Decoder: Microsoft's Phil Spencer on launching the new Xbox

On this week’s episode of Decoder Nilay Patel talks to Phil Spencer, the guy in charge of Xbox at Microsoft. They discuss not only the next-generation Xbox and PS5 just arriving in stores now, but how gaming itself has become part of mainstream culture, a trend that has definitely accelerated during the pandemic. We’ve also reached an inflection point for game streaming: Google, Amazon, and Microsoft all have services that allow consumers to play games on any device by streaming them over the internet, kind of like Netflix for games. Is that the future? Learn more about your ad choices. Visit podcastchoices.com/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Nilay Patel?

  Hey everybody, it's Neelai. Once again, we're running an episode of my new podcast Decoder in this feed to promote it a little bit, but I think you're gonna like this episode. This week on the show, I interviewed Phil Spencer. He's Microsoft's Executive Vice President of Games, which means he's in charge of the Xbox. And we got into the next-generation Xbox consoles that just launched. We talked a little bit about competing with the PS5. We talked an awful lot about game streaming, whether it's the future, and how he's working the platform companies. Check it out, Phil Spencer on Decoder.

• 0:29Speaker 01

  This episode is brought to you by On Investing, an original podcast from Charles Schwab. Each week, hosts Lizanne Saunders, Schwab's chief investment strategist, and Colin Martin, head of fixed income research and strategy for the Schwab Center for Financial Research, bring you fresh insights on what's happening in the markets and why, and what the implications might be for your portfolio. Join Colin and Lizanne as they explore questions like, how do you evaluate corporate bonds that look interesting? And what sectors are on the move right now? Download the latest episode and subscribe at schwab.com/oninvesting, or wherever you get your podcasts.

• 1:14Speaker 01

  This episode is brought to you by On Investing, an original podcast from Charles Schwab. Each week, hosts Lizanne Saunders, Schwab's chief investment strategist, and Colin Martin, head of fixed income research and strategy for the Schwab Center for Financial Research, bring you fresh insights on what's happening in the markets and why, and what the implications might be for your portfolio. Join Colin and Lizanne as they explore questions like, how do you evaluate corporate bonds that look interesting? And what sectors are on the move right now? Download the latest episode and subscribe at schwab.com/oninvesting, or wherever you get your podcasts.

• 1:59Nilay Patel?

  Hello and welcome to Decoder. I'm Neelai Patel, editor in chief of The Verge, and Decoder is my new podcast about big ideas and other problems. On this week's episode, I'm talking to Phil Spencer, the executive vice president of gaming at Microsoft, or more simply, the guy in charge of Xbox. And we had a lot to talk about. Not only did a new console generation just arrive in stores with the Sony PS5 and Microsoft's own new Xboxes, but gaming itself has become part of mainstream culture, a trend that has definitely accelerated during the pandemic. On top of that, we've reached an inflection point for game streaming. Google, Amazon, and Microsoft all have services that allow you to play games on any device by streaming them over the internet, kind

• 2:43Nilay Patel?

  of like Netflix for games. Although, no one really likes it when you call it that. Phil and I talked about all of this: how much the pandemic has accelerated those trends in gaming, why he chose to launch two next-gen consoles at the same time, the issues we've seen with pre-orders and supply, and how he sees Xbox growing over time. And we talked about game streaming: where it is now, where it might go, and how it's going with Apple and Google to get his streaming service in their app stores. Spoiler alert: medium. I really enjoyed talking to Phil, and we definitely got deep into it, but Microsoft's Xbox products have a lot of confusing names. So I'm just gonna run through them all at

• 3:23Nilay Patel?

  the top, so you know what they are. The Xbox is obviously Microsoft's game console. There are two new Xboxes in this generation that just launched: the entry-level Xbox Series S and the high-end Xbox Series X. I know, and it's not gonna get better. Xbox Live is a service you pay for to play your Xbox games online with other people. Xbox Game Pass Ultimate includes Xbox Live and access to a library of 100 games you can download and play. XCloud is the codename for Microsoft's game streaming service, which is now in beta for Game Pass Ultimate subscribers. You got that? It's a lot. But trust me, it

• 4:06Nilay Patel?

  sort of makes sense over time. All right, here's Phil Spencer, EVP of Games at Microsoft. Here we go.

• 4:26Nilay Patel?

  Phil Spencer, welcome to Decoder.

• 4:28Speaker 02

  Thanks for having me. It's fun to be here.

• 4:29Nilay Patel?

  You are our third guest. I'm excited to talk to you. There's a lot to talk about. I have a million questions about the Xbox. Is there two of them? You just launched the future of games and streaming. There's a lot to talk about, but I want to start a little bit bigger picture. You are a Microsoft lifer. You started as an intern in 1988, like screwing around in video games. You are now the Executive Vice President of Gaming. I think you report to the CEO now.

• 4:55Speaker 02

  I do.

• 4:56Nilay Patel?

  That's quite a rise. And this moment seems like a particularly gigantic inflection point in gaming, right? We're talking about the entire architecture of games moving to streaming. We've got two big consoles. It's exploded in the mainstream culture. Is this what you expected? When you were an intern in 1988, does this look like what your wildest dreams? Is it meaningfully different? What's your view on sort of where we are right now?

• 5:23Speaker 02

  Well, definitely not what I expected as an intern. I mean, just from both my own career, if we go into kind of my side of it, which I won't dwell on, but I've never been one with kind of huge, like a career roadmap. I kind of follow my passion and what I'm passionate about, teams I get to work with. And in terms of where we are in gaming, I think it's somewhat regretful, but it's also nice to see that during this time of social distancing and disconnect from our friends and our family, that gaming's really pushed to the forefront as a real communal way for people to connect. And I think the world needs more of that. I've kind of been on my,

• 6:06Speaker 02

  you know, gaming as a connective tissue opportunity for people of different backgrounds, different beliefs coming together. And during the C19 pandemic, people staying high at home, we've really seen a rise in gaming. So I think we've seen the acceleration of some of the timelines and kind of trends in gaming over the last six months. We've definitely accelerated maybe a year or two in terms of adoption of some of this. But I think gaming has always been building towards this moment of being a real unifier.

• 6:33Nilay Patel?

  So that it's interesting, it's a year or two. With some of the other trends that have accelerated, you know, I've heard e-commerce is a five-year acceleration because of the pandemic, streaming and cable television falling apart and everyone moving to streaming services way faster than people thought was going to happen. You're thinking with games, it's only a year acceleration?

• 6:55Speaker 02

  You know, it could be longer. I think gaming was further along, some of those communal aspects of our art form than some of those other, you know, I don't, when I'm watching video, streaming video services, I don't know that I feel connected to anybody that's not in the room while I'm doing that. You know, some of the shopping stuff and stuff, maybe in different parts of the world, sitting in Seattle, you know, we see a lot of online shopping and delivery. We just always have. So maybe it's, it's different.

• 7:26Nilay Patel?

  Is there a big company in Seattle that does online shop?

• 7:28Speaker 02

  Yeah, there's a few of them now. It's funny. We used to be like the sole outpost here at Microsoft, but everybody's around here now. And for gaming, though, I think with, you know, you've seen Twitch, you've seen the power of gaming on YouTube. So you've seen Discord and other places where people come together to talk about games, watch games, watch others play games. So I say the acceleration, and I don't know if I'm accurate in my timeline, but I feel like it's a little more gradual for us in gaming because we've already been so far along that, kind of using community and virality as a way for people to get into gaming. But we've definitely seen a surge, and I don't think it's something that's going to reverse. I think we've just become more and more a part of a way people entertain and connect.

• 8:09Nilay Patel?

