Why Scorpio and Xbox One S sales don't actually matter

During a busy first day of E3 2016, I visited the Xbox booth to sit down with boss Phil Spencer. In the aftermath of the press conference in which Microsoft announced two distinctly new members of the Xbox family, the Xbox One S and the super-powered Scorpio, my head was filled with questions about Microsoft's quickly evolving strategy. Was this really a sea change to the console industry as we know it? How does Microsoft view the technology curve and will developers and consumers be willing to ride that curve? And what about Microsoft's continued reticence on actual sales numbers while Sony's PS4 races steadily ahead?

On that last point, it's become evident that the Xbox business is, ironically, no longer about selling Xbox units. Wrap your head around that - Phil Spencer does not care if you upgrade from Xbox One to Scorpio, so long as you're an Xbox user. Yes, there needs to be a certain number of boxes out there, but what matters most to Microsoft now is that you're an active user of Xbox Live and their ecosystem, purchasing games, DLC and playing online. Whether you're doing that through an Xbox One, an Xbox One S, Scorpio, a Windows PC or some other device is of little importance.

The full interview with Spencer follows below.

GI.biz: Scorpio sounds like it's effectively the beginning of the end of the traditional 5 to 6-year console cycle, and that would have huge ramifications for consumers and developers. Recently you've hinted at how things could be headed in the direction of a smartphone technology curve, where every year or couple of years a consumer might want to get a new console. Does Scorpio mark the beginning of that happening?

Spencer: I probably think about the motion in console a little differently than the phone market, though I've used the phone market as an example, so I'm not being critical of you using that model. When I think about gaming technology, I think there are certain inflection points that happen that excite gamers and developers to a point that they create kind of a foothold for themselves. 2D to 3D was one of those. Cartridges to discs was one of those. Standard def to hi-def was one of those. And frankly, when you think about the generation of consoles that are here today with PS4 and Xbox One, I don't think there was actually that big thing that we could all point to... Standard def to hi-def to PS3 and 360 was just so obvious. 4:3 to 16:9 [aspect ratios], interlace to progressive. You saw a thing on screen that was just so obvious that [you said] "Ok, a new generation of graphics is here."

Watch on YouTube

When we were looking forward with Scorpio, we saw 4K as something that's catching on on the PC side of gaming and we said, "Ok, is there a way for us to bring that to console?," but to also not create a scenario where somebody has to start again at zero with their library and their overall experience, the old kind of put all my stuff in the closet, buy something new and start again that we're used to in that kind of generation change. And 4K was that thing on the horizon that we saw and said let's go and build a box. And when we started talking to creators, six teraflops of power was what they were looking for.

Probably where it differs a little bit on the business angle... cell phones are sold almost always at a positive margin on the device, so the model of selling you a new phone every - as often as you will buy it - is a good business for phone manufacturers, most of them. For us in the console [industry], the business is not selling the console. The business is more of an attached business to the console install base. So if you're an Xbox One customer and you bought that console 3 years ago, I think you're a great customer. You're still using the device. That's why we focus on monthly active users. That's actually the health of our ecosystem because it's really you want this large install base of people that are active in your network buying games, playing games. That's the actual judge of the health. Not somebody who buys a console and puts it in the closet. That's actually a horrible customer for us because we probably paid money actually, subsidized the console and nothing ever happens with it. So our model's not really built around selling you a new console every one or two years. The model is almost the exact opposite. If I can keep you with the console you have, keep you engaged in buying and playing games, that's a good business.

"So our model's not really built around selling you a new console every one or two years. The model is almost the exact opposite"

But when you see things like 4K coming, I want to make sure that we create a part of the Xbox One family that supports 4K but doesn't have you feel like you're leaving all the content investment that you made in the platform itself. So that's what we think about the generations differently. 4K I think you can say will be a generation, but unlike in previous consoles, we don't want you to have to feel like you left behind the experience you had. And, frankly, if you're an Xbox One customer, and you want to continue to build your library and buy and play games, if and when you decide 4K and Scorpio is for you, we'll be there. And if you never do, you're a great customer for us. I don't need to abandon you in any way. In fact, I want to keep you as happy with your Xbox One as you've ever been. So that's what we think about Xbox One and Xbox One S and Scorpio as all part of one family.

