Microsoft is Gutting the Video Game Industry w/ Nathan Grayson

0:00 That was one of the largest acquisitions of any company in history. That's going to turn the IFSA on on you internally, I would imagine. Because eventually, like you have to justify a purchase like that. You can't just make it be like, okay, anyway, back to normal. This changes everything.

0:49 You probably saw the recent news that Microsoft laid off another 9,100 workers, and many of those were in its Xbox gaming division. Now, there's been a lot of talk recently about Microsoft's focus on AI and all of the money and resources that it's plowing into data centers and trying to make itself a leader in generative AI, chatbots, and you know, all of these tools by rolling it into so many of its services and pushing it on its cloud clients.

1:16 But that has also meant sacrifices for other parts of Microsoft's business, especially if they're not living up to the expectations of the C-suite as it makes this major AI push. And the gaming division has been in the crosshairs as a result of all of that. That's why I wanted to have Nathan on the show today, not just to understand what's going on with Microsoft more broadly, but how its corporate decisions are affecting the gaming division and how a number of decisions made over the past decade or so have tried to upend the video game industry as a whole by moving it from a focus on buying games and owning consoles or PCs to just having a subscription service where you get access to a library

1:55 of games like we see in music and video. But gaming is quite a distinct market, and that doesn't seem to have worked out, at least not in the way that Microsoft planned. And as it tried to achieve that upending of the industry, it spent tens of billions of dollars buying up all manner of major studios so that it could fill out that library and attract people into the Xbox ecosystem.

2:18 But this major layoff, the cancellation of a number of projects, the closure of studios that Microsoft acquired is yet another example of how that strategy has not worked out and how there has been immense collateral damage as a result of that, as growing numbers of video game workers, not just at Microsoft but across the industry, are losing their jobs as the business model for how video games works is upended and people question what its future might look like.

2:47 So as a result of that, I figured this would be a fantastic conversation to have Nathan in on, where he's been reporting on this industry for so long, because this isn't just a gaming story, but it's a larger tech story as well that shows us how the attempts to cram these business models and these expectations for how digital services should work into different industries doesn't always pay off and can have serious harm as a result of that.

3:13 So I hope you enjoy this conversation. I really enjoyed having Nathan on the show and talking to him about all of this to get his insights. If you do, make sure to leave a five-star view on your podcast platform of choice. You can also share the show on social media or with any friends or colleagues who you think would learn from it.

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3:54 Thanks so much and enjoy this week's conversation. Nathan, welcome to TechWon't Save Us.

3:59 Thank you for having me.

4:00 I'm really excited to have you on the show. You know, obviously I've been following your work for a while, particularly at Aftermath since you guys launched that recently. And I wanted to have you on the show because there's a big story that has been making the rounds in the video game news recently that hits on bigger, more structural issues that people have been talking about in that industry for a while.

4:22 And so I figured it was a good opportunity to kind of use it as a jumping off point to have a wider discussion. And that is, of course, these layoffs that we saw happen at Microsoft recently, where 9,100 people were laid off. And, you know, a disproportionate amount of those came from the video game division, Xbox and the various video game studios that Microsoft owns.

4:42 So I think the first thing I would ask is what did you make of that story? Like, you know, what was your response when you heard that so many people were being laid off and that it was yet another big layoff in the gaming division after a number of them happened in 2024 as well?

4:58 Yeah, a few things. One of them, and I I think the people were really upset about this part, just like the fact that another kind of mass layoff that targeted video games came so soon, because there had been a handful of them. There was also one that happened toward the end of 2024 that hit around 650 people.

5:15 And so, like the fact that, especially after they had purchased Activision Blizzard, which is this gargantuan video game company, they spent $68.7 billion on that purchase, it just sort of reeked of them not really having a grander plan beyond cutting their way to, you know, acceptable profit. And like, if you're going to spend that much to buy this large chunk of the video game industry, then why do it like this?

5:42 Because prior to that, they'd also bought a bunch of other video game companies. And like again, it seemed that their overall strategy was have people subscribe to Game Pass, which is a subscription service that allows people to have access to like a smorgasbord of games that they can stream, sort of akin to Netflix, and then populate it with content.

6:00 And so they're going to do that by just buying up all of these different studios who could make games at an acceptable clip, and then that would ensure that Game Pass was always moving and didn't feel stale. But especially as soon as they bought Activision Blizzard, they just started with cuts almost immediately.

6:16 They closed the Activision Blizzard deal at the end of 2023, and then January 2024, massive cuts. If you're thinking about the overall health of the video game industry, if that is your priority, then that's just not what you would do. But it's clear that Microsoft's priority is just ensuring that their balance sheet looks good and whatever happens after happens.

6:38 Yeah, and and of course, you know, then a lot of people suffer the consequences of those corporate decisions, whether it's the 1900 people at the beginning of last year, the 650 you mentioned later in the year, and now, of course, the ones who have been hit in this latest round of layoffs. And, you know, we know that there has been union organizing in the gaming division at Microsoft as well.

6:59 And of course, one of the stories that came out was some of these union members were actually kind of like in limbo as Microsoft was negotiating with the union to figure out how to like get them out the door, basically, because they didn't have a collective agreement yet.

7:12 Yeah, the union situation was also interesting because in the lead up to the closure of the Activision Blizzard deal, CWA, which is the union that sort of organized a bunch of different units within Microsoft, or which has since then made a deal with Microsoft saying, okay, well, uh, Microsoft will observe neutrality when it comes to unions, you know, will not interfere in terms of like having mandatory meetings that you have to listen to that are like anti-union or, you know, breaking up efforts to organize or anything like that.

7:42 And basically CWA, as a result, went to bat for Microsoft and said, like, yeah, this uh Activision deal is something that actually should be allowed to close, the regulators should let happen because this will ultimately be good for workers. And then again, the moment it closes, layoffs, mass layoffs.