  Anything about that surge surprising to you, or is it just, this is what I thought was going to happen in 2024, and it's happening in 2020?

• 8:16Speaker 02

  It's been cool to see the, kind of some of the genres and stuff that have really popped to the front in gaming. When I think about things like Among Us and Fall Guys and stuff, really finding an audience, Animal Crossing, which has always been big, but you know, you have people like Gary Wetta doing his talk show inside of Animal Crossing, and it almost seems normal that in this time that that would be happening. In certain times gets really hyper focused on realism and grit and it's nice to see that during these times, you've got a breadth of things that are really finding large audiences

• 8:57Speaker 02

  and large viewers. I think that's not, I wouldn't say a surprise, but a nice to see. The other thing I'll just say, and it's something that I think is special about the game space, is everybody can be a creator, whether you're somebody on YouTube, or somebody building a social following on TikTok, or on Twitter, or whatever, or you're somebody building games. We've really democratized people's ability to create their own content and get that to millions of customers fairly easily. The consoles all support that now. Obviously, Steam has supported that for a long time. You've got these social platforms that are out there that are letting people build the audience. And I really just think also you're seeing the rise of the creators, and creators can be of different types. And that's something

• 9:39Speaker 02

  that I think really provides longevity to what gaming is about as well, is you have so many people that are both a consumer of gaming content, and frankly, now creators of game content.

• 9:49Nilay Patel?

  So I want to get into that for sure, but just on a sort of zoom out level, you have been at Microsoft for a long time. You've seen three different CEOs. There have been three very different styles of how to run that organization. There have probably been even more versions of Microsoft itself, under Gates, Bomber, and Nadella. What have you pulled into your decision-making style?

• 10:12Speaker 02

  Yeah, I haven't really talked about this, or I love the question. I started as obviously all Bill G. Bill had such a, just a presence in the company, both from a technical standpoint, and from a leadership standpoint. And I kind of learned the value in people believing in the direction that an organization is going in, and having a leader in Bill at the time, that was just so consistently, kind of maniacally consistent in the things that he would focus on, and push us. I was a developer at the time, so it was sometimes the wrath of Bill when my code was being used.

• 10:53Speaker 02

  Checked in or whatever was wasn't always the easiest, but he was very consistent in the things that he cared about. And even today, I review my gaming business with Bill probably two, three times a year, and he's still remarkably consistent in the things that he will push on. And I think that consistency for a large team as the company grows is very valuable. If the the teams can kind of predict how you're going to respond or react, or the things that you're going to focus on as opposed to being, you know, moody or random. I found real value in that from Bill. Steve was just so focused on customer and selling.

• 11:34Speaker 02

  And I thought for me, as a developer, it was a great way to learn. Under Steve, they sent me overseas. I worked in the UK for a while. And that was a it was the company's effort to to expand the kind of perspective of some of the leaders to get out of Redmond. What is it like to work for Microsoft when you're not in our zip code and in the same time zone? And that was all really the push that Steve had at the time of let's get very close to our customer and our selling what we do in selling our products and how our pro our customers perceive our products, not just how we built something, or even why we built it, but what do they our customers feel about what we've built. And then moving on to Satya, he's just such an empathetic leader, somebody who's connected to the the

• 12:19Speaker 02

  feelings and motivations. Like when he says, we're here to empower every person on the planet to achieve more, which is the mission statement of the company, every person in organization on the planet, he truly believes that. And it's amazing to see him talk about that in our leadership meetings. Like, okay, how is this going to touch 7 billion people on the planet? How is this what we're doing? And when you're a company with the market cap that we have and the capacity that we have, that's the scale we should be working at. And Satya just raises us to that every moment. Like, it's and when you see us standing up for climate change, you see us stand up for representation in our senior ranks and making public statements that frankly, we don't exactly know how we're going to achieve. Like, there's no math today that says how we get to all of our carbon neutral and carbon

• 13:04Speaker 02

  negative goals, but being bold to stand up and be accounted for in the public eye, I think is just incredibly, incredibly a great learning opportunity for me. And I value it.

• 13:16Nilay Patel?

  So just thinking about those decision-making styles and frameworks and what you've picked up, walk me through a decision leading up to the launch of this new Xbox, where you pulled from that, where that decision could have gone a different way, but you, I don't know, like, do you put on your bomber hat and be like, we have to be focused on sales here? Like, you know, it's like, it's time, or is it Sony's launching a console too? I'm gonna put on my Gates hat, we're gonna have to crush the competition.

• 13:38Speaker 02

  I didn't say that about Bill, but the uh...

• 13:41Nilay Patel?

  I think he's said that about himself. I feel comfortable with that one.

• 13:45Speaker 02

  The decision, just thinking real time, the decision to ship two consoles at the same time is probably one that's worth kind of pushing on, because we've never done that before with the differences that we have between Series S and Series X. You know, I can't think of other console launches that have had that delta in the products that have come out at day one. And it was really a decision that clearly you could have made a different decision. Clearly, you could have shipped only one of those two SKUs at launch, would have made some of the kind of supply chain and other things easier, naming and other things. But, you know, we started from a point of view of gaming should be growing, going back to our first point as an industry,

• 14:29Speaker 02

  and Microsoft should be growing as part of that industry. I want to grow faster than the industry's growing, but I want to be part of a growing industry. And it was really this inclusion of how do we include more people in the launch euphoria and hype and everything that happens, and make it as accessible to more people as possible, going to that Satya push on how do you really build things that can get to true scale and influence everybody and impact everybody on the planet? And I know, like, Series S and Series X, there's more with X-Cloud and Game Pass that we can talk about, but the decision to do two hardware SKUs was really centered on that of, you know, $499 in the US for the Series X, that's a lot of money.

• 15:10Speaker 02

  That's a lot of money during a time of economic uncertainty and everything else. Now, we didn't know when we made those plans that we'd be sitting here, but even regardless of COVID, $499 is a lot of money. So can we build an accessible console that will... Deliver a great next gen experience, clearly different, but a next gen experience at a more accessible price point. And it really centered on that. How many people can we impact with everything that we do? And that decision wasn't easy and was questioned a number of times by our internally. But we feel really good about where we are now that we've launched and we see the result, but that that was a, you know, a good, tough decision.

• 15:52Nilay Patel?

  What was the best argument against doing two consoles?

• 15:54Speaker 02

  Just complexity in the market, I would say. Well, I guess the way I would frame it, the best argument against doing it was Sony. Like, we didn't think that they were gonna do it. Now, and I don't, I have a ton, I've said it before, I have a ton of respect for what Sony does. So it's not to say what they're doing is wrong, but if it's, we're gonna go compete with one hardware competitor and we just want to make it as easy as possible to compare our one product to their one product. That was the thought process that would have you push to say, no, just do one thing. But when we, we think about where gaming is going, you kind of go into maybe the bomber framing of it. You've got a business that's growing and you want to grow as fast as you can. You want to grow in a healthy way.

• 16:37Speaker 02

  You're either gonna grow by making more from the customers that you have now or finding new customers. And I'd say in the console space over the last four or five years, most of the growth that the industry has, has realized has been growth per user, not growing the number of console users that are out there. It's actually been a fairly fixed number over the last decade, which for us that love console gaming like we do, should be like a sign of, hey, we don't want to be about raising the price on retail products because you have a fixed number of customers and you just want to fight, figure out, how do I get 10 more bucks from them? We want to think about how do we bring more people into the gaming funnel, have more people experience this art form that we love.

