Microsoft hints at its Xbox endgame

Ever since Satya Nadella took over as Microsoft's CEO, there's been a cloud of speculation lingering over the company's Xbox division. Nadella's focus is strongly and unapologetically on a key set of Microsoft's core strengths - enterprise software, cloud services and securing the market position of the Windows / Office product range - and Xbox, an entertainment hardware platform for consumers, seems at odds with a company increasingly focused on software and services for businesses. There have been rumours of talks with other industry giants aimed at selling or spinning off Xbox, though they ultimately came to naught, leaving Xbox as an unusual, out of place division within a pivoting Microsoft.

"As the core features (and software) of Xbox are made available on Windows 10, so too will the Xbox become more like a PC"

This isn't actually a new position for Xbox, which has been at something of a tangent to the rest of Microsoft since its inception. Originally conceived as a strong response to the perceived threat of Sony - the then-dominant PlayStation 2 seemed to herald a bid to wrest control of consumer home entertainment from Microsoft, whose previous living room initiatives (WebTV, anyone?) had failed miserably - the division was led by and attracted a talented if motley group of Microsoft outsiders and mavericks. Within a few years, the original raison d'être of Xbox had evaporated; both Microsoft and Sony lost the battle for the consumer, with smartphones, tablets and other devices running Apple and Google operating systems becoming the core of most people's entertainment and communication ecosystems instead.

The Xbox 360, though, justified its place in the company on its own strengths, comfortably outselling Sony's PS3 for most of its lifespan. Xbox One, despite selling more strongly than the Xbox 360, is a different story, and a distant second to PS4 in installed base. It's easy to justify sustaining a strange, badly fitting business unit when it's generating acres of good press and dominating a market sector; with that advantage gone, the spotlight has inevitably turned back to the question of what Microsoft does with Xbox now.

At last week's Xbox Showcase event, we got a pretty good, albeit still incomplete, answer. Xbox is going to push ever deeper into the Windows 10 ecosystem. Following updates to the console that essentially turn its OS into a version of Windows 10, and permit various cross-platform features between Xbox One and Windows 10 PCs, Microsoft is now pushing the concept of a Universal Windows Application, which essentially means games that run on PC and on Xbox One (and on tablet devices like the Surface). Developers will create their games and sell them through the Windows Store, with the notion being that, in theory, you'll buy a game once and play it on whichever Windows 10 platform you prefer - a paradigm Microsoft has been driving towards with, for example, the free copies of Quantum Break on Windows 10 it's giving to people who pre-order the game digitally on Xbox One.

As the core features (and software) of Xbox are made available on Windows 10, so too will the Xbox become more like a PC; without giving details, Xbox boss Phil Spencer hinted at a (near) future where the console is upgraded on a much faster, more flexible cycle, more like a smartphone (with a 12-month refresh cycle and, generally, a 24-month lifespan in consumers' hands) than like an existing console (whose hardware spec remains fixed for six or seven years).

"If successful, it would probably mark the end of game consoles as we know them; the long predicted "death of the console" brought about through evolution into a new form of device"

This is a vision that makes enormous sense in the context of trying to fit Xbox within the jigsaw puzzle of Microsoft's wider business. It would essentially take the Xbox One - a console which, remember, has already pivoted dramatically from its original, highly controversial vision - and turn it into a formal extension of the Windows 10 ecosystem, treating it as an experiment in discovering a new technical and business model for console hardware within a much more connected world. If successful, it would probably mark the end of videogame consoles as we know them; the long predicted "death of the console" brought about through evolution into a new form of device. But in some ways, this move is less about overall market success and more about figuring out how to position Xbox (which Microsoft's upper management and shareholders do not care deeply about) as an important pillar of strength for Windows 10 (about which they care very, very much).

Don't underestimate just what an enormous change to the console model Spencer was proposing in his Showcase talk. Cross-play between Windows 10 and Xbox One is a big deal, of course - though it's likely to infuriate PC gamers who already vociferously dislike console specifications being used as the "base spec" for games on their platform - but it's the knock-on consequences of the notion of a more frequently upgraded console that are most important, and most suggestive of an end to the console model as we know it today.

The existing console model is relatively straightforward: an expensive, high-spec device is released to the market at or below cost price, with the platform holder gradually moving into profit over five to seven years through a combination of cost savings on hardware (the price of the machine falls far more slowly than the cost of parts and manufacturing) and licensing fees on software sold for the device. There are many reasons why consoles remain popular despite the huge performance advantage of PCs: ease of use, design, software line-up and future-proofing are important, but price is perhaps the biggest factor, with consumers who buy something like a PS4 getting a pretty amazing bargain in terms of cost to performance ratio, at least in the early years of the console's life.

