What the Xbox secrets leak tell us about the console business | The DeanBeat

Microsoft had a monumental leak of some of its most sensitive plans this week, as reported by The Verge’s Tom Warren. It was all thanks to someone at Microsoft who didn’t properly upload redacted documents to the Federal Trade Commission. I’ve been thinking about what this means.

And now last night, the United Kingdom’s antitrust regulators gave preliminary approval for Microsoft’s $68.7 billion acquisition of Activision Blizzard. Approval can come in a few weeks, after feedback.

Perhaps the biggest news leak was that Microsoft plans a hybrid Xbox game console for launch in 2028. The company also plans to launch a mid-life update (code-named Brooklyn) for the Xbox Series X/S console that launched in November 2020. These dates tell us a lot about the state of the console business and the progress of technology that is a key part of the decision making among the console leaders.

Microsoft didn’t dispute the accuracy of the documents, and Xbox head Phil Spencer said it was “disappointing” to read about the leaks to this staff, and he tweeted the company would say more when it is ready. Microsoft declined to say more.

Console timing is critical when it comes to keep secrets from rivals such as Sony and Nintendo. As an example, Microsoft was late with the original Xbox and it debuted 21 months after Sony’s PlayStation 2. As a result, Sony vastly outsold the Xbox and had about 20 million consoles in the market by the time Microsoft sold its first million. And Microsoft lost billions of dollars on the original Xbox.

For the second generation of Xbox, Microsoft wanted to race ahead, and so it launched a new console four years after its first one and wanted to sell 10 million before Sony sold its first PlayStation 3. The gap was narrower in that generation, but Microsoft rushed its machine out and soured consumers with the “red rings of death” flaws that generated a $1.1 billion write off for returns.

Now, with the expected 2028 launch (which Microsoft could still change), Sony knows when Microsoft will launch years ahead of time, and it can plan accordingly to pursue whatever strategy it wants, like coming out before the next Xbox or shooting for better technology. The leaks suggested that Microsoft would continue using Advanced Micro Devices and its sixth-generation Zen cores.

That means that Microsoft’s console generation is stretching to eight years, from 2020 when the Xbox Series X/S launched to 2028. That’s a long time, and it suggests that Moore’s Law — or the public’s appetite for new video game hardware — is slowing down. In the previous cycle saw a seven-year gap from 2013 to 2020 with the Xbox One, compared to the four-year gap for the Xbox 360.

And once upon a time, the console makers would introduce both price cuts and updated versions of their consoles every year or two. This time, to go four years before a mid-life update is a long time. Part of that was due to the pandemic, and how supply chains were shredded with the unexpected see-saw in demand.

Does it make sense to slow down the console cycle? Only if there isn’t as much innovation. And to be honest, once you can launch a console that can display awesome 4K graphics, a lot of consumers may not be able to judge the improvements in the next generation. 3D graphics has had a decades-long run, but it many be hitting a wall. And so new consoles have had to rely on other innovations like 3D sound, virtual reality (PlayStation VR), haptics (in game controllers) and more. It’s no surprise that one of the things Microsoft is doing is working harder on a new kind of game controller, per the leaks.

If you look at the Nintendo Switch, it came out in 2017 and it has lasted this long with graphics that are worse than the PlayStation 4 (circa 2013 technology). The Switch is probably the next console that we will see coming, and rumors are strong that the Switch 2 will debut in the next year. Of course, the earlier rumors held that the Switch 2 was going to show up this year, and it didn’t happen.

But Nintendo is probably feeling pressure from Valve’s Steam Deck and other new Qualcomm-based handheld game machines coming out this year. It’s a good time for the Japanese company to fend off the competition with a new machine. Sony remains a wildcard, and it hasn’t accidentally tipped its hand.

What I am more concerned about is the fundamental slowdown in chip technology. Intel this week held its Intel Innovation 2023 event and it said many ti-mes that Moore’s Law is on track and that it has a combination of packaging and substrate technologies coming that will improve electronics. Microsoft is also throwing in more storage into the mid-life Brooklyn machine (disc-less and low-powered) to make it appealing.

But each new advance in manufacturing generations is coming slower. This prompted Nvidia CEO Jensen Huang to say Moore’s Law is dead. Moore’s Law is the prediction made by the late Intel CEO Gordon Moore, who said in 1965 that the number of transistors on a chip would double every couple of years or so. That prediction held true for decades and it ticked off technological progress like a metronome. But now chip manufacturing can produce patterns on a chip that are merely atoms thick. It’s hard to miniaturize chips further, and so progress that to be made on different vectors.

Why is manufacturing progress important? If you can create circuits with finer width, then you can take a chip design from the prior generation and shrink it for the next one. That chip becomes faster (less distance for electrons to travel), smaller (less materials used to make a smaller chip), and cheaper (less materials used in manufacturing) — all at the same time. With a faster, smaller, cheaper chip, console makers were able to cut prices on a regular basis and make consoles that were smaller than the originals.

Ken Kutaragi, Sony’s PlayStation chief for many years, once said that the PlayStation 2 Emotion Engine chip was only 13% of the size of the original launch chip after seven years. That meant we had more money in our pockets and, at least on the PC side, much faster machines to run our games. We’re not going to get the same manufacturing benefits anymore, if the slowdown is real. (That’s a big if). Of course, there is still progress to be made. It just takes more innovative design, not automatic gains.

Among the other leak details, we got profit and revenue numbers for Xbox, which Microsoft never breaks out. For the fiscal year ended June 30, 2022, Microsoft reported revenue for gaming hit $17.7 billion, up 13% from the prior year. The accountability margin was 0%, meaning profits were flat at about $2.2 billion versus the year before. Xbox Game Pass subscribers were at 35 million, up 73% from 24 million a year earlier. And Xbox monthly active users were 117 million, up 9%.

This means that Microsoft was planning to get less aggressive about its hardware schedule at a time when profits were becoming smaller. We’ll see how that changes this year with improved profits after the launch of Bethesda’s Starfield this month, but that tells us one reason that Microsoft needs to do something — like buying Activision Blizzard for $68.7 billion.

Microsoft even considered buying Nintendo and Spencer referred to that as a possible “career moment.” I don’t believe that deal is ever going to happen, at least not while Nintendo’s current leadership is at the company. And Microsoft considered bringing more titles to Xbox Game Pass at a cost of hundreds of millions of dollars.

One intriguing direction gaming could go is hybrid between the storage on the console and accessing data in the cloud. Microsoft did this with Flight Simulator, which constantly accessed data in the cloud so you could always have a cool view of the ground as you flew over different parts of the world. This notion will likely be extended with the 2028 machine.

Something I didn’t see in the plans were any big references to AI. This week, Intel predicted that the AI PC would bring powerful AI technology to the edge of the network, democratizing AI. You could foresee a similar prediction that game consoles of the future will have built-in AI at the edge. I think that would go a long way toward bringing advances in AI into games at very low costs. But if the PC is going to get AI technology this year, then console gamers will have a long wait if they don’t even get it until 2028, at the earliest. It’s another example of the PC’s chance to race ahead of the consoles.

Now that the United Kingdom’s Competition and Markets Authority has given preliminary approval to Microsoft’s acquisition of Activision Blizzard, you can bet that Microsoft is going to plan a lot of things all over again, and all of those leaked schedules are going to change. But I’m at least intrigued to finally get a glimpse inside and find out what was going on inside Microsoft’s planning group at the time these documents were created. If only the whole industry could give us this kind of transparency.