I've seen a lot of talk about the console business essentially failing to grow in a long time. It has a relatively stable number of customers, but if you look at the install base for each generation over the last however many years, the needle hasn't moved significantly. Phil Spencer explained Microsoft’s recent layoffs in terms of the industry's failure to grow the gaming audience. Do you agree with that sentiment?

Yeah, well the numbers don't lie. Let's not forget hardware is a messy business. If you extract hardware and look at the P&L (profit and loss) on its own, it's brutal, but it's the facilitator to the software and services that drive the industry. You've got a generation coming through now, and this is the concern maybe Phil's talking about, that’s more likely to be utilizing their smartphone for everything, including gaming.

From the perspective of what the console means, it was a plug and play. It was easy, it was powerful. But it goes back 35, 40 years. What you're now seeing and certainly hearing from a company like Microsoft is, does the cloud replace the need for bespoke hardware? Does streaming change the way we game to the devices that we're now used to, in particular smartphones? I don't think people are gaming less, they're just gaming differently. And more and more you're seeing a generation coming through that is not about to sit down for an evening in front of the television with whatever the game du jour is this week.

And it's always, as we had suggested and thought — maybe feared — going to be snack-size stuff. What can I do in the next 10, 12 minutes? What can I do on my lunch break? And there's so much pressure on the gaming experience from everything else in this world, this unbelievably and perhaps overconnected world dominated by social media content, TikTok videos. Gaming, while still robust — let's not forget, we're probably $200 billion this year — it's fragmented across regions, across different content, and there's only so many hours in a day and there's so many choices for us to use those hours. Information, entertainment, more and more content, YouTube, streaming channels — for me it's Apple TV, Paramount Plus, Peacock, Amazon Prime, go on and go on. And linear television sits in the background now, but with that immense opportunity to sit and gorge on content rather than interact with a console.

The broader picture — and we certainly feared during my time even at Microsoft — we were saying then, in 2007, is this the last console generation? Do televisions start to come with chips that can play games and you just need a controller? Is the PC, as it was then, a renaissance? And why do you need a bespoke piece of hardware that costs us, Microsoft, billions upon billions of dollars to install, and you hope to hell you get an attach rate of software and something out of your Xbox Live, your connected service, that would justify the losses, the hemorrhaging of cash that hardware costs you?

And then you think back now to music and gosh, Zune and iPod — and I go back to Discman and Walkman — bespoke devices that play music. Well, we don't have those anymore. And so now, whatever's streaming out of my phone on Spotify, or I listen to a lot of music on SoundCloud, but I don't have anything that plays music. Somebody gave me a DVD the other day, I have nowhere to actually look at this. Now the smartphone dominates. So gaming isn't immune to these changes in technology and viewing, listening, and playing habits.

And what are we doing? Well, we're not in the living room anymore. We're back in the bedroom with our YouTube influencers, our TikTok creators, and it's about content on demand. And we are going through the same thing in sports. So you're seeing all of these different pressures, if you will, on this next generation that Phil's talking about. Gen Z is coming through and they're going, why do I need to spend four or 500 bucks on a bespoke piece of gaming hardware when I've got my smartphone, or I got my PC or my Mac, and I can do things there with a pretty decent controller?

So I think that's what we're facing. In particular Microsoft with Azure is thinking, are we now finally ready for cloud gaming? Are we finally ready to just crank on our 8K television, get in our gaming menu with 10,000 games available? Who's playing what right now? Click, go, play.

You mentioned that even as early as 2007 internally you were wondering, is this the last console generation?

Yeah, the Xbox 360, during the back end of that. You have that concern. If you were thinking then of something that launched the mid-2000s, what does the end of the decade look like and how long the cycles were — usually five, six years — and what does it look like in five, six years? Are we going to need another? Well, the answer ultimately was yes, but the questions were being asked then. And why? Because you've got faster, cheaper broadband, more ubiquitous in just about everybody's home. I always remember this: you're looking at music and the lessons learned, and all of a sudden streaming of high definition movies was starting to happen as we had those capabilities at home. Again, gaming wasn't immune to this. The thing that kept us going was, games were 30 gigabytes then or 40 gigabytes and music was four megabytes, and a movie you could stream, but it was linear and passive.