GI.biz: Right, I get that, but we've seen some Twitter reactions from developers saying, "How can we afford to support yet another console?" And if they're building out a game that takes advantage of Scorpio's much greater power, how do they make that same experience at the same time for Xbox One? Do they have to water it down?

Spencer: That's a great question. When we were talking to people about the design point for Scorpio, we talked to the people in the PC community because the PC community has been doing this for a while. And frankly, we know this. There's no developer out there today, except for in maybe a first party, that's only focused on one platform. Some are still going PS3, 360, PS4, Xbox One, and PC. When you say PC there's probably a minimum [spec], a recommended [spec], and then an uber-config that they're focused on. So what we've been talking about for the last couple of years is how do we unify that PC and console development ecosystem on Xbox so that if I'm a DirectX 12 developer they run on both consoles and Windows. If I'm using Xbox Live, that's available on console and Windows. So my social connection, my graphics layer all works. The engine and middleware providers are almost all on console and Windows. We're continuing to grow the capability of the Universal Windows Platform to literally allow you to build one game that would run on console and on PC. So that's an enabler. You still have a scenario of whether the different configs [and resolutions is something you'll support] and I think that will all be part of install base size.

Xbox One is at an install base now where as a developer you're going to look at that design point of the Xbox One and Xbox One S capability and there's enough - I mean, there's tens of millions of customers there. So you're going to say, "Absolutely, I'm going to focus on that config." And then we want to create that same capability with Scorpio and we kind of bridged to some of the 4K capability in PC to say, ok, here's a common design spec here. And then other people will go and do unlocked frame rate 6K games on PC and we want to freely support those as well. So I don't think Xbox One actually becomes a challenge in support because you've got so much capability in that PS4/XBox One compute spec that people will see that install base of players there that will always be worth [targeting] for an awful long time. On the PC side, developers have been doing this for quite a while, right? You kind of look at, whether it's GPUs that created real massive consumers that you still see in the PC space or in console generations, like I said, there are still people building Xbox 360 games and PS3 games. It's really all about an install base of players that are buying and playing games.

GI.biz: But how do consumers afford a quicker upgrade to Scorpio? Is there a possible scenario where the business model changes so that an Xbox Live subscription helps subsidize a new Xbox console purchase every few years?

Spencer: To some extent, that model already plays. I mean, most of the hardware that's out there - if you look at the fully burdened costs of all the design work and everything else, is not really sold at a profit. Most of it's sold at break-even to a loss. And the model is I'm selling games on top of that and I have services that I sell on top of that. In terms of subsidizing even more, we looked at this at the tail of 360, of do we go and actually create - effectively they're financing plans, because in the end it's all, "Ok, how much do you pay up front and how much do you pay over time and what's the interest rate on that?" There's no secret math there, right? It's all pretty straightforward in terms of how the business runs. And there could be models where you'd want to say, "Is there some kind of plan that I'm on?" Clearly the cell phone model has data plans that they attach... we don't really have a data plan necessarily that we would add on top of. If I was to add something on top of your purchase today, buy your next console early or something, in the end it's just a financing or a layaway plan, depending on how you look at it for the model.

"If I was to add something on top of your purchase today, buy your next console early or something, in the end it's just a financing or a layaway plan, depending on how you look at it for the model"

We want to focus on making consoles as affordable as we can. I love that Xbox One S is $299. Today we announced that the original Xbox's promotional price is at $279. What I can say to the price sensitive customers, which is a vast majority of the customers that are out there, you go buy one of those consoles now and start building the library of games that you want to play, when you move to Scorpio, if you ever do, those games are going to continue to run just like we did with 360 back compat and we're going to continue to invest in the experience for you across the whole family and making sure that as you upgrade, when you upgrade, if you upgrade, you feel like you're getting value in the new hardware but your experience is also continuous with what you've done before.

