While many recent Xbox games have performed quite well in terms of critical reception, it"s been a difficult past couple of years for Microsoft"s gaming division. Despite posting a strong quarter with $27.2 billion in profit, the firm did lay off thousands of employees, including those who work for Xbox, canceled several games, shuttered studios, and hiked the price of Xbox Game Pass Ultimate. Now, we may have a reason behind all this madness.
According to a report from Bloomberg"s Jason Schreier and DinaBass, both of whom have a solid track record in terms of credibility, Microsoft CFO Amy Hood has set an extremely difficult profit margin target of 30% for the Xbox division. Internally, this metric is tracked as "accountability margin". Apparently, this pursuit of high profit margins is why Microsoft is canceling games left and right. Projects that aren"t expected to generate a sizable return are getting the axe.
For context, typical profit margins in the video game industry revolve around 17-22%, but they"re likely even lower for a division that also deals with hardware, like Xbox. For the past six years, Xbox"s margin has hovered between 10% and 20%, and in 2023, it was reported at 12%. This is why the latest 30% target sounds so impossible.
This mandate was imposed in the fall of 2023 by Hood and has apparently caused pivots in strategy for Xbox chief Phil Spencer, who has released Xbox-published games for Nintendo and Sony PlayStation platforms in recent months. Xbox studios have not been tasked with hitting profit targets in the past, and that is still not the case with all teams, but it is being assigned to a lot of teams nonetheless. Studios that are unable to achieve their targets are also given credits called "member-weighted value" that account for lost sales through subscription services like Game Pass. This formula tends to favor titles on which Game Pass players spend a lot of time.
An Xbox spokesperson told Bloomberg that:
We look at the business as a whole, balancing creativity, innovation, and sustainability across a diverse portfolio of offerings. As with any creative business, sometimes that means making hard decisions and stopping work on things that are no longer working for a variety of reasons, and shifting resources toward the projects that are more aligned with our direction and priorities.
It remains to be seen if Xbox will be able to sustain this pressure moving forward, but it does seem like an impossible task. The division is expected to reveal its next quarterly earnings on October 29.