The smartphone model, to which Spencer alluded approvingly, is very different. No manufacturer sells smartphones below cost. While smaller manufacturers struggle to make money in a competitive market, both Apple and Samsung have solid profit margins on their devices. New smartphones are, as a consequence, very expensive, with $700 to $800 not unusual for a high-end model. Consumers do replace these, in general, every two years, with most using plans from their network service providers to spread that cost out over a 24 month period, "buying" a new phone with a renewal of that plan at the end of the period. The cost of the phone isn't subsidised, despite the often misleading claims of phone networks. Consumers pay the full amount, one way or another, spread out over two years.

"In the space of time between console launches under the old model (let's say six years), the Xbox hardware would be refreshed three times"

How might an Xbox operating on that model look? One can imagine essentially 'leasing' an Xbox from Microsoft, paying a monthly fee for the system (which would incorporate your Xbox Live access) for 24 months, with the company giving you a new, improved Xbox at the end of your two-year contract, and either letting you do what you want with the old device or - more likely - collecting it from you at the end of the period, since it's in their interest to keep consumers on up- to-date Xboxes rather than letting a ton of older, less capable devices float around in the after-market.

The notion of console "life-cycles" would be gone. In the space of time between console launches under the old model (let's say six years), the Xbox hardware would be refreshed three times. The console would get to make some cost savings on hardware over its shortened two-year refresh cycle, but they wouldn't be very significant; the chances are that consumers would always be expected to pay the full launch-day price of the console, spread out over monthly payments. This would, of course, mean that over a six-year life-cycle, a regularly-refreshed Xbox customer would probably end up paying something like $2000 for their hardware, while a customer buying a PlayStation on the old model (assuming Sony stuck to the old model) would have paid around $400. With the actual monthly cost probably being around $30, though, and Xbox being accessible to customers who didn't have $400 on hand right then, would consumers notice or object to the huge difference?

A lot of people are going to have quite visceral reactions to what Spencer and Microsoft are proposing, no doubt, but I think there's a really interesting argument on both sides. A regularly updated console platform could still offer many of the advantages of a console - a somewhat fixed target spec for developers, great ease of use for consumers, relatively low cost to entry - while taking on board some advantages of a PC, like being able to deploy performance improvements and technological advancements more rapidly. As part of the Windows 10 ecosystem, and sharing many (though not all, Spencer has confirmed) games with its PC counterpart, there would also be the interesting opportunity to allow consumers to bounce between a gaming PC and an Xbox console depending on which suits their lifestyle and their budget better at any particular point, safe in the knowledge that they'd be taking their library of games with them on the move.

"Microsoft is to be commended for trying - once again, and perhaps more credibly and interestingly this time - to shake up the status quo of the console industry"

On the other hand, the existing console model is popular for good reasons, too. It's extremely cost-effective, and it gives consumers a cheap system that's pretty much guaranteed to deliver good quality games for over half a decade. Backwards compatibility, despite much being made of it in the media, has rarely proven to be much of a draw for consumers; rather, they seem more concerned with feeling confident in forwards compatibility, the knowledge that the system they own today will still be playing games released in a year, two years' or three years' time. A smartphone-like "leasing" model for a more regularly upgraded Xbox might assuage that concern, but there will still be overlap between models' lifespans, and games on the 2020 Xbox that won't play (or will play badly, which might actually be worse) on the 2018 Xbox many consumers still own.

There's also a question of how this model plays in markets outside the United States and other wealthy, developed countries, where the success of consoles generally hinges on them launching later in their lifespans, when cost savings in manufacturing make it economically viable to release lower-cost hardware in lower-income territories (and the second-hand aftermarket is a big deal there, too). In the traditional model, that lower-cost hardware can still play today's latest games; in Microsoft's new model, older hardware will play older games, which may severely limit its appeal outside high income regions.

Even while recognising the internal politics within Microsoft that have fuelled this swing in the vision for Xbox, the company is to be commended for trying - once again, and perhaps more credibly and interestingly this time - to shake up the status quo of the console industry. Of course, there's no innovator's dilemma facing Microsoft; in distant second place behind Sony, it has little to lose from trying something new, but that doesn't detract from the value of what it's proposing. It may not work; it may well be that console consumers, who are developing a solid track-record of proving pundits wrong about their preferences for console hardware over alternatives, stick with what they know and love. But faced with a market drubbing at the hands of Sony after releasing a console that is, objectively, not all that different from the PS4, Microsoft is doing the right thing by trying something entirely new. Whether it fails or succeeds, this battle of two very different models and visions for the world of consoles is something the industry truly needs.