we should all reflect on that and think about it”

www.polygon.com

“The math on [making] a game has definitely changed,” said Phil Spencer, CEO of Gaming at Microsoft.

Polygon spoke with Spencer during the annual Game Developers Conference, and though the conversation ranged from the possibility of a handheld console to the trouble with closed platforms, one theme was inescapable: What the hell is going on with the games industry? And how will video game makers and publishers — Xbox included — get out of it?

Spencer’s views point to a collision of rising budgets, diversifying business models, and the exceptional financial risk now required to meet the audience expectations of a AAA release. He specifically pointed to the astronomical budgets of big-budget games, which have created a knot of problems that has been a challenge to disentangle. And for Spencer, the path forward is to abandon assumptions about exclusivity and attract new customers who have cooled on the console experience.

But first, for context, Spencer talked about how things used to work when budgeting and greenlighting a video game. The Microsoft exec has been producing games for long enough that he can remember when the financials were relatively straightforward. A publisher could set a sales goal (say, 800,000 units), set an earnout goal (how much money they want to make), and set the price of the game (usually $59.99). From there, a video game’s publisher and/or studio could set a budget.

However, the financial calculus has changed. In 2024, most games are sold across multiple storefronts, often steeply discounted mere weeks after release or included as part of subscription services on launch day. Plus, the games themselves take many years to create with the help of hundreds, if not thousands, of team members, sometimes spread across the world. All of this adds up, and as Spencer says, it can cost “$300 million to build a video game.”

Spencer explained how this cost forces three substantial problems: one for all big-budget games, one unique to console exclusives, and one that spans the entire industry.

1. The cost “really reduces the risk that publishers are willing to take.” Where previous games needed to sell a few hundred thousand units to justify their cost, new games may need to sell many millions of units. “If you’re a publisher, you know that’s a pretty big number in a world that already has a lot of video games coming.” said Spencer. “How are you going to establish this thing? Am I willing to take the red on new IP — on a new kind of game — when the earnout risk is that high? I think it impinges on the creativity of this industry, which I don’t love. Creativity is like the cornerstone of what we should be about in gaming.”
2. This cost is particularly prohibitive for exclusives that can only reach so many players. As Spencer explained in our conversation about the perils of exclusivity and walled-garden consoles, these games need to make additional money to justify the console maker subsidizing the cost of the console. As Spencer explained, “[The case for] exclusivity gets pressured as the cost of the game goes up.”
3. According to Spencer, the console market has not grown in the past year. Though Xbox, PlayStation, and Nintendo Switch consoles continue to sell, Spencer notes that many console gamers are simply upgrading — or, to put it another way, they’re not new to the market and won’t contribute to growth. And without new customers, “everybody else’s customer is your success state,” said Spencer. “You can’t succeed unless you draw in customers from other publishers and other platforms. And because you’re not finding new customers with the games that you’re building, everybody’s kind of fighting over the same-size pie.”

These problems have had a very real, substantial, and immediate human cost. The industry has seen consistent and mounting layoffs, including a particularly rough start to this year. Shortly after Microsoft’s acquisition of Activision Blizzard King, the company announced it would be laying off 1,900 workers from its gaming division.

Polygon asked Spencer if the ABK layoffs were part of this wider trend, or if there was something unique about the layoffs as they pertain to the current Xbox business.

“It’s a little bit of both,” said Spencer. “But I’ll say the thing that has me most concerned for the industry is the lack of growth. And when you have an industry that is projected to be smaller next year in terms of players and dollars, and you get a lot of publicly traded companies that are in the industry that have to show their investors growth — because why else does somebody own a share of someone’s stock if it’s not going to grow? — the side of the business that then gets scrutinized is the cost side. Because if you’re not going to grow the revenue side, then the cost side becomes challenged.

