Microsoft’s Xbox Strategy Failed by Chasing Corporate Goals Over Games

? ben-thompson frames Xbox less as a gaming project than as a Microsoft corporate strategy that chose gaming as its route into the living room. In his telling, the original Xbox made sense inside Microsoft’s pre-iPhone “three screens and the cloud” worldview: Microsoft already owned the desk through the PC, wanted to own the pocket through mobile, and saw the television as the third screen. Consoles were plugged into TVs, so a console looked like a plausible gateway to the living room.

The problem, Thompson argues, was that the actual buyer was not shopping for a Microsoft living-room portal. The buyer wanted games. A multi-hundred-dollar console could earn a place under the TV among people who cared about playing games, but it was never going to become a mass-market internet appliance for people who did not.

Thompson’s broader point is that Microsoft correctly identified a new surface for online services but chose the wrong vehicle. The living-room front page was real. It was just captured by cheaper, more direct devices: Fire Stick, Chromecast, Roku TV, and, in Thompson’s view, Apple TV as a strong but too-expensive product. Xbox was too costly and too specialized to be that default interface.

That strategic mismatch then fed back into the console itself. Thompson describes Xbox One as the clearest example: Microsoft tried to use the console to realize the living-room vision, bundling in Kinect, pushing a more digital posture, and adding restrictive DRM ideas. Gamers rejected it. In his phrasing, Microsoft’s unrealized corporate vision “also killed their console.”

He sees the damage as both strategic and cultural. Xbox did not achieve the stated corporate goals that justified it, but it continued because it already existed and because it mattered to Microsoft’s internal identity. Thompson worked at Microsoft from 2011 to 2013, when he says the company’s stock had been around $40 for about a decade, and says Xbox carried prestige inside the company: “at least we have Xbox, all the cool kids over there.” That mattered culturally even as, in his view, the division had failed against the objectives that created it.

The most interesting console generation, according to ? ben-thompson, was the Xbox 360 and PlayStation 3 era, because the economics of game development shifted in a way that favored Microsoft. John Coogan asks about Xbox’s confusing naming — Xbox, Xbox 360, Xbox One, Series X — and Thompson says the 360 name was chosen because Microsoft wanted to appear on the same generational level as PlayStation 3. The naming was messy, but the timing was strategically important.

Sony’s PlayStation 3 was, in Thompson’s account, Sony’s major misstep of the PlayStation era. It used the Cell processor, carried extra capabilities, and was tied to another Sony corporate priority: getting Blu-ray off the ground. That priority partially succeeded, but the console was too expensive, ran hot by Thompson’s recollection, and contained hardware capabilities that many developers did not meaningfully use.

The deeper change was that the first HD generation made asset creation much more expensive. In earlier console eras, Thompson says, games were more differentiated by how well they were written for specific hardware. But as 3D games and high-definition graphics matured, more of the underlying technical work moved into game engines such as id’s engine and Epic’s Unreal Engine. Game companies increasingly focused on game design and asset creation rather than writing uniquely to every console’s architecture.

That changed the economics. Developers could no longer afford to build only for PlayStation. They needed to run everywhere: PlayStation 3, Xbox 360, and PC. That was ideal for the Xbox 360. It had a PC-like architecture, was relatively simple to develop for, and benefited from a market in which almost every major title had to be cross-platform.

Thompson contrasts that with Sony’s later correction. Sony learned from the PS3 that hardware differentiation was no longer the winning lever. For the PS4, it moved toward more generic, easier-to-develop hardware and differentiated with exclusive games. It bought smaller studios and pushed them to build major PlayStation titles. Thompson cites Spider-Man, Naughty Dog, and The Last of Us as examples of the strategy that made the PS4 “an unbelievable generation.”

The business logic was straightforward: cross-platform games such as Call of Duty and Madden would run everywhere, but exclusives would shift console share. If most gamers were on PlayStation, Sony could limit the addressable market of its own studios’ games and make up the economics through licensing fees from third-party publishers selling into the dominant console base. Thompson says that Sony “just crushed Microsoft” in that generation, and that the same dynamic continued into PS5.

Microsoft’s answer to Sony’s exclusive-driven model was to make Xbox a services business. In ? ben-thompson’s account, that fit the company Microsoft had become: Azure was growing, the stock had recovered, and the company increasingly thought in subscriptions and services. Xbox Game Pass was meant to be the opposite of Sony’s strategy. Instead of asking players to buy individual $60, $70, or $80 games, Microsoft would charge one monthly price for access to a catalog.