Do you think this is the last console generation?

Well, it's a great question already. PS5 saying, yeah, maybe we could sunset this thing, but no mention of a PS6. Now look, Sony is very much a hardware company, so I would say that that's your barometer company. Microsoft, not so much. Microsoft I'm sure would love it if everything moved into the cloud. The only thing that Microsoft doesn't get to play in as well as anybody else is the smartphone business, right? Because that's where Apple, Google, the handset manufacturers will benefit from enormously and they already are. They're making tens of billions of dollars without really trying in gaming with the 30% royalties.

But I think it's a real serious question that's being asked I'm sure in Tokyo, in Redmond, Washington, in Kyoto. That's what everybody's working on right now, because when you start off that next generation, you've got to be ready to absorb billions of dollars in losses. And is the industry, given all the layoffs and everything we're going through right now, is the industry ready for that? Look at Sony laying off 900 people — a lot there in the UK. My two eldest daughters work at EA, they're all right, but they're always looking over their shoulder.

You just never know. And tech broadly, Silicon Valley broadly, you just don't know what's going on anymore as everything evolves and inflation hasn't helped. A lot of companies, gaming companies in particular, did not exit Covid well, hired too aggressively thinking this thing was never going to wind out again. And of course it did. I always call it the Peloton theory of like, oh, we're forever going to be at home and we're forever going to be playing games and jumping on a bike. Well, no, we're not. And if you thought that, as did Peloton, and you geared up for that future, then that's why they're in such a financial mess right now.

So I think that in answer to your question, those are the questions that are being asked right now and it'll all be tied around, do we continue to develop silicon? The role of AI, what does that mean? You can't look away from that. Are these companies willing to go another round of multi-billion? And at the same time you're gearing up for another cycle where gamers may not embrace the console and just say, you know what? I don't need this, times are tough. I've got my phone, I'm enjoying what I've got on my phone. There's plenty of games I can play. Failing that, of course I have my PC or my Mac, I can go do whatever I need to do there. And do I really need to be spending what could be five, $600 on a bespoke piece of hardware just to play games? So both the companies and gamers themselves are asking this question.

Peter, it very much sounds like you are suggesting the era of consoles might be coming to an end. 

What I'm saying is the questions are being asked, as they have been for the last 20 years. Are we ready to gird our loins financially for battle and all of the cost of development, silicon development? What is it that PS6 can do that PS5 can’t that would make people jump from PS5, or same with Xbox, same with Switch, right? God forbid it's just incremental. And I think that the companies are also looking at that. What can we do to extend this life cycle?

And then if you're Microsoft and you're Phil Spencer, you've got Satya Nadella coming in and saying, alright, what is the future here and how does this play into the biggest strategy of cloud with Azure, with AI? What are we doing with AI game development? How do you make your games faster, cheaper, with less people? These are all the questions I think are being asked.

We know Nintendo is making a next-generation console. Most people assume Sony will make a PS6. It feels like there are question marks over whether Microsoft has another meaningful generation of Xbox in it, though.

I'm not being a doomsayer. What I think Phil is doing is setting up some smoke signals that we're thinking very differently. And then the idea of, well, we bought Activision Blizzard King, but we may not make those games ultimately exclusive on our platform. There may not be a platform, and we turn into what we really had at our roots, which is a software and services company.

While you were at Sega you witnessed the company go from first-party to third-party after the failure of the Dreamcast. Can you comprehend Microsoft going third-party in the same way?

I think the words first-party and third-party may just disappear. It'll just be, we make great games and we deliver a phenomenal service on which you can play our games, and first-party and third-party, those are legacies of hardware.

I think the question that will be being asked from Nadella and the executive team to Phil is, alright, what we've just given you, whatever it was, $69 billion, but what does the next five to 10 years look like, Phil? What is the long-term strategy? Exactly what's going on right now? And yeah, they'll be like, alright, we're thinking about what the next-generation of hardware could look like. But the challenge will undoubtedly be coming from Nadella: what does it look like without hardware? And so that's going on right now, and, what do we look like if we're more like EA than we are Sony? So that's what I'm sure is going on.

