XBOX CEO Sharma Shares Vision for Reboot

[00:00:00] Speaker 1: You're a hundred days in. A hundred days in. It hasn't been uneventful. You haven't wasted a second. It's been wild. Gamers have gone from saying you were going to kill Xbox to putting your face on Jesus memes. How would you describe the first 100 days? [00:00:20] Speaker 2: You know, there is nothing that can prepare you for, you know, taking on a new role in the new industry, being a first-time CEO and having hundreds of millions of people having an opinion about you without ever talking to you. And so I think it's been wild. I think it's been wonderful. I think it's been weird and everything in between. But, you know, for my first 100 days, I really just wanted to learn and listen. I felt like my first job as CEO of Xbox was just to understand the soul of Xbox, understand the soul of what makes art, understand the soul of creating, understand the soul of the the platform and kind of what made us great for the first 25 years. [00:01:02] Speaker 1: You were a surprise pick for CEO. Phil Spencer, your predecessor, 20-year veteran, super passionate fan base. You're not a gamer. Came from Instacart, Meta, Microsoft AI. Tell me about that call from Satya. How surprised were you? [00:01:23] Speaker 2: Yeah, I would say no one was probably as surprised as I was when I got that call. You know, I didn't know he had the right person on the line. Did you try to talk him out of it? I tried to understand it. Look, like, it's one of those things when we're all every day working on AI, it's hard to see past it, right? We started with a model launching every six months, and now it was launching every six weeks and every six hours in some cases. And so it took a moment to just pick my head up and say, what is this all about? And then you see, oh gosh, over a billion people play on Xbox every single year. 70% of Americans spend at least one hour every single week gaming. And all of my career, I've picked the things that I worked on because I deeply cared about the thing that I was going to go solve with technology, whether it was helping to make sure that every single retailer would have a chance to fight against Amazon with Instacart or, you know, private communication and preserving that and protecting that all around the world with messaging or helping people take care of their homes. And so in this case, I think that gaming is culture, it is entertainment in many ways. If you think about some of the top shows in the world right now, they are games that turned into TV series or movies. Fallout, number one on Amazon. I think that every, yeah, yeah, Fallout's number two of all time. Minecraft was number five at the box office when it came out. So it just feels like the world is going through such a change and it's a consequential time and we've got great people working on AI to help enable every enterprise. And I wanted to take on something that could help the world continue to be entertained and help them play. [00:03:07] Speaker 1: So let's talk about the numbers. Gaming revenue last quarter was $5.3 billion, down from 5.7 a year earlier. Hardware revenue down 33%. The Switch 2 and PS5 are outselling Xbox by some metrics. When you walked in on day one and looked at it, what was the most uncomfortable thing you saw? [00:03:28] Speaker 2: Look, the gaming industry is going through a hard time. It's not unlike any other consumer industry with when COVID hit, demand pulled forward and then, you know, growth slowed after that. And in our case, we were not immune to that and we have not been immune to that. I think the last generation product has particularly been a hard time. I think the most uncomfortable and surprising thing for me is what is happening in consumer electronics that we're not really talking about. I think that, you know, usually what happens at this point in a generation is your costs come down, right? Memory, storage, et cetera. Well, with AI, memory and storage costs are going up, 2.75X rather than 50% down. Just in my first 100 days, it's up 50% and I think it will continue to go up. And so the biggest challenge and opportunity is how do you make affordable products during that time? And that's what the next 100 days will be about. [00:04:20] Speaker 1: So Project Helix, the next Xbox, can you show me how big it's going to be, like with your hands, maybe? No. All right. But for this to pay off, it's going to have to be pretty expensive for all of the reasons that you just mentioned. Do gamers still care enough to show out that much? [00:04:38] Speaker 2: I think it's expensive if we do not innovate. And I came to help that problem. I think that, look, it is natural that prices go up. Every generation around us is raising prices. But I don't think you can raise prices through the hardware crisis that we're seeing. And so it will require fundamental change in terms of how we innovate and how we think about the business models and how we go bring this to market. And we're working on that. Do you think Xbox is still selling consoles, mainly in 2030? So, look, the console market is stable and it's core to who we are. But at the same time, there's a lot of other growing markets. And so we're certainly going to continue to put out great reference experiences. But we're also going to push into new spaces. Microsoft owns Windows. Windows is one of the largest gaming platforms in the world. It has long had more players and more hours than any other platform. And I think it's going to have a lot of dollars associated with that in the future, too. Mobile, we own Candy Crush. We have incredible worlds and characters that can meet