7:58 So we went from having CWA kind of endorse Microsoft as a steward for the video game industry to slowly but surely getting angrier and angrier. Like every statement they put out around layoffs has more and more aggressive language in it. And then, yeah, in the meantime, you know, the the silver lining is that a bunch of different unions have popped up in Microsoft, albeit, you know, not so many that they have unionized the entire gaming unit, just enough that there's a significant presence.

8:25 But a lot of those unions still don't have their contracts yet. One finally managed to get a like, I think a tentative contract, basically. Like they agreed on it, but I'm not sure it's set in stone. And then layoffs hit again. So yeah, now the unions are bargaining around those layoffs to, you know, ensure decent severance in terms and all of that.

8:46 It's a terrible situation to be in. And and then, of course, you see a story that, of course, you know, you guys had aftermath reported on that there was an Xbox producer who actually recommended that we'll laid off workers use AI to kind of, you know, deal with the difficulties of being laid off, which just seems like such a sign of the times that we're in right now.

9:05 Uh-huh. Yeah. And I mean, it's also a very Microsoft thing to do at this point. Microsoft has been all in on AI. They've been shoehorning it into pretty much any product or service you can think of. There was a report that they are like pressuring people into using it via like annual reviews. So they're also like making employees use it.

9:24 And so, yeah, of course, somebody who is kind of stewarding forward that kind of internal effort would also be tone-deaf enough to say, yeah, the solution to your problem right now, even as you are no longer a Microsoft employee, is to use AI about it. Big slap in the face because the end goal of AI, whether or not executives will say it, is almost certainly to replace people, especially in these contexts where they are cutting everywhere, or rather they're doing these like massive cuts at least once per year.

9:54 Like what else is your plan?

9:56 I couldn't agree with that more. And it's so troubling to see, but it gives you a real kind of moment where this kind of all comes together, right? Where you can see all these consequences coming in with this one layoff. I want to talk a bit more about what potentially led to these layoffs, the consequences of it, but I want to go back and kind of talk us through a bit of what Xbox and what Microsoft gaming were doing to get to this point, right?

10:20 Because you started to give us a bit of an introduction to it in your earlier answer. But, you know, we see Game Pass, this effort to launch a subscription service for gaming, you know, because the traditional model is, you know, you buy this console, then you buy your video games, you know, you can trade them in, whatever.

10:38 But Microsoft and Xbox were really launching this new way, you know, trying to copy like a Spotify or a Netflix to say you can subscribe to this kind of library of games instead of having to individually buy them. And so that happens in 2017. What is the argument that Microsoft is making in that moment for why this is the direction to go?

11:01 And at what point does it become clear that they need to start buying up a lot of other game studios in order to fill out the library for this service?

11:11 It's an interesting circumstance because I think that only Microsoft could really do this, given just how deep its pockets are. Because like other video game companies just don't quite have the money to bankroll an operation like Game Pass. Because again, if you think about, you know, Netflix or what have you, the amount of time it takes to make even like a decent, you know, big or medium budget TV show is not as long as your average AAA video game.

11:37 Many AAA video games, many video games of the quality that you would associate with like a Last of Us or a Call of Duty or whatever can take anywhere from four to eight years to make. And they also cost, you know, hundreds of millions of dollars. And so to keep a service like Game Pass moving, that is to say, to have this like constant influx of new content every month, you need to have so many different studios working in tandem and producing new games and all of that.

12:02 And so Microsoft, I think, when they decided to actually go all in on Game Pass, realized that and started buying like everybody, like all these formerly independent studios are now Microsoft owned. Xbox has been in third place in the console wars short of a couple times when Nintendo faltered since its inception.

12:20 And so I think that they hit a point of being like, well, what can we do to kind of differentiate ourselves and essentially take over the industry or become number one? And they're like, Well, we can have this kind of hardware agnostic platform that allows us to be everywhere, and that also as a result kind of fits the times.

12:39 Because, you know, if you talk again about like, say, Netflix, it's on everything. You know, you can watch it on your TV, you can watch it on your phone, you can watch it on your computer, whatever you want. Any place that you can be is a chance that somebody will open that app instead of whatever else.

12:55 And so I think that all of those factors combined made Microsoft say, like, yeah, this is the thing that we should associate with the identity of our platform going forward. And that should be the way that we ultimately become dominant in the video game marketplace.

13:09 Yeah, yeah. I I think you explained it really well, right? In the sense that if you're losing on the console side of things and it doesn't seem clear that you're going to be able to catch up, then why not try to like redefine the competition and how you're going to win it, especially when you have the deep pockets of Microsoft behind you.

13:26 And I feel like for something like Game Pass, it also fits into this broader Microsoft corporate strategy where they're focusing on subscription services, whether you're subscribing to Azure and Cloud Services or AI services or the Office Suite. It's like it kind of fits into that idea of how this business is going to function, right?

13:46 Yeah, exactly. And like, again, you know, it's a very modern way of operating. In a lot of ways, consoles, video game consoles are kind of relics at this point. They still generate revenue for, you know, the three main companies that release them, Nintendo especially, they make money hand over foot on hardware sales because they usually never sell at a loss on that.

14:07 But just given the way that we consume media, we're kind of hitting the point of the last generation or two of consoles. And people have been saying this for years, but they just make less and less sense as devices, as things that people actually use and especially that they spend money on. So I think that to a degree, Microsoft was correct on this front.

14:26 It's just more like how do you redefine what a console is such that people use it and pay for it enough to make it profitable? Because the other big issue with Game Pass is that for a long time people have speculated that it's operating at a huge loss, in part just because spending all of this money on all these studios is very expensive.

