In mid-2014, Satya Nadella, who had just become Microsoft’s CEO, led the company’s gaming heads to his fifth-floor office in Redmond, Washington.
Executives wanted Mr. Nadella to write a check for $ 2.5 billion to buy Mojang, a Swedish company that made a blocky, pixelated game called Minecraft. Mr Nadella asked why Microsoft, which is consistently being outwitted by Sony in the console business, should continue to invest in video games. How, he said, did that fit with his vision of a company with a friendlier face that appealed to more consumers?
Then Phil Spencer, the new head of Xbox, told Mr. Nadella about the vast world of Minecraft, where millions of people socialize and teenagers have been encouraged to learn math and science skills. A deal would be the first step in a “pretty bold vision” to transform Microsoft’s gaming business into one that focuses on a wider audience, not just console gamers, Spencer said.
Mr Nadella agreed and carried out the deal. What followed was a year-long postponement, according to interviews with more than 20 Microsoft executives, game developers, industry analysts, and gamers. Rather than competing primarily with Sony to sell more consoles, Microsoft bought 15 other game studios and invested in new technologies like a Netflix-style game subscription service and a mobile tool known as cloud gaming.
Now that Microsoft is preparing to showcase new offerings at the annual E3 gaming convention this weekend, its video game business is looking very different. The company is still known for the Xbox, a new version of which was released in November. Even so, it has diversified beyond boxy hardware to offer a new range of services.
“Your strategy has deviated significantly from a traditional console approach,” said Piers Harding-Rolls, gaming researcher at analytics firm Ampere Analysis.
With the changes, Microsoft is betting that the future of gaming will be a post-hardware world where people may not want to spend hundreds of dollars on a console, executives and analysts said. At some point, they said, people may no longer be tied to certain devices to play games and will instead be more concerned with software and services.
While Xbox consoles are still generating a lot of revenue – in January, Microsoft reported $ 5 billion in quarterly gaming revenue for the first time, coming from content and services, not Xbox hardware sales, said Tim Stuart, Xbox chief financial officer.
The gaming business still faces hurdles including the perception among gamers that it is not up to their best. That dislike stems from a messaging bug in 2013 when Microsoft unveiled its new Xbox One console as an entertainment device that people could use to stream music and movies. In response, the players outraged.
According to analysts’ estimates, the Xbox One still sold 50 million units. But it was far surpassed by Sony’s PlayStation 4, which was also introduced in 2013 and sold 116 million times.
“We lost our step of what the players wanted,” said Stuart.
After the game, Microsoft changed gears. Mr. Nadella had just taken over the helm and wanted the company to move from focusing on software to cloud computing and subscription services.
Mr. Spencer made sure that the development of the games department reflected these goals. He persuaded Mr. Nadella to buy Mojang in September 2014, which was the new CEO’s first acquisition.
“Games are much more central to Microsoft today than ever before in our history,” said Nadella in an interview last week.
In 2017, Microsoft released the Xbox Game Pass. For $ 10 or $ 15 a month, subscribers could play a specific set of games for as long as they were using the service. That turned the traditional model on its head, where people paid $ 60 for games like Call of Duty and owned them forever.
To convince game publishers to put their titles on Game Pass, Xbox executives flew around the world to meet developers and proselytize their vision of an industry where video games are cheap and easily accessible.
Initially, developers were “unsure” and feared they would lose money on the service, said Sarah Bond, a Microsoft vice president who leads the gaming ecosystem organization.
So she decided to look into how Game Pass affected player behavior. Microsoft announced on Thursday that users of the service spent 50 percent more money on games and played 40 percent more games than non-subscribers.
Mike Blank, senior vice president at Electronic Arts, which put its games such as the Madden NFL and FIFA soccer franchises on Game Pass in 2020, said there were “initial concerns” about subscription services. But the company is happy with the results and “the players are responding positively,” he said.
Microsoft also spent a lot on game development to expand the Game Pass offering by buying studios, including a $ 7.5 billion acquisition of ZeniMax Media in September and adding hundreds of games to the service. This year, consideration was also given to purchasing the Discord messaging app, which players can chat with while playing the game.
Diversification continued in late 2019 when Microsoft released a cloud gaming service that hosts games in a company’s data centers and broadcasts them to devices. The Xbox Cloud Gaming or xCloud service means users don’t have to install games or use expensive hardware.
The idea of a cloud gaming service crystallized for Mr. Spencer this year while he was sitting on a bus in Nairobi, Kenya and connected to Wi-Fi. He found out that he could stream a game from Microsoft’s London data center to his phone.
“It was literally the same saved game I had in Redmond, Washington,” he said. “It just drives how you can really make gaming global.”
On Thursday, Microsoft announced that it is working with television manufacturers to bring its games to televisions without the need for an Xbox. It added that it would soon bring cloud streaming to the console as well.
At the moment, cloud gaming is still hampered by faulty gameplay and requires a strong internet connection. Xbox Cloud Gaming is still in the testing phase and Apple has banned the app from iPhones because it contains a catalog of games. Apple requires separate apps for each game as part of the app review process.
At the same time, Xbox continues to lag behind Sony’s PlayStation. In April, Sony announced it had sold 7.8 million new PlayStation 5s between November and March, while analysts estimated that Microsoft had sold more than four million new Xboxes over the same period. Sony declined to comment.
Some gamers said Microsoft couldn’t win them over because it was still lagging behind Sony in exclusive, high-quality games.
“I just always had the impression that PlayStation was better,” said Natalia Mogollon, a gamer named Alinity who streams her gameplay to 1.3 million followers on the Twitch website.
However, if Microsoft snaps exclusive content, it can backfire. When game publisher Square Enix first released a popular game on Xbox in 2015, gamers were upset that Microsoft was restricting access to the title. The reaction was similar when it was considered buying Discord and when it was reported last month that an upcoming ZeniMax game would be exclusive to Xbox.
“It can seem like a big company is coming in to screw up its favorite game developer,” said Rod Breslau, a video game consultant.
As Microsoft moved away from the Console Wars, Mr. Spencer’s own tone also weakened. In a 2014 interview with the New York Times, he signaled that he would not give in to Sony. “I’m here to win,” he said.
In an interview last month, he took a different route. “We don’t look at Nintendo and Sony and say that the company has to lose to win,” he said.