• 17:22Speaker 02

  And so, you know, the, the question of would you go do this and why would you not go do it? The pushback against that was always, but we want to grow, we want to find new customers. Because it can't just be a fight over the same. Customers that we've all seen that every year get one, your average age of your product goes up by one year every year. Cause it's the exact same demographic that's just moving with you. And all of those things were important when we thought about the decision on S and like I said about X cloud and game pass. It's can we create a platform that's more inviting to more people, including the hardware that we build? And even how we sell it with things like Xbox all access, allowing people to buy the, uh, the hardware on a monthly basis as opposed to one fixed. Fee. It's all about how we bring more people in.

• 18:08Nilay Patel?

  So it's obviously really early and they're just out. You have a lot of names. You've just said a lot of names of a lot of product. There's a lot of X's and series and games in sort of Mad Libs order. Is it playing out? Do people understand what the difference between the series S and the series X and game pass ultimate and X cloud is?

• 18:26Speaker 02

  Um, on the hardware side, it is. And I think sometimes inside of the industry is we want to be, you know, like poking at ourselves. I, I think we, we can look at series S and series X, even the enunciation of S and X isn't the easiest to kind of differentiate. But for most consumers, they walk in and one's $500 and one's $300.

• 18:47Nilay Patel?

  Yeah.

• 18:47Speaker 02

  Like, and that's, that's the difference that it's not to make everything about the iPhone, but like, if you asked me to explain the iPhone lineup, I can't really do it. But when I walk in the store, it's pretty clear, right? One's big, one's not, one's, you know, a thousand dollars, one's 800, whatever. Like they, they differentiate based on normal people's vocabulary of how much does it cost and what, what does it do? So from that perspective, we're very happy with the early results on both consoles. A lot of new people to Xbox are coming in through series S, which is what we would have expected. It's lower price. It has, there's game pass there. Some people get a bunch of games. And X is our, our power play, right? It's the thing. It's the most powerful console. It's the, if you want the highest fidelity, the highest experience, we want, we want it there.

• 19:33Speaker 02

  On game pass, it's a good question and I went back and forth and I, I still sometimes, I really want it to all just be about Xbox. And I want people to get into this feeling of, I can be a member of Xbox regardless of whether. I own the console. I'm still a member of the community. I might play on PC. I might play streaming on my phone. I might own a console. But I'm always a member of Xbox. So this Xbox Game Pass was an attempt to make sure it tied back to, yeah, I'm just a member of Xbox. But I think over time, and even the Xbox Series S, Xbox Series X was to bring it all back to, yeah, I'm just Xbox. Like, where do you play? I play on Xbox. And that doesn't necessarily mean one piece of hardware. It could mean many different things. But I agree, like, it's a journey for us.

• 20:18Speaker 02

  Uh, in going from one console that has one name and one price point to something that's a little more expansive.

• 20:25Nilay Patel?

  Do you know that, uh, Microsoft people always say things are a journey and Google people always say things are early days and that's how. That's like, it's a very clear tell of like, we're just gonna figure it out. Just give us a minute. It's, every company has its own vocabulary. I, I do want to talk about the, the notion of gaming shifting away from the hardware, but you launch some hardware. It's

• 20:46Speaker 02

  Yes.

• 20:46Nilay Patel?

  It's, you're gonna ship a lot of them. Uh, when do you make the decision to say this thing is done? We're moving on. The, the development of the console is done. We're moving on to figuring out how to manufacture a million of them and put them in stores and ship them to people. What, when is that decision? Because it, it feels like it all happened yesterday, but that clearly isn't the case.

• 21:05Speaker 02

  No, no, no. We started manufacturing kind of late summer. We were a little bit later than the competition because we were waiting for some specific AMD technology. Um, in our, our chip. So we were a little bit behind where they were. Uh, where Sony was in terms of, of building units. But we started in, in late summer and when you do that, then you have to ship them to all the right retailers and distributors. So there's a time lag. Even in when you start and even when they're coming off the assembly line, like, when are they sitting at retail shelves? But we've been building at full capacity for now, you know, a few months and we continue to. So units continue to hit the shelves. Demand is just incredibly high right now.

• 21:50Speaker 02

  And it's like the biggest disappointment for me in this launch, but I'm also happy with it is people love the product and the demand is high such that when you're going to see product hit the shelf, but it goes very quickly. And I would, if you want one, I'd recommend picking, it sounds like a salesman now, but I'd recommend picking one up when you see it because we're going to be in this, this situation, probably into the spring of they're just going to be maybe not as tight as it is now, but demand is just really high and we're building. So we start the supply chain back at kind of end of summer. We're building, we're building. There is just physics in how many lines at the fab you can put in the assembly lines.

• 22:32Speaker 02

  So there, you can just, you can build as many as you can build and that's what we've been doing. There are decisions around mix, like how many of the S and the X do you build? So you kind of, you have to make decisions on that, but.

• 22:44Nilay Patel?

  Have you shifted that since you've started?

• 22:46Speaker 02

  No, we, we knew that, well, our, no, is probably overstating our level of insight. What should I say? We're at the starting line. Was that the Google line?

• 22:55Nilay Patel?

  Early days.

• 22:56Speaker 02

  Early days. Sorry, I've got, we've got to get it right. We figured that our first holiday and probably our second holiday, you would see more of the higher end SKU, just the higher, the series X sold. So we, we built more series X's than we did series S's. I think when we go into kind of spring and summer, we'll probably moderate that a bit. Over the long run, in most cases, price wins out. Like if you just go back and look at previous generations and when console generations hit the real sweet spot of sales, which is one of the reasons we like having that, that's the series S at its price point. But yeah, well, and then when we go back into next holiday, which we're already thinking

• 23:39Speaker 02

  about with supply chain and build, so we're already in that, that framing, trying to look at what we think our ratio should be between the two. The chips are very different in size and this is a little bit in the weeds. So we can actually build more of the series S at kind of in the same die space as we can the series X, but right now, demand for the series X is higher, which is kind of what we expected.

• 24:01Nilay Patel?

  It seems like there's still hiccups with the retailers. Like, I would love to just tell Walmart or Best Buy or Amazon, like, I want one, like, here's some money, just send me when you get it. And like, that's not the way the pre-orders have gone. It's just hard to buy either one. It's hard to buy the PS5, too.

• 24:18Speaker 02

  Yeah.

• 24:19Nilay Patel?

  And it's weird because we're just like fully in the age of e-commerce. Do you ever think about just doing more of it yourself?

• 24:25Speaker 02

  Well, I think our retail relationships are important. We do think about solving, or at least helping with the issue that you talk about. Like, we've had real discussions internally about, should I be able to reserve my slot? So I'll put some money down. I know my machine's getting built January 20th, and I'll get it on, you know, February 1st. And we have customers that would do that today.

• 24:49Nilay Patel?

  Dude, I'll mail you a check for $500 right now. I'll do it in cash.

• 24:53Speaker 02

  This is, this is actually a good discussion about the, what you were talking about before, with stay-at-home and the transformation of the retail channel, you know, even for day one. So November 10th, we're going line. We go, so we do our pre-orders, whatever, six, eight weeks before that. And we tell the retailers what percent of their allocation we want them to preorder. The retailers would sell them all, not because they're evil, but if you've got demand, why wouldn't you take the money? But we're like, no, we actually want November 10th to be a moment. We want people to feel like there's some consoles to go buy, and it's not just the day where everybody gets to go pick up, pick up their console. I don't know if that's the right decision in today's world. Like, that's very old-world thinking. People are gonna go line up outside of a store, kind of, you know, last decade thinking. And, and

• 25:38Speaker 02

  I think we should challenge ourselves on that. Is that really the supply chain through to the consumer that we're talking about, that, that is a reality day? And we talked to our retail partners about this as well. So I do think, you know, this, this business is going through, both for us and Sony, and Jim and both, Jim Ryan, somebody I talked to, I have a lot of respect for him, we both have lamented, like, how these pre-orders have gone. And what problem are we really solving when we seem to still have as many upset customers as we have, because they can't get our product? So I do think it's gonna push us to think about new models. And it could be like, reserve your slot. It could be doing things more direct with the customer. Still could have the retail, the retailer fulfill the order,

• 26:21Speaker 02

  but just so people can have more clarity in when they can get a console. It's something we're working on.