14:45 And then Microsoft actually just admitted to this, they do a little bit of balance sheet magic where any first-party costs incurred are not considered to be part of the expense of Game Pass. So with third-party companies, like developers they don't own, they pay out a certain amount of money or certain amounts of money to them as a result of their games being on Game Pass to make up for the fact that those games often sell less because people can just get them on Game Pass.

15:11 But they don't do the same math or they don't make the same payouts for studios they bought. And so they can go claim, yeah, Game Pass is profitable. And it's like, well, no, it's not. Like, it's profitable if you lie.

15:26 It's also like, let's not consider all the billions of dollars that we spent buying up all these companies in order to like make this strategy work, right? Even when you talk about like the consoles, though, like it stands out to me that even this generation, right, with the PS5 and the Xbox Series S and X, like in past generations, when these consoles came out, we would have expected price cuts after a few years, you know, the console becoming more affordable over time, eventually reaching the point where it's like maybe a few hundred bucks or whatever to pick one up.

15:58 But this time, it's like not only have they stayed basically stable in price, every now and then you might get a sale where you can pick it up at a slightly lower cost. But in some markets, the prices of these consoles have even gone up over time because of all the inflation that we've seen over the past few years.

16:14 Like it's just this wild shift in how this market even works.

16:19 Yeah. The world has changed around consoles, but consoles have not changed that much. And so you're seeing all of these strange fluctuations in how the business operates to accommodate that, which, you know, on the consumer level is just not super appealing. Like you see a price go up and you're like, well, I missed the boat on that one.

16:36 I'm going to keep instead engaging with things that to me are basically free. Like again, I'm gonna, instead of playing Xbox, I'm just gonna scroll TikTok.

16:45 I feel like as well, you know, going back to this Microsoft strategy, you know, you were talking about how they were picking up all of these video game companies, you know, that seemed to really kick off in 2018 when they picked up a number uh of companies, including Obsidian, then Doublefine in 2019, Xenemax in 2020, which has a number of you know major studios within kind of its umbrella.

17:06 And then as you were talking about Activision Blizzard, like the big one in 2022, of course, some of those sales took a little bit of time to actually close, right? But those were the years when the plans to acquire them were were announced. As Microsoft was acquiring more of those studios, what was the feeling around that?

17:24 Like initially, was it kind of like excitement that you know these companies were being picked up? And at what point did it did it kind of shift to be like, oh, maybe Microsoft is picking up way too much here and this could really go south?

17:36 Yeah, I mean, it varied sometimes on a company-to-company basis. Because if you look at something like Doublefine, right? Doublefine has always been this kind of punching above their weight indie. So they had all these interesting and fun ideas that they often executed very well, but you would always see some rough edges and think, what if they had a proper budget?

17:55 What if they had more time to cook? And also, like, what if their games found a proper audience? Because a lot of their games have not sold historically that well. And so Microsoft buying them, you are initially concerned because you're like, oh, they're going to wring the creativity out of them. They're not going to be the same studio they were before.

18:13 But then you think, okay, well, if they manage to maintain this kind of like flair for whimsy that they have, then having like a greater budget could be really good for them. They could finally like realize their visions in their totality. And so you had a lot of that kind of like back and forth of people not being sure what was going to happen.

18:32 But at the same time, in the video game industry, historically, like acquisitions have been followed by companies or studios slowly losing their identities and being subsumed into the greater whole of whatever like major publisher bought them. Long history of that at like electronic arts. Them buying bioware essentially destroyed bioware over time.

18:52 There were bright spots between all of that. Like I would say that, at least in terms of output, Obsidian has been thriving under Microsoft. They've released some phenomenal games in the past several years. Avowed just came out. That's one of the best games of this year. Pentiment came out a couple years ago.

19:07 It's a really creative, interesting, narrative-driven game. Grounded has been a big hit for them. They're about to release the sequel. They also have Outer Worlds 2 coming out this year. They're like supplying Xbox's entire first party lineup. It's kind of funny, actually. But a lot of these studios, yeah, have either kind of languished like they haven't released anything in a while, or you know, again, they've been hit by cuts.

19:31 So it's been regrettable to watch because given how much of the industry Microsoft has absorbed, when they make these cuts, it's felt throughout the entire industry. It's not localized, it's everywhere.

19:44 Yeah, no, absolutely. And personally, I would say I'm looking forward to Outer Worlds too. I like the first one. So I'm hoping that turns out to be uh a good game. When you're talking about these acquisitions and, you know, kind of the changing views on Microsoft's decision to buy up all these companies over time.

20:02 One name obviously really stands out to me, and that is Xbox head Phil Spencer. He seems to be someone who like had this reputation among Xbox gamers as like, you know, he's a fellow gamer, he cares about the games. And it felt like that really helped the company to like convince people that this would be okay because you had someone like Phil Spencer at the helm.

20:23 And then of course, I feel like in the past year, year and a half, you know, that that kind of way of seeing him has really fallen off as he has, you know, carried out all of these cuts, all of these layoffs. What do you make of someone like Phil Spencer and the role that he played and continues to play at Xbox today?

20:40 I mean, I think the entire myth of Phil Spencer was savvy branding. I think that Microsoft and probably just Phil himself were smart to be like, we got this guy who's just like you, who loves games. And I think that like to an extent it's not false. I think he does play a lot of games. Like he has shown his like Xbox hours spent before.

21:02 I think he likes video games a lot, but I think that he likes being a you know C-suite level executive more. And so he makes decisions that are in line with that. So as a result, like, yeah, for a long time you had this notion, especially amongst Xbox fans, but also in the industry in general. Like, this was very much the fault of people who cover the video game industry too.

