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Microsoft CEO Satya Nadella talked with Xbox game leader Phil Spencer about why Microsoft is all-in when it comes to gaming.

The hour-long business discussion with a bunch of Microsoft Xbox executives preceded the company’s upcoming reveal event for games on Sunday at the all-online Electronic Entertainment Expo (E3). Wisely, the company got the dry business stuff out of the way so it can focus on the sizzling gameplay revelations on Sunday.

The conversation between Spencer and Nadella focused on the importance of gaming at Microsoft and in the world. Since this was such a vital conversation for Microsoft’s cred in the game business, the company decided to share it in its entirety. It was smart of Microsoft to separate this business talk from the other event. A message of this power displays was targeted at game publishers, shareholders, and developers, as Microsoft has to convince them it is more serious about games than Nintendo or Sony.

These are the sorts of questions I would quiz Microsoft about, if I had the chance. But fans would have hated this presentation because it would have taken up a lot of time talking about the game business, rather than showing them actual games and gameplay, as Microsoft will do on Sunday.

“Gaming has been key to Microsoft from our earliest of days,” Nadella said. “Our oldest currently supported software franchise is in fact our game Microsoft Flight Simulator, which we released three years before the first version of Windows, even. Gaming is fundamentally aligned and woven into our mission as a company. When you talk about Xbox’s mission to bring the joy and community of gaming to everyone on the planet, which I absolutely love, this is precisely what I think of when we think about Microsoft’s mission, which is to empower every person, every organization on the planet to achieve more.”

That was good reinforcement of the CEO’s confidence in games, which is a healthy business but a very small part of Microsoft’s overall business and value as a company. It reminded me of Google CEO Sundar Pichai showing up at the Game Developers Conference in March 2019 when Google entered the game business by unveiling its Stadia cloud gaming service. Of course, that venture hasn’t turned out as well as Google had hoped. But CEOs coming onstage to talk about games is a strong endorsement of the opportunity at hand.

Above: Microsoft is putting players at the center of gaming. That’s its brand message.

Image Credit: Microsoft

“As a company, Microsoft’s all-in on gaming. We believe we can play a leading role in democratizing gaming and defining that future of interactive entertainment, quite frankly, at scale,” Nadella said.

He said there are three areas where Microsoft has a competitive advantage. First is the leadership in cloud computing; second, the resources Microsoft has to build out the subscription value with Xbox Game Pass; and third is the overall focus on empowering creators, he said.

“I’m really excited about the opportunity in gaming,” Nadella said.

Cloud tech and cloud gaming

Speaking about Microsoft’s Azure cloud technology, Spencer said, “Going back to the birth of personal computing in the 1970s, the ability to play games has been limited by the cost and power of the specific device you’re using, whether it’s an arcade cabinet or a PC, a phone, a tablet, whatever. And that cost and those requirements have always severely limited who can play, where they can play, and who they can play with.”

Spencer said the company would continue to invest in cloud computing and spread across more devices to reach more gamers. It will move into internet-connected TVs, for instance.

Cloud gaming will launch later this year for Game Pass Ultimate members in Australia, Brazil, Mexico, and Japan. Cloud gaming will be added directly to the Xbox app on PCs and consoles later this year to enable features like “try before you download.” Cloud gaming is also moving into browsers, even on iPhones. You’ll also be able to get an Xbox Series X experience via the cloud through Azure. That project is in the latter stage of testing.

“When I was a kid, it was crazy to think about having a Galaga machine or a Ms. Pac-Man machine in your house,” Spencer said. “You had to go to the arcade. More recently, if you couldn’t spend hundreds of dollars on a game console, potentially thousands of dollars on a high-end PC, you simply couldn’t participate in the global gaming community in a significant way. The cloud will allow us to completely remove these barriers to play worldwide.”

He said there is still a place for consoles and PCs, and there always will be.

Above: The Xbox Series X/S express Microsoft’s approach to gaming.

Image Credit: Microsoft

“But through the cloud, we will be able to deliver a robust gaming experience to anyone connected to the internet, even on the least powerful, least expensive devices, even on devices people already own,” Spencer said. “And with the cloud, gaming players can participate fully in the same Xbox experience as people on local hardware. We couldn’t do that if we weren’t part of Microsoft.”