GI.biz: Does Scorpio upscale those older games to 4K if you have a TV to play in 4K?

Spencer: So a couple things happen. Even on the Xbox One S, if it's plugged into a 4K TV, it is going to upscale the picture to 4K. It doesn't touch the pixels of the game. It just upscales everything. The video it supports is obviously true 4K. It has true 4K video streaming in Blu-ray. There are games that were written on Xbox One, and we continue to evangelize this tech of dynamic scaling - Halo 5's a good example - when Halo 5 runs it wants to max out at 1080p/60 frames per second or highest resolution/60 frames per second. As scenes get more complex, the vertical resolution will shrink... to keep the 60 frames per second. When that same game's running on Scorpio, because of the compute capability, it's effectively is going to run at its max resolution the whole time. And so you will see advantages like that when your Xbox One games are running on Scorpio. So that's why we continue to talk to developers about dynamic scaling because I think as compute capability goes up on the hardware, they kind of get it for free. Now, it's not going to make Halo 5 run with 4K pixels. The frame buffer is not a 4K frame buffer for the game. But it will run more solidly. And certain developers might go back and decide if they've built a 4K version for PC already for some of their games, they might go back and decide to enable a 4K version for the Scorpio Xbox when it launches.

Watch on YouTube

GI.biz: It seems like Scorpio is being built to support VR in part. I realize Microsoft is looking to build its own mixed reality ecosystem with Windows Holographic, encouraging devices to be built around that, but how does the overall VR/AR picture fit into Xbox and Scorpio?

Spencer: When we were designing Scorpio, we went out and talked to developers about what they wanted from us and, as I mentioned, 4K was something that was really important. As we continued along that journey and people were doing VR work - in fact, Todd Howard was in our Scorpio video talking about Fallout 4 for VR - we made sure that our device capability and graphic capability in the box could support the high-end VR that our creators wanted to go and make. That was an important point for us, because, like you said, you kind of see that VR is an emerging technology and an emerging art form and entertainment form and we wanted to make sure we were building a box that was part of that. The mixed reality work we do with Hololens I would say is further out, when you think about an untethered device where all of the compute capability is built into a head mounted display [and] it doesn't really dock to anything or tether to anything. But as you mentioned - a couple weeks ago at Computex in Taipei, we announced Windows Holographic as part of Windows that we would make available to VR and mixed reality companies. And, obviously, since Xbox One is a Windows 10 device, we want to enable those VR developers that are doing so much incubation on Windows to see that capability come to console. We will talk more about specifics about what we're doing with Scorpio later, but it was an important part of the road map as we designed it.

GI.biz: You've talked previously about how proud you are about how Microsoft Studios has grown with a diverse lineup, but many people have characterized Sony's studio system as being stronger in that regard. Do you feel that that's an unfair comparison at this point considering the array of content you have?

Spencer: That's a trap question... You know, I was very proud of our line-up in 2015. I thought we had a really good line-up. When I look at this year, I'll just take the E3 conferences... we showed four big games launching exclusively on Xbox One and Windows 10. When I think about Gears, Forza Horizon, ReCore, Dead Rising 4 - all of those games are launching this year and they've been announced, there are dates next to them. And I think on the indie side, we've got Inside which I've been playing. We've got We Happy Few. We've got Blow. We've got Cuphead. There are a ton more, but I'm just thinking about some real highlights in indie games that are coming this year. When I watch the other platforms, it's not always clear to me when the games are shipping or how many of them are shipping this year.

