Why the head of Xbox isn’t worried about its future

Did Xbox really lose the console war?

In May, Phil Spencer, the head of Xbox, made a comment that got picked up far beyond the video game world. The New York Post ran the provocative headline, “Microsoft exec admits Xbox lost console war to Nintendo, Sony: ‘Worst generation to lose.’”

Of course, that’s not quite what Spencer meant.

His comments, made on Kinda Funny Games’ Xbox show, do sound dire out of context. In his words: “We’re not in the business of out-console-ing Sony or out-console-ing Nintendo. There isn’t really a great solution for us.” He continued, “That’s just not the world that we are in today. There is no world where Starfield is an 11 out of 10 and people are selling their PS5s. That’s just not going to happen.”

Image: Bethesda Game Studios/Bethesda Softworks

But Spencer wasn’t catastrophizing. He was acknowledging Microsoft’s need to think about different — and frankly, much bigger — opportunities than the market of people who buy video game consoles. Some people own a console. Nearly everyone owns a computer or a smartphone.

So perhaps it shouldn’t be contradictory that, only a month after those headlines, Spencer can say confidently, “I actually don’t have a lot of fear about 2024.”

We spoke with Spencer shortly following the 2023 Xbox Games Showcase, in which the company revealed an ambitious slate of games, beginning this fall with the decade-or-so-in-the-making Starfield and running through 2024 and beyond.

“My strategy isn’t to steal their customers,” Spencer said of his longtime rivals. “We’re really looking at new customers, new creators, and that being kind of a real critical component of our strategy.”

Spencer also spoke at length about how Xbox uses AI and player data, why Game Pass won’t make the same mistakes as video streaming services like Netflix, and why 2024’s big slate of games should be the new normal for Xbox moving forward.

If the console war is over, something even bigger is just beginning.

[Ed. note: This interview has been edited and condensed for clarity.]

Polygon: You talk about finding new customers and differentiating Xbox. Being a part of a large company like Microsoft, you have access to many tools and capabilities that Sony or Nintendo don’t have. What are some of the ways that you are partnering with Microsoft to acquire these new users?

Phil Spencer: Yeah, the Microsoft aspect of it, there are clearly areas where it’s beneficial. One is obviously just capital, right? We’re part of a large company. It lets us do things like our Zenimax acquisition and the Minecraft acquisition back in the day. And I think that I’d be remiss to not say that that’s part of what we’re doing.

Yeah, I’d also say, we can take a longer-term view of our financials and our success. We’re about — call it 10% of Microsoft’s revenue right now. So Microsoft doesn’t sink or swim based on Xbox’s success today. So it allows us to take some longer-term views of what our success looks like. We run a profitable business inside of the company and that’s important. We do that today. We want to grow that; we continue to grow it. That’s an important part of our strategy.

But I’d say the biggest thing that Microsoft gives us is stability and a long-term perspective, more than any kind of individual technology. And that’s a pretty important component of what we are.

Image: Microsoft

To push just a little further into the Microsoft partnership, I want to ask about artificial intelligence. I’m sure it’s familiar to you, having worked directly on video games. Not a new idea in this space!

How much of your time in a week is spent having to think about artificial intelligence? Are you serving as a resource for Microsoft? Or are they helping you and Xbox with AI opportunities?

I love this topic, and I think you hit on it with your question. When I get asked about AI in gaming, I’m like, OK, from the [beginning] when I was playing Pong, I’m moving one paddle and the computer is playing the other paddle — like there’s some amount of AI that’s been in video games almost from the beginning.

Now, today, when people say AI, they really mean large language model-driven AI. The ChatGPT equivalent. But I think gaming has a long history in using AI to make games better and more robust.

We’re having a lot of conversations with creators, where they’re saying, “How can AI make my games more complete?” A lot of it, frankly, is on the “How do we ensure the quality of our game?” Testers do a great job of playing a game and getting a very human perspective on a game. But games are so large today, I think there are opportunities for us to think about ways where AI can kind of traverse what a game is. And help us understand if there are gaps in our logic.

You see this in some of the code tools that Microsoft has. GitHub. Copilot. They allow developers to be more efficient in the way that they write code and to even get feedback on what they built.

For me, though… Twelve months ago, you and I would have been sitting here talking about blockchain and Web3 and metaverse. And we don’t really seem to talk about that much anymore. I will say I always come at it from a player-first perspective. So players don’t play games because of the tech. Gamers play games because it’s a fun, rewarding experience. And the technology can make that possible. So sitting at the Microsoft leadership table, and the discussions that we have, I bring a player perspective or a consumer perspective. Let’s make sure it’s not technology for technology’s sake. It’s technology that either makes the lives of our players better and/or makes the lives of our creators better. And that’s got to be fundamental to what we’re doing.

