Microsoft sacrificed Xbox Series X sales for “long term ambition” in the cloud

Microsoft has been sacrificing growing its Xbox Series X / S sales numbers since launch as a tradeoff for investment in cloud and gaming content. In an internal email exchange between Xbox chief Phil Spencer and Xbox CFO Tim Stuart in December 2020, the pair discussed the reasons behind lower Xbox console volumes. The email has been revealed as part of the FTC v. Microsoft hearing.

Spencer admits that Microsoft had a “yield miss for Scarlett,” the codename for Xbox Series X / S consoles, but that it and the delay to Halo Infinite weren’t the “main factors in our console scarcity” during the initial launch period. Microsoft had cut the compute units on its Xbox Series X silicon down to 52 from 56 to improve production yield, but the company still missed a target for hardware production of the console. Microsoft also had a strategic bet on cloud that it appears to have been holding back chips for.

The email exchange references a tradeoff on spending money on Xbox console volume or content and cloud bets. “From a strategy perspective I believe in our tradeoffs for Cloud and Content in Gaming over console volume,” says Spencer. “With our strategy and opportunity console volume will still be the thing we constrain to grow our long term ambition.”

Microsoft has had to invest money into building out its cloud infrastructure for Xbox Cloud Gaming, particularly as it’s based on custom console components. “I believe our investments in content and xCloud are critical to realizing our potential in gaming,” says Spencer. “Amazon Luna and Google Stadia do not have the console strength we have giving us developer engagement, gaming community, and catalog of content.”

Microsoft was also working on a separate “dedicated” version of Xbox Cloud Gaming last year. But that “dedicated xCloud SKU” isn’t necessarily launching anytime soon. In testimony during the FTC v. Microsoft hearing last week, Sarah Bond, head of Xbox creator experience, said Microsoft was “more clear on the costs” related to Xbox Cloud Gaming and the popularity of the service, so a dedicated version wasn’t currently being worked on.