Microsoft recently released some of its exclusives on PlayStation and Nintendo Switch. There are reports Microsoft is considering bringing other, more high-profile games to rival consoles. When you were in charge of Xbox, would you have ever done this? And why do you think Microsoft is doing it now?

I think they're dipping the toes in the water to see how all of this works. And you do it a little bit tentatively and go, all right, let's test the ecosystem here. We're not throwing Halo out there.

I do remember conversations about Halo on PlayStation. You're constantly looking. You get into wargaming, which we did prior to the launch of Xbox 360 as a team. We went away for a couple of days and I played the role of Ken Kutaragi, and this was fascinating to me. McKinsey, the consultancy group, set this up and the idea is you understand your competition a little better when you do some wargames.

My job was, how would PlayStation react to Xbox 360 and what would they do, as they did to me in Dreamcast with the fear, uncertainty, and doubt? We went through two days of this and we learned a lot. It scared us because you're stunned to figure out, well wait, I hadn't thought of that. You mean they might do that to us or this might happen? And so you're constantly thinking about every scenario, as ridiculous or disruptive or radical as it sounds. You have to, absolutely have to.

Once upon a time you stood on a stage and showed the world a Halo 2 tattoo to promote Xbox. Now, do you see Microsoft releasing Halo on PlayStation?

Look, if Microsoft says, wait, we're doing $250 million on our own platforms, but if we then took Halo as, let's call it a third-party, we could do a billion… You got to think long and hard about that, right? I mean, you just got to go, yeah, should it be kept? It's a piece of intellectual property. It's bigger than just a game. And how do you leverage that? Those are the conversations that always happen with, how do you leverage it in everything that we would do?

It's had its ups and downs, but look, Xbox wouldn't be what Xbox is without Halo. But yeah, I'm sure those conversations are happening. Whether they come to fruition, who knows? But they're definitely happening, I'm sure.

Do you think any potential backlash from the hardcore Xbox community at such a decision would make a meaningful difference to Microsoft?

The question would be, ultimately, is that reaction enough not to make a fundamental business decision for the future of not only Microsoft’s business, but gaming in itself? Those hardcore are getting smaller in size and older in age. You've got to cater to the generations that are coming through, because they're going to drive the business over the next 10, 20 years.

Interview With Peter Moore on Xbox

GamesBeat: You hear similar things coming from the console guys. Phil Spencer talked about the decisions they’ve made to take some games to Sony’s platform, to other platforms. One thing he said was that what everyone needs is for the market to grow. When the market’s not growing, it explains a lot of the suffering going on, and the need to rethink.

Layden: Absolutely. When your costs for a game exceed $200 million, exclusivity is your Achilles’ heel. It reduces your addressable market. Particularly when you’re in the world of live service gaming or free-to-play. Another platform is just another way of opening the funnel, getting more people in. In a free-to-play world, as we know, 95% percent of those people will never spend a nickel. The business is all about conversion. You have to improve your odds by cracking the funnel open. Helldivers 2 has shown that for PlayStation, coming out on PC at the same time. Again, you get that funnel wider. You get more people in.

For single-player games it’s not the same exigency. But if you’re spending $250 million, you want to be able to sell it to as many people as possible, even if it’s just 10% more. The global installed base for consoles–if you go back to the PS1 and everything else stacked up there, wherever in time you look at it, the cumulative consoles out there never gets over 250 million. It just doesn’t. The dollars have gone up over time. But I look at that and see that we’re just taking more money from the same people. That happened during the pandemic, which made a lot of companies overinvest. Look at our numbers going up! We have to chase that rocket!

We’re not doing enough to get heretofore non-console people into console gaming. We’re not going to attract them by doing more of the shit we’re doing now. If 95% of the world doesn’t want to play Call of Duty, Fortnite, and Grand Theft Auto, is the industry just going to make more Call of Duty, Fortnite and Grand Theft Auto? That’s not going to get you anybody else.

GamesBeat: When we get to the subject of why we’re having such a tough time in games, there are things that go way beyond blockchain. I felt like last year, all the layoffs–they were bigger than normal, but it just meant it was a bad year. The layoffs that are continuing this year make me think this is an unusual catastrophe. What’s going wrong here? Why are we in such a funk?

Layden: We’ve been around this tree for a very long time. There are some dynamics that we haven’t seen before. It’s the biggest thing in the world. It’s a $240 billion industry. It employs more people now than it ever did before. During the pandemic, particularly here in Silicon Valley, we saw the Googles, the Amazons, the Facebooks, the Apples just sucking up engineering resources left and right. They were in lockdown, but they were hiring. Nothing fuels this industry like FOMO. If you look around and see that all your competitors are hiring engineering talent, you want to make sure you get some too before it all evaporates.

There was a huge hiring spree, and because of the pandemic, it’s not like you needed to find them a desk or an office or a chair or anything. You just hired them and they sat at home and wrote code or made marketing plans. That exploded. There was the metaverse thing going on. Chief metaverse officer was a job for a hot minute. Money was essentially free. All this money sloshed into the system. All the excitement about what we could do. At the same time, revenues increased across the interactive space because we had a captured audience. They couldn’t leave the living room. They spent more time online. They spent more money in the stores. All indicators, the numbers go up.

Then it was over. Or we called a timeout on the pandemic, anyway. People went back into the world. Consumption dipped to normal levels. It’s dropped, but it’s not lower than 2018. It’s normalized. The big companies laid off tens of thousands of people, whether Amazon or Netflix or whatever.

GamesBeat: It seems like at least those big guys are in a boat where they have to hire them all back, because AI is creating another boom again.

Layden: It’s crazy how you can lay off 900 people and have 300 open recs on your website. There’s a mismatch between what companies think they need and what they actually have. What did they say, 12,000 or 13,000 last year and we’re already up to 7,000 just in February of this year?

GamesBeat: I think it was 10,500 by one set of numbers and then 8,000 already this year.

Layden: Does it stop tomorrow? No. I think we’ll see more. Today was EA, right? Yesterday was Sony. It’s going to continue to occur. What’s remarkable, when you look at the bottom line of these companies, some of them are hitting record revenues, record profitability, and laying off 8% of their workforce. Other than a mad chase for profitability, I don’t understand it.

GamesBeat: It’s maybe made people more suspicious about AI. Is AI causing this? It doesn’t seem like it’s ready yet, though.

Layden: AI is a convenient throwaway line. I think it has nothing to do with what’s happening at all. Maybe around the margins, around places where private equity is getting skittish and VC doesn’t want to go because they don’t know about the AI component. But deep down in the companies that have been building stuff for decades, that are experiencing layoffs, it’s not an AI thing. It’s just, “We took on a lot of capacity because we thought we were going to build all these things for a population that was stuck in their living rooms.” Then that growth curve dropped when the world came back.

Look at live service gaming. I can’t imagine a game industry where you have 20 live service games, all of them incredibly successful. There’s just not enough energy around that. Remember back in the day when we played Ultima? Then Everquest came, and everyone left Ultima to play Everquest. Then everyone left Everquest for World of Warcraft. It’s difficult for multiple titles in a service or a persistent world category to be successful.

GamesBeat: I don’t know whether I’ve become overly optimistic, but I feel the need to remind people that it’s not going to be a complete disaster. Things are going to get better after we hit bottom. For a lot of people, they seem to think this is bottomless, that it will go on forever. But every week I write about companies raising money. Amir Satvat is one of the people who’s been monitoring jobs. He’s tracking 2,000 companies now, and they do have job openings. I think he thinks that hiring is going to exceed layoffs by September. At some point in the pipeline it will make sense to have an improvement in the overall situation. Do you think people have been overly pessimistic? At some point do we have a recovery?

Layden: Layoffs are always a lagging indicator. Layoffs occur trying to solve a problem that happened a year ago. You had this plan and it didn’t work out. You feel you have people now who aren’t in line with the new course correction. Layoffs don’t address today’s problem. They address decisions made in the past that may not have been the right decision. Let’s understand it’s not taking the temperature of today.

