You’ve probably seen a lot of headlines about Xbox leaks this week: new hardware, upcoming games, Game Pass Cost, Acquisition strategies. A trove of unredacted documents accidentally uploaded to a federal court case server gave the world a chance unprecedented insight into the secret machinations the gaming arm of a $2 trillion tech giant. But if you look at just one leak from this historic week for Xbox, it would be Microsoft Gaming CEO Phil Spencer analyzing what’s currently troubling triple-A video game publishers.
His analysis came in a March 2020 email exchange while the Xbox team was scheduling a feedback meeting Grand Theft Auto Publisher Take-Two. “When it comes to subscriptions and the impact on larger publishers, I realized I haven’t done a really good job of sharing our perspective on the potential disruption that AAA publishers could experience and how their role in the industry relates to that Growth of subscription platforms like Xbox Game Pass,” Spencer wrote (the memo was addressed to Microsoft CEO Satya Nadella, CFO Amy Hood, then-executive business VP Peggy Johnson and marketing director Chris Capossela).
The Xbox boss, who first joined Microsoft as an intern in 1988 and has worked in the company’s gaming division for over 20 years, then analyzed the current situation of major publishers, who are facing one wave of market disruption after another. It was a compelling, incisive commentary on the fears that drive an ever-shrinking class of mega-gaming companies that are increasingly clinging to the few big-budget franchises that still pay off.
Spencer explains how publishers once existed to achieve economies of scale when negotiating with retailers for shelf space. Then everything changed. “The creation of digital storefronts like Steam, Xbox Store, and PlayStation Store ultimately democratized access for developers and broke the barrier of physical retail to game distribution,” he writes. “Publishers have been slow to respond to this disruption. AAA publishers have not found a way to exploit the moat that physical retail has created in the digital space to maintain their dominance in the gaming market.”
Companies like Activision, Electronic Arts and Ubisoft eventually created their own middleman customers to avoid platform fees, and some later followed suit with their own subscription services. None of them were built early enough or offered a compelling alternative to make it big. Players complained about it bad user interface and bad offers. Franchises like call of Duty And Driving me crazy that had once given up Steam returned. Game Pass grew big while EA Play and Ubisoft+ stayed small. The only competitive advantage publishers have left is that they can pour more money than anyone else into annual blockbusters.
Over the last five to seven years, AAA publishers have tried to use production scale as a new defense. Very few companies can afford to spend the $200 million that Activision or Take 2 spend to bring a title like Call of Duty or Red Dead Redemption to market. These AAA publishers have largely used this scale of production to keep their top franchises in the top-selling games each year. The problem these publishers face is that the same production scale/cost approach affects their ability to create new intellectual property. The hurdle rate for new IP at this high level of production has led to a risk aversion to new IP among major publishers. They’ve seen a rise in AAA publishers using rented IP to offset risk (Star Wars with EA, Spiderman with Sony, Avatar with Ubisoft, etc.). The same dynamic has clearly played out in Hollywood, where Netflix has created more new IPs than any other film studio.
In particular, AAA game publishers, which have assumed a position of strength through physical retail, have failed to achieve a real platform effect for themselves. They effectively continue to expand their size through aggregate wins and losses per game, hoping to maximize each new release of their existing IP.
In the new world, where a AAA publisher has no real distribution advantage with consumers, has no production efficiency, and its new IP hit rate is not disproportionately higher than the industry average, we see that the top franchises today are largely not founded by AAA game publishers. Games like Fortnite, Roblox, Minecraft, Candy Crush, Clash Royale, DOTA2, etc. were all developed by independent studios with full access to distribution. Overall, I think this is a good thing for the industry, but it puts AAA publishers in a precarious position going forward. AAA publishers are exploiting their top franchises but are struggling to replenish their portfolio of successful franchises. Most AAA publishers rely on the success of franchises founded more than 10 years ago.
It’s a brutal but fair assessment. The major publishers are dominated by sequels, remakes and spin-offs. Companies from Sony to Ubisoft are Reduction of further canceled projects and development teams To focus almost exclusively on games that have a chance of selling over 10 million copies. Now it is The development plans are getting longer and longer And Budgets are explodingThis makes it increasingly difficult for even the largest publishers to cope with even a disappointing release, let alone a disastrous one. If none of this sounds sustainable, that’s because it isn’t.
Microsoft’s answer to this is Game Pass, not out of the goodness of its heart, but because it sees something new Platform that can scale to drive financial growth demanded by investors. “Our goal is to find a way to both expand our subscription (which is our new platform) and help AAA publishers build a successful future,” writes Spencer. “This is a difficult transition for publishers with 2-3 large franchises. Again, taking a cue from Hollywood, it is not clear how a standalone media publisher can grow on a smaller scale in this world without adapting to new paradigms or consolidating, but we believe we can help a Take2, by increasing monetizability [total addressable market] across more endpoints within a global platform like Xbox Game Pass (including xCloud).”
The suggestion here is that the kind of game can do that Benefit from a subscription service is either a small one that benefits from better curation and visibility, or a liveA service that can offset revenue on the backend by charging all new players for microtransactions (the new store shelves are in the games themselves). That’s also a pretty bleak assessment, and probably one of the reasons Sony has repeatedly said it will like the launch of its big first-party exclusive games Spider Man 2 And The last of us to its rival PS Plus service day and date would cripple the economics of blockbuster production.
Read more: The massive Xbox leak: 11 big revelations
Spencer’s email was written over three years ago at this point and was primarily aimed at summarizing the current state of the industry to his superiors. However, we can see how things have evolved since then. Take Two, Ubisoft, and Electronic Arts have decided to collaborate with Game Pass and EA Play is now part of the service. Microsoft, on the other hand ZeniMax devoured (including Bethesda Game Studios) and is now on the verge of doing the same Subscription refuser Activision Blizzard. Anything but smaller competitors like Embracer go into a tailspin.
It’s not clear who the big publisher model served after the demise of physical games, beyond the richly compensated CEOs and occasional stock buybacks. But it’s also not yet clear whether what replaces it will serve anyone – developers, players, fans – better.
You can see the entire email exchange below: