Microsoft Needs To Spin Off Xbox, Before It’s Too Late

[Music] The big news of the week was that Jason Shrier wrote an article basically suggesting that Microsoft plans another major cut at the Xbox division of Microsoft that's supposedly going to happen next week. And so it just got me motivated to actually finally write the article that I've been trying to write for a while and publish it. And actually, unfortunately, Joseph Kim like beat me to it. But anyway, nonetheless, as I've said a million times on this podcast, and I've been talking about this way too much, is that Microsoft whole strategy has been a [ __ ] train wreck from the get-go, right? And so, what I wanted to articulate in this article is why they have failed succinctly. And I wish I write more on LinkedIn because it actually got has like 30,000 views already in like less than 24 hours. All right. So why is Microsoft failing is most important and what they can do in order to improve it. Right? One, Game Pass is missing the

mark. They are less than 40 million subs and it's nowhere near their 100 million people target. And the whole point of a subscription is to scale it so that you can justify like giving away [ __ ] content, right? So this is not happening. Their hardware share is absolutely cratered. Like they are just not competitive anymore. They're less than 30% of the console market versus Sony. And then if you add Nintendo in there, devastating loss for them. But software is the biggest red flag because software is where they make all their money. Like this is a razor razor blade business. And all the margin that they get from third party software that's cratering, right? So they are less than 14% share against Sony and even worse against Nintendo. Cloud gaming feature on the box, right? That is not expanding the market. It is not removing friction at all. Well, that is a complete loss leader for them. That is a [ __ ] [ __ ] product that that doesn't even make sense. And then the cross-platform promise is broken as well. Like all the [ __ ] PR about bringing [ __ ] to

mobile that is not [ __ ] working, right? People are not playing Xbox on a [ __ ] iPhone, right? That's not happening. That will never happen. There's a stupid idea that was all PR [ __ ] to get this deal done. It had nothing to do with like the reality of what consumers want, right? And then finally, AI is actually bad for Xbox, right? Because AI is what Microsoft is focused on. They don't give a [ __ ] about Xbox, right? It is not part of their core strategy, as I've said a million times, and it doesn't make sense to have this as part of it. The only push back I keep getting on this is that the player data that they gain from Xbox could help them build out their LLMs, which may be true, but they're not [ __ ] doing that now, as far as I can tell. And also, it's a privacy nightmare for them. So, what my solution is, [ __ ] spin out Xbox now, right? Do it now before we have a death of a thousand cuts of this [ __ ] that you guys are doing. Layoff after layoff after layoff, destroying the Halo teams, cutting all these other teams like this. It's got to stop. And if you do this now, you might might save

like the business holistically. Having said that, there are a lot of challenges again with this. So, become an independent company to keep compete head-to-head with Sony. Sunset Game Pass. Get rid of Game Pass alto together and just create a normal sub for like catalog and other [ __ ] Maybe some exclusives over time or timed exclusives, but none of this like day and date like release exclusive thing. That's not going to work. And then bring back exclusives, right? Everything will be exclusive to Xbox. Obviously, they can't do that with Call of Duty because it's contractual and they have all these legal issues, but make a very specific experience on Xbox that differentiates it from other platforms for Call of Duty. Kill the Series S. The Series S was a [ __ ] dumb idea from the get- go. That is like kept them in the dark ages of game development for since [ __ ] the launch. Almost half of their units have been Series S, which are not a capable device. And then then license it to third parties, right? And then go public, right? This would be a huge

publicly traded company. This would be Activision 2.0 with hardware, right? A pure play gaming company, right? And giving them the flexibility to do crazy things like Joseph suggested of buying Epic, which will never happen because it will never sell. But nonetheless, that gives them the much more flexibility to do what they need to do as a standalone gaming entity. The alternative, keep it [ __ ] at Microsoft, right? It avoids like the short-term pain of a major reorg and lots of like changes and big strategy pivot, but it also guarantees like this quiet decline of the destruction of teams and franchises and it trades disruption for complacency and that path leads straight to death by a thousand cuts. That is the end of my article. So, yes. Yes. Well, so one thing I wanted to ask you that we you didn't talk about was kind of the AMD and the new console announcement. So, basically, I think the last week they came out and said, you know, they're