• 26:26Nilay Patel?

  So you mentioned people lining, there's like all these cultural things that happen at a console launch, right? People line up and then there's waves of unboxings. And then one thing that just mystifies me is there's a wave of people who like run over the new Xbox with their car and smash it with a hammer. And like, I'm like, I can't get one in your, what goes through your head when you're like, well, the inevitable people smashing my new console is happening and my next phone call is with my retail partners to figure out how we can get them more.

• 26:54Speaker 02

  To be honest, I love the industry I'm in. Like, I don't want any of, this is the job I love. My wife will tell me it's the only job I'm qualified for, but this is definitely the job I love. That tribalism in the industry, if there was anything that would ever drive me out of the industry, it's actually that that you're talking about. You know, I look at shipping a product, shipping a game as one of the bravest things a team can do. You put your product out there, it gets analyzed and prodded and reviewed. It can't defend itself. It's an inanimate object. You can't go on the internet and defend it. We've seen that way too many times. That never works. So when a team releases something into the market for this kind of, kind of the world to tear it apart on the, on the internet,

• 27:38Speaker 02

  it's just such a brave thing for a team to do. I'm never going to vote against any creative team or any product team to do poorly because I have a competitive product. I just, it's not in me. And I don't actually think it helps us in the long run in the industry. But there is, and especially in the console space, there's like a core of the core that's, I think, taken it to a destructive level. I really want that to fail. So the thing that I bought succeeded. And I'd say on both sides, like, I'm not saying that, you know, it's, it's all people crushing Xboxes and everybody on that, that loves Xbox is always completely inviting to all the PlayStation stuff. And I just, I've said before, I find it distasteful.

• 28:19Speaker 02

  Maybe that is too light. I just really despise it. Like, I, I don't think we have to see others fail in order for us to achieve the goals. And that's not some kind of like kumbaya thing. It's actually real. We're in the entertainment business. The biggest competitive We have is apathy over the products that we service, it's games that we build. And and we see that today. Everybody's doing well in the industry right now, for the most part, with the stay at home and the surge. And that's what we should be focused on as an industry. We've done it with things like cross play and other things that we focused on, breaking some of those tropes. But there is like a core that just really hates the other consumer product.

• 29:00Speaker 02

  And man, that's just so off putting to me. And again, that word's probably too light. But to me, it's it's one of the worst things about our industry.

• 29:09Nilay Patel?

  Yeah, I always tell our team that rooting for failure is a bad, it's just a bad place to be. You should root for success. It makes more, it makes you happier.

• 29:16Speaker 02

  And it's just not a, I've said it before, not a two may enter, one may leave scenario. Like, could you imagine if you were the director of a movie and you wanted another movie to be bad? So that people would hire, maybe directors do that, but I don't.

• 29:29Nilay Patel?

  There are some directors.

• 29:30Speaker 02

  Maybe they do, but like, you know, I could see maybe, like, I don't know, like, in the end, we know there's a, there are millions and millions of people that are going to end up with a Switch, a PlayStation and an Xbox in their home.

• 29:43Nilay Patel?

  Yeah.

• 29:44Speaker 02

  And those are great customers and they're going to buy the games that they want on the platforms where their friends are, where the exclusives are, whatever it is. So like, it's just, it's not a world where in order for us to win, Sony has to lose, or Nintendo has to lose, or Steam has to lose or something. And if it is, it's not really a Microsoft business. What I mean by that is Microsoft has this perspective. I mean, you look at our market cap, you look at the businesses we aspire to go be. I can't target Microsoft and say, hey, the board of Microsoft, our enemy is this Sony company. We should go take them out. It just doesn't, it's not even in our vocabulary to talk about Sony like that way. They're they're a partner of ours, frankly, in a lot of different places.

• 30:25Speaker 02

  So it's, our ambition has to be a global business that's growing, that's going through transformation, where Microsoft has some real opportunity to help with that transformation and play an important role. And that's how we frame our opportunity in gaming.

• 30:41Nilay Patel?

  We're going to take a quick break, but when we come back, I'll ask Phil about the role of software in streaming and Microsoft's gaming strategy, and whether this is the last generation of big consoles for the Xbox.

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• 31:55Nilay Patel?

  All right, we're back with Phil Spencer on Decoder. To launch a console, you don't just need hardware. You obviously need big games. The Sony PS5 has two games that everyone seems to be talking about. Spider-Man: Miles Morales. Remember, Miles, you're Spider-Man. And Astro's Playroom, which takes full advantage of the next-generation haptics on the controller. The new Xboxes don't seem to have those standout titles just yet. One of Microsoft's flagship games, Halo Infinite, was delayed to 2021. So I asked Phil how he's thinking about the role titles play in the launch of next-generation consoles and how he feels about not having the new Halo game right away.

• 32:35Speaker 02

  We were very public about Halo Infinite and our desire to have Halo at launch. I do think there are some great launch games that are there to go play that maybe get lost up in this dialogue about who's got the better launch lineup, which is, I think, a downside of the games. I'm playing a lot of Tetris Effect from my friend Mizuguchi and the team, and it's awesome. But the overall that you talk about, we wanted Halo at launch. We thought it would have been kind of a real cultural moment for us as Xbox. Last time we had done that was the original Xbox and Halo CE. You know, from a business standpoint, I'm selling every console I can build. So it's hard for me to paint out why, how I would be selling more consoles today. I wouldn't be, but there's also a fan promise.

• 33:21Speaker 02

  And that's not lost on me that people want to see new, great games that play on their, on their new platform that they purchase. And that's a commitment that we've really, we believe in. We've made huge investments in our first party and growing the amount of games that we can build. That can be special on Xbox, that can be there for our Xbox fans. So that they feel like they made the right purchase. And that was a miss on our part. I wouldn't change the decision based on kind of the right game, healthy situation for the team and how they're working. But absolutely, it's something that we had planned for Bonnie Ross, who runs the studio and I to have Halo there.

• 34:05Speaker 02

  In the long run, I think what's going to happen is we're going to get a better Halo game at a good time when people can actually get a console. So I feel good about that. I think the game will be better for the time that we're giving it. And I'm incredibly excited about the lineup, not only of Xbox Game Studios, but we've obviously also announced our intent to acquire Zenimax. And Starfield and great games that Todd and the team are working on, that people are going to go play on their Xbox. And so I feel good, really good, the best I've ever felt about our roadmap. But yeah, it would have been really great to have Halo at launch.

• 34:39Nilay Patel?

  Well, so it's, that's all wrapped up into the idea of game streaming, right? So just to lay a foundation and feel free to disagree with me if I'm getting this wrong. But it, there's a part of me that says, this is the last generation of hardcore game consoles that you're going to buy at this moment. And the future is streaming games over the internet to all kinds of devices in your house. And you've launched a service like that. Google has a service like that called Stadia. Amazon just launched a service like that. We see it from a lot of different directions that the game code will actually run in the cloud. You'll never really know what those computers are and then.

• 35:18Nilay Patel?