I agree with Amir’s point. We talked about this earlier. All these thousands of layoffs over here, all these open recs over there across the industry. It’s a mismatch of talent to requirements. That will level out over time. The demise of the industry has been predicted so many times in the last 20 years that it’s almost a joke. We’re fine. I don’t want to sound like a broken record, because I’ve been saying this for five years, but it’s the rising cost of development. That’s the existential threat. It’s not “live service gaming is tricky” or anything else. When we’re in the $250-300 million to make a game world…

I’m giving a talk about this tomorrow at Stanford. Gaming is reaching its cathedral moment. There was a world hundreds of years ago where they built cathedrals, massive edifices to God, throughout Europe and around the world. Eventually, indentured labor only takes you so far. Then it stopped. It became prohibitively time-consuming and expensive. They were wonderful and beautiful. You can look at any of them across Europe and think, “That’s a marvel.” But we don’t make them anymore. We don’t make them because the math doesn’t work. If you have four walls and a roof, you can call it a church, and God will come visit. You don’t need the cathedral anymore.

I’m afraid that we’ve bought into the triple-A, 80 hours of gameplay, 50 gigabytes of game, and if we can’t reach that then we can’t do anything. I’m hoping for a return of double-A gaming. I’m all for that.

GamesBeat: Matthew Ball’s most recent essay had a few good points that helped paint a picture for people. We have 10% inflation. We have larger teams than we used to. We want to put all these cool new things in games and make them bigger, 100 hours of gameplay or more. But we’re still selling them for $60.

Layden: Crash Bandicoot, back in 1998, cost $49.99. But it probably cost less than $7 million to make. It sells 10-15 million units? Well hey. In today’s world, God of War costs more than $100 million to make, and yet you can only charge $59.99. What happens to your break-even point? That’s why, back in the late ‘90s, there were a lot more Ferraris in the parking lot at game developers. The profit sharing explodes. Price elasticity has been a huge problem in gaming.

GamesBeat: I remember people saying, many years ago, that the games business is better than movies, because you could make a game for $10 million and get $100 million back. At the same time Hollywood was making movies for $90 million to get the same $100 million. Now games have caught up.

Layden: Right. Profit sharing ain’t what it used to be.

GamesBeat: What do you see as the solutions to drive for?

Layden: Granted, I’m an old man. We have our own nostalgia. But I look back at the PS2 era, and there was so much variety. You had God of War and Assassin’s Creed. But you also had Loco Roco and SingStar and Dance Dance Revolution. You had this entire spectrum of entertainment opportunities. At $7-12 million a throw, why not make a bet and see what happens? Katamari Damacy, for Christ’s sake, you couldn’t get that built today because you can’t even explain what it is. But now, when every bet is triple-digit millions, risk tolerance is super low. You end up with copycats and sequels and not much more.

GamesBeat: I look at what’s structurally different about the industry now. We have these big co-development companies, like Streamline and Keywords. Keywords is more than 10,000 people. There are 3,700 people at Virtuos. Those didn’t exist before. Maybe game companies should make use of them. I think they are making use of them, but the big companies still seem caught in a hire-then-fire cycle. Perhaps not as much as they used to, but they’re still doing it.

Layden: Less, actually. If you look at the growth of Keywords or Streamline or Virtuos, getting more business all the time–if you look at the credits at the end of an Assassin’s Creed or The Last of Us or any of these big games, you used to be able to get through the credits in about 30 seconds in the PS2 days. Now there are thousands of people in the credits, and you’ll see all of these outsource companies, supplemental VFX houses, supplemental graphics houses. They’re outsourcing a lot of it. That happens more and more. For a company that’s great. It’s talent that doesn’t sit on their P&L. It’s not an FTE. You don’t have long-term employee liability. That has expanded, and those sectors are growing dramatically.

There’s going to come a time, in my lifetime, where game development becomes more like movie development. When you make a movie, you hire all the components in. You create the Fast and Furious company. All these people come together. You make the movie. Then everyone disperses. I think that’s the only way to work in the future. The idea of having 300 people sat in a massive warehouse waiting for the workflow to come by them is just not going to be efficient anymore.

GamesBeat: Waiting for Neil Druckmann to say, “This is the next game.”

Layden: There’s always going to be the creative core. You can’t get away from the creative core. But it’s like movie studios. Movie studios used to have screenwriters, actors, musicians, composers, carpenters, electricians, all on salary. They’d punch in every day at MGM and wait to build the set. In the meantime they’re having coffee.