Thompson argues that the model ran directly into publisher economics. Major game publishers make a large share of their money upfront by selling to their most committed fans. Coogan compares the attempted transition to music streaming: make the product more accessible, bundle it into a subscription, and hope volume compensates for lower per-unit revenue. Thompson agrees that this was the bet.

The hardware strategy followed from it. Xbox Series S, a cheaper and less powerful console than Series X, was supposed to expand the market. Thompson says Series S launched around $300, versus Series X at roughly $500 or $600. Microsoft could package cheaper hardware with Game Pass and bring in consumers who would not otherwise buy a full-priced console and individual games.

But Thompson sees two problems. First, Series S risked constraining the higher-end console, because developers build to the lowest common denominator. Second, independent publishers had little incentive to put their best economics into Microsoft’s subscription. So Microsoft bought content: Bethesda, ZeniMax, and ultimately Activision. Thompson’s view is that those acquisitions came with a structural contradiction. Microsoft was paying for businesses whose existing value came from selling games across platforms, then trying to use those same assets to seed a subscription service that would reduce the revenue those assets were built to generate.

The intended consumer switch was clear: instead of paying $70 per game on PlayStation, players would buy Xbox and pay around $20 per month for Game Pass. Thompson says that did not happen. Microsoft did not meaningfully expand the console gaming market. It caused gamers who would have paid more to pay less, and Microsoft absorbed the difference.

Thompson says recent reporting put Microsoft’s internal expectation at 75 million Game Pass subscribers by this year, versus roughly 30 million in reality, with the number decreasing rather than rising. The figures matter here because Thompson uses them to explain why he sees the subscription strategy as having failed on its own terms.

Thompson connects that shortfall to a difficult moment for Xbox: layoffs, leadership changes, and a hard strategic decision about what the business should now be. He says Phil Spencer “got retired,” and adds that at that level of a company, being retired means “you’re probably canned.” That is Thompson’s inference, not a formal account of Microsoft’s personnel decision. The strategy, in his judgment, was a disaster, and Xbox is now stuck between models that do not work cleanly together.

The Activision acquisition raises the question ? ben-thompson says regulators feared: would Microsoft make Call of Duty exclusive to Xbox? During the merger fight, Thompson says those fears did not make sense “at the time, in the context,” because the existing economics of Activision depended on selling across platforms. Pulling Call of Duty from PlayStation would destroy a large revenue stream.

But Thompson floats a possible reset path if Microsoft is willing to absorb the economic reality of the acquisitions. He says Microsoft could write off the deals — by which he means acknowledge that it lost billions and billions of dollars — and then use the assets differently. Instead of preserving the legacy publishing model, Microsoft could decide that the strategic value of Call of Duty is to force hardware adoption: “Call of Duty, buy an Xbox.”

Coogan points out that this would be an unusually revealing pricing test. If people who own PlayStations bought Xboxes just to play Call of Duty, then the effective value of the game would be in the hundreds of dollars, not just the $70 or $80 boxed-game price. Thompson does not present exclusivity as a certain plan or as a straightforward recommendation. He treats it as a speculative possibility that would amount to giving in to the FTC’s “worst fears,” after earlier arguing that those fears did not fit the economics at the time of the deal.

He also says the possibility gives him some pause because, according to Thompson, Microsoft hired Matthew Ball as chief strategy officer. Thompson says he respects Ball’s views and is curious what he is thinking. The implication is not that Ball validates any specific plan, but that his presence makes Thompson less willing to assume there is no serious reset being considered.

On the question of spinning Xbox out, Thompson is more direct: he thinks it “needs to happen.” He says he had argued for years that Microsoft should kill, spin out, or get rid of Xbox, then softened when Game Pass looked like an interesting experiment. In hindsight, he says, he should have stuck with his original view.

Coogan asks what ? ben-thompson reads into Microsoft’s approach to Xbox cuts, framing it as a 1,600-person layoff now and another 1,600-person RIF still ahead. Thompson calls that structure terrible in morale terms. Employees left inside the organization will spend the year waiting to be fired. Coogan invokes the venture-capital rule of cutting hard and moving forward with whoever remains: if you are still on the ship, “we’re going to Valhalla together.”