  You'll just stream them. And I think people call that Netflix for games. You're going to pay a monthly fee to Microsoft or Amazon or Google or whoever you have access to. And there's some differences in business models, but I see that. Well, you're shipping two pieces of hardware, right? Like that, we've talked a lot about the nuts and bolts of your hardware so far. But do you think that shift to game streaming is, will be the inflection point? Do you think that these are the last big pieces of hardware you're going to ship?

• 35:43Speaker 02

  I don't think it is. These will be the last big pieces of hardware that we ship. But I totally understand the logic flow that you're running through. Like, it makes sense. I'll say, and obviously, I don't know. Like, I'm learning every day. We react to what our fans and our customers want, not what we need to have happen. But like, it's funny, because I'm sitting here and I look to my right and here's my Sonos speaker, the Sonos Move, which is a big piece of hardware. Well done. The advent of streaming audio has not caused me to buy fewer audio devices in my home. If anything, it's actually increased the number of like, not they're all, they're not like, you know, $2 little speakers that I'm throwing. These are real money spent on real devices.

• 36:25Speaker 02

  I'd say streaming video the same way. Like, if anything, I'm spending more on my TVs than I ever have because I care about like, I care about the quality. And does it have HDR and all of these things because of the capability? So I don't know that it's inevitable that streaming games means that there's no local compute capability that I want in my house. And in fact, that's not what we're building towards. So when we think about X-Cloud, which is our version of Stadia or Luna, I think what it needs to evolve to are games that actually run between a hybrid environment of the cloud and local compute capability. And that they can actually take full advantage of the cloud that's there and that's available.

• 37:07Speaker 02

  But also full advantage of my edge compute capability that I have. In my home, in the console, and it's really a hybrid between both of those. And that's, I think, the compute model that most people are going to move to with most app development is a hybrid model between Edge and the cloud, where things that either from a security or latency or even cost and bandwidth standpoint can be done locally, should be done locally, and things that really could use the scale that you can get through cloud and be able to light up multiple blades to deliver whatever experience you want to deliver to somebody would use the power of the cloud. Now, if your local device has almost no compute capability relative to games, obviously we'll move almost everything to the cloud.

• 37:50Speaker 02

  But if I have a device that's very capable in my home, we should use some of that and we shouldn't ignore it. So I think it will change. I definitely think your point about inflection point is right. I just, I don't think the outcome is by definition going to be everything becomes terminal server in my home and all my games are just running completely in the cloud. And when we think about the evolution of our game platform, it's really more of a hybrid game platform between Edge and cloud that we're shooting for.

• 38:17Nilay Patel?

  Well, let me, so the Sonos speaker is a really good example because I could, I can concoct the sort of same example that proves a different point, which is 10 years ago, if I wanted to get satellite television, I needed dedicated satellite television hardware in my house. And if I wanted to get Sirius radio, I needed dedicated Sirius radio equipment in my house. And if I wanted to record anything, I needed a dedicated piece of hardware to record it. And all of that has converged and all of it is delivered over the internet to a single relatively high-performance computer, right? Whether that's a Sonos Move or like an Apple TV or an Xbox or, or in many cases, the television itself is just a giant tablet that we call a TV, right? And it's got an ARM processor and it runs Linux and we're off into the races.

• 39:02Speaker 02

  Yeah.

• 39:03Nilay Patel?

  What's stopping you from saying, okay, Xbox is an app, it has minimum hardware specs, and we're just going to run it on a smart TV?

• 39:09Speaker 02

  I think you're going to see that in the next 12 months, right? So I don't think anything's going to stop us from doing that. But I thought what you said about the TV was spot on. What we used to call a TV was a CRT that's just throwing an image on the back of a piece of glass that I'm looking at. And now, as you said, a TV is really more of a game console stuffed behind a screen that has an app platform and a Bluetooth stack and a streaming capability. So is it really a TV anymore? Or is just the form and function of the devices that we used to have around our TV been consolidated into the one big screen that I'm looking at? And so I do think you're going to see hardware change. I mean, frankly, even on the console, we see this.

• 39:52Speaker 02

  One of the primary things that people do on game consoles is watch video, right? Which is they watch Netflix and Disney Plus and Hulu and everything else. So what it's meant is we actually have to build out an app platform inside of a game console so that these providers can go and build their Spotify app and the different things that run. And there's real like hours and hours of usage on these things, which, you know, my N64 didn't do that. The first Xbox didn't do that. So I think you're absolutely right that the definitions and the, there will be winners and losers and things that evolve and get combined together. I think what I'm saying is my, the amount of compute capability in my home, I think,

• 40:33Speaker 02

  has increased with the number of streaming signals that have come in, not decreased. And I think gaming will be one of those things as well. Let's take a scenario of, you know, my kids want to play game, the same game on multiple televisions. Is there going to be something that keeps all of the local inputs for low latency and other things in my house? And maybe even I want that from a safety and security standpoint. So only the kids in the house can get on Xbox Live and it's not out on the open Xbox Live. But I still, those kids will still want to go play games together on their own screen and other things. So I, I think we're going to stay eyes open on what scenarios evolve. I just push back a little bit of. And this is not exactly what you said, but that when streaming comes, all the consoles

• 41:18Speaker 02

  go away, or all my local kind of devices that play video games go away. And I'm not quite as sold on that. I think we just have to be nimble in watching what players want.

• 41:28Nilay Patel?

  One of the larger challenges with streaming writ large is that the two phone platforms are owned by companies that are very interested in competing with the major game vendors.

• 41:38Speaker 02

  And they're not Microsoft.

• 41:39Nilay Patel?

  And they're not Microsoft. I won't say anything about Microsoft and phones. I promise that conversation is dead and over. But right, it's Apple and Google. Apple, obviously, it's embroiled in a lot of different controversies with various game makers. I think Fortnite is just at the top of the list. But right now, if you wanted to put X Cloud on to the iPhone, and Apple won't let us do a storefront, they've come up with all these rules. And we've seen, I think, Amazon, I think, to some extent, Microsoft has said, screw it, we're just going to go through the browser. What is that conversation with Apple like right now? Is it just whatever the Safari is open, we're not going to deal with your App Store?

• 42:15Speaker 02

  No, they actually remain open to the user experience we would like people to see. But we have this avenue of a browser that works for us that we will go and build out, which gives us access, frankly, to a lot of devices. If the device is capable of running a capable web browser, we're going to be able to bring games to it, which is pretty cool. And you'll be able to bring all of your saved games and your friends and everything comes with you. So it's like, it's just Xbox on this new screen with the games. But Apple does remain open in the conversations that we have on this topic. I mean, I can understand their perspective from their position. I don't say I agree

• 42:56Speaker 02

  with it. But I can under, they have a competitive product in Apple Arcade that is competitive with Xbox Game Pass. I'm sure they like having Apple Arcade as the only game content subscription on their, on their phone. We want access to at scale compute devices that we think should have open access to services that customers want. And we're willing to work with them on safety and other things that people have come up with. We run a platform that we take safety and security very carefully, and it's very important to us on Xbox. So it's, that's topics, not something that's foreign to us. But yeah, it's one of the things that we navigate. We're on Android today. But I think going with a web solution gives us a lot of opportunity on a lot of different devices.

• 43:40Nilay Patel?

  Do you don't think that, I mean, this is like in the realm of conspiracy theory, but I've heard it from other developers that Safari is limited in what you're able to accomplish in order to push developers to the App Store and Apple's fee system?

• 43:53Speaker 02

  We have not seen that to date, just like we haven't on Chrome. I will say, you know, that maybe more Chrome, just because I'm, I happen to be an Android user. So, but it, Google's good at advertising their first-party services through their platform. Right? So there's a capability of can our, can our service run on Safari or Chrome? And then there's also just the promotion capability that those platforms have of any time I try to go to Game Pass, do I end up at Stadia? Like, you know, those are things that isn't happening today. I'm not accusing anybody of things, but that's just one of the positions we're in and not being a platform holder. You know, Windows is open. Things like Steam were created on Windows.