Image: Microsoft

So that is a great point and something I’m curious about. Xbox has a tremendous amount of player data, especially through cloud gaming. You have the opportunity with the power of machine learning. And you have design problems that just straight up have not been solved despite plenty of effort.

Take, for example, playing really complicated 3D games on a mobile phone. It is still challenging. Comfortable, natural touch controls are still not well solved across most 3D, console-style games. And that limits the types of games that can be played on mobile.

Are you using player data and machine learning to kind of solve for these complex design problems?

Not yet. And I say “yet.” Like whether we get to that, I don’t know.

There are areas where we’re focused on using data and the activity on our network. One is player safety. Like, it’s just fundamental that when you have millions of people playing on Xbox Live, with literally hundreds of millions of conversations going back across any small slice of time, that we have great human moderation. And that we’ve got rule-based moderation that runs on our platform. But having AI moderation that can work across text, across images, across other things that might pop up — that’s very, very important. We want Xbox Live to be a safe place. And it’s a place we do a lot of investment because… you frankly just can’t out-human that problem, right? The network is just too large. So that’s one area where we do spend a lot of time.

Another thing that we think about: There are so many games now that are just out there that run on Xbox, but you can [play on] PC as well, and mobile. And finding the right next game for you… We think is an interesting opportunity. Whether it’s through Game Pass, or the games that you own, or free-to-play games. Us looking at who you play with, what you’ve played, and having some amount of intelligence that can actually offer up something that might not be the next thing that you expected to like — we’ve done a lot of work in our store on that functionality. And we see players loving it. When we can surface for you a game that might not have been on your radar, but we kind of matched up with some of your tastes and your interest and the people that you play with and all of that — it’s pretty cool.

Image: Xbox Game Studios

That point about curation is a good transition to streaming and subscription services. Curation continues to be one of their big challenges, too.

When Game Pass first launched, the common comparison was Netflix. Which, at the time, seemed like the nicest thing you could say about a new service. Now, in 2023, comparing something to streaming services is a bit more complicated. [Ed. note: Many streaming services are cutting budgets and laying off employees as they struggle to make profits off the original business model of spending fortunes on massive new catalogs of content.]

Are there any lessons you’ve learned or are learning as you’re watching this chaos shake the streaming industry?

I’ve never been a fan of “Game Pass is the Netflix of games.” Not because Netflix isn’t a great brand. I love Netflix.

But as you know, video games have a very different financial model than video. A lot of the video games that are out there are kind of a financial engine unto themselves. So for us, when we think about Game Pass, it’s as much about curation and distribution as it is value.

We found in our talking to our customers that the number one thing they cared about was us curating a great portfolio for them that they could have access to anywhere that they wanted to play. And actually, we weren’t getting a lot of feedback of, “I’m doing the math of how much I’m paying each month versus how many games I’m playing.”

When I think about Game Pass, I think about it more as community-led, both from the creator and player-led side. Which you wouldn’t say about video streaming services today. Most of them don’t have any sense of community, right? You log in and you can’t talk to somebody about how you feel about a show or actor or actress.

We know in video games that a community is so critical. So when we think about taking Game Pass to other endpoints, we want to make sure that as Game Pass moves, the community moves with it. So Xbox Live’s got to be there. We want to make sure your state moved with you — so your games are all there, your achievements are there. And we want to make sure you can go play with your friends. If you’re sitting on a cloud device, somebody else is on a PC, and somebody else is on an Xbox console, and you all want to play Sea of Thieves, then great. We want to enable that.

So I think, in some ways, it’s more complicated than music or video. Because there’s this community and multiplayer aspect to it that’s just fundamentally what Game Pass is. That adds some complexity. But I also think it adds opportunity.

Image: Asobo Studio/Xbox Game Studios

You described some big games as being an engine unto themselves. I want to circle back to that.

At the beginning of the Xbox Showcase was Sea of Thieves, which effectively has a little game being launched inside of it with the Monkey Island update. And then right after that, we saw Microsoft Flight Simulator 2024, which appears to build new types of game features onto the work of its predecessor.

At the same time, you look at the rest of the industry with living games. And you often see a very incremental week-to-week approach. Get people hooked and keep them perpetually engaged, right? These two examples with Sea of Thieves and Flight Simulator, they feel unusual.

It seems like the designers have created entire worlds. And then they’re layering different types of games onto the original to try to pull new people in. How intentional is that? And if it is intentional, is this something that we could expect to see with Xbox games moving forward?

