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How Microsoft Is Ditching the Video Game Console Wars

In mid-2014, Satya Nadella, who had just become the chief executive of Microsoft, ushered the heads of the company’s gaming division into his fifth-floor office in Redmond, Wash.

The executives wanted Mr. Nadella to write a $2.5 billion check to buy Mojang, a Swedish company that produced a blocky, pixelated game called Minecraft. Mr. Nadella asked why Microsoft, which was being consistently outsmarted in the console business by Sony, should keep investing in video games. How, he said, did that fit with his vision for a company with a friendlier face that appealed to more consumers?

Then Phil Spencer, the new head of Xbox, told Mr. Nadella about Minecraft’s vast world where millions could socialize and where teenagers were encouraged to learn math and science skills. A deal would be the first step of a “a pretty bold vision” to transform Microsoft’s gaming business into one focused on a broader audience, rather than just console gamers, Mr. Spencer said.

Mr. Nadella agreed and made the deal happen. What followed, according to interviews with more than 20 Microsoft executives, game developers, industry analysts and gamers, was a yearslong shift. Instead of competing mainly with rival Sony to sell more consoles, Microsoft bought 15 other game studios and invested in new technologies, like a Netflix-style games subscription service and a mobile tool known as cloud gaming.

Now, as Microsoft prepares to show off new offerings at the annual gaming convention E3 this weekend, its video game business looks very different. The company is still known for the Xbox, a new version of which was released in November. Even so, it has diversified beyond boxy hardware to provide a new array of services.

“Their strategy has diverged quite significantly from a traditional console approach,” said Piers Harding-Rolls, a gaming researcher at the analytics firm Ampere Analysis.

With the changes, Microsoft is betting that the future of gaming will be a post-hardware world where people may not want to spend hundreds of dollars for a console, executives and analysts said. Eventually, they said, people might no longer be tied to specific devices to play games, and will instead care more about software and services.

While Xbox consoles still generate plenty of revenue — in January, Microsoft reported $5 billion in quarterly gaming revenue for the first time, bolstered by the release of the Xbox Series X — the company stopped disclosing its console sales in 2014. The majority of gaming revenue comes from content and services, rather than Xbox hardware sales, said Tim Stuart, Xbox’s chief financial officer.

Its gaming business still faces hurdles, including shaking a perception among gamers that it does not have their best interests at heart. That distaste stems from a messaging failure in 2013, when Microsoft presented its new Xbox One console as an entertainment device that people could use to stream music and movies. In response, gamers revolted.

The Xbox One still sold about 50 million units, analysts estimated. But it was far outdone by Sony’s PlayStation 4, which was also introduced in 2013 and has sold 116 million units.

“We lost our step of what gamers wanted,” Mr. Stuart said.

After the backlash, Microsoft shifted gears. Mr. Nadella had just taken over and wanted the company to move from focusing on software to cloud computing and subscription services.

Mr. Spencer ensured that the games division’s evolution mirrored those goals. He persuaded Mr. Nadella to buy Mojang in September 2014, which was the new chief executive’s first acquisition.

“Gaming is much more central to Microsoft today than it ever was in our history,” Mr. Nadella said in an interview last week.

In 2017, Microsoft released Xbox Game Pass. For $10 or $15 a month, subscribers could play a specific set of games for as long as they stayed on the service. That upended the traditional model, where people paid $60 for games like Call of Duty and owned them forever.

To persuade game publishers to put their titles on Game Pass, Xbox executives flew around the world to meet developers and proselytize their vision of an industry where video games were cheap and easily accessible.

Initially, developers were “leery,” worrying they would lose money on the service, said Sarah Bond, a Microsoft vice president who leads the gaming ecosystems organization.

So she decided to study how Game Pass affected gamers’ behavior. Microsoft said on Thursday that it found that people using the service spent 50 percent more money overall on games and played 40 percent more games than nonsubscribers.

Mike Blank, a senior vice president at Electronic Arts, which put its games, like the Madden NFL and FIFA soccer franchises, on Game Pass in 2020, said there was initially “trepidation” around subscription services. But the company has been happy with the results and “players are responding favorably,” he said.

Microsoft also spent heavily on game development to expand the Game Pass offerings, buying studios including a $7.5 billion acquisition of ZeniMax Media in September and adding hundreds of games to the service. This year, it also considered buying the messaging app Discord, which gamers use to chat while playing.

The diversification continued in late 2019, when Microsoft released a cloud gaming service, in which games are hosted in a company’s data centers and are broadcast to devices. The service, Xbox Cloud Gaming, or xCloud, means that people do not need to install games or use expensive hardware.

The idea of a cloud gaming service had crystallized for Mr. Spencer earlier that year, when he was on a bus in Nairobi, Kenya, and connected to Wi-Fi. He found that he could stream a game from Microsoft’s data center in London to his phone.

