Editor’s note (July 10): Fiji Simo has resigned from his full-time role at OpenAI due to health reasons.
Game Pass, which was supposed to have 77 million members this year, has less than 30 million. (Reuters)
It’s not the PayPal mafia yet, but the Instacart matriarch is making her mark. Shortly after former online grocery store head Fidji Simo became Sam Altman’s product-focused assistant at OpenAI, Asha Sharma, the former chief operating officer of Instacart, became Satya Nadella’s Ms. Fix-It at Microsoft Gaming. Groceries are a tricky, low-margin business. So is Xbox—and Ms. Sharma has wasted no time in getting to work. On July 6, less than five months after becoming the division’s boss, she launched what she called the biggest reset in its 25-year history.
Ms Sharma has shown candor in her work, which is rare in the conservative world of big tech. Declaring that Microsoft’s gaming arm was “not healthy”, he announced that 3,200 employees would be laid off over the next 12 months, and five loss-making studios would be axed. His diagnosis makes two things clear: first, Mr. Nadella’s gaming strategy has failed miserably; Second, the entire console industry is in a supply-chain crisis. Not a hard-core gamer, the battles ahead will test Ms Sharma’s mettle.
As Mr. Nadella has focused on the artificial-intelligence boom in recent years, Xbox has suffered from neglect. Under previous management, it sought to reduce its reliance on Xbox consoles and focus on its multi-platform subscription service called Game Pass, intending to become the “Netflix of gaming”. To drive demand, Microsoft invested more than $20 billion on games and studios, insiders say, plus it invested more than $70 billion in buying “Call of Duty” maker Activision Blizzard in 2023.
Sadly, Game Pass, which was supposed to have 77 million members this year, has less than 30 million. Meanwhile, the multi-platform approach has weakened Microsoft’s own console business by making content available on other platforms, such as Sony’s PlayStation, which has kept its own games away from Xbox. Microsoft’s quarterly gaming revenue has been declining since last autumn. Xbox’s operating margin is just 3%. It is losing market share to another console-maker, Nintendo. The bureaucracy has ballooned; In some parts of the company, work passes through 14 layers of management, Ms. Sharma says. Like the real-life Pac-Woman, she intends to limit those to at least three.
His strategy is bold. The year of layoffs would be the largest in Xbox history. The settlement of his studio would end Microsoft’s efforts to poach indie game-developers. Yet it’s not all cost cutting. Insiders say Ms Sharma intends to invest in “Minecraft”, a hit game that was used as a cash cow rather than a growth engine and which Roblox, a game competing for the attention of young people, has lost significant ground. She also plans to double down on mobile gaming by using the untapped expertise of King, creator of “Candy Crush,” which was purchased with Activision.
The hardest part will be saving the console. When Ms. Sharma took office in February, she promised “to bring back Xbox.” Gaming hardware sales have been in decline for a long time, but insiders say Ms. Sharma considers Xbox users her core customers, and spend far more on games and services than PC players.
Yet when Ms. Sharma tries to win him back, the ground slips beneath her feet. When he took control of the business, costs had already increased in the consumer-electronics industry due to AI-related demand for memory chips and other components. A company source says that within its first 50 days, input costs increased by 50%. All three console-makers have been forced to announce price increases at a time when growth in the industry (except China) is sluggish.
The lack of components will have long-term consequences. Microsoft had hoped to increase production of the console to support the eagerly awaited release of the latest version of “Grand Theft Auto”, created by listed studio Take-Two, which is rumored to have cost a whopping $2 billion to develop. The lack of supply will make it difficult to increase console production to meet expected demand.
Both Microsoft and Sony are expected to launch next-generation devices in 2028, which may also be disrupted by supply-chain chaos. Piers Harding-Rolls of consultancy Ampere Analysis says Microsoft may suffer greater losses, because as a consumer-electronics company Sony has strong relationships with suppliers. On July 1, Sony said it would stop selling physical discs in 2028, a decision Mr. Harding-Rolls says is long overdue, but could help offset rising costs.
Some think that Microsoft’s best response to both the strategic blunders and the hardware crisis would be to shut down the gaming business. Gil Luria of DA Davidson, an investment firm, believes the revenue lump resulting from the seven-year console cycle is better suited for private-equity investors than public investors.
There are still potential development opportunities within Xbox, which Ms Sharma hopes will be worked on before a final decision is made about its future. But as Ben Thompson of Stratechery, a popular newspaper, says, “Sometimes it’s game over.”
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