Nadella said that the cloud and Azure put people at the center of gaming, enabling them to play wherever and whenever they want on any device.

“It’s been a game-changer for me. I love that I can go from my PC to my Xbox to my Duo, picking up on any game right where I left off and even using the touch controls on Duo,” Nadella said. “That is super-well done, and I can use my controller, of course, on my PC. You also see the power of the cloud when you look at the evolution of some of our first-party games, like Flight Simulator. It exemplifies, at least for me, what uniquely we can do by bringing together the power of all of Microsoft’s tech stack, from Azure AI to Bing maps, and even spatial computing, which came together to create essentially literally a digital twin of the entire planet.”

He noted that game developers like Pearl Abyss are using Azure to scale their games using the power of the cloud.

“And of course, game development doesn’t stop when the game is launched,” Nadella said. “In fact, one of the things we have learned from all of the work you all have done is in some sense, it starts after the game is launched because you want to be able to experiment, learn through analytics, and continuously change gameplay. And one of the things I’m most excited about is how we are enabling game developers to do just that with Azure PlayFab, which now holds more than 2.5 billion player accounts. It’s being used as the backend for more than 5,000 games, so a lot of exciting things that the cloud can enable.”

Xbox Game Pass

Above: Xbox Game Pass is Microsoft’s subscription service for games.

Image Credit: Microsoft

Spencer turned the subject to Microsoft’s Xbox Game Pass subscription service, which costs $10 a month or $15 a month for access to a wide range of games. He noted that at the beginning, Microsoft approached this business with trepidation because it wasn’t sure how fans and developers would react.

But like the rest of Microsoft, Xbox is shifting from packaged good software sales to services and subscriptions, Spencer said.

Microsoft is putting the big sell on its subscription service for games, which it believes is changing the habits of gamers. Earlier this year, the company said its Game Pass subscriptions had passed 18 million. Microsoft said that Xbox Game Pass members play 30% more genres and 40% more games. And more than 90% of members said they played a game that they would not have tried without Game Pass. The result of games going into Xbox Game Pass is that they get a lift at retail, Spencer said, and publishing partners see the benefit of being on the service.

“With Game Pass, we are truly redefining how games are distributed, played, and shared,” Nadella said. “The content is the driving force behind Game Pass’ growth, which is why I’m so excited about our acquisition of ZeniMax, which brings some of the world’s most iconic, beloved games to the service. With Game Pass coming to the browser, the value of the subscription is going to transcend from the console to the PC to mobile, and it’s great to see the progress. I’m looking forward to how we continue to invest in Game Pass to add more content and bring the service to even more geographies as we make progress.”

On average across the Game Pass library, partners see engagement go up by more than eight times when they enter Game Pass. Whether it’s purchasing games inside or outside of what’s available in the library, or purchasing additional content for the games they like, members spend 50% more than non-members.

“For the first couple of decades, the only way you could play the game was to buy the game outright,” Spencer said. “And for many players, this can be an investment that limits their ability to play. That cost, the retail model, has limited the audience for creators and the entire industry. That’s why we created Game Pass, to open up the ways that players can play more games with their friends, ultimately bringing in more players, making games more accessible to everyone.”

Above: The game business has been growing.

Image Credit: Microsoft

Xbox Game Pass has become a discovery engine, a platform for connection and community, and is driving game sales, the company claims. Microsoft revealed today that, since its partnership with EA Play to make Game Pass Ultimate, EA Play has seen record usage on Microsoft platforms compared to before the integration, driving up hours played by more than 200%.

The new Square Enix game Outriders is in Game Pass; it was the No. 1 selling digital game on Xbox during its launch week and a top 10 selling digital game on Xbox in the month of April, said Liz Hamren, corporate vice president of game engineering at Microsoft. Game Pass helped introduce millions of players to the game, Microsoft said. During launch week, MLB: The Show 21 was the biggest sports game of the past year on Xbox, the No. 1 selling paid game on Xbox for the month of April, and the second biggest sports game of all time on Xbox. Again, Microsoft said Game Pass added millions of new fans and grew Major League Baseball’s player base significantly.