“It was literally the same saved game I had sitting in Redmond, Wash.,” he said. “It really just pushes how you can make gaming truly global.”

On Thursday, Microsoft said it was working with television manufacturers to put its games inside TVs without the need for an Xbox. It added that it would soon bring cloud streaming to the console as well.

For now, cloud gaming is still bogged down by glitchy gameplay and requires a strong internet connection. Xbox Cloud Gaming is still in trial and Apple has barred the app from iPhones because it includes a catalog of games, and Apple requires separate apps for each game as part of its app review process.

At the same time, Xbox continues to trail Sony’s PlayStation. In April, Sony said it sold 7.8 million new PlayStation 5s between November and March, while analysts estimated Microsoft had sold more than four million new Xboxes in the same period. Sony declined to comment.

Some gamers said Microsoft has failed to win them over because it still lags Sony in exclusive, quality games.

“I just have always been under the impression that PlayStation is better,” said Natalia Mogollon, a gamer known as Alinity who streams her game play on the site Twitch to 1.3 million followers.

Yet when Microsoft nabs exclusive content, it can backfire. In 2015, when the game publisher Square Enix released a popular game first on the Xbox, gamers were angered that Microsoft would limit access to the title. The reaction was similar when it considered buying Discord, and when it was reported last month that an upcoming ZeniMax game would be exclusive to Xbox.

“It can look like a big corporation coming in to screw up and screw over their favorite game developer,” said Rod Breslau, a video game consultant.

As Microsoft has shifted away from the console wars, Mr. Spencer’s own tone has also softened. In an interview with The New York Times in 2014, he signaled that he would not back down against Sony. “I’m in this to win,” he said.

In an interview last month, he took a different approach. “We don’t look at Nintendo and Sony and say that company has to lose in order for us to win,” he said.

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He Warned Apple About the Risks in China. Then They Became Reality.

In 2014, shortly after Mr. Guthrie left his job as dean of the George Washington University business school, Apple hired him to teach its managers and advise executives about China. He also conducted research, and his first project was the company’s supply chain. Mr. Guthrie, now 52, left Apple in 2019 and is a professor at the Thunderbird School of Global Management at Arizona State University.

When he started at Apple, Mr. Guthrie said, its executives knew they relied too much on China and wanted to diversify. India and Vietnam were the top candidates, but Mr. Guthrie concluded that neither was a viable replacement.

Vietnam’s government was cooperative, but the country simply did not have enough workers, he said. India had the people, but its bureaucracy made it complicated to build infrastructure and factories. Beyond those issues, most of the smaller suppliers that made Apple’s screws, circuit boards and other components were already concentrated in China.

Apple has still pushed into India and Vietnam in recent years, including by building a smaller iPhone assembly plant in India, but Tim Cook, the chief executive, has said publicly that its supply chain will remain centered in China.

To Mr. Guthrie, that stance left Apple vulnerable, especially as China’s new leader was looking for ways to use his influence over American companies in the country. In 2014, China’s so-called dispatch labor law went into effect, limiting the share of temporary workers in a company’s work force to 10 percent. From Day 1, Apple and its suppliers were in violation.

At a Foxconn plant in Zhengzhou, China, the world’s biggest iPhone factory, temporary workers made up as much as half of the work force, according to a report by China Labor Watch, an advocacy group. After the report, Apple confirmed that the factory broke the law.

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Lina Khan Was One of Big Tech’s Biggest Critics. Now She’s Its Regulator.

WASHINGTON — One of Lina Khan’s first projects as a new staff member at an antitrust think tank in 2011 was researching the history of the market for books, which had increasingly been dominated by Amazon. It was an early, unpublished entry in a body of work that has since established her as a major critic of the tech giants and corporate concentration.

She spent the next 10 years honing her arguments, becoming a leading figure in a growing movement that calls for more aggressive policing of Google, Facebook, Apple and Amazon.

Now she’s in a position to put those ideas into action — and in doing so, potentially reshape how the country regulates its biggest companies. On Tuesday Ms. Khan, 32, was sworn in as chair of the Federal Trade Commission after being appointed to the role by President Biden, the youngest in the agency’s history and its most progressive in at least a generation.

“She brings to the job what I would call the boldest vision for the agency in its history,” William Kovacic, a former chairman of the agency, said of her approach to competition law. “So in that respect, she is a potentially transformative figure.”

The question is how much she will be able to accomplish.

Her fast ascent from researcher to leader of a large federal agency underscores the growing concerns about the power of the big tech companies — and big business in general — in Washington. In her new job, she will command more than 1,000 investigators, lawyers and economists who are responsible for policing the American economy.