21:22 Is that they always handled Phil Spencer with kid gloves. They were always super chummy with him at events, still are to some extent. Everyone's like, oh, Phil, you know, we're pals. It's like, no, this is a dude who's in charge of massive numbers of people, who makes a ton of money, and who should be held to account at every turn for the decisions that he's making.

21:39 And so I think that we've only really seen cracks in that armor, as you were saying, in the past couple of years or so, because the reality of his station has become impossible to ignore, because he has overseen these massive rounds of cuts that have impacted so many people and left them without jobs or opportunities, and they have destroyed the identities of a lot of beloved studios.

22:00 At that point, you cannot turn a blind eye to like what Phil Spencer actually is. And then also just people have gained a more complete picture of the ways that Microsoft has mismanaged its entire video game operation, not just with the cuts, but in terms of output, in terms of kind of being wayward and not having a clear identity anymore.

22:21 And a lot of that rests on the shoulders of somebody like Phil Spencer and other people in, you know, that kind of executive suite. But, you know, I think that the scales have finally fallen from people's eyes. And I'm like, oh yeah, this is another fucking bloodless executive. He was pretending that he wasn't.

22:37 Yeah, it's been really interesting to see as well, like how once the layoffs kind of started, Phil Spencer seemed to recede from public limelight, not doing as many of the interviews that he used to do, as kind of that like view of him really changed among these gaming communities. Obviously, Microsoft bought up all these studios on the one hand, so it would have the first party games to compete with companies like PlayStation and Nintendo, but also, as you were saying, to fill out the library of Game Pass so it had things to offer.

23:09 At what point did it start to become clear that the bet on Game Pass was really not paying off and that they weren't seeing like the huge increases in subscribers that they would need to actually make this like a viable business that was going to completely change the way the video game industry worked?

23:27 Yeah, I would say also in the past couple of years, you know, they've reported Game Pass subscriber numbers. A couple years ago it was 25 million. As of this year, it's 35 million. And like those are, you know, big numbers. That's that's a significant user base. But if you compare it to any of the big streaming subscription services over in the world of TV and movies, that's nothing.

23:47 You know, Netflix and HBO and company have hundreds of millions. Um, and even then, the way that they are operating those businesses is pretty different in terms of like how they create content and the price and the amount of time that it takes to make that content. That plus the kind of underlying math that they're using to calculate how quote unquote profitable Game Pass is that I mentioned earlier, all of those things in tandem, I think, have made people realize, like, yeah, how are you going to sustain this?

24:14 Because the big question after a while becomes, like, okay, you can do this right now because you're pouring all this money into it. But, and this was brought up recently by somebody who used to work actually for Microsoft, or used to work for Arcane, which is another studio that Microsoft bought when they obtained Xenemax.

24:30 But he was like, well, what happens when Microsoft finally stops doing all that spending? What happens when they pull the plug on that and say, okay, we need to turn this thing into something a little bit leaner that actually directly makes us money instead of being kind of a money pit? And that is the question, right?

24:45 Especially if you have all these studios becoming Game Pass forward, making games for Game Pass, accepting that their retail products and their like downloadable products that you spend money on up front will sell worse because they're on Game Pass. Like if you heavily invest in it as a developer and then Microsoft stops investing in it as a publisher, at least in terms of giving you money directly, then you've marooned yourself on their little island.

25:11 And then you are out of options and you probably go out of business.

25:15 It's a huge risk, right? And I wanted to ask you about that as well, because the guy you're talking about, Rafael Colentino, founder of Arcane Studios, I just wanted to read a little bit more of what he said, and I'll quote him here. I think Game Pass is an unsustainable model that has been increasingly damaging the industry for a decade, subsidized by Microsoft's infinite money, but at some point really has the hit.

25:37 I don't think Game Pass can coexist with other models. They'll either kill everyone else or give up. And, you know, obviously that bet, as we were talking about, is not playing out particularly well right now for how, you know, this service is actually working. And it's the company's desire to really up-end the video game industry with it.

25:55 And so, you know, you had a few other people in the industry come out and kind of back up his comments. But then I also saw some people saying that the focus on Game Pass is missing the real reason for these layoffs and for the troubles, which has to do much more about Microsoft's focus on AI above everything else.

26:14 And so I wonder for you, you know, when you look at these recent layoffs and when you look at the decisions that Microsoft and Xbox have been making, what do you chalk this up to? Do you think it's more of a Game Pass issue? Do you think it's more of an AI issue, or do you think it's kind of a combination of factors that we're seeing here?

26:32 I think it's definitely a combination. And I think that it's easier to justify cuts from a division of your business that is, you know, not necessarily doing great, that you keep having to reinvent out of a concern that it's not moving in the right direction and that it's never going to find its footing as far as being like an industry leader or like a dominant force.

26:53 And then on top of that, like as you're saying, yes, Microsoft is going all in on AI. They've shoehorned it into all sorts of very questionable things. An example that just came to mind is I think they're adding it. Oh no, they they came up with like a, I think it was a prototype of like an AI tutorial for video games.

27:09 They like demonstrated it, I believe, as like a Minecraft helper. So it's like a chat bot that you have access to in a game like that, and you can like ask it for advice. And it's like, yeah, or you could have a friend, or you could just use Google, like this is adding nothing to the experience. But it's things like that.

27:25 That's why I use the word shoehorn in particular, because it's like, there's no need for this. Nobody's asking for this, and I can't really think of many use cases for it. But they are nonetheless going forward with it because they feel like that is, you know, what their business needs to be. That's how you build shareholder value now, all of that stuff.

27:43 I think that down the line, again, you look at all these cuts and you think, well, someone still has to do this work. And I imagine that Microsoft thinks, okay, well, we can just offload a lot of it onto AI. A story that I'm also chasing a little bit, and this is, you know, these are just tips that I've received.