We’ve done some slightly similar things or near things with Minecraft over the years as well, which is a space that we learn in a lot.

Like the Sonic and Disney expansion games built within Minecraft?

Right. If I step back, for us on this journey of forever games and people playing… We started that journey long ago. And I think Matt Booty, who runs our first-party studios, [pointed out that] in the last five years we have 10 games that we’ve created that have over 10 million players. They create almost a platform unto themselves.

The individual things — like Monkey Island [in Sea of Thieves], like Dune [in Flight Simulator] — those unique opportunities just come up from the strength of partnerships that our teams have built. So they’re really driven organically at the team level.

I’d say for us in terms of how the business works of it, which is a little bit what you’re asking as well — and it’s going to sound like a Game Pass ad — but the fact that I have a content subscription that’s at scale means I don’t need to think about every game monetizing every engagement. Because Xbox Game Pass’ success is enabling us to invest more in driving engagement than in driving the dollars. The dollars will come from people loving the games that they’re playing. So it does open up opportunities for us to not be as incremental on every piece of content in terms of how we charge, and thinking about, Is this going to re-engage some Sea of Thieves players? Is it going to bring in some new Sea of Thieves players?

Image: Playground Games/Xbox Game Studios

Yeah, I mean, the closest comparison that I could think of is Mario Kart [8 Deluxe] on the Nintendo Switch. Nintendo has sold so many copies, and it knows it has so many receptive players. So it’s currently not releasing a new Mario Kart. It’s releasing a bunch of new levels on top of the original instead.

I wouldn’t normally call Mario Kart 8 a living game. It’s very different than something like Fortnite. But Nintendo’s strategy is to still keep long-term players engaged.

What’s interesting about Xbox is you could apply Nintendo’s logic with Mario Kart to Xbox with any game on Game Pass. That you know people are already engaged with Game Pass; you just need to come up with inventive ways to keep them engaged.

Yeah, this applies to the single-player games as well. Which I think is important, because we opened with Fable today. [We had] Clockwork Revolution, a great RPG coming from an inXile [Entertainment].

When a game’s design doesn’t beg for a business model inside of the game, we can just say, “Go build your game.” The Game Pass platform has a business model that these great narrative single-player games will be able to fit inside of.

For a creator, you can say, “What am I trying to do? And is there a business model on this platform that allows me to do that?” And we want that answer to almost always be yes. And in the end, the player will decide if the creative [side] and the business model result in something that’s successful, because they always vote with their time and their money. In the end, the player always wins. Because the player gets to vote on what they play.

Image: inXile Entertainment/Xbox Game Studios via Xbox/Twitch

2024 looks like a potentially great and stressful year for you. Xbox has tons of games theoretically coming out. Calendars change, but theoretically, right now, a ton of games are going to come out on Xbox in 2024. And I know you can’t talk about the Activision deal. But in theory, something could go one way or the other, looking into 2024.

What is the best-case scenario? Like, what does a great 2024 look like for you? And then also, what is your biggest fear for 2024?

This will sound maybe naive, almost. I actually don’t have a lot of fear about 2024. 2022 was hard for us. But I think waiting on certain games… Let’s take South of Midnight. Like you saw, the game got announced [during the Xbox Games Showcase]. We had that game ready to announce last year. But we said, let’s keep working on the game. Let’s keep working on the announcement. It’s OK to hold the announce. Or, let’s take Clockwork [Revolution]. When I was here at E3 last year, I was at inXile playing that game. Not looking at the announcement video, but actually playing that game. And I come back this year down at inXile, playing it again with that team, going through the latest builds.

So it gives me confidence because we’re staging the announce of the game closer to [release]. We’ve got hands on the game. We have confidence in when things are coming out. We obviously dated Starfield. We dated Forza [Motorsport]. And this year has already been amazing, right? If you just think about the games as an industry, all the games that have come out.

But I have confidence in terms of how I think about 2024. In a way, I say this is what we’ve been building towards for the last five years. You know, we stood on a stage and announced the acquisition of Compulsion and Double Fine and Ninja Theory. Some of those teams had some things that were underway and we said, “OK, let’s finish those things.” Now we have over 20 studios building video games.

Now, it shouldn’t be surprising that we can have a show like we did today. I think these are the kinds of shows we’re teed up to have really into the future, with the creative capability that we have inside of Xbox Game Studios and Bethesda. That gets me excited.

2022 was hard. Not having enough… I’d call them AAA first-party games launched. But I didn’t want to do anything artificial. Like you just kind of, you know, hold the line, as our friends like to say. And that’s what we did. And I think now we’re in a position to really pay that off. And not just for the next 12 months.