And then when I think about next year for us, I think about Sea of Thieves; I think about Scalebound; I think about Halo Wars 2; we've got Crackdown coming; we've got State of Decay 2 which we showed on stage. I'm really proud of the line-up that the studios have and we continue to deliver year-in and year-out. It's an art form, so it's not like every game is going to be perfect for every person, but a diverse set of games, like you said, that they're not all shooters, they're not all this, they're not all that. I mean these are a pretty diverse set of games from a great set of developers. And to say that the other consoles are doing a better job shipping more games for their customer... I don't see that. And I see what the other first-party is doing - Uncharted was an amazing game. I think Naughty Dog did a great job. I'm sure Last Guardian, when it ships this year, will be great, but I just look at the lineup and the quantity and the quality that our team's been shipping and I feel really good about that.

GI.biz: Xbox has continually evolved its strategy. First you had to do the about face with the always-on approach, then you had to distance yourself from Kinect and separate it from the bundle, and now the real focus seems to be with Xbox Play Anywhere and the ability to play cross-platform and create one ecosystem between Windows 10 and Xbox. Is that the crux of the strategy going forward now, what you expect to drive the Xbox momentum?

Spencer: I think the strategy is really based on what we see our customers doing. And we have our biggest Xbox customers playing on console and they play on PC, and I want to embrace what they're doing. I see all the snaky comments that people will send me, "Thanks for putting all your games on PC. Now I don't have to buy an Xbox One." And I'm like, if you want me to build content to force you to buy an Xbox One... it's this kind of weird [perspective], like somehow they've caught me in some kind of trap that I didn't realize that we were creating. I want to build games and services that can reach people where they want to play. I think we have a great console experience when you're sitting on your couch with your controller in your hand looking at a TV screen 10 feet away. That is a different experience than playing on your PC. I want to embrace the console gamer, PC gamer, and frankly, a lot of people who play in both and I think we've got unique capability there. I've noticed certain people, certain constituents out there are kind of looking for manipulation. I think we're trying to offer choice in what people can do and if you want to buy our first-party games and play them on Windows, as Microsoft that's a good thing for us. At the same time, we just announced two game consoles in the same conference. I mean, who does that? It's kind of crazy.

"The strategy is focus on the customer, giving them choice about what they want to do. If you're a PC customer and you want to play all our games on PC and never even learn to spell Xbox, that's great"

We remain focused - I don't want to get distracted by other things. That's why we're not doing a lot of other things around - just people playing on PC and people playing on console, making sure that we've got the right control, we've got the right library, we've got the right service for those customers. That is the strategy. The strategy is focus on the customer, giving them choice about what they want to do. If you're a PC customer and you want to play all our games on PC and never even learn to spell Xbox, that's great. We're not trying to build any false lures to move you back ad forth. If you're a console customer and you don't play on PC and it's not for you, we want to make a great experience there. Things like Xbox Play Anywhere is, "Hey, if you're playing in both places, I don't want to have you buy the game twice." We'll authenticate you in both places through your Xbox Live account so you can play in both places. We're just trying to put the customer at the center of it and I think usually good things happen when you do that.

GI.biz: So with We Happy Few coming to Xbox preview program, are we going to hear more about how the preview program is doing? Early Access on Steam has gained momentum. I'm kind of curious if that's something you've been watching and learning from or have you been getting a lot of developer feedback? We haven't heard a whole lot about how it's going.

Spencer: So We Happy Few is coming to Xbox preview in July, but we've got a lot of games in preview now... I'm usually not a big fan of talking a lot in numbers on stage, but Chris [Charla] did go through some of the numbers in terms of Preview. It's been really successful for good games and for good pre-games that are a little earlier in development it's less good. That's the way it should be, right? Good games do well. Do I watch what Steam does and take the learnings from what different people do? Absolutely. I think that's just trying to be smart about the path forward. Developers definitely give us a lot of feedback. They love the Preview program. They see a preview program on console as a way for them to get in front of a lot of active really consumptive gamers that play a lot, get feedback and evolve what they're doing. I think We Happy Few will be a great addition to the Preview program.