basically continuing the partnership with AMD. So, nothing new here. Nvidia stopped making console chips for the PS3, I think, was the last time they really did it. And AMD has been the leader since then. So, let me read Sarah Bond's quote from the announcement. This is all about building you a gaming platform that's always with you so you can play the games you want across devices anywhere you want. Delivering you an Xbox experience not locked to a single store or tied to one device. Bon said at the AMD partnership, that's why we are working closely with the Windows team to ensure that Windows is the number one platform for gaming. I think they're actually doubling down on staying at Microsoft, going more vertically integrated and not listening to you whatsoever, which is No, no. Actually, this this doesn't necessarily not align with what I'm saying. Okay. I think they can execute on this strategy as a standalone

operator much better than they can under the Microsoft umbrella. Right. The AMD partnership is actually good, but the AMD partnership has been going on since the PS3 days. Like the only time Nvidia was yeah a factor was back then. So the subscription is the problem. They need a hardware strategy and this is actually a decent hardware strategy. They partner with AMD to bring the capability to different multiple devices. But then also the integration with Windows is the other thing that's really interesting as well. But I am not objecting to the PC strategy at all. Like I think the PC strategy makes sense. Like bring Xbox to PC, right? Windows 11, all that stuff. They don't need the subscription. the subscriptions are what's killing them right now, right, in terms of profitability. So, so I think they are making the right moves. This is the right strategy and even like creating third parties like licensing the tech for handheld devices with the ROG ally. Yeah. Right. Like that makes sense too, right? It's small potatoes, but that could make sense in terms of bringing the pricing down from the hardware perspective potentially over time, but

that's what they need to be focused on, not like subscription cloud, all this other crap that they've been doing. It's been an absolute like train wreck, right? Okay. All right. So, this is an Xbox strategy. Crest is approving subscription cloud. Yes. And on mobile like and mobile. Yeah. Apple and Google. Yeah. No, that's not happening. Got it. Okay. This is a stupid idea to spin off. There's no value there. Your hardware business is negative margins. you're a giant publisher with really no cohesive core with mobile king just sits around like this is just waiting to be diced and sliced and sold at different places. They're not stronger together than they are separately. That instantly is what happens if there's even a sniffle of this actually being done. There's no way they're going to be held together as a public health company. You know that too. This is why I keep pressing you on what does the P&L look like? It looks like dog [ __ ] It doesn't have to be public. It could be private equity. Sure, it can be private, but it's not going to be as one entity because that

entity sucks under one P&L. It's going to be sold and diced up for its most profitable parts. This is the thing is when I write this article, I am saying what they should do, not what they will do and not what's easy, right? Like it's much easier to stay within Microsoft and just die a slow death as they, you know, destroy all value and all teams within the company, right? Which is basically what's happening right now as we speak, like real time, right? and they have enough money, Microsoft clearly has enough money to keep this thing going for basically forever, right? In order to actually help the gaming business and create more of a dynamic market and to really innovate on the gaming side, they need to be standalone. And you're right, it's [ __ ] messy, dude. And it ain't easy and it ain't going to happen, right? Probably. But I just want it to happen so that we have a legitimate competitor against Sony and Nintendo and and just basically try to bring it back to the competitor that it used to be before they [ __ ] up that Xbox 360 generation. Xbox One generation, sorry. Nintendo and Sony are

not even like competitors. Like they're kind of like it's normal to have both of the devices, right? Which one? Switch and PlayStation. like they're not substitutes. No. Correct. Yeah. I agree with you. Actually, Philip, I don't I can't say I disagree with you, dude. But but the fact like having new leadership and I suggest like someone like Frank Chi or Owen Mahoney would be that type of person that maybe could lead this as a publicly traded company. They could actually I think make the changes needed, but it's going to be messy. Really messy to your point. Right. Like All right. [Music]