When I look forward… there are so many things. We haven’t talked about what’s coming from id [Software]. We haven’t talked about what’s coming from The Coalition. When are we going to see Perfect Dark again? And when are we gonna see Everwild again? There are so many things that we still are working on that we haven’t shown. I mean, I don’t like to be confident, but I like to be humbly confident. I feel good about where that portfolio is.

Image: Studio Zero/Atlus

I feel like there’s an unspoken promise of Game Pass or really any solid subscription service. That there’s something there for you every month. Something that’s really good. And you’re gonna stay subscribed for it. And it looks like that could happen with Game Pass in 2024.

But what about five years from now? Do you think that is the norm? That this is what Microsoft is able to regularly offer, because of its investment in original studios? That Xbox has finally kind of ramped up this engine that — again, you walked out on stage three or four years ago and announced all these acquisitions.

Matt Booty and I have set a goal of a game a quarter. So that would be four games a year. But then we have things like Monkey Island [in Sea of Thieves], which we kind of don’t count in that. Or Dune in Flight Simulator, which we kind of don’t count in that.

So [that’s the cadence] when you think about games content that hits into the subscription or really onto the [Xbox Store] platform — because every one of those is also available for sale. And if you want to buy an Xbox and say, I just want to I want to buy my games, yeah, they’re equally important that you also have a steady flow of great content.

One of the areas I’m also excited about is what this means on PC. PC Game Pass is growing at a very, very fast rate for us — like the fastest-growing part of Game Pass today. Console Game Pass at some point just taps out, because you’ve reached kind of everybody that owns your console. And then it’s about selling new consoles. We like that. That’s good.

But with PC, there are hundreds of millions of people [with the necessary hardware] who don’t buy games from us today. They don’t subscribe. So I look at that as an opportunity.

When I’m looking at our content lens, I’m thinking, Console. Let’s keep it healthy. Let’s keep it growing. And we’ve got all these PC players. And then we’ve got new devices like Steam Deck and ROG Ally. We get a lot of requests to tune Game Pass for those devices. And then players on the cloud. And it is about a steady flow of content. And it’s great to see it.

Just a clarification on detail there. When you said a game a quarter, you’re talking like a $60, $70 game. That caliber of game.

Yeah. And then there are sometimes smaller games. We’ll get a Pentiment. We’ll get a Hi-Fi Rush. And those can be great as well. Like, I don’t like to dictate the price point of a game. But when we say “every quarter,” we would like to have that. And when I think about the next two quarters, we’re gonna have Starfield in the third quarter. And then we’re gonna have Forza Motorsport in the fourth quarter. And then we’re gonna roll in the first quarter of 2024, which is crazy to think about. That 2024 will be here in less than a year. And then I think we’re set up very, very well.

Image: Microsoft

Last question: The first shooter that my father let me play — not the first shooter I actually played, but you know – was the Heretic/Hexen double pack. That series has been dormant for decades, but to close the Xbox showcase, you wore a T-shirt with the Hexen box art. What the hell! You can’t just wear that and then say nothing!

[Laughs] Let me go back to this stupid T-shirt thing: The first time I wore a T-shirt on stage, in this way, was a game called Jumpman that I used to play with my dad on the Commodore 64. Epyx Jumpman. I wore a Jumpman shirt thinking nobody would know what it was except my dad, because he was watching. And it was right around Father’s Day, which is when E3 always is. One of the things when I think about the Zenimax/Bethesda deal closing — and obviously the opportunity with Activision Blizzard King — games that have meant so much to the foundation of what us as gamers think about, and like our jobs as shepherds of those games…

Hexen was a game that I loved. If you know anything about, like, where that game was built, or where it was published, there’s just these games that kind of come together — or that have the potential to come together — that I get excited about.

I get excited about going down to id and talking to them about what they’re working on and thinking, How amazing is it that I’m working with id? Seeing Fable open our show, and thinking about the roots of that with [Peter] Molyneux and all the like. Those are the things that mean a lot [to somebody like me] who’s been playing for so long.

So for me wearing the shirt wasn’t as much about a tease forward as it was just about the nostalgia. I recognize that as our portfolio grows, we’ve got important things that we have to kind of protect and nurture and maybe bring back at some point. But that wasn’t trying to pre-announce it. But it was just recognizing the importance of some of the games in our portfolio.

It also doesn’t hurt to have the head of Xbox put the idea out in people’s brains. Maybe they start asking for it.

To be truthful, I didn’t really communicate it much internally. And then I’m on camera recording that and people are like, “What is that?” And I was like, “Oh, don’t worry about it.” I mean, you know, the game. If you think about where our future could go, there’s kind of some interesting intersection.