Xbox exec: 'Content and services is our north star'

Xbox gaming chief financial officer Tim Stuart offers a candid outline of Microsoft's video games business and confirms importance of content & services.

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Following its loss in the Gen8 console race, Microsoft shifted its business towards content and services rather than hardware. The bet is paying off.

Xbox exec: 'Content and services is our north star' 34

Xbox has changed in the years leading up to the Activision Blizzard King acquisition. Xbox went from a console to a service that bridges consoles, PCs, mobile phones, and even smart TVs. Xbox even has a very powerful presence on competitor systems thanks to heavy-hitters like Minecraft, Elder Scrolls Online, and Fallout 76. The company prepped its infrastructure throughout 2013-2015 by unifying Windows PCs and Xbox Ones, and now services have accelerated dramatically with the popular Xbox Game Pass subscription.

Microsoft's core strength has always been services, software, and subscriptions, and it made sense to adapt Xbox into this model--After all, hardware isn't a very high-margin business, and for Xbox, it's actually a negative-margin business because no Xbox console has ever been sold at a profit. Microsoft makes its money back from software, content, monetization, digital advertising, and subscriptions. Based on Xbox's recent record-breaking $16.2 billion revenues for FY22, ths plan appears to be working well.

Now in a recent interview at Wells Fargo's TMT Summit held last month, Xbox chief financial officer Tim Stuart breaks down the center of Microsoft's gaming strategy.

Below we have a transcript of what Stuart said during the interview. If you're an Xbox fan, you'll want to do a read-through because this gives us a good idea of what's on the horizon for Xbox.

Can you talk about the mix of services to hardware? Does this change seasonality?

Xbox chief financial officer Tim Stuart:

"Starting with seasonality, one of the things we focus on a lot is sort of a games-as-a-service. What we really mean is the ability to talk to your customers more often.

"Think about Fortnite, a great example that really did it well, things like Fortnite are less about a holiday bump and more about, 'hey, we're launching a Thanos skin in game, in May.' I'll say, as a platform, we love that.

"As you think about content and services as our north star, it really smooths things out. You're still going to have a holiday bump, you're still going to have consoles that we sell, and customers that spend in those time periods, but even things like Game Pass...we announced 25 million Game Pass subscribers, obviously it's grown since then.

"Game Pass is millions and millions of subscribers month in and month out, which for me I love because it's a sort of paid annuity as opposed to you betting on those big game launches every quarter or every year. Game Pass helps us smooth it out as well.

"About 6-7 years ago, we stopped giving console volume externally. At first they're like 'what are you doing, you're the Xbox business, you're not giving us consoles...that makes no sense.' But it was really the first point of us saying 'no, it's about content and services.'

"Our business is P times Q (price x quantity); more customers spending more money. That's really how I think about our model.

"So when we talk about content and services externally, that's our KPI. For that number to go up, you need more gamers and you need more gamers spending money. We've really focused on that with our internal teams to say 'here's how we grow the business. Go bring more users in, and find ways for them to play.'

"And it goes a little bit to my last point here, which is business model optimization...well, we call it optimization, but it's really 'business model diversity.'

"If a gamer comes in, they can subscribe to Game Pass, they can buy a game digitally, they can have advertising to fund their game that way. However they want to monetize, we're trying to find a way for them to spend money with us. We've seen that as a very good accelerant in this content and services landscape.

"It also helps us, maybe lastly, on geographic expansion. The vision I like to talk about is we have xCloud game streaming, so you can subscribe to Game Pass Ultimate and you can stream hundreds of games to really any endpoint that has a browser experience.

"For models like Africa, or India, Southeast Asia, maybe places that aren't console-first, you can say, 'hey, do you want to watch 30 seconds of an ad and then get two hours of game streaming?'

"Africa is, you know, 50% of the population is 23 years old or younger with a growing disposable income base, all with cellphones and mobile devices, not a lot of high-end disposable income, generally-speaking.

"So we can go in with our own business models and say...there's millions and millions of gamers we would never have been able to address there, and now we can go in with our business models.

"That's a long way of saying...smooths it out, but really, content and services revenue is that north star that we're aimed at."

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Derek joined the TweakTown team in 2015 and has since reviewed and played 1000s of hours of new games. Derek is absorbed with the intersection of technology and gaming, and is always looking forward to new advancements. With over six years in games journalism under his belt, Derek aims to further engage the gaming sector while taking a peek under the tech that powers it. He hopes to one day explore the stars in No Man's Sky with the magic of VR.

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