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Phil Spencer on what the hell is happening in the games industry and why exclusives have become a risky business

Thick Thighs Save Lives

NeoGAF's Physical Games Advocate Extraordinaire
“The math on [making] a game has definitely changed,” said Phil Spencer, CEO of Gaming at Microsoft.

Polygon spoke with Spencer during the annual Game Developers Conference, and though the conversation ranged from the possibility of a handheld console to the trouble 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 — Xbox included — get out of it?

Spencer’s views point to a collision of rising budgets, diversifying business models, and the exceptional financial risk now required to meet the audience expectations of a AAA release. He specifically pointed to the astronomical budgets of big-budget games, which have created a knot of problems that has been a challenge to disentangle. And for Spencer, the path forward is to abandon assumptions about exclusivity and attract new customers who have cooled on the console experience.

But first, for context, Spencer talked about how things used to work when budgeting and greenlighting a video game. The Microsoft exec has been producing games for long enough that he can remember when the financials were relatively straightforward. A publisher could set a sales goal (say, 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’s publisher and/or studio could set a budget.

Halo_Infinite_2020_Ascension_Demo_Campaign_04_1920x1080.jpg


However, the financial calculus has changed. In 2024, most games are sold across multiple storefronts, often steeply discounted mere weeks after release or included as part of subscription services on launch day. Plus, the games themselves take many years to create with the help of hundreds, if not thousands, of team members, sometimes spread across the world. All of this adds up, and as Spencer says, it can cost “$300 million to build a video game.”

Spencer explained how this cost forces three substantial problems: one for all big-budget games, one unique to console exclusives, and one that spans the entire industry.

  1. The cost “really reduces the risk that publishers are willing to take.” Where previous games needed to sell a few hundred thousand units to justify their cost, new games may need to sell many millions of units. “If you’re a publisher, you know that’s a pretty big number in a world that already has a lot of video games coming.” said Spencer. “How are you going to establish this thing? Am I willing to take the red on new IP — on a new kind of game — when the earnout risk is that high? I think it impinges on the creativity of this industry, which I don’t love. Creativity is like the cornerstone of what we should be about in gaming.”
  2. This cost is particularly prohibitive for exclusives that can only reach so many players. As Spencer explained in our conversation about the perils of exclusivity and walled-garden consoles, these games need to make additional money to justify the console maker subsidizing the cost of the console. As Spencer explained, “[The case for] exclusivity gets pressured as the cost of the game goes up.”
  3. According to Spencer, the console market has not grown in the past year. Though 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, “everybody else’s customer is your success state,” said Spencer. “You can’t succeed unless you draw in customers from other publishers and other platforms. And because you’re not finding new customers with the games that you’re building, everybody’s kind of fighting over the same-size pie.”

These problems have had a very real, substantial, and immediate human cost. The industry has seen consistent and mounting layoffs, including a particularly rough start to this year. Shortly after Microsoft’s acquisition of Activision Blizzard King, the company announced it would be laying off 1,900 workers from its gaming division.

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

It’s a little bit of both,” said Spencer. “But I’ll say the thing that has me most concerned for the industry is the lack of growth. And when you have an industry that is projected to be smaller next year in terms of players and dollars, and you get a lot of publicly traded companies that are in the industry that have to show their investors growth — because why else does somebody own a share of someone’s stock if it’s not going to grow? — the side of the business that then gets scrutinized is the cost side. Because if you’re not going to grow the revenue side, then the cost side becomes challenged.

“We’re a business. I’ve said over and over. I don’t get any luxury of not having to run a profitable growing business inside of Microsoft. And we are that today. But just across the industry — you mentioned it, and in sitting here at GDC, I reflect on friends of mine in the industry that have been displaced and lost their jobs and how just, I don’t want this industry to be a place where people can’t, with confidence, build a career. So that’s why I keep pivoting back to: How does this industry get back to growth? But to your question, for us as Xbox or any of the teams that are out there, it is really an outcome of an industry that’s not growing. It can grow and it will grow again. But you see this time right now and the implications have human impact. And we should all reflect on that and think about it.”

As we talked through Microsoft’s plans for growth — both with the company and the wider games space — Spencer continually returned to the idea of exclusivity. This year, Xbox Game Studios Publishing has begun 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, like exclusivity, that may be responsible for the stagnation of the console market.

Xbox Series X controller


“[Consider] two years of lack of growth in the gaming industry at the top line. You start to ask yourself, 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, every decision we make today and tomorrow is for the better of Xbox,” said Spencer. “I know sometimes things get weaponized, that there’s some evil in the background that’s making us do things — ‘Phil hates exclusives and that’s why we’re like PlayStation and Switch now.’ Every decision we make is to make Xbox stronger in the long run. It doesn’t mean everyone’s going to agree with every decision we make. But it is fundamental for how we make decisions.”

For Spencer, moving toward the future is about walking — in some part — away from exclusivity.

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

 
This weird notion kids don't want consoles makes no sense to me specially considering most people i hear on multiplayer games.