Watch on YouTube

The fact that we've got thousands of [ID@Xbox] developers now across Windows and console - because most of the ID teams are trying to develop them both - they're just looking for as much oxygen and customers as they can get. I loved how we showed up on stage with ID. A couple years ago people thought we were really behind in our outreach to independent developers. I looked at it this year and I thought we had a really strong showing with some great independent developers showing amazing content. We Happy Few...was the demo for the show at such an emotional level and I love the work that Chris and the team have done both in preview and in ID across both Windows and Xbox to take the feedback from those teams about what they're looking for from a platform holder.

GI.biz: You mentioned the Xbox install base earlier, but are you able to address where Xbox actually is in terms of install base now? You've acknowledged previously that Sony is way ahead but we haven't had an update in a while, and I'm wondering if you believe Xbox One S might make a difference?

Spencer: The reason I focus our team, I focus the studios we work with, I focus the company and Microsoft on our monthly active user number - and I get some pushback sometimes if I'm just trying to dodge a PlayStation 4 vs. Xbox One number - I will say over and over the core of our strategy is to drive more and more engagement on Xbox Live, which means more people playing games, which means more games get sold for our partners and our customers are more happy. And that is the total focus. The last number we announced was 48 million monthly active users... And certain people say that's a cop out that we focus on the monthly active users. I would like to say it's actually more risky than install base. Install base always goes up. Monthly active users, actually, year-over-year can go down if people are less engaged on Xbox. I know how games that sell on Xbox do relative to the competition to some extent. I'll hear the anecdotes. What I would say is Xbox Live has grown 26% year-over-year... our customers buy a lot of games. I'm trying to reach them on Xbox and on Windows.

"The last number we announced was 48 million monthly active users... And certain people say that's a cop out that we focus on the monthly active users. I would like to say it's actually more risky than install base"

So the real reason I get less focused on how many consoles I'm selling versus Sony is because it falls right back into the trap of the guy tells me, "Thanks for putting your games on Windows. Now I don't have to buy one of your Xboxes." I don't want people to start painting a strategy onto us that everything we're doing is about selling you an Xbox console because that's not actually what we're trying to do. So then I kind of feed the wrong view into the business and what we're trying to get done if I play into a number that's actually not a number that we use to drive our strategy or our focus on delivery of games. So I know certain people will say, "Oh, that's PR speak and he's just a suit and he's kind of walking around it." I will say, fundamentally, how many people we can get on Xbox live - we just announced Minecraft coming to iOS and Android connected with Realms, that'll be more Xbox Live customers coming in - having those people engaged on the service buying games is the fundamental part of the strategy, whether they're on Windows, Xbox, or, frankly, on other devices.

GI.biz: I understand that, but at the same time it's almost like situation around Hillary Clinton's Goldman Sachs speech. It's like, "Why don't you just release it?" What's the big deal if it's not going to hurt you or harm you? Even if the numbers of engaged users on Xbox Live matters more, why is it going to harm you to put the install base figure out?

Spencer: Because the dialogue then turns into the other discussion of, "Hey, what can you do to sell more Xbox Ones than Sony sells PlayStation 4s." And I would say, the answer would be probably not put my games on Windows because then you have to buy an Xbox One in order to play those games. But then that's not what we actually get from our customers in terms of what they want. So then it starts this whole [dialogue] - I start having to answer the other question of, "Well, why don't you do more things that are counter to the actual core strategy that you have?" when the discussion that I want you and I to have is the engagement success of the studios putting the customer at the center. Xbox Play Anywhere is a program you would never do if all you were focused on was selling more Xboxes. So then I end up having this weird conversation with you about the things that I really think we should be doing and you're going to keep asking me about something that's actually not what I'm [trying to achieve]. Honestly, I'm not focused on doing things purely to outsell PS4 with our Xbox One. We're doing things beyond that.