“We’re a business. I’ve said over and over. I don’t get any luxury of not having to run a profitable growing business inside of Microsoft. And we are that today. But just across the industry — you mentioned it, and in sitting here at GDC, I reflect on friends of mine in the industry that have been displaced and lost their jobs and how just, I don’t want this industry to be a place where people can’t, with confidence, build a career. So that’s why I keep pivoting back to: How does this industry get back to growth? But to your question, for us as Xbox or any of the teams that are out there, it is really an outcome of an industry that’s not growing. It can grow and it will grow again. But you see this time right now and the implications have human impact. And we should all reflect on that and think about it.”

As we talked through Microsoft’s plans for growth — both with the company and the wider games space — Spencer continually returned to the idea of exclusivity. This year, Xbox Game Studios Publishing has begun porting more and more former exclusives to other consoles, like Nintendo Switch and PlayStation 5. For Spencer, this is a way to bring more players (and sales) to old games, but it’s also a way to break some old industry habits, like exclusivity, that may be responsible for the stagnation of the console market.

“[Consider] two years of lack of growth in the gaming industry at the top line. You start to ask yourself, Well, I don’t want to grow at the expense of the industry, I want to grow as part of the industry, and what do we need to do as an industry to get back on the growth path?

“I will say, every decision we make today and tomorrow is for the better of Xbox,” said Spencer. “I know sometimes things get weaponized, that there’s some evil in the background that’s making us do things — ‘Phil hates exclusives and that’s why we’re like PlayStation and Switch now.’ Every decision we make is to make Xbox stronger in the long run. It doesn’t mean everyone’s going to agree with every decision we make. But it is fundamental for how we make decisions.”

For Spencer, moving toward the future is about walking — in some part — away from exclusivity.

“This notion that Xbox can only be this one device that plugs into a television isn’t something we see in the Gen Z research. Because nothing else is like that for them. Some of them will have an iPhone, some will have an Android, but all the games and everything is the same. I can still get to TikTok on both of them, at least for now. All of their stuff is available wherever they want. So for Xbox, our brand pivot — as we attract and maintain relevance with a younger audience — is ‘Xbox is a place where I can find the great games I want to.’”

Also...

In an interview with Polygon, Spencer talked about the “lack of growth” within the gaming industry as well as Xbox making sure its fans can get all the games they want, wherever they want.

“It’s a little bit of both,” Spencer told Polygon. “But I’ll say the thing that has me most concerned for the industry is the lack of growth.


And when you have an industry that is projected to be smaller next year in terms of players and dollars, and you get a lot of publicly traded companies that are in the industry that have to show their investors growth — because why else does somebody own a share of someone’s stock if it’s not going to grow? — the side of the business that then gets scrutinized is the cost side. Because if you’re not going to grow the revenue side, then the cost side becomes challenged.”


On top of that lack of growth Spencer sees, he mentioned Xbox being a business first. With that comes the need to answer to shareholders and executives that require the company to be profitable.


“We’re a business,” he said. “I’ve said over and over. I don’t get any luxury of not having to run a profitable growing business inside of Microsoft. And we are that today. But just across the industry — you mentioned it, and in sitting here at GDC, I reflect on friends of mine in the industry that have been displaced and lost their jobs and how just, I don’t want this industry to be a place where people can’t, with confidence, build a career.


“So that’s why I keep pivoting back to: How does this industry get back to growth? But to your question, for us as Xbox or any of the teams that are out there, it is really an outcome of an industry that’s not growing. It can grow and it will grow again. But you see this time right now and the implications have human impact. And we should all reflect on that and think about it.”

Phil Spencer Says Activision Layoffs Were Due To Lack Of Growth And Need For Profits

In a new interview, Xbox head Phil Spencer says that the layoffs at Activision Blizzard were due in part to Xbox needing to be profitable

insider-gaming.com

They previous said the layoffs were due to "areas of overlap"

Phil Spencer blames capitalism for games industry woes: 'I don't get [the] luxury of not having to run a profitable growing business'

Spencer said publicly traded companies have to show constant growth or else nobody will give them money.

www.pcgamer.com

 

[Nhomnhom]

Nothing could be better for the game industry than this clown going away.

"Console market has not grown"... PS5 and Switch breaking all kinds of records... I wonder why the console market has not grown.

