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Lets look at the 3rd party publishers in the industry by revenue & profit on their best years since 2009.
1. Activision Blizzard - Net Income ($2.6bn) & Revenue ($8.8bn).
2. Electronic Arts - Net Income ($3.0bn) & Revenue ($6.9bn).
3. Take Two - Net Income ($589m) & Revenue ($3.5bn).
4. Ubisoft - Net Income ($163m) & Revenue ($2.5bn).
I didn't include Tencent or NetEase because they're more than Gaming companies and it's hard to find their specific Gaming only revenues and profit. Also, it's a bit unfair because they literally control the entire Chinese market, nobody can get into the market without having to partner with a Chinese company so they have a huge advantage. I didn't include Japanese companies because they're smaller than all the Western ones, and Embracer isn't worth listing either.
"Gaming" is doing around $16bn for Microsoft right now on an annual basis in Revenue. PlayStation is doing around $25bn IIRC and Nintendo around $16bn as well but Nintendo's incredible 1st party sales and extremely high selling hardware business counters Xbox's 30% cut in store transactions. There is a reason why Fortnite, GTA, Call of Duty, etc. Are mentioned regularly in Fiscal Reports as growth drivers too.
Consoles making a loss is irrelevant to PlayStation and Xbox because they make it up in the billions from Xbox Live/PlayStation Plus and the 30% store cut. The Windows Store cut is irrelevant to Xbox if we're going to be brutally honest, Xbox is very unlikely to be making any worthwhile money there. So we'd have to weigh up if going 3rd party would replace the losses from the 30% cut of every single transaction made on the storefront and the loss of Xbox Live Gold.
Xbox currently makes $16bn annual and Activision-Blizzard makes around $8bn. Xbox would literally have to become the biggest third party publisher to make it worth their while to go fully 3rd party unless they want to lose billions in revenue and someone will say what about profits but the fact is that Microsoft doesn't report profits on anything aside from the overall business, seeing Xbox's revenue shave off billions would be a dire sight because we'd still not know profits, neither would the shareholders.
Look at Xbox's recent quarter, $3.6bn was "Gaming" overall and "Nearly $1bn" was Subscription Services (Which includes Xbox Live Gold). Hardware was $500m and "Content & Services" which also includes Subscriptions was $3.1bn. So if we round up "Nearly $1bn" then that means $2.1bn in the quarter came from "Content" and what 1st party content did Microsoft release in that quarter? Hi-Fi Rush, Age of Empires II for Xbox and Goldeneye HD. Hard to say how much 1st party content accounted for that $2.1bn" but given their releases I'd say it was a small amount. We'd have to account for 3rd party sales on other platforms too (such as Minecraft) but then they'd also take a 30% cut off Microsoft.
Even if we say half is Xbox IP sales (extremely unlikely), that would still make $1bn coming from 3rd party sales.
Annual Gaming is $15.4bn right now. Content & Services is around $12bn of that, 78% of the total in a Fiscal Year where Xbox released Grounded, Pentiment, Hi-Fi Rush, Goldeneye and Age of Empires II HD. How much do we think of that $12bn is Xbox Live Gold and 30% store cuts? Phil says Game Pass is around 15% of the "Content and Services revenue" so that would be $1.8bn so far in this Fiscal Year which Game Pass accounted for. The remaining $10.2bn would be Xbox Live Gold and "Content". Taking into account their 1st party in this Fiscal Year has been dire so far, it likely doesn't account for much, a few hundred million? If that? Maybe Minecraft makes up a large chunk? But it's only $30 so I doubt it. Also take into account any 3rd parties on other storefronts (Steam/PlayStation) also take a 30% cut from Xbox.
Lets think of Minecraft...Its best years have been around 20m in sales, it's currently a $30 title. Lets say $30 x 20m which gives us 600m at an maximum, if all of Minecraft's sales happened on the Xbox stores where Xbox would take 100% of the transaction, which we know is nonsense but we don't know the platform breakdown. Even if we say 600m for Minecraft (impossible) and 400m for 1st party (high estimate I would say) that would only give us 1bn which still leaves us with $9.2bn between 3rd parties and Xbox Live Gold.
I think it's safe to say that Microsoft would lose billions if they were to abandon hardware, in revenue and in profits.
Will fully multiplatform make up for that? Well...If they want to remain the same $16bn company then they'd have to make $8bn more than the current biggest 3rd party publisher in the industry, do we genuinely believe that XGS + Zenimax have that much more selling power than annual CoD + Diablo, Overwatch, World of Warcraft, Candy Crush, etc?
I don't...Not yet anyway, Xbox will need to acquire a ton more content...And they just failed at getting Activision-Blizzard.
They'd also have to grow their upcoming new IPs into major hits alongside revitalising some older IPs. They'd definitely need a Mobile developer.
The other option is Game Pass absolutely explodes but they'd need it on Steam, PlayStation and Switch. Even if Xbox killed their Hardware. Nintendo and PlayStation still have no reason to accept Game Pass on their service unless Microsoft gives them a nice split of the revenue/profits, Nintendo and Sony especially, won't want Game Pass taking away 3rd party sales from them, taking away that 30% cut.
- Is Xbox hardware less important to Xbox? Yes.
- Does that mean it's not important? No.
Game Pass needs Xbox hardware, Microsoft needs the 30% cut and unfortunately also need Xbox Live Gold.
There ain't no chance Xbox is going to be like "lets shave billions of revenue off our balance sheet" and watch Xbox turn from a $16bn revenue driver to a $10bn or less and be able to spin that as a good thing to the public or shareholders unless Microsoft makes a change and starts reporting profits on individual business units which even then isn't guaranteed to be a huge difference.
Xbox can't abandon Xbox hardware until they do multiple things.
- Have a large scale mobile presence.
- Massively increase Game Pass PC adoption.
- Find a replacement to Xbox Game Pass - Getting it on PlayStation/Nintendo isn't a guarantee.
- Grow some IPs to juggernaut levels and release them more regularly.
So to sum up.
- Do I need Xbox hardware? Nobody needs gaming hardware, but do I want Xbox hardware? Yes.
- Does Xbox need Xbox hardware? Absolutely, as of right now and in the near future.
The Hardware business is justified by the 30% cut, Xbox Live Gold and now, Xbox Game Pass.
Additionally, xCloud is literally powered by Xbox hardware, why is that? Because it makes it far easier to bring titles to xCloud and upgrade it faster, developers who develop for Xbox consoles will only have to make a few configurations to enable their games to work with xCloud. As opposed to Stadia's solution which required developers to custom port their titles to Stadia's specific hardware specifications and is one of the reasons that Stadia had such shit support.
If Xbox hardware is abandoned then xCloud might as well be abandoned too otherwise it will end up like every other Cloud failure, few developers want to go through the effort of making customised ports for such a tiny and insignificant market. And in that case, Microsoft would then have to go harder on native ports to Mobile to expand their business.
Last edited by Ryuu96 - on 03 May 2023
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