GamesBeat: There’s a role for another structural difference now, too, which is VC. The game VCs are here. They still have money. But they’re getting gunshy. They’re investing 75% less than they did last year.

Layden: And they want to go late round. I talked to a lot of VCs at DICE. They’d rather come in late. Guys, private equity is supposed to come in late. VC is supposed to come in first. That’s not venture capital.

GamesBeat: They should be funding the original IP.

Layden: Absolutely. That’s why you come in early. You get a better back end. But they say, “We’d rather come in late and get a smaller back end with more predictability.” Aha, okay. Then you’re private equity now. You’re no longer VC.

Some of the VCs are telling me they’re getting pressure from their LPs. “We gave you a bunch of money in January. It’s November now. Have you invested it?” “Well, we’re still looking for opportunities.” “Then I could have just put that money in T-bills.” There’s pressure coming from the LP community. They want their money put to work. They’re paying fees, but the money isn’t going to work.

GamesBeat: One problem I’ve heard about, maybe they’ve started funding things in tranches. Maybe three rounds will get you to finishing your game, but now we won’t give you the second and third round because we’re afraid. All you get is that first round. That’s not going to work.

Layden: No. We have to scale back the ambition. Not the creative ambition, not the entertainment ambition. Again, I want 15-20 hour games. As the average age of the gamer has increased over time, from early 20s to early 30s, we’ve seen the swap between people who are time rich and money poor to people who are time poor and money rich. That person can’t fit an 80-hour game into their lifestyle. I still have Red Dead Redemption 2 in shrink wrap on my shelf. It’s way too much.

GamesBeat: We have Palworld and we have Helldivers 2 right now, though.

Layden: The big change isn’t going to come from the big franchises. The change will come from the outsiders. The change will come from a place we’re not even looking at right now.

Interview With Shawn Layden on the Industry

It didnt really had much relevance, even in the xbox groups you see the statement, 'If you missed the show you not really missed something'.
It could have been some xbox wire posts on it is own, we had plenty of similar releases that never got a partner preview and it was also fine. I am still thankfull that they made a partner preview.

Maybe I am missing something, can you say why you think the partner preview was great and why is the general consensus 'it was fine' wrong?  Youtube/twitch reactions is full with commentators and viewers who said it was bad or great but the biggest group clearly being 'it was fine' So yeah I am curious...

I don't think my expectations were high, I made two? related partner preview posts before it was shown; one was about how it is a good thing to have a partner preview and I think a second one about how I hope Octopath Traveler 2 will be announced (considering it was stated to have an early 2024 release)...

The negativity and my opinion is not just mine it is going through whole the community,
If I open a spawn wave video I probably will hear 'hope MS proof the naysayers wrong/ does what gamers hope etc'   
I will hear mattyplays say 'Please Xbox proof me wrong and fix redfall and Starfield like you promised'   
I hear MintBlitz say 'Please Xbox listen to 343',   
I will hear Asmongold say 'Ofcourse I want MS to Fix WoW/Diablo IV but to do so you need a company who cares about the quality and opinions of gamers and invest in it but MS just cares about $,  if I am wrong, well MS proof me wrong and invest',
I hear  Max Dood guy say 'Xbox spend more time trying to ban third party accesoires than in what gamers want; if you need me again for KI I am here!' 

Personally I would love to be proven wrong aswell...but all I see is a community who wants the Xbox naysayers to be proven wrong; xbox defenders getting tired and a new pityfull group who now hopes xbox consoles die soon and will bring PS consoles with them out of spite..

Konn Sterlings off again.

Thank god I don't follow all these guys talking so negative about Xbox all the time. Maybe that's why I'm happier with my Xbox experience because I don't have to watch videos about what's all bad every single day

Thank God I don't follow Youtubers full stop, Lol. Oh and I'm able to form my own opinions without Youtubers telling me how to feel about something.

That's a rare thing these days everyone are like sheep and just mimic the opinions of what some random person on the internet says glad to know I'm not the only one that cares nothing for youtubers.

Xbox bad :(
Why?
Coz Youtuber told me so

Damn.  You win, king.