Phil Spencer on what the heck is happening in the games industry

“The math of making a game has definitely changed,” said Phil Spencer, CEO of Gaming at Microsoft.

Polygon spoke with Spencer at the annual Game Developers Conference, and while the conversation ranged from the possibility of a portable console to the issues with closed platforms, one theme was inescapable: what the hell is going on with the games industry? And how will video game makers and publishers – including Xbox – come out of this?

Spencer’s views point to a collision of rising budgets, diversification of business models and the exceptional financial risk now required to meet the public’s expectations of a AAA release. He specifically pointed out the astronomical budgets of big-budget games, which have created a tangle of problems that are difficult to untangle. And for Spencer, the way forward is to let go of assumptions about exclusivity and attract new customers who have been chilled by the console experience.

But first, for context, Spencer shared how things are going used to work when budgeting and greenlighting a video game. The Microsoft executive has been producing games for so long that he can remember when financial matters were relatively simple. A publisher can set a sales goal (for example, 800,000 units), set an earnout goal (how much money they want to make), and set the price of the game (usually $59.99). From there, a video game publisher and/or studio can set a budget.

However, the financial analysis has changed. In 2024, most games will be sold through multiple stores, often with steep discounts just weeks after release or included as part of subscription services on launch day. Moreover, the games themselves take many years to create, with the help of hundreds, if not thousands, of team members, sometimes spread across the world. This all adds up, and as Spencer says, it can cost “$300 million to build a video game.”

Spencer explained how these costs create three substantial problems: one for all big-budget games, one unique to exclusive consoles, and one that spans the entire industry.

1. The fees “really reduce the risk publishers are willing to take.” While previous games needed to sell a few hundred thousand copies to justify the cost, new games may need to sell many millions of copies. “If you’re a publisher, you know this is a pretty big number in a world where a lot of video games are already on the way.” Spencer said. “How are you going to set this thing up? Am I willing to overdraw for new IP – for a new kind of game – if the earnout risk is so high? I think it affects the creativity of this industry, which I don’t like. Creativity is the cornerstone of what gaming should be about.”
2. These costs are especially prohibitive for exclusive offers that can only reach a limited number of players. As Spencer explained in our conversation about the dangers of exclusivity and walled garden consoles, these games need to make extra money to justify the console maker subsidizing the cost of the console. As Spencer explained: “(The case for) exclusivity is coming under pressure as the cost of the game rises.”
3. According to Spencer, the console market has not grown in the past year. While Xbox, PlayStation and Nintendo Switch consoles continue to sell, Spencer notes that many console gamers are simply upgrading – or, to put it another way, they’re not new to the market and won’t contribute to growth. And without new customers, “everyone’s customer is your success status,” Spencer said. “You can only succeed if you attract customers from other publishers and other platforms. And because you don’t find new customers with the games you build, everyone is fighting for the same pie.”

These problems have had very real, substantial and immediate human consequences. The sector has seen continued and increasing layoffs, including a particularly difficult start to this year. Shortly after Microsoft’s acquisition of Activision Blizzard King, the company announced it would lay off 1,900 employees from its gaming division.

Polygon asked Spencer if the layoffs at ABK were part of this broader trend, or if there was something unique about the layoffs as they related to the current Xbox business.

“It’s a little bit of both,” Spencer said. “But what worries me most about the sector is the lack of growth. And if you have an industry that is expected to be smaller in terms of players and dollars next year, and you get a lot of publicly traded companies in the industry that need to show growth to their investors – because why else does anyone own a company? part of someone’s stock if it is not going to grow? — the side of the business that is next examined is the cost side. Because if you don’t grow the revenue side, the cost side will be tested.

“We are a company. I’ve said it again and again. I don’t have any luxury if I don’t have to run a profitable growing business within Microsoft. And that’s us today. But across the industry – you mentioned it, and as I sit here at GDC, I’m thinking about friends of mine in the industry who have been displaced and lost their jobs, and how righteously I don’t want this industry to become a place where people cannot build a career with confidence. So that’s why I keep going back to: how does this industry get back to growth? But to your question: for us as Xbox or any of the teams out there, it’s really a result of an industry that’s not growing. It can grow and it will grow again. But you see this time now and the implications have a human impact. And we all need to think about that and think about it.”

As we discussed Microsoft’s growth plans – both with the company and the wider games world – Spencer continually returned to the idea of ​​exclusivity. This year, Xbox Game Studios Publishing has started porting more and more former exclusives to other consoles, like Nintendo Switch and PlayStation 5. For Spencer, this is a way to bring more players (and sales) to old games, but it’s also a way to break some old industry habits, such as exclusivity, that may be responsible for the stagnation of the console market.

“(Think about) two years of lack of growth in the gaming industry at the top. You start to wonder, Well, I don’t want to grow at the expense of the industry, I want to grow as part of the industry, and what do we need to do as an industry to get back on the growth path?

“I will say that every decision we make today and tomorrow is for the better of Xbox,” said Spencer. “I know that sometimes things are used as a weapon, that there is an evil in the background that makes us do things – ‘Phil hates exclusive games and that’s why we’re now like PlayStation and Switch..’ Every decision we make is designed to make Xbox stronger in the long run. It doesn’t mean that everyone will agree with every decision we make. But it is fundamental to the way we make decisions.”

For Spencer, moving into the future is about – in part – walking away from exclusivity.

“This idea that Xbox can just be this one device that plugs into a television is not something we see in the Gen Z research. Because nothing else is like that for them. Some of them will have an iPhone, some of them will have an Android, but all the games and everything is the same. I can still reach TikTok on both, at least for now. All their stuff is available wherever they want. So for Xbox, the linchpin of our brand – as we attract a younger audience and maintain relevance – is ‘Xbox is a place where I can find the great games I want.’”