Hamren said the company is exploring new subscription options as a way to spread the reach of Xbox Game Pass.

“When you step back and look at the next decade and the evolution of technology, I think one of the most defining trends will be how the balance between consumption and creation is achieved and the changes it brings about,” Nadella said. “Already, more and more people are creating something new and magical every day. You see that in all sorts of platforms, and there are growing communities who want to discover, explore, and build on other’s creations. I believe we will need that virtuous cycle between content consumption, commerce driven by communities for everything we build. And there’s no better example of this than gaming.”

Nadella said Minecraft is leading the way into the creator economy, as Minecraft players craft their own worlds. Players have generated more than $350 million in proceeds from the more than one billion downloads of mods they created.

“That’s fantastic to see. And when I think about our new platform, Microsoft Mesh, which enables you to interact holographically with other people with a true presence in a very natural way, one of the most exciting applications, I think, will be gaming,” Nadella said. “Niantic, for example, showed a great demo of Pokémon Go using Mesh at our recent event. We’re very excited about what creators can do going forward with the platform shifts that we are going to have in the next 10 years.”

Xbox and Xbox Game Pass are coming to more screens

Above: Microsoft’s three Cs.

Image Credit: Microsoft

Xbox is working with global TV manufacturers to embed the Xbox experience directly into internet-connected televisions with no extra hardware required except a controller, as well as new subscription offerings for Xbox Game Pass around the world.

Xbox is working with telecommunications providers on new purchasing models like Xbox All Access, which enables consumers to buy both a console and Game Pass for a low monthly price, rather than spending money upfront. The company is also building its own streaming devices for cloud gaming to reach gamers on any TV or monitor without the need for a console at all. Cloud gaming through Xbox Game Pass Ultimate will launch in Australia, Brazil, Mexico, and Japan later this year.

In the next few weeks, cloud gaming on the browser will open to all Xbox Game Pass Ultimate members. With Edge, Chrome, and Safari support, players will be a click away from gaming on almost any device. And Microsoft is in the final stages of updating its datacenters around the world with the latest generation of hardware, the Xbox Series X. The company said gamers will see faster load times, improved frame rates, and experience Xbox Series X/S optimized games.

Later this year, Microsoft will add cloud gaming directly into the Xbox app on PC and integrate it into its console to power features like “try before you download.”

A pipeline of games

Above: Microsoft owns 23 game studios.

Image Credit: Microsoft

Microsoft has spent a lot of money developing hardware like the Xbox Series X/S, but the cornerstone of big bets has been content acquisition. Role-playing games, shooters, strategy titles, adventure games, and more are under development with first-party teams to ensure a steady stream of compelling exclusive content.

With more than 23 studios worldwide creating games for Xbox, the company’s goal is to release at least one new, first-party game into Game Pass every quarter. The company has provided the financial support to make both small acquisitions like Double Fine and huge deals like the $7.5 billion purchase of ZeniMax/Bethesda, said Xbox Game Studios head Matt Booty.

Xbox chief financial officer Tim Stuart said the game division’s goal is to be an engine of growth for Microsoft. That means Microsoft has to be a player in large and growing global markets where it can gain share. Gaming fits that profile, he said.

And Microsoft’s independent developer program ID@Xbox has earned developers over $2 billion since the program’s inception, with over 2,000 titles launched and many more on the way, Spencer said. The company is expanding the model beyond games to ID@Azure, which allows independent devs to build cloud-based experiences.

Spencer said that gaming has become the most powerful form of entertainment globally because people from different backgrounds can come together and form real bonds through games. Microsoft wants billions more people to come to games.

Dave McCarthy, corporate vice president for Xbox product services, said a culture of inclusion is fundamental to the team at Microsoft. “Being intentionally inclusive is business critical,” he said, noting there are 400 million players with disabilities who should not be left behind because of accessibility problems.

Microsoft has added new accessibility features to its consoles and the Xbox Adaptive Controller, which was introduced in 1998 for players with limited mobility.

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