Although a number of recent Xbox games have gained a good reputation in the industry, Microsoft's gaming division has experienced a turbulent period in recent years. After reporting a quarterly profit of $27.2 billion, Microsoft still laid off thousands of employees, including those in the Xbox division, canceled several games and closed some game studios, while also raising the price of Xbox Game Pass Ultimate.
The latest report from Bloomberg's Jason Schreier and Dina Bass shows that the reason behind this series of changes may be related to the extremely high profit margin target set by Microsoft Chief Financial Officer Amy Hood for the Xbox division. Starting in the fall of 2023, Microsoft will use "responsible profit margin" as its internal assessment standard, requiring the Xbox department to achieve a 30% profit margin. This results in projects that fail to bring significant returns to be frequently axed. In comparison, the gaming industry's usual profit margins are around 17% to 22%, while the Xbox division's profit margins, which are involved in the hardware business, have hovered between 10% and 20% over the past six years, and will be only 12% in 2023. Therefore, the latest 30% target is almost impossible to achieve.
Under this requirement, Xbox director Phil Spencer had to adjust his strategy and recently released some games developed by Xbox Studios to Nintendo and Sony PlayStation platforms. This profit assessment does not cover all Xbox studios, but it is gradually allowing more teams to accept the challenge. For studios that are unable to reach their goals, Microsoft will provide certain compensation based on "member weighted value", which also takes into account the sales lost through subscription services (such as Game Pass). This formula is more inclined to reward works with high activity on the Game Pass platform.
In response to Bloomberg's report, an Xbox spokesperson said: "We consider the entire business and balance innovation, creativity and sustainability across multiple product lines. Like all creative companies, sometimes they have to make difficult decisions to stop projects that no longer fit the development direction and invest resources in areas that are more aligned with strategy."
Whether Xbox can withstand this pressure in the future is yet to be seen, but at present, the 30% profit margin target is undoubtedly an arduous task. Xbox is expected to announce its latest quarterly earnings on October 29.