• 44:38Speaker 02

  Because Gabe and the, the team could go build an app that on Windows sold products and it, they didn't have to come through Microsoft. They had open access to the SDK and the, the users. And as a platform holder, you have to be diligent in how you manage that, but it frankly, Chrome was built on, on Windows. I think when compute platforms really get to scale, like, like an Android or iOS or Windows, I think there's a responsibility for us to keep those open and allow for competition on them. I, I do fundamentally believe that and I've seen it work on Windows.

• 45:11Nilay Patel?

  What's interesting about that is when you go and push Apple and Google on their platform and how they run it, their first response is, well, Xbox and PS5 are the same fees. Do you think that's a fair comparison?

• 45:23Speaker 02

  Uh, I don't. If that was it, like if, you know, if we want to do the, if I can put Game Pass on, on iOS, if I open Xbox, like I'd kind of do that yesterday, right? If you just look at the scale, right? I mean, there's, there are a billion mobile phones on the planet. Those are general compute platforms that a game console does one thing, really. It plays video games. It's sold at, for us at a Loss and then you make money back by selling content and services on top. Like the model is just very, very different from something the scale of Windows or iOS or Android.

• 46:01Speaker 02

  You know, I, I think that there are 200 million game consoles that are sold in a generation across all of our, our platforms. And there's, there's as many, that's like less than a year of phone sales. I think like, you know, it's just not even close. And then, and people say, well, the scale shouldn't matter, but it actually does. When you start looking at how we look at open platforms and, and access. Those things do matter from a legal perspective, they mattered. We know that at Microsoft, we, we had our DOJ time. So I think as platforms get to scale, there's a responsibility there. Absolutely.

• 46:35Nilay Patel?

  We're going to take one more break, but when we come back, we're going to talk about the game studios. Microsoft is buying to fill up that game pass subscription service and how the subscription model is impacting the entire gaming industry.

• 46:51Speaker 03

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• 48:14Nilay Patel?

  All right, we're back. Microsoft has acquired a lot of game studios over the past few years, but the biggest acquisition by far has been Zenimax Media, which brings huge titles like Fallout, Elder Scrolls, and Doom under the Microsoft umbrella. So I had to ask Phil, is the thinking behind buying all of those studios to make Game Pass work, to have that library of first-party content?

• 48:39Speaker 02

  Yeah, it is. I mean, Game Pass relies on third-party content, and I want it to be that way. I want our third parties to have success. One of the things, going back to like, previous CEOs, Bill always had this good point of view that you're not really a platform until other developers make more on your platform than you do. That's kind of one of the fundamental definitions of a platform, and I think it's very smart to look that way. And I think about Game Pass as a platform. It's not just a subscription on a platform, and I want third parties to see the distribution and monetization capability of Game Pass as something that is accretive to their business and important to them. I,

• 49:22Speaker 02

  obviously, as the owner of Game Pass, are going to invest earlier than third parties will, both in when I put games on the service and the number of games that I need in order to create the flywheel that gets it to scale. So yeah, we're investing in content because we're early in Game Pass and frankly, in X-Cloud, and I need to have great content as an attractor to customers into Game Pass and X-Cloud, and our consoles as well. But when I play it out, I want to get to the world, and you've seen this, you've seen developers, it's been great as Game Pass has grown, start to come out and say, "Look, Game Pass is actually a critical part of the discovery process of my game, and it's actually created

• 50:06Speaker 02

  business opportunity for me," which isn't true in video and music today, right? Because when certain people try to call Game Pass the Netflix of, or the Spotify of, there is a fundamental difference that-

• 50:17Nilay Patel?

  I was seconds away from doing it, so I'm excited for this answer.

• 50:20Speaker 02

  I mean, these games are all for sale, and what we've seen, because, one, games, some games have a business model inside of themselves, and there's retail availability at the same time, and all these other platforms that games are on, that the big, one of the big issues that some of the mid-tier and smaller games deal with is, how do I just get known? How do I actually create that either that Twitch moment that you see with something like Fall Guys? Or just the it's live on so many people's social graph because people are playing that people just see it. And Game Pass has been a real avenue for that because we have over 15 million subscribers and a very consumptive kind of base of players and everybody sees what everybody's playing on Xbox Live.

• 51:04Speaker 02

  When a game hits in this curated marketplace of Game Pass, it becomes more discovered on the network, which is just such a huge viral marketing for the game that's out there. And that's what I need to get to with Game Pass. So we invest in first party and we're seeing it. So I'd say get to like we're, I think we're at the, we're right at the inflection point of that really being true. And it's definitely true for a lot of developers already. So we invest in our first party to as a catalyst for growth. But in the end, I do know that most of the games, just like most of the games that are played on an Xbox should be third parties. And those third parties have to build a healthy business on Game Pass, otherwise it doesn't work.

• 51:40Nilay Patel?

  Well, so let me make the Netflix comparison, you know, just to have done it, just to check the box. The Netflix business model was it started with a bunch of third party content. Right. They were licensing TV shows from networks that had no streaming capability of their own. It was just free money because it was on this thing called Netflix. The TV networks realized, oh crap, they're eating our lunch. And Netflix started pouring money into originals to increase and maintain the value proposition of your Netflix subscription. And they're, they're still doing it. They're still spending a lot of money. When the TV networks are saying, we're all going to build our own streaming platforms now. You're describing the opposite of that. You're saying, I'm going to spend all the money upfront to make people come onto the service. And then the game developers who are not going to build their own subscription bundles, we don't think.

• 52:25Nilay Patel?

  They're going to come on to Game Pass to make a lot of money.

• 52:27Speaker 02

  That's our goal. That is absolutely our goal. And, and we see it and not in all cases, but this is all learning every day, but we see it. And even things like EA Play coming on to Game Pass was us working with the, our partners at EA to say, it's not about a per title thing. Let's actually bring the channel that you guys want to go drive and grow value in called EA Play. And let's bring that to Game Pass on console and PC. So you see growth in people's attachment to your service through the distribution power of Game Pass. And that's real strength for them, right? It actually for a content partner like an EA or someone else, it helps them create

• 53:11Speaker 02

  the kind of moat around their content that says, no, this EA Play thing has value. And we love that. Now, that's at a portfolio level. There's certain teams that are just, let's do that with our game. If I think about Studio Wildcard with Ark, you know, a game that does really, really well in Game Pass. It's a good example. If they've got a whole ecosystem around what it means to be in Ark and the business model behind that. And they can use Game Pass as a great way for them to grow and find new customers who might not choose the game just on an open marketplace or might never find it. But we can actually raise the visibility of the content. And that's just not true in the video space. I mean, it is true at some level. There's definitely some

• 53:54Speaker 02

  third-party series that I've found like season one and two on Netflix. And then I'll go to watch on the studios service or even on broadcast, if it's something that's on broadcast. I just don't think the video companies were there to catch that growth in in Friends. You think about something like The Office or Friends or these things that were kind of critical at parts of Netflix growing. I think the opportunity that was missed there, and I'm not disparaging anybody, but if you're going to grow a bunch of interest in Friends because it hit Netflix, what do you do with people's interest when they get to the last episode? That's in Netflix. Gaming knows how to do that. Like our gaming partners, whether it's an annualized franchise that comes out.