Thompson agrees with the morale criticism but offers a qualified defense. He appreciated the note, he says, because Xbox is “in big trouble” and the leadership did not sugarcoat it. If the company had described the severity of the problem while cutting only 1,600 people, employees would have known more cuts were coming anyway. In that situation, Thompson says, being open about the larger process may be the least bad option.

His argument depends on the employment climate. He thinks employees are less likely to leave voluntarily because they will want to keep their jobs at Microsoft. That may allow leadership to do more deliberate cuts in the open: asking what each employee is working on and why that work should remain. Thompson does not say this is good management in an ordinary sense. He says it reflects how bad the situation is.

? ben-thompson’s view of Grand Theft Auto 6 is that Rockstar is charging too little. Jordi Hays warns that the argument will get Thompson “canceled” and calls it a “nuclear take.” Thompson says Rockstar should charge not $80 but something like $200.

His reasoning is not that all games should cost $200. It is that GTA 6 represents something unusually costly and maybe historically bounded: the pinnacle of AAA craftsmanship built before AI reshapes production. Thompson describes years of “blood and sweat and tears” and says he feels compelled to buy GTA 6 “in honor of it existing,” even if he may not play it.

The point ties back to Game Pass. Thompson says game pricing, particularly for AAA games, has stayed suppressed for a long time. Game Pass pushed in the opposite direction: it trained users to expect access to expensive games as part of a monthly bundle. For Thompson, that may be a bad match for a product category whose best examples require vast upfront investment and whose economics depend on committed fans paying full price.

Hays adds that one of the younger people on the TBPN team reacted to online complaints about the GTA 6 price by saying players had 10 years to save $80. The joke reinforces Thompson’s view that the market’s sense of acceptable game pricing is detached from the scale of work behind the biggest releases.

Jordi Hays sees a pattern in which an AI application company or lab can disappear from the discourse for a few months, seem to be written off, then return with hundreds of millions of dollars in revenue and a major up round. He asks whether the tenth-best company in a category can now have the financial performance that would have made it the leading company five years ago.

? ben-thompson first says this kind of scale inflation is a general tech phenomenon, but Hays pushes back. Was the tenth-best CRM company between 2000 and 2015 really “printing”? Thompson concedes it was not.

His reference point is Apple’s 2014 acquisition of Beats for $3 billion. At the time, Thompson says, the tech press treated the deal as a major event. His view was that Apple was a $500 billion company, so $3 billion was “couch cushions.” Looking back, two things were true: the amount did not matter much to Apple, and Apple being “only” a $500 billion company now looks small in retrospect.

That is the lens he applies to AI-company numbers. He says the figures are not remotely tied to prior intuition, and he mostly writes them down without feeling that they mean much. The serious point is that old category comparisons no longer calibrate scale. A company can be tenth in a hot category and still produce numbers that would once have defined category leadership.

Coogan brings up Getty Images calling off its Shutterstock deal after, in his framing, UK regulators said Getty would have to sell the editorial business for the merger to be approved. His premise is that stock imagery is under intense pressure from generative AI, making the combination of Getty and Shutterstock look like an obvious defensive move.

? ben-thompson says this fits a recurring pattern. When an industry is threatened by an external force, consolidation is the natural response. Established, declining companies are comparatively easy to value: their businesses are knowable, the future is less speculative, and a discounted cash flow can anchor negotiations. That makes consolidation rational for the companies — and, paradoxically, easier for regulators to block.

Thompson says this has happened in television and telecom as well. Regulators can more easily intervene when the market structure is legible and the companies are mature. But the time when intervention might matter most — when an industry is growing and acquisitions could help one company take over the future — is also the time when regulators are least able to know what will happen. He adds that regulators are often right to be cautious at that stage because the future is unknown and intervention can distort it.

That leaves him skeptical of merger blocking in broad strokes. He says he has come to think regulators probably do more harm than good in many of these cases, while acknowledging the tension in his own position: he had just entertained the idea that Microsoft might make Call of Duty exclusive, which would look like the kind of post-merger conduct regulators worried about.

Hays notes another complication in the Getty-Shutterstock case: he says the deal was priced back in January 2025 at $3.7 billion, but both companies’ market caps had declined sharply since then. Coogan adds that their combined market cap is now under $1 billion, raising the possibility that the deal might no longer make sense even aside from regulation. Thompson compares the dynamic to a company whose stock suffers after the market decides it was desperate to make a deal, even if the deal never closes.