Report: Xbox targeting 30% profit margin amid layoffs, restructuring, and AI adoption

Demanding profit targets have driven the radical shifts at Xbox, new reports from Bloomberg indicate.

Racked by overseas tariffs and economic disruption, the video games industry has collectively downsized in an effort to make sure profit margins don't sink too low. Xbox, which made a $68 billion acquisition just years ago, has responded aggressively in ways in which the FTC had previously warned--mass layoffs for workers and price hikes for consumers.

The economic squeeze comes at a time when Microsoft's executive management and board of directors demand the best from Xbox, which now owns Call of Duty and 19 other $1 billion+ grossing franchises. Sources tell Bloomberg's Jason Schreier and Dina Bass that Xbox is expected to target a substantial 30% "accountability margin," which is Microsoft's internal accounting version of a profit margin.

• Read more: Microsoft clarifies Xbox revenue reports, says Activision has delivered growth
• Read more: Xbox helped contribute to a 21% increase in segment profitability
• Read more: Xbox is becoming more profitable despite $530 million earnings decrease

According to data from S&P Global Intelligence, Xbox had an accountability margin between 10-20% over the last six years, with the latter likely reflecting post-merger performance that includes Activision's contribution.

Information gleaned from the FTC v Microsoft trial shows that Xbox had an accountability margin of just 12% in a 9-month period from July 2021 to March 2022.

30% is a higher profit margin than major competitors like PlayStation can deliver, but Nintendo spent half of the Switch's 8-year generation with margins exceeding 30%.

There are some major caveats to making these kinds of comparisons.

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Nintendo enjoys stellar profit margins due to its work with profitable hardware, tight software budgets, and a more profit-oriented revenue recognition structure.

For one, Nintendo's revenue is more profit-oriented than PlayStation's right from the start because the company does not include the full sum of third-party microtransactions or digital game sales in its net revenues figures.

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PlayStation's operating income margins are typically lower because its revenue is always larger due to how it recognizes sales.

Sony, on the other hand, does include 100% of these revenues in its figures. This means that PlayStation's revenues are less profit-oriented from the start because the company still has to pay the publishers/game developers their cut of the sales.

Then there's Xbox's mysterious accountability margin measurement. That's an internal financial metric used by Xbox's accountants and bookkeepers, and isn't explained in a straightforward way.

The only explanation that we have is from the FTC trial, where both Xbox gaming CEO Phil Spencer and Microsoft CFO Amy Hood define the metric.

Below is Phil Spencer's testimony, with the FTC's questions outlined in bold:

Q On the other side we have Sony with PS5 and a very analogous hardware subsidy. Sony's gaming P&L runs at lower GM and AM percentage margins than our gaming business, even though they have 2 times the console installed base.

GM means gross margin, right?

Gross margin percentages.

Q And AM means accountability margin?

Accountability margin percentage, yes.

Q Is that like profit?

That's the percent of your revenue that you keep in profit.

Amy Hood's declaration from 2023 confirms the definition of accountability margin, but does not detail how the metric is calculated:

"Xbox sometimes referred to as Microsoft's Gaming business, is treated as a standalone entity for purposes of financial accountability. The annual financial targets I set for Xbox include a top-line revenue target and a bottom-line "operating profit" or "accountability margin" (AM) target. Xbox is accountable to me and to Microsoft for meeting those targets.

"Xbox has historically had a lower operating margin that Microsoft's other lines of business. That is still true today. Microsoft's operating margin is approximately 40%. Over time, we are starting to increase Xbox's operating margin to bring it closer to those of Microsoft's other lines of business."

Given these disclosures, we can make rough comparisons of the Big 3 companies, because Xbox's accountability margin of $1.5 billion had been previously leaked in the FTC trial.

Here's a side by side of each of the Big 3's revenues, operating profit (or equitable measures), and margins.

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