 

[ethomaz]

A failure as Xbox boss can’t be taken as opinion imo.
And I never saw a guy having so many second changes like him and he messing every single one.

His biggest skill was lying (and convincing) to the vocal Xbox crowd on Twitter.

 

[Fenton]

 

[Dr Bass]

Phil Spencer is saying the next year is projected to be smaller ... and this is the same guy that said good games won't increase sales.

He is so freakin clueless. why is he not fired yet? The answer is the rest of MS is just as clueless, that's why, but when does this end?

 

[Entropi]

Xbox sucks at exclusives, Phil; that is why you need to reach as many customers as possible to profit.

 

[shrike0fth0rns]

Phil Spencer on what the hell is happening in the games industry

“The implications have human impact. And we should all reflect on that and think about it”

www.polygon.com

1. The cost “really reduces the risk that publishers are willing to take.” Where previous games needed to sell a few hundred thousand units to justify their cost, new games may need to sell many millions of units. “If you’re a publisher, you know that’s a pretty big number in a world that already has a lot of video games coming.” said Spencer. “How are you going to establish this thing? Am I willing to take the red on new IP — on a new kind of game — when the earnout risk is that high? I think it impinges on the creativity of this industry, which I don’t love. Creativity is like the cornerstone of what we should be about in gaming.”
2. This cost is particularly prohibitive for exclusives that can only reach so many players. As Spencer explained in our conversation about the perils of exclusivity and walled-garden consoles, these games need to make additional money to justify the console maker subsidizing the cost of the console. As Spencer explained, “[The case for] exclusivity gets pressured as the cost of the game goes up.”
3. According to Spencer, the console market has not grown in the past year. Though Xbox, PlayStation, and Nintendo Switch consoles continue to sell, Spencer notes that many console gamers are simply upgrading — or, to put it another way, they’re not new to the market and won’t contribute to growth. And without new customers, “everybody else’s customer is your success state,” said Spencer. “You can’t succeed unless you draw in customers from other publishers and other platforms. And because you’re not finding new customers with the games that you’re building, everybody’s kind of fighting over the same-size pie.”

Lmao what a his opinions on exclusives changes every yr

 

[shrike0fth0rns]

Phil Spencer is saying the next year is projected to be smaller ... and this is the same guy that said good games won't increase sales.

He is so freakin clueless. why is he not fired yet? The answer is the rest of MS is just as clueless, that's why but when does this end?

Won’t be smaller for ps or Nintendo. 2025 is the nail in the Xbox console coffin. Ps will ride into 2025 on new hardware and big games will drop. Nintendo will drop hardware and possibly games. Xbox will drop some mid games that will eventually go everywhere else and no new hardware, declining sales, market share, mindshare, physical presence in the industry .

 

[Bryank75]

All the decline in consoles is due to one brand: Xbox.

The other two brands are growing.

Saying consoles in general have not grown may technically be correct, it ignores the details and shrugs off Xbox / Microsofts blame / failures onto two competitors that have been very successful in this supposedly stagnant market.

Also if 150 million customers is not enough...no number will be. You are simply not managing costs properly.

 

[Gediminas]

Nintendo laughing to the bank.
Playstation also were raking billions in profit.

this guy has no clue what success is. his name is Phil 'Failure' Spencer snake oil salesman.

 

[xollowsob]

This cost is particularly prohibitive for exclusives that can only reach so many players.

The cost “really reduces the risk that publishers are willing to take.” Where previous games needed to sell a few hundred thousand units to justify their cost, new games may need to sell many millions of units.

This guy is a clown.
The reason they need to sell millions is because of YOUR choices in the industry. Stop selling 4k slop with RT and sweet baby stories and sell simple, cost effective games.

Not every game needs to be a huge blockbuster AAAAA Michael Bay movie with mocap and Hollywood actors.

Surely he must see that the series S has better than the XSX. Not because people don't want premium hardware, they do, but because tech that we have is good enough for the vast, vast majority of gamers.

If a new player entered the console space and dropped a £250 console that was powerful enough to play modern games at 1080p/60fps, it would sell like hot cakes. Combine that with studios making simple, cost effective games and you own the industry.