28:00 So this is not entirely confirmed, but as I understand it, Microsoft also over the years, as a result of a lot of these layoffs, has replaced, you know, a lot of people in their workforce with contractors, or they even tend to bring back people who got laid off as contractors or as vendors. So, you know, they're they're finding all these ways to have the work get done more cheaply and in ways where they're not on the hook to provide benefits, or even like, for example, the opportunity for people to unionize.

28:31 Yeah, which is, I think, also a very modern tale. A lot of companies in the year 2025 do this.

28:37 Absolutely. You know, it it would not surprise me one bit if Microsoft was doing that, because as soon as you were talking about that, I was thinking about when I found out the percentage of Google workers who were actually contractors and how enormous it actually is. You know, we we don't think about those companies that way, but that often is the way that they operate.

28:57 And, you know, because you were talking about this larger Microsoft strategy, one of the things I feel like I've heard discussion of more over the past year, year and a half, you know, certainly since the Activision Blizzard, you know, merger was finalized or acquisition was finalized, is that in the past, Xbox could operate a bit more autonomously without the frequent interference of Microsoft executives.

29:24 And kind of the argument that I heard being made was that since the Activision Blizzard acquisition, because as you were saying, it was over $68 billion, you know, a crazy ton of money, that Microsoft executives are focused much more on the gaming division than they would have been in the past and expecting returns.

29:44 And that is part of what leads to these decisions, like the frequent layoffs and and things like that. Do you have any insight into whether there's any accuracy to that?

29:52 I do not have any specific insight, but the rationale certainly makes sense. I mean, again, that was one of the largest acquisitions of any company in history. That's going to turn the IFSA on on you internally, I would imagine. Because eventually, like, you have to justify a purchase like that. You can't just make it be like, okay, anyway, back to normal.

30:12 This changes everything. And so, like, the first round of layoffs back in early 2024, you know, it is far from uncommon for a major acquisition to close and then for there to be a bunch of layoffs. Like, that's just how big companies do it. It's like, oh, we're going to make this more efficient. Now we're going to turn the fat.

30:27 We have our managerial layer, we don't really need yours anymore, that kind of a thing. But these subsequent ones are signs of, I think, a deeper rot or more trouble of like, okay, how do we actually make this whole thing make sense? And how do we start actually making money off of it as opposed to, you know, just sort of trying to fit this like square peg into a round hole and hoping for the best.

30:52 Yeah, because as you're saying, it wasn't just kind of the laying off of workers. As part of that, there was also the closure of studios, the cancellation of games. And that has certainly set off some alarm bells for people, you know, watching what Microsoft is doing with all these game companies that it has acquired.

31:09 Yeah, and like a lot of cancellations too. I mean, because they had like they had studio closures and cancellations surrounding like a lot of Bethesda and Xenemax projects last year, the the closure of one of the Arcane studios, Arcane is beloved, that one in particular made Prey, which was a critically acclaimed game.

31:27 And then they had even more game cancellations with the most recent round of layoffs. And like all this time, a core issue that Microsoft has faced is that they've not really had many like first-party hits this console generation. And indeed, in the past couple, they've had this problem of like, okay, what is the kind of marquee Microsoft game?

31:47 Because if you talk about Sony, you can kind of just name them off the top of your head. You have God of War, you've got Last of Us, you have even recently like Astrobot, you have these games that kind of immediately define Sony's identity as a company that makes both consoles and games. Like, yeah, that's what they're about.

32:06 Now try that with Microsoft. The first thing that springs to mind is Halo. And Halo has not been particularly relevant as a game series in at least a decade. And then in the meantime, you say, okay, well, they bought all these studios. Surely one of them, with all of this talent, can churn out a new game that becomes the next hit Microsoft series.

32:27 But if you're canceling them all the time, then there's never a chance for that to happen. And so you had a lot of games that showed promise, at least conceptually, if not like in reality, because a lot of them we didn't get to see. But like we saw Perfect Dark, for example. So Perfect Dark is one of the games that got canceled.

32:43 Recently, it was at development at a studio called The Initiative, which got closed. That game looked really good. When people saw it, I think during what Game Awards or something like that, they were all very impressed. It still got canceled. Similarly, one of the games that Xenemax was working on, an MMO that would be a follow-up to uh Elder Scrolls Online, which is kind of like their big game.

33:03 Apparently, according to reporting from Bloomberg, Phil Spencer himself played that game recently, I think this year, and was so impressed and liked it so much that they had to like pull him away from it so they could have their actual meeting. Like that's how into it he was. But again, canceled. Like if you're smothering all these things in the crib, then you're never going to find your big hit.

33:25 You're never going to define your platform identity, and your business will always keep struggling. Because even in this version of the video game industry, where you know there are all these different factors that go into being profitable or even just like making the line go up, which is more the goal these days.

33:43 You still have to deliver on games. That's still at the end of the day what people are coming to you for. And if you can't do that, then they're going to look elsewhere.

33:52 Yeah, of course. And it feels like that is increasingly what we're seeing, right? I feel like, you know, obviously it's anecdotal, but I see these stories about Xbox fans being annoyed about the fact that the strategy isn't working out, that the dedication to like these Xbox franchises doesn't seem to be there anymore, that there's questions about what future console generations from Xbox and Microsoft are going to look like.

34:18 And paired with that, the company has started publishing its first party games on other platforms because, you know, seemingly it needs the additional revenue of doing that. And so I guess my question is what does it look like Xbox's future is now? You know, previously it was kind of the main Sony PlayStation competitor in the console space.

34:40 Then it tried to become the company that was going to launch the big streaming service of gaming. Now it looks like it's turning into maybe just a third-party games publisher, but a big one, but still a third-party games publisher. Like, what do you make of the trajectory that this company is on now?