• 54:38Speaker 02

  So you're building an audience for the next release or it's an ongoing perpetual game. Destiny 2 is in Game Pass right now. And those, those developers know how to continue to manage and grow communities. And that's what I would say in the video space. Like go, if you want to use Netflix for distribution. Absolutely, but make sure you know how to catch the signal of fans for you as the content creator when it comes out. And we enable that. That's something like we've got a storefront. We've got discoverability you can bring, you can, you can have your social, you know, whether it's Uplay or EA or other things on our platform. So you're building a direct to consumer relationship for you as a publisher. Those are all critical, critical components of Game Pass.

• 55:19Speaker 02

  And even more important with X cloud, as we start taking this content to a device that's never seen your game in a part of the world that's never going to own a game console or a gaming PC. How do you as a publisher build that strong direct relationship customer either around your portfolio or around your game?

• 55:36Nilay Patel?

  Does a subscription model change the kind of games you're commissioning or that developers are making? Right. One of the things we've heard from Apple Arcade developers, for example, is that Apple's pushing for engagement time. They want people to play the games for longer. So you feel like you're getting every ounce of money, every ounce of value out of the money you're spending on the subscription. I buy Madden every year. I just pay the $65. I know I'm going to get my money out of it. But when you're paying that monthly fee, right, you always need some novelty or you need to come back to a game over and over again. Is it changing how you're thinking about how games should be made and, and developed over time?

• 56:10Speaker 02

  I'd say for us, the biggest, the biggest change has been just expanding the kind of creative chances we will take. Because we know we have 15 million subscribers at players who will try something. The marginal cost of trying the next new thing is today a download and with X cloud will just be opening a stream and, and giving it a try. So we're doing more episodic things, even games like Flight Sim come back because we know we have millions and millions of customers who will give it a try. I don't know how many of those people would have paid 60 bucks for that game, but the business model allows us to try new delivery methods. Whether like things like episodic new themes, it doesn't all have to be the known genres.

• 56:53Speaker 02

  Like let's go push on some genres that have either fallen by the wayside or people are making new things. Those are the areas where I see us unlocking capability. I will say, and this is a health Thing for Game Pass and it's true. It sounds like a BAPL arcade as well. The number one metric that we see that drives success of Game Pass is hours played. Like it's not catalog size. It's not actually even the size, the retail price of the games that are included in the subscription. Like we've kind of run the math from all different angles. And I love the fact that if people's happiness with the subscription is in line with how often they use it and play it. That seems like a pretty good thing to me.

• 57:34Nilay Patel?

  How do you pay out developers? Like I'm a developer. I make a game. I say, I'm going to put it in Game Pass. A customer pays $14.99 a month. How do you decide how much to pay me the developer?

• 57:44Speaker 02

  Yeah, we have our deals are kind of, I'll say all over the place. That sounds unmanaged. It's really based on the developer's needs. So one of the things that's been cool to see going to the question of, do we see kind of what new things are happening? Is a developer, usually a smaller to midsize developer, might be starting a game and say, hey, we're willing to put this in Game Pass on our launch day. If you guys will give us X dollars now. And so what we can go do is we can, we'll create a floor for them in terms of the success of their game. They know they're going to get this return. Certain cases will pay for the full production cost of the game and then they get all the retail opportunity on top of Game Pass. So they can go sell it on PlayStation, on Steam and on Xbox and on Switch.

• 58:28Speaker 02

  So for them, what they've said, they've, they've kind of protected themselves from any downside risk. The game is going to get made and then they have all the retail upside. We have the opportunity for day, day and date. So that would be a flat fee payment to a developer. Sometimes the developer is more done with the game and it's more just a transaction of, hey, we'll put it in Game Pass if you'll pay us this amount of money. Others want more based on usage and monetization in, whether it's kind of store monetization that gets created through transactions or kind of usage. So we're, we're open and experimenting with many different partners because we don't think we have it figured out. When we started, we, we had a model that was all based on usage. And most of the partners said, yeah, yeah, we understand that, but we don't believe it.

• 59:13Speaker 02

  So just give us the money upfront.

• 59:16Nilay Patel?

  That's what I mean. Look, if you look at every other model, Spotify is always in a fight with the industry. I get that model makes a lot of logical sense. We'll pay you based on if people use it, but it seems to lead to an enormous amount of conflict down the line.

• 59:29Speaker 02

  My hope is we will get there and maybe not 100%, like maybe some hybrid model, which I think could work. You know, we already have a rev share relationship with most of the content creators because we have a store, a digital store on our Xbox. So, which is basically a usage based thing. If you think about it, like I buy the game, we take a little, a cut, they take a cut and we build success together. And I'm hoping we can get to a model where as we see upside, they see upside, there's some downside risk that we can help cover, which gives us certain capability with the content, but also helps them go do some things that maybe they couldn't get greenlit on a pure retail model. And that's like the thing that's been heartwarming to me as somebody who's been building games

• 1:00:11Speaker 02

  for so long is to see games come to the service that wouldn't have been built if there wasn't this engine called Game Pass that allows us to go off and help fund, you know, a certain game to go built when the team, if they're just out there pitching to publishers on how do I get the, this signed as a retail game? And if it doesn't fit into some Excel spreadsheet that tells you what the retail outcome will be, that it doesn't get greenlit? And, and you see this in things like Netflix. There are clearly shows on Netflix that would have never been greenlit by NBC or CBS or ABC in the old model and frankly can have real success.

• 1:00:50Nilay Patel?

  So it's interesting about this, and we've been talking a lot about Game Pass and streaming being on lots of devices. A thing about this console generation in particular is that, you know, Sony took a leap forward with the actual controller and they were able to do something because they built haptics into their controller. It's tightly integrated into their system. They have a few titles at launch that really take advantage of it. How is, how are you thinking about that split? There's something I can do if I own the whole stack over here. And then there's this massive inflection point and opportunity to be everywhere if I sort of commoditize a little bit more. And I say commoditize and like, that's a little bit unfair because every controller in the world

• 1:01:31Nilay Patel?

  looks like the Xbox 360 controller, right? Like that's, that design has won. So you could just take that everywhere, but they were able to take another leap with their controller because they control the hardware stack.

• 1:01:42Speaker 02

  So I applaud what they did with the controller, not actually for this, well, I shouldn't say not for the specifics of the controller, but more than just the specifics of the controller. I think for all of us in the industry, we should learn from each other and the innovation that we all push on. And whether it's distribution and business model like Game Pass or Controller Tech, or the Wii back in the day, which clearly had an impact on us when we went off and did Kinect and Sony did the move. You know, I think all of that innovation is something that we should all be looking at and learning and growing and saying, okay, what's really going to break out and become a common part of a platform that developers and players are going to look for?

• 1:02:27Speaker 02

  Or what is more kind of vertical around a specific scenario on a specific piece of hardware? And so we're trying to be eyes open on that for any technology, whether it's controller or any VR or anything else.

• 1:02:39Nilay Patel?

  Yeah, but I look at that controller and I say, there's no way you could execute that unless you have a box right there. Right? Like you couldn't abstract the PlayStation platform to every phone in the world and then support haptics with that low latency. You think you could?

• 1:02:52Speaker 02

  Yeah, yeah, you could create as part of the API that we have with direct input or other with Apple and Android, which is where our controller works, we could clearly add API calls for rumble, which we already do in certain cases, or haptic triggers and stuff that we've looked at. I think your point earlier around the Xbox controller has kind of become a default, even outside of gaming scenarios, always bizarre to me. I'll see something like somebody controlling a robot and they're using an Xbox controller somewhere in like an enterprise scenario. But you know, that's, that's something where we have to think about superset, subset. Not all of our controllers have all exactly the same capability. The Elite has the, the kind of buttons on the back and stuff.