And without new customers, “everybody else’s customer is your success state,” said Spencer.

There were enough customers in the console space to sustain profitability for a long, long time. You screwed the pooch by being a fucking imbecile and not realising the gaming industry isn't like the rest of the tech or entertainment industries.

Spencer notes that many console gamers are simply upgrading — or, to put it another way, they’re not new to the market and won’t contribute to growth.

One contradicts the other; upgrading is additional spend. Unless of course that Spencer means upgrading out of the console space; PC, Mobile or just leaving the hobby. Personally, I believe the writing is on the wall for the future:

Sony goes multiplat with PC/PS
Microsoft go 3rd party pub
Nintendo stick with handhelds.

All three have the possibility of shitting the bed and crashing out.

The most frustrating bit is that Microsoft could focus all it's energy on Series S, making it more cost effective to produce and order 90% of their studios to make games with setting of 1080p/60fps. With the studios they earn they could churn out dozens of isometric RPGs, racing games, demolition racing games, fighters, scrollers, 2d beat em ups, road rash style games, RTS, point and click, etc etc.

Then the remaining 10% make 3rd party showcase blockbusters like TES, CoD, Halo etc

 

[klomzi]

Playstation also were raking billions in profit.

No they are not, that's the problem. They are making more money than ever, but barely any profit.

Nintendo on the other hand makes a ton of profit because the games they make doesn't cost in the hundreds of millions.

 

[Gediminas]

No they are not, that's the problem. They are making more money than ever, but barely any profit.

Nintendo on the other hand makes a ton of profit because the games they make doesn't cost in the hundreds of millions.

stop writing FUD

 

[Gods&Monsters]

He's the reason why the industry is not growing. His business is failing so he's blaming the whole market.

He's also always worried about Gen Z and growing the market when he can't even keep his own customers

 

[klomzi]

stop writing FUD

Stop rejecting reality just because you like Playstation.

Here is some info

Sony plunged $10 billion after its PS5 sales cut. But a bigger issue is its near decade low games margin

Around $10 billion of value was wiped off Sony's stock this week after it cut its sales forecast for its flagship PlayStation 5 console for the fiscal year.

www.cnbc.com

 

[FatKaz]

Phil also said he wants other storefronts on xbox.

It would be absolutely humiliating for sony if steam or epic games store become available on xbox, you might able to play playstation exclusives on xbox assuming of course things just run as they would on pc and doesn't require extra dev effort.

Sony deserve that humilation.

 

[Gods&Monsters]

Stop rejecting reality just because you like Playstation.

Here is some info

Sony plunged $10 billion after its PS5 sales cut. But a bigger issue is its near decade low games margin

Around $10 billion of value was wiped off Sony's stock this week after it cut its sales forecast for its flagship PlayStation 5 console for the fiscal year.

www.cnbc.com

They were paying for Bungie with their Playstation profits. Totoki threw them under the bus so he could fire 900 people. Without that they were making all-time records.

You fell for the FUD.

 

[Nhomnhom]

Stop rejecting reality just because you like Playstation.

Here is some info

Sony plunged $10 billion after its PS5 sales cut. But a bigger issue is its near decade low games margin

Around $10 billion of value was wiped off Sony's stock this week after it cut its sales forecast for its flagship PlayStation 5 console for the fiscal year.

www.cnbc.com

You clearly don't even understand what you are posting.

Changes in the price of Sony shares has little to do with how profitable the PlayStation business is.

 

[klomzi]

They were paying for Bungie with their Playstation profits. Totoki threw them under the bus so he could fire 900 people. Without that they were making all-time records.

You fell for the FUD.

Now you are making up facts and using the word FUD as buzzword.

 

[Gediminas]

Stop rejecting reality just because you like Playstation.

Here is some info

Sony plunged $10 billion after its PS5 sales cut. But a bigger issue is its near decade low games margin

Around $10 billion of value was wiped off Sony's stock this week after it cut its sales forecast for its flagship PlayStation 5 console for the fiscal year.

www.cnbc.com