34:56 It's a really good question because their current strategy is like Xbox everywhere. And so it's this idea of, oh, you know, we will have this kind of app-based offering that you can access on your phone or on your TV or even potentially on another platform, on your PC, anywhere that you could think of.

35:14 But as you're saying, you know, between that and like Game Pass and these other, especially publishing on other platforms, like literally releasing, you know, games like Sea of Thieves on PlayStation, at what point do you just become a publisher? Where is the line between being a platform holder and a publisher at that point?

35:33 What is the identity of this brand that was already struggling to really find one, especially in the modern era of games? I think that's the question looming over Microsoft at this point. And they are not doing themselves any favors by cutting themselves to the bone.

35:47 And what does that tell us about Microsoft as a company itself? You know, seeing how it has treated the gaming division, but then also seeing this like massive focus on AI that it has been making the past few years. How should we be approaching and thinking about, you know, Microsoft, the big overarching company that's behind all this?

36:07 In terms of the overarching company, you know, it depends on the stomach that you have for AI. If you're not a fan of that, then I think that that's your cue to divest from it. That's sort of where I've been personally, is like, I don't really like the direction Microsoft is headed in. And like also just if you look at their suite of products in general, like what is really good about Microsoft anymore if you are the end user.

36:30 Office is expensive and it sucks. You can just use Google or many alternatives. Windows itself has been repeatedly inshitified over the years. It's all right at this point, but it's not great. There are many alternatives. Xbox is everywhere and also nowhere. Like, why deal with that? They want you to use AI no matter which of those products you're engaging with.

36:52 That sucks. And then the other thing that I've yet to mention, but that is, I think, very important, is that those AI products and Azure power a lot of Israel's efforts in terms of their genocide in Gaza. BDS has put out a statement about them. BDS, for those who don't know, is the band I vest sanction movement around Israel.

37:10 Basically, it is a consumer effort to ensure that Israel has fewer resources. They go after companies that support Israel directly. And yeah, Microsoft is one of their big targets right now, specifically their games division, because they're like, okay, we can get people to pull subscriptions from Game Pass, and that will hit them hard.

37:28 Rather, that's one of their main advisories. All of that in conjunction, at least for me, means that like giving money to Microsoft is very low on my list of priorities at this point. If I can avoid doing that, I will avoid doing that. Like I still, you know, use Windows as my operating system because it's kind of the universal standard.

37:48 But as soon as I see the door, I'm running for it.

37:50 Totally. Yeah, it's hard to blame you, right? I've been like working my way off of Microsoft Office as well. And as you say, I think it's really important to point out the degree to which Microsoft is aiding what Israel is doing in Gaza, which we've talked about many times on the show. The No Azure for Apartheid campaign has been specifically focusing on what Microsoft has been up to in regards to its relationships to Israel and the tech that it has been selling it.

38:16 So I think that's a really key point for you to mention, and I appreciate you bringing it up. We've been talking a lot about Microsoft and Xbox through the course of this conversation. But as we wrap it up, I wanted to kind of broaden out and talk about the state of video games and the video games industry more generally.

38:33 Because I feel like when you were talking about the fact that Xbox is increasingly cutting all of these games that could potentially be its next big hits if it were just to give them a chance, I feel like increasingly we see so much of that from so many of the other companies as well. You know, EA and Electronic Arts, you know, comes to mind in particular and some of the things that they have been up to recently.

38:56 I wonder what you see, you know, across the broader industry and the difficulties that workers are facing and kind of the cancellation of projects that we're seeing more broadly.

39:04 I mean, this has been a big point of discussion in the video game industry this year, especially as we hit a second year of just absolutely brutal layoffs like everywhere. 2024 set a record, 2025 is on track to surpass that record. You just have like an industry that I think, for a minute, in terms of the way that it actually makes money, has been, if not a Ponzi scheme, then at least, you know, a game of making line go up, making numbers go up.

39:31 And if you do that for long enough, then you've like cut everything essential and kind of destroyed any semblance of an industry. So many games workers are out of work right now. They don't have jobs, they have no hope of finding them. A lot of people I know who are immensely talented have been trying to find a job for like a year and have not been successful, despite like I'm talking decades of experience, industry thought leaders, all this stuff.

39:56 Then in tandem with that, you have the rise of, on one hand, like a very talented indie movement, but one that primarily exists on Steam. Steam is a PC gaming platform that is essentially ubiquitous. But the way that that works is that pretty much anyone can publish a game there, and Valve, the company that runs it, takes a 30% cut of sales, which is a lot.

40:18 And if you're operating on Steam, yeah, you might have a big hit. And a lot of like out-of-nowhere hits have come from Steam in recent years. But the percentage of developers that actually see that kind of success on Steam compared to the number that release on the platform is vanishingly small. And so a lot of people have drawn comparisons to the gig economy.

40:38 Basically, if you go self-published on Steam, you are a gig economy worker in video games. You do not have any of the guarantees of sustenance or benefits or whatever else that you would get from working at a major company. But all these major companies have also made those guarantees go away. And so all the people who make games are basically a wash at this point, just kind of saying, like, okay, what do we do?

41:01 Like, how do we maintain this as a career? And if you can't maintain a career, if there's no safety in that regard, what industry is there? Games have become decentralized in this way that I think really hurts the people who make them and the effort to create larger scale projects that might like actually move the needle.

41:24 I I think that it looks very different five years from now than it looks now. I think that we are seeing the final vestiges of this old way of doing things wearing away and whatever comes next will hopefully be better. But it could also just be, again, that model that I described on Steam, where it's just people largely who are hobbyists first and foremost, because they they're not gonna support themselves this way, or at least it's unlikely, making games that they want to make and play.