• 1:03:36Speaker 02

  So I don't think it precludes us, but there is something about the common just expectation that people have on our controller and its ubiquity that's out there that I think is a strength. It doesn't keep us from innovating, but it clearly, we do have to think about all of the use cases that are out there. We can't turn the controller inside out because there's so much expectation about the way it should work now. But we can innovate on top of that and we're going to look at what any other company does and learn from it and see if it's something that we want to apply to what we're doing.

• 1:04:09Nilay Patel?

  I feel like this comes back to that conversation about what happens in the cloud and what happens on the edge, which is like every time I talk to anybody from Microsoft, I feel like I use the words edge and cloud like five times in the conversation. But right, what I'm describing is they've made a user experience improvement at a very local level, right? The thing you're holding in your hand connected to the box, it's all running on the box. And it just, a lot of our conversations so far has been about streaming, like, how do we abstract the platform and put it everywhere? And that level of abstraction usually just comes with a commoditization of user experience. Like, it's sort of necessarily what happens.

• 1:04:45Speaker 02

  Yeah, but so I understand that. I'm just thinking real time. Like, if you, is like a 4K television that different? Is HDR in my television that different? Like, I get a 4K HDR signal from Disney Plus that lights up my local hardware capability in a unique way. It's coming from the cloud, but my local edge device, my TV, to use Microsoft vocabulary, knows how to decode that and actually turn on specific hardware capability locally and make that work. And I don't think that the fact that things are coming from the cloud really keeps us from innovating on local hardware, whether it's input, whether it's

• 1:05:26Speaker 02

  display, whether it's audio. And you see that with DTSX and a bunch of other things that are hitting now. You know, those streams could easily come from, from the cloud and light up in interesting ways. It's something to think about, but we don't see it blocking us in any way.

• 1:05:41Nilay Patel?

  Last question. We've talked a lot about just sort of the business of games. We've talked a lot about how you architep the consoles, how you make them, how you get them in people. This is all in the context of what we started with, which is games are having a moment. It's an inflection point. They're more visible than ever. Certainly, I think that's right with Fortnite. We're seeing a Roblox moment. There are concerts happening. This is how people are socializing in a pandemic. Games have just been a sideline in the entertainment industry. They were over there for a long time. Now they're just like in the middle of everything. Does that change your responsibility? You talked a lot about, you know, the parts of the gamer culture you don't like, but are there parts that you want to enhance that you want to push forward? There's a lot of kids learning their social interactions in these spaces, like.

• 1:06:26Nilay Patel?

  What's your responsibility? How has it evolved?

• 1:06:28Speaker 02

  I love, love this topic. I absolutely think as an industry, it's our responsibility to use both the interactive nature of our, our medium, as well as you say, the audience that comes into gaming to help build social norms that are durable across the physical and the digital space and gaming and non-gaming scenarios. Like I, I think we, we have that opportunity as an industry and I actually see us, we got tons of learning and growing and mistakes in our, in our past as a company, as an industry. I say as a company is like as Xbox, you know, I'm learning on this every day. But I absolutely see the industry. I'll go to like game developers conference.

• 1:07:13Speaker 02

  You know, back when we were having it physically and you see blacks in gaming, Latinos in gaming, LGBTQIA+ in gaming events. You see topics around the discourse that should be able to happen in our social gaming networks. You see work on ML, machine learning techniques to detect whether it's bullying or grooming that happens online or people that are in social suicidal stress situations and can we detect these things? For the longest time, gaming, and again, as you've said many times, I've been around for, some will say too long. And when it's the adoption of things like AI or simulated 3D

• 1:07:55Speaker 02

  technology, gaming has always been at the forefront of adopting these things and making them mass market into consumers' hands. And I think now what we have as an industry is an opportunity on more social and, and maybe even global issues that we can really lean into. And, and I love the way that the industry itself and Team Xbox has, has done its share on, on seeing that opportunity and trying to realize it. It's part like, who are we as teams? It can't be a bunch of old white guys like me that are running all of these teams. And that's the only perspective that shows up in the creative and the business model, the opportunities. It can't just be people from North America, Europe and Japan that are building.

• 1:08:36Speaker 02

  We need to diversify what voices are being heard through the creative and where those creations happen. We need to really build safety and security. Obviously, we have Minecraft, Roblox is on our platform. We think very, very carefully about both the social norms and the safety and security. So if I'm a parent and my kid's online, that I know that they're as safe as they are upstairs playing in their bedroom. And that's a goal for us. So these are our real opportunities. I could have said challenges, but I see them as opportunities for us as an industry. And I'm actually motivated by the accessibility and all of the work that

• 1:09:17Speaker 02

  this industry takes on and tries to go tackle. And that's a Sony comment, a Nintendo comment, a Steam comment, like an Xbox comment. It's not a competitive thing. It's something for us as an industry. Sorry, I'm a little bit passionate about this one.

• 1:09:32Nilay Patel?

  No, I'm gonna ask you one more question because you're gonna keep giving me time if I stay on it. So when you think about the opportunities there, how active are they? One of the things every platform company that we talk to, we ask them about content moderation. You know, like user generated content comes with like a known set of challenges. How active do you need to be in moderating and shaping your community versus putting norms around it and hoping it develops the right way?

• 1:09:57Speaker 02

  Every second. Like you need to be real time with your community as it gets to scale, whether you're an individual developer with one game or a platform. And we, as Microsoft, and other companies will do the same, we need to give you the tools to help you as an individual game developer, or as a growing platform, to help monitor. Because it's, one answer is to throw bodies at it. And like, okay, I'm just gonna go hire a thousand people to manage the community that happens on my game as it gets to scale. That runs out of steam at some point. Not everybody can go put Azure stacks with RL, with reinforcement learning capabilities all over. But we can, we have that capability. And we've built technology through Microsoft

• 1:10:42Speaker 02

  Research, whether it's on the voice side, the tech side, or the image Side that can detect certain things. We've shared that with other game industry and community companies that are out there. This is an area where Microsoft and Xbox, I want us to be leaders, not leaders, again, to the exclusion of other people, but leaders just in helping because you do need to do it real time. You can't put three rules up on the on the whiteboard and say, okay, well, the rankings will figure it out, or the good stuff will float to the top because regretfully, that's just, you know, people will, that doesn't work. It can work for maybe a short while, but it doesn't work. So we see it as an active, we have hundreds of people and a ton of technology and cores

• 1:11:25Speaker 02

  that we throw against this problem real time. And I really think it matters. So I think it's a constant opportunity. I see it as an opportunity because I value what bringing people together and play does. I see the empathy it builds into that social contact theory that I'm a big believer in of bringing disparate groups together with shared rule sets and understanding can help build empathy between different groups. But with that becomes a responsibility to make sure it's the right environment for that to happen.

• 1:11:53Nilay Patel?

  Well, that's great. Well, thank you so much for going a little bit over. I really appreciate it. This is a great conversation. Thanks so much, Phil.

• 1:11:58Speaker 02

  No, I appreciate it.

• 1:12:00Nilay Patel?

  Okay. Thank you again to Phil Spencer for taking the time to talk with me. Thank you all for tuning in. I hope you enjoyed it. As always, I'd love to hear what you think of the show. You can tweet at me. I'm at reckless on Twitter, or you can email us at decoder at the verge.com. And if you enjoyed the show, please share it with your friends and subscribe wherever you get your podcasts. Decoder is a production of The Verge and part of the Vox Media Podcast Network. It is produced by Sophie Erickson. Our audio engineer is Andrew Moreno. Our music is by Breakmaster Cylinder. We'll be back next Tuesday with another episode of Decoder. We'll see you then.

• 1:12:37Speaker 05

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