the next generation where they are. And so, look, I look at console as core. And I look at our responsibility to not only serve that really well and get that healthy, but to also look at bringing the next generation online. The Switch 2 is having a huge year. [00:05:54] Speaker 1: You know, what are your learnings from the first generation of Xbox handhelds? And would you ever build your own? Or do you not need that category? [00:06:02] Speaker 2: Look, I think that there's a lot of interesting things to think about when it comes to how do you actually meet players where they are. I think handheld is just a way to take your games on the go with you. And so that can happen on mobile. That can happen with Asus, which is our partner on handhelds. That can happen on all gaming handhelds. I think what's clear is the next generation plays a lot, and they see play as the most important form of entertainment to them. And a console is great when you're at home, and we're going to have to look for other ways to help serve that audience. [00:06:36] Speaker 1: One of the most controversial things you did, first few weeks on the job, you kill Copilot in gaming. Satya has literally said multiple times, Microsoft is a Copilot company. Microsoft is trying to put Copilot into everything. How hard was it to make that call, and what did he have to say about it? [00:06:56] Speaker 2: So, look, one of the first commitments I made was future of play. And I said, look, we're not going to, you know, we're going to be really thoughtful about how we ship AI. My job is to think about where we invest, what we prioritize, and how we operate. And our console players aren't excited about that experience in their console. Now, do I believe in AI? Absolutely. I think neural rendering is a great opportunity for us to invest in that. It helps upscale. It's helping with the footprint on your device so you can get better graphics. There's a lot of things that AI can be really great at. I think that we have to make sure it's solving a problem if we put it out there for gaming. And so I made that call. So Satya was cool with that? It was an Xbox decision. He's given me latitude to make the best decisions for our players. [00:07:47] Speaker 1: Well, how much latitude elsewhere do you have? You know, there's this idea that Microsoft wants to sort of extract software kind of revenues out of a gaming business, which, you know, may not be possible. Do you have more breathing room when it comes to the financials? [00:08:02] Speaker 2: Yeah. So my mandate is not 30% accountability margin. It's not enterprise software margins. It's to be the number one gaming and entertainment company. And that's what we're going to go do. If you think about it, Microsoft has invested more aggressively than nearly anybody in this category over the last six years. We've bought Activision and Zenimax, we've invested in our core platform, we've invested in hardware cycles, we invest in subsidies even when we're losing money because of memory and storage. And so we're long on gaming, we're long on Xbox, we'll keep investing, but we've got work to do. You shared the numbers. We're not in a healthy spawn. And so, you know, next 100 days is going to be about resetting the business. [00:08:44] Speaker 1: Let's talk about Activision. Microsoft paid $70 billion, $69 billion for Activision Blizzard, largest gaming acquisition in history. There have been layoffs, game cancellations, game pass prices have gone up rather than down. You inherited this deal, is it paying off? [00:09:01] Speaker 2: So, look, I mean, as a, I don't know anybody in entertainment who wouldn't want Call of Duty, which is now grossing in more revenue than Marvel Cinematic Universe, who wouldn't want one of the top three apps in the world, the Candy Crush, who wouldn't want World of Warcraft, and wouldn't want a team that for 20 years has been able to create predictable hits every single year. So, I love Activision Blizzard King. Look, it was bought at a time before ChatGPT. It was bought at a time before our strategy, when our strategy was predominantly on the core consoles. It was at a time when, you know, we were right in the middle of COVID. So, hard to say, you know, how to think about those decisions, but I think these are incredible assets, and we intend to continue to invest in them. [00:09:50] Speaker 1: Not in not one of your games, but Grand Theft Auto 6 is expected to be pretty big. Outsell. I'm very impressed you know these things. I am very impressed. I do have a 13-year-old son, as I said. Yeah. Expected to outsell any game, movie, or album in history. You delayed Fable, in part, in anticipation of this. What impact do you think this game is going to have on the industry? Like, is it, do you see this as kind of a litmus test? [00:10:16] Speaker 2: I think it's just one of the most important parts of culture at this point, and we want to make sure that we're fully supporting it. And so, I'm excited to see how it does. I'm excited for the reactions. I'm excited to learn from it. [00:10:30] Speaker 1: So, the players didn't want co-pilot, but how do you see AI changing gaming and game development in the future? Like, where does and doesn't AI belong when it comes to games? [00:10:43] Speaker 2: Look, I think the biggest thing that I'm thinking about is how do we just make sure it's solving problems. On the game development side, I've gone to a lot of our studios, you know, big and small. And I'm blown away with how they're using AI in the production pipelines, how they're using it for iteration and prototyping. Look, that's not production ready. There's still work. And