That's Jez's narrative now?

Video games consoles overall was always something niche when compared to mobile phones, etc...this isn't new.

Jez needs this narrative.

If he admitted the truth, he would have to kill himself....

He's still thinking about Windows Phone, that's how desperate he is
 

SlimySnake

Flashless at the Golden Globes
I'm not going to lie, my kids dont play xbox or switch, they would rather jam out on their tablets, playing roblox or some other garbage ass game..
Thats your fault lmao.

I started my kid on my 3ds playing zelda link between worlds. took him a year to get it and make progress. by the time he was six, he was able to beat some dungeons. Got him a switch and raised him on Mario, Luigi and more zelda games. When he went to trash like minecraft and robolox a couple of years later, he just didnt find them fulfilling enough. Now he plays robolox with his friends to socialize every now and then but would rather play street fighter, spiderman, botw, totk, and other AAA games.

apparently all his friends are playing fortnite too but im not letting him play that trash. you control the trash they play.
 

RCU005

Member
Of course for Xbox exclusivity is risky. They don’t have a big market share.

Look at Nintendo, out of those 100M Switch consoles, their biggest games sale 20% 30%. All other games could sell between 5% and 10%.

If you have a market share of 30M, your biggest game could only sell 10M max.

Phil is looking to keep themselves in the gaming industry by removing the console, but how many times do they have to tell him that is called “Third Party”?

IMO, Microsoft could rearrange their entire business to become third party and I believe it could work. They would have to change entire managements in order to coordinate different studios to make great games, but if they were smart about it, they have franchises that could sell 20M+ between Nintendo and PlayStation, plus making new great IPs.

However, it’s Microsoft, and they don’t want to do things to succeed, they want to do things to make others fail.
 
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The idea of constant growth is such bullshit. There is a limit of individuals on the planet, hence a limited number of customers, current and potential. Even if they were the market leaders, they would eventually hit the max amount of units/services they can sell. So no, there cannot be "constant growth", be it Sony, Nintendo, or Microsoft. This is by far the most stupid fallacy of capitalism.
 

ChorizoPicozo

Gold Member
This weird notion kids don't want consoles makes no sense to me specially considering most people i hear on multiplayer games.

That's Jez's narrative now?

Video games consoles overall was always something niche when compared to mobile phones, etc...this isn't new.
that's not the issue

to me is more about these clowsn using those kind of arguments (Xbox Tax, PS is a big baddie, Gen Z etc.. ) to defect Xbox incompetence.

These fuckers act like they have released AAA GOTYs/New IP consistently for 10 years. and then said:

"Well, we have tried to compete but GEN Z man, they don't wanna buy consoles"🤷🏻‍♂️

yxPybat.gif
 
To be fair, when I was growing up we got stuff like Halo, CoD, Mass Effect, Half Life, etc. and i could go on and on. Point being all this stuff was brand new and unlike any games before them. They were made for us and were ours. What has the industry given to Gen Z? Fortnite is really the only new IP that is theirs, everything else is sequels or reboots of shit thats been around so of course Gen Z is not going to be in the console space like we were.

Just want to add that, with skyrocketing budgets and six year production cycles, the unfortunate reality for Gen Z is that they are not going to get their own set of AAA games like previous generations have. Playing that forward, most of them probably do not migrate from mobile to consoles meaning, we see a contraction in the console market. Note, this contraction probably gets masked by MS dropping the Xbox (perhaps something like 125M PS5/XSS-X --> 100M PS6). A contraction when budgets and dev cycles are at all-time highs. It's going to be a bloodbath in the AAA space.
 
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Thats your fault lmao.

I started my kid on my 3ds playing zelda link between worlds. took him a year to get it and make progress. by the time he was six, he was able to beat some dungeons. Got him a switch and raised him on Mario, Luigi and more zelda games. When he went to trash like minecraft and robolox a couple of years later, he just didnt find them fulfilling enough. Now he plays robolox with his friends to socialize every now and then but would rather play street fighter, spiderman, botw, totk, and other AAA games.

apparently all his friends are playing fortnite too but im not letting him play that trash. you control the trash they play.
It's my fault that my kids have their own tastes and opinions? Good.

I'd rather them be individuals. My son, 9, would rather draw, build, work on circuit projects, and other stem projects. He spends more time in Procreate than he does in Roblox. My daughter, 6, plays with toys and sometimes digs into goose game, but overall prefers youtube and bluey.
 

JackMcGunns

Member

Phil Spencer on what the hell is happening in the games industry and why exclusives have become a risky business*​


*for xbox

It's an industry problem, not just Xbox. Why is Sony closing studios and laying off people as well? Why are PS Only exclusives now also available on PC? If you told me a few years ago that God of War, The Last of Us, Horizon, etc, were coming to PC, I would've laughed in your face, but times are changing.
 

kbear

Member
The idea of constant growth is such bullshit. There is a limit of individuals on the planet, hence a limited number of customers, current and potential. Even if they were the market leaders, they would eventually hit the max amount of units/services they can sell. So no, there cannot be "constant growth", be it Sony, Nintendo, or Microsoft. This is by far the most stupid fallacy of capitalism.
The problem is that, as he said, they’re publicly traded companies. Investors invest in them expecting growth. When that growth is stagnant or decreasing, investors lose confidence. That’s why the FIN guy is running Playstation now, Hiroki Totoki, desperately trying to improve margins and cut costs.
 

gothmog

Gold Member
It's an industry problem, not just Xbox. Why is Sony closing studios and laying off people as well? Why are PS Only exclusives now also available on PC? If you told me a few years ago that God of War, The Last of Us, Horizon, etc, were coming to PC, I would've laughed in your face, but times are changing.
Not sure I agree. The layoffs are largely because they can get away with it and wall street approves of this approach to stabilize financials. The pandemic made these companies a ton of money and their shareholders demand that the growth keeps happening even though it makes no sense. Pandemic is over and people aren't spending like they did in 2020 to not die of boredom.
 

SlimySnake

Flashless at the Golden Globes
The entire interview sounds like him defending the reason to go multiplatform with his exclusives tying everything from layoffs to poor release quality to costs to his decision to take MS multiplatform.


  1. The cost “really reduces the risk that publishers are willing to take.” Where previous games needed to sell a few hundred thousand units to justify their cost, new games may need to sell many millions of units. “If you’re a publisher, you know that’s a pretty big number in a world that already has a lot of video games coming.” said Spencer. “How are you going to establish this thing? Am I willing to take the red on new IP — on a new kind of game — when the earnout risk is that high? I think it impinges on the creativity of this industry, which I don’t love. Creativity is like the cornerstone of what we should be about in gaming.”
The costs are higher but they are the ones making 100-200 hour games. Gamers said no to 8 hour games. No one skipped buying Mass Effect 2 because it was 20 hours long. Or TLOU/UNcharted 4 because they were only 15 hours and linear. No one said spiderman needed to be 50 hours like GOW Ragnorak or 100 hours like Horizon FW. It sold more than both.

Phil gets to decide the budgets and thus the scope. Cut games down to 15-20 hours and it will reduce dev time which is why the game budgets have ballooned to hundreds of millions. Get games out in 2.5-3 years and no one will complain.

  1. This cost is particularly prohibitive for exclusives that can only reach so many players. As Spencer explained in our conversation about the perils of exclusivity and walled-garden consoles, these games need to make additional money to justify the console maker subsidizing the cost of the console. As Spencer explained, “[The case for] exclusivity gets pressured as the cost of the game goes up.”
Nonsense. We have seen sony's leaked numbers and virtually every game sold 3.5-20 million. including so-called flops like Days Gone which sold over 7 million and didnt get a sequel. All the big AAA games like Horizon, GOW, Spiderman, TLOU, uncharted and GoT were over 10 million. Most around 20 million. Easily profitable.

  1. According to Spencer, the console market has not grown in the past year. Though 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, “everybody else’s customer is your success state,” said Spencer. “You can’t succeed unless you draw in customers from other publishers and other platforms. And because you’re not finding new customers with the games that you’re building, everybody’s kind of fighting over the same-size pie.”
Console market didnt grow last year because Xbox failed to ship consoles. PS sold 22 million units. PS4 never did this and PS2 only did this twice. Switch is in the 7th year of its life and still outsold MS consoles. this is his fault. not the industry's.

Also, PC market did grow because sony and ms decided to port or ship everything on PC. So stfu. you did this to yourselves.
 
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Pejo

Member
That was a pretty good read, quite a few good points I think Phil makes in this one.

Nobody "official" will say it, but I think ignoring and then turning against their core demographics has hurt videogames much in the same way that Hollywood is feeling pain from constantly pushing certain narratives and seeing box office bomb after bomb. People want entertainment, not activism and politics at every fucking turn.

There's no way that somebody at Microsoft isn't smart enough to see the correlation, yet they continue to double down on it to the detriment of sales.
 

SlimySnake

Flashless at the Golden Globes
It's an industry problem, not just Xbox. Why is Sony closing studios and laying off people as well? Why are PS Only exclusives now also available on PC? If you told me a few years ago that God of War, The Last of Us, Horizon, etc, were coming to PC, I would've laughed in your face, but times are changing.
Sony did it because everyone else is doing it. most of these companies are making record profits and laying off people. Why? The industry culled a bunch of people to keep shareholders happy. if everyone in the industry is doing it and you dont do it, the shareholders want to know why. And because sony CEO threw PS under the bus, Sony had no choice but to cull 900 employees.

Look at sonys revenues. They are up 3x from 2016. Their profits per year are in the billions. they made $2.5-3 billion in profits the entire PS2 gen.

The only reason why their profits took a hit the last two years is because they are paying off the $3.5 billion bungie purchase. Otherwise their business is very healthy. This is all for show for the shareholders.
 
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