41:50 And a few of those will blow up, which is great for them because you can go from being nobody to a millionaire overnight. But a lot of people saying, okay, well, you know, I'm I'm not a game developer anymore. I can't be. I've got to go get a day job, and that's just how it's gonna be. And then in the meantime, you know, primarily the main beneficiary of this is one company, Valve.

42:10 Again, that's not an industry, that's not a healthy model. That's essentially a monopoly. Maybe things will turn out better, maybe people will find alternative, better solutions. I really hope they do. But it feels unlikely right now, especially because the other big competitor we have to all of this that's worth mentioning is like Roblox or Minecraft.

42:29 These games that are under themselves essentially platforms. Roblox, especially, a lot of people are like, oh yeah, that it's a video game, right? That's not really correct. Roblox is more of a place that people can go to make games using relatively simple game development software. But you know, that's like what most kids play now.

42:47 If you look at what younger people are doing, they're playing free games on Roblox instead of spending money on these more discreetly packaged games. That's definitely going to have an impact on how games are made in the coming years. It already has. And so, yeah, I think you just see more and more of this gig economification of games alongside that same dynamic playing out for everything.

43:11 Yeah, which is exactly not what you want to see and what you want to hear, right? And I feel like, you know, as you're talking about Steam, we hear a lot about the 30% cut that, say, Apple takes on its app store. I feel like we don't hear nearly as much about how Steam, you know, has similar rules and demands of the people who publish on its platform.

43:30 And I feel like, you know, there's this narrative that we hear sometimes that, okay, there are going to be these layoffs at the major game studios, but then those people are going to be able to go start indie studios, you know, kind of do their own thing. But I imagine in an environment like this, that it's hard to even find the funding if you even wanted to start up an independent studio, right?

43:53 It's nearly impossible because like what happened is 2020, 2021 pandemic, here I remember. We were all there. People were inside. And so they're playing a lot of video games. And so tons of investment capital went into the video game industry. And there was a lot of hiring and all of this stuff. That kind of bubble, that little bubble, burst essentially in the coming years because people started playing fewer video games.

44:17 They went outside again. And so ever since then, investment money has been near impossible to come by in games. So that's a big issue for studios. And then if you want to start up on your own with or without that kind of investment money, it's still really hard. People think about an indie developer and they say, oh yeah, it's like one guy in their garage, right?

44:37 Or one or two people, maybe five, whatever. But then you start to think about the actual material realities of that, the real costs. And it's like, oh, this is very expensive. Say you have a staff of five people, they're very talented, they've worked at other studios, major big name studios. They're probably going to command salaries of over 100K, you would think.

45:00 That's already half a million dollars per year. Often they command salaries bigger than that. Often you need more people than that to make a game. We're talking for a small-scale indie production, even 10, 20, 30 people, easy. That's millions of dollars that you suddenly need to be able to access somehow.

45:19 But good luck finding that, because again, investors are not into funding video games right now. Maybe you can crowdfund it, but that's a total crapshoot, and you don't usually make millions off of that. After a certain point, it's like, okay, this is kind of starting to feel like a dead end. That's been the case for a lot of developers.

45:36 And so there's this refrain, I think, amongst people who are maybe a little bit less educated on the ins and outs of the gaming industry, of like, oh yeah, indies are going to save us. Because in this time period where we've had this dearth of kind of major new AAA releases, big budget releases, we haven't had anything on the scale of a Grand Theft Auto for a while.

45:54 And the ones we have had have been kind of like, they're okay, but they play it very safe because they're worried about getting a return on their investment. We have had these like very creative and interesting indies spring up and become big hits. Things like Lethal Company kind of paved the way for this like new era of co-op games that everyone is into, or like, you know, Pow World did the things that Nintendo wouldn't with Pokemon, you know, just a couple of semi-recent examples.

46:21 But again, you have many, many others who are attempting to make games at a similar scale or a smaller one that are not getting noticed or are failing or never getting off the ground because they can't get the money to, you know, get their foot in the door. And like that's just not a way for an industry to survive.

46:37 That's too boom and bust. That will lead to most people not even trying in the first place.

46:42 Yeah, a really good point. And before we wrap up, I also wanted to ask about the two other, you know, major kind of platform companies, obviously Sony and PlayStation. It had its PlayStation 5, which is obviously selling a lot more than the Xbox consoles, but there have also been questions about whether it has been able to make as many good games this cycle as in the past.

47:03 And of course, you know, Nintendo had its Nintendo Switch 2 be released recently, selling plenty of consoles. What is going on with those two companies? Are they experiencing similar struggles as Microsoft? What's happening with them?

47:16 Sony also had a major round of layoffs last year when it was kind of the in vogue thing to do. Because that's also, you know, the really horrifying part of any of this is that half the time heads start rolling in that way because one executive had an idea at one company and everyone else is like, oh, we should do that too.

47:33 And like the thinking is often not much more complex than that. That's the hook that we're all dangling on. Will a CEO get worried and decide that they've got to suddenly ruin thousands of people's livelihoods? Sony is in, broadly speaking, a much better position. But yeah, like they also have not really had like a major hit that has defined this generation.

47:56 They're still leaning on older series, sequels, things of that nature. Even Astrobot was technically the sequel to like a pack-in demo that came with one of the PlayStation devices. That's kind of, you know, I think their big new one or like thing that feels newer. But even that game, if you want to get into it, the themes of its levels are like homages to other Sony franchises.

48:19 So it's still not doing anything super original. And then Nintendo, I mean, Nintendo will always be an aberration. Nintendo plays by its own rules and continues to win at the game that it's playing. So yeah, the Switch 2 is by all accounts selling really well, but that's because it is a essentially a hardware upgrade to the Switch 1.