so, and, you know, 30% of game development is software. And so, there's the traditional applications that we see in enterprise. At the same time, I do not think AI will replace AAA games. I think it's entirely possible, though, that AI represents a new category of games and a new type of development and enables more people to create and participate. And we'll keep an eye on that, and we'll see how we best serve that. [00:11:30] Speaker 1: Your biggest competitors used to be or maybe still are Sony and Nintendo, but I don't know now. Is it Roblox or Netflix or TikTok? Like, what, who keeps you up at night? [00:11:42] Speaker 2: Honestly, I think our biggest competition is attention. Right now, the next generation's number one thing they want to do is play. So, we've got that going for us. But the way that they consume is really different. They want it wherever they are. They want it in shorter bites. They want to be able to customize. They want an open ecosystem. They want a lot of different things than our core user base. And so, what's great is we have the characters in the world and the technology to be the best in the world and serve who we're serving. And we're going to have to invent new things to serve the next generation. [00:12:14] Speaker 1: We talked about Fallout and, you know, your characters showing up in theme parks and movies. I waited in line for a really long time to go on a ride at Universal Studios. Like, it's, you know. Is Xbox a gaming business with an entertainment side hustle? Or are you an IP company? [00:12:31] Speaker 2: I think at the end of the day, gaming is entertainment. And so, I look at us as, at the core, we have to create great games. People spend 70 billion hours a year with us. And that gives us the right and the permission to then have great shows, have these great, you know, theme parks, have these great attractions. I don't think you can do that in reverse. And so, at the core, we will always think about how do we make great games. And then, increasingly, as people want to experience those worlds and characters outside of that, that's great, as long as it's authentic to that audience. [00:13:03] Speaker 1: You just hired Matthew Ball, one of the most influential gaming analysts in the industry. I've interviewed him many times. He is very critical. He's been very critical of Xbox's mistakes in particular. What are you hoping he tells you that others aren't? [00:13:17] Speaker 2: Look, we're a challenger right now. And so, we have to be uncomfortable and understand hard truths. And I think he's going to help us do that. At the same time, he's one of the most creative people that I've met. I don't think that there is a linear path to success here. I think we need to take all of the learnings across entertainment, across gaming, across all of our collective histories. We have a lot of very tenured gaming leaders that are still on the leadership team. And we're going to need to find our way through it. And I think he's going to help us do that. [00:13:45] Speaker 1: You've been labeled as not a gamer, but I know you have a gamer tag. Do you game now? And how much time do you spend fiddling around with it? [00:13:55] Speaker 2: Yes. I'm not a gamer, but I do play games now because that is our core way that we reach our audience. And so, again, in my first hundred days, I've been trying to learn and listen and understand what makes this art form amazing. And what's interesting is there's a lot of people who are gamers that you never would have known until you start to pick up a controller. And so, there's something about that. Look, in a world in which everybody's attempting to automate the economy, there's something wonderful to just be able to escape and have memories and connect to something that you deeply care about and that's deeply personal. And I think that's what games do. [00:14:28] Speaker 1: What do you think the future of exclusivity is? And, you know, for example, with Game Pass and, you know, the comparisons to Netflix, is it really going to get there? Like, where is all that going? [00:14:37] Speaker 2: I think it's a tough topic. Look, we're the number two publisher in the world. And in order to be a great publisher, you must have your games reach large audiences to play. At the same time, we're increasingly becoming a platform. In order to be a platform, you must have exclusive content and services. And so, we're looking at that very closely. I think that we have to be very thoughtful about each title on how we want to think about it and learn from similar cases in the industry. And that's what we're doing. What do the next 100 days look like? Well, I think the first 100 days are going to be hard to beat in terms of the excitement. But the next 100 days is, look, we've done so much to start to revive Xbox. We've shipped more in the last 100 days than we have in the last year. We've been able to reset Game Pass after an eight-month decline. It's now returned to growth and expanding retention. And most importantly, we're starting to get back to being closer to our players. And our community. I think the next 100 days, we have to reset the business. We need to look at how we're investing, how we're prioritizing, change how we operate in order to return to growth, in order to be where the world plays. [00:15:49] Speaker 1: So it's 2030. You've had four years to run Xbox. What does success look like? What is true about Xbox that isn't true today? [00:16:00] Speaker 2: I'd love to see us be the number one gaming and entertainment company. [00:16:04] Speaker 1: All right. Let's do it. [00:16:06] Speaker 2: Let's do it. Thank you. Thank you.