Her reach will extend far beyond the tech giants and the antitrust legal critiques where she made her name. The F.T.C. investigates unfair or deceptive practices by companies in addition to antitrust violations. This year alone, it has challenged the merger of two cement producers in Pennsylvania, cracked down on unsupported statements about treatments for Covid-19 and reached a deal with two liquor companies over a merger it said would hurt competition for cheap sparkling wine.

But Ms. Khan will also confront her share of limits. In order to create new rules or take major actions against companies, she will need to persuade at least two of the four other commissioners to agree with her. She will also need to make decisions that can hold up in the courts, which have tended to push back against aggressive antitrust enforcement.

“If you want your vision to endure,” Mr. Kovacic said, “you have to change law and policy, and you can’t do that by yourself.”

Ms. Khan did not comment for this article. In a statement on Tuesday, she said she looked forward to “working with my colleagues to protect the public from corporate abuse.”

Ms. Khan rose quickly to prominence. After a few years at the think tank in Washington — during which she wrote, among other things, about the failure to rein in concentration in chicken farming — she went to law school at Yale. While a student there, she wrote about how Amazon’s rise illustrated the need for a more muscular approach to regulating industry. The article turned her into a celebrity in the small world of antitrust law.

Ms. Khan then made stops in Washington that established her as a behind-the-scenes presence. She worked at the F.T.C., for the progressive commissioner Rohit Chopra, and on Capitol Hill, as a staff member for a sweeping investigation of Silicon Valley’s power. As lawmakers grilled the chief executives of the Big Tech companies, Ms. Khan sat behind them.

During that time, Ms. Khan rarely circulated among Washington’s politicians and policymakers at galas and other events. Her supporters say she is cerebral, calm under pressure and generally lacking the kind of visible ego that is endemic to Washington strivers.

“She is extremely humble,” said Sarah Miller, the director of the American Economic Liberties Project and a former co-worker of Ms. Khan’s who supports her approach to antitrust. “She is focused on ideas and strong arguments.”

But as chair of the F.T.C., she will most likely need to use the bully pulpit as one of her most powerful tools.

She will be the face of the agency, and of the country’s oversight of big business. She will represent the agency at congressional hearings and on panels and in speeches for the thousands of lawyers paid to defend clients in front of the F.T.C.

Leaders of the agency frequently use those public events to present their vision of antitrust and consumer protection law, making the case to the public and their colleagues on the commission.

Ms. Khan will also have more blunt instruments at her disposal. The agency can reject mergers or force companies to modify the terms of their acquisitions. In the past decade, the agency has approved numerous deals involving the tech giants, like Amazon’s acquisition of Whole Foods. It didn’t stand in the way of Facebook’s purchases of Instagram and WhatsApp. But Ms. Khan has already said she thinks regulators should scrutinize those types of transactions more closely.

The agency can also take companies to court for violating the law, as when it sued Facebook last year accusing it of abusing its monopoly power. It is able to make rules regarding what constitutes fair competition.

Ms. Khan is one of five commissioners, and one of three Democrats, giving her a working majority as she starts her new job. But Mr. Chopra has been nominated to lead the Consumer Financial Protection Bureau, and his departure would deadlock the commission between the Democrats and its two Republicans until Mr. Biden can get a new member confirmed by the Senate.

She also faces other threats to her agenda. Whatever major moves she makes will most likely have to survive challenges in courtrooms dominated by conservative judges. This year, the Supreme Court unanimously limited the F.T.C.’s ability to claw back money from companies that deceive customers.

Critics say that the job of antitrust and consumer protection enforcer is to adhere to laws that already exist. Her reputation, however, is built on her criticism of the laws.

Robert Bork Jr., president of the Antitrust Education Project, a group that advocates for a traditional interpretation of antitrust law, wrote on Tuesday that Ms. Khan was a “celebrity scholar recasting antitrust law into a tool to enable government to control capitalism.” Mr. Bork is the son of Robert Bork, the legal scholar who championed much of the current antitrust doctrine that Ms. Khan criticizes.

Her skepticism of an antitrust theory known as the consumer welfare standard — the measure of competition based on whether prices for consumers rise — is dangerous, Mr. Bork warned.

“When standards are vague, and the law ambiguous, the Biden administration and its regulators will have the means to arbitrarily crack down on any business,” he said.

For now, though, her supporters are elated. Representative David Cicilline, the House Democrat whose investigation Ms. Khan worked on last year, said he believed her appointment was a change from decades during which the agency largely approved corporate concentration.

“I think we can expect a very different approach with this monopoly moment and the enormous market dominance of these technology firms with Lina Khan at the head of the F.T.C.,” he said at a Wednesday news conference.

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Amazon Is Brilliant. Why Not at H.R.?

This article is part of the On Tech newsletter. You can sign up here to receive it weekdays.

We’ve heard a lot of debate about whether work at an Amazon warehouse should be considered a good job or a bad one. My colleagues Jodi Kantor, Karen Weise and Grace Ashford spent months trying to answer a different question: How well does Amazon manage all those people?