48:39 It's not doing anything super new or outside the box. It's basically the Switch 1, but better. Like, you know, problems you had with the Switch 1 in terms of its performance, definitely resolved in terms of just like the way it feels, what it's able to do, also resolved, like cool, great. Of course, that is an appealing value proposition to most people.

48:59 But it also speaks to, I think, where at least some video game hardware is going, which is like Nintendo got it right with the Switch 1. People want something that they can travel with, and they care increasingly less about visual fidelity. The ultimate example of this is Roblox. Like most Roblox games look like trash.

49:16 They look absolutely horrible. Like from a visual standpoint, they are garishly ugly, but people still enjoy them. They still play them because they are accessible and often free. And like that's what the Switch does. It's very accessible. It's easy to use. You can take it anywhere. You can sit down and play it as a handheld.

49:32 You can play it on your TV. And I think that more and more companies are wising up to this. Sony released the PlayStation Portal recently, which is not, you can't take it with you. It's still tethered to your console, but it allows you to play PlayStation games on a handheld. Microsoft recently announced their own, not their own handheld, it's kind of a licensing deal with Asus, but for a branded handheld.

49:55 And of course, like the Steam Deck is a major force. I think the Steam Deck is what a lot of these companies are sort of copying. That's, you know, again, a portable take on Valve and Steam's library of PC games. I think that everyone is sort of looking at these ways to fill smaller niches in people's lives.

50:13 This notion of the console as a centerpiece of your home is eroding. And what you're getting instead is okay, well, between having something on your television and scrolling on your phone and like your commute and everything else, where can the idea of video games slot in? And I think that a lot of people are coming to the same conclusion.

50:32 Like, okay, we make a handheld, and hopefully that entices people back into our kind of realm.

50:39 Yeah, I think that makes a lot of sense, right? I remember reading a few years ago that the Japanese market was weighted more toward handhelds that they were more popular there. It seems to be that that's kind of moving into the way that you know people in our markets play games as well. My final question for you, Nathan, is we've been talking about a lot of kind of depressing, downer kind of stuff about the video games industry.

51:01 Do you see any kind of positive stories or hope in what is going on at the moment? Are there things that really shine as things that are good news stories, I guess?

51:10 There's definitely a lot of doom and gloom, and I think it's warranted. But I mean, there are still people who are extremely passionate making really good games. One of the bigger problems I think that a lot of people face on Steam is that, you know, they're not just competing with a lot of games coming out because Steam's algorithm kind of sorts for various preferences and sifts out the garbage, basically.

51:32 But you're competing with a flood of new good games every day. This is, in many ways, a time of plenty. I'm not sure it's going to stay that way, but for the moment, there's tons of really good and really interesting stuff coming out. I mean, the kind of big surprise hit of this year is uh Claire Obscure Expedition 33, which is like a very French role-playing game that came out.

51:54 It's from a studio of a lot of relative unknowns. These are people who prior to this, like maybe didn't even necessarily have video game industry experience. Like they uh, the composer of their soundtrack, they literally found on SoundCloud. He was just like a guy making music on there, and they're like, I like your music.

52:10 Want to come work for us? And it has like a gorgeous, incredible soundtrack. Like, absolutely picked the right guy for the job. And so Claire Obscure came out, was critically acclaimed, sold millions of units out the gate. And so people started saying, like, oh man, amazing. And they did this with like a team of only 30 some odd people.

52:28 Yeah, it can be done. The games industry is saved. Neglecting to mention that hundreds of people touched that game over the years that it that it was made. It had plentiful funding, all of these things that make it less of a blueprint and more of a unicorn. Same thing happened a couple years ago with Baldur's Gate 3, which is an incredible game.

52:47 Like if you want to have any faith in the games industry, just go play that. This is a colossal labor of love that was made by a team that you can just tell cared so much and got to make the game they wanted to make. But can that be repeated by anyone else? Probably not. They were a company that spent years and years and years growing, not laying people off, building games at a sustainable pace and scale, amassing the funds to eventually make their dream game.

53:15 You know, that that studio had been around for decades before they made this one. So you have these moments of like hope, which I think it's worth clinging to, but not in this way where it's like, okay, we're going to remold the entire industry in the image of this one company that managed to pull it off.

53:32 It's like, well, no, you you can't do that. That's not actually going to work the way that you think it will. And so it's this precarious balance. I'm sure we'll have another one of these in like six months. Like a game will come out. People will be like, whoa, I didn't even know that that was in development.

53:45 This is amazing. We've got to apply all the lessons that they learned to our projects. And it's like, no, you can't, unfortunately.

53:52 It's funny you mentioned those two games because I'm currently playing Baldur's Gate 3 and Claire Obscure is next on my list, you know, as a result of your recommendation. But Nathan, it's been really great to speak with you to learn about what has been going on with Microsoft, but also, you know, the larger games industry.

54:08 We often don't pay enough attention to games, but obviously, like it's a huge industry in its own right, often even bigger than you know, movies and TV and music and all that kind of stuff. So it has a real big impact on our culture and is something that we should be paying more attention to, which is why I would certainly recommend people check out the website where you're a co-founder and writer, Aftermath, because it's fantastic.

54:30 I always enjoy reading the stuff that you guys are doing. Thanks so much for taking the time to come on the show. I really appreciate it.

54:35 Thank you for having me. This is great.

54:38 Nathan Grayson is a co-founder of Aftermath and the author of Stream Big. Tech Won's Save Us is made in partnership with The Nation magazine and is hosted by me, Paris Marks. Production is by Kyla Hewson. Tech Won's Save Us relies on the support of listeners like you to keep providing critical perspectives on the tech industry.

54:53 You can join hundreds of other supporters by going to patreon.com slash tech won't save us and making a pledge of your own. Thanks for listening and make sure to come back next week.