What they found was that Amazon’s systems for mass-managing its hourly work force are strained and uneven, resulting in high turnover of employees. I encourage you to read their deeply reported investigation, which left me wondering whether Amazon’s handling of arguably its most important asset — its roughly one million employees in the United States, mostly hourly workers — is effective or sustainable for the company, let alone those people.

I spoke with Karen about what she and her colleagues learned, and where Amazon’s reputation for supreme efficiency is at odds with the chaos of managing its staff.

Shira: You found that Amazon had to replace more than the equivalent of its entire hourly work force in a single year. That is stunning. Is Amazon pushing them out or are they quitting?

Karen: Both. Amazon hires so many people, often with no in-person interview and little vetting, and it loses a significant number of workers within the first couple of weeks after they’re hired. We’ve heard of people walking out on their lunch break on their first day of orientation. That creates a tremendous amount of turnover and some chaos in the workplace.

We also wrote about an employee named Dayana Santos, who had been praised by managers and then was fired for one bad day when for various reasons she wasn’t consistently producing. She’s someone the company should have wanted to keep. Amazon has since changed the policy that led to her firing, but the example shows that the company has built systems that cannot always effectively assess who is a capable worker.

Is the high rate of employee turnover intentional?

David Niekerk, a former Amazon vice president who built the warehouse human resources operations, said that Jeff Bezos didn’t want lengthy tenure for hourly employees. Company data showed that employees became less engaged over time, and Amazon wanted people who would push to go above and beyond.

Maybe Amazon doesn’t want to have so many people leave every year, but changing that is not the No. 1 priority, either. Amazon churns through so many employees that I’ve heard numerous Amazon leaders in Seattle describe a nagging fear that the company will run out of Americans to hire.

What does Amazon say about this?

Amazon told us that the rate of attrition of workers is just one metric that isn’t relevant without context. The company didn’t elaborate. Company officials didn’t say that it is unacceptable to have 150 percent turnover in a year.

Let’s be real about the dollars and cents. Isn’t it costing Amazon a lot of money to replace so many people?

It is. And a crucial — maybe the most important — factor in Amazon’s future growth is not the success of futuristic inventions like delivery drones or home robots. It’s how effectively Amazon manages the people who pick, pack and ship all those boxes to our doors.

Tech companies talk about “moonshots,” or doing the seemingly impossible. With Alexa, the company started with a vague idea but put its best people on the project, set incredibly ambitious targets and figured it out. Some Amazon executives at the corporate level and those who oversee the warehouses are asking why managing more than one million humans hasn’t been that type of high priority moonshot.

Bezos wrote in April that he wanted Amazon to become “Earth’s best employer and Earth’s safest place to work.” What does he mean? And what actions is Amazon taking?

Amazon has talked about the safety part but not as much about the other half of Bezos’ statement. Being a great employer is about more than pay, although Amazon has increased hourly wages recently and is paying new-hire bonuses.

After we inquired about the company’s policies, Amazon also changed its use of a productivity metric that some workers said had been arbitrarily applied. Someone can no longer be fired for one bad day. (Amazon said it had been reconsidering the policy for months.)

Are there successful companies that manage hourly workers differently than Amazon?

Costco’s chief executive testified to Congress that its hourly workers tend to have long tenures. That’s a source of pride for Costco.

Walmart is often criticized for its labor practices and it generally pays less than Amazon, but it says that more than 75 percent of managers at its U.S. stores started as hourly employees. It’s extremely challenging to make that jump at Amazon.

Sam’s Club, which is part of Walmart, trains workers to do multiple jobs in a store. That’s partly to keep people feeling fresh in their jobs and learning new skills. Amazon warehouse employees might do the same type of work for 10-hour shifts every day.

  • Cyberattacks are on top of the foreign policy agenda: My colleague David E. Sanger explains why digital hacking was at the top of the agenda for President Biden’s meeting Wednesday with President Vladimir Putin of Russia. The “deterrents that kept an uneasy nuclear peace in the Cold War won’t work with digital threats,” David writes.

  • What happened when Nigeria banned Twitter: After the government suspended people’s ability to access Twitter this month, BuzzFeed News spoke to Nigerians who felt that they lost a lifeline to speak up, connect and organize protests against inequality and violence.

  • We are the gadget guinea pigs: Amazon experiments with selling devices to see how people respond to them, like Alexa eyeglasses and buttons to reorder items like toilet paper. My colleague Brian X. Chen writes about the benefits and risks of Amazon conducting its research and development on the public. (I wrote last month about the difference between worthy real-world tests of new products and reckless ones.)

Esme the cat is an adorable thief. A woman in Oregon put up a clothesline in her yard for her neighbors to retrieve gloves, masks, bathing suits and other items that Esme had cat-burglared from them.

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