The company is putting pressure on its Xbox gaming division to achieve an operating profit margin of at least 30%, a level significantly higher than the industry average of 17% to 22%.
This new direction has led to the cancellation of several projects, price increases for games, and the layoff of thousands of employees in an effort to improve financial performance amid global challenges facing the gaming market.
According to S&P Global estimates, Microsoft’s gaming division profit margin in recent years has been only between 10% and 20%.
The head of gaming at Microsoft is seeking to restructure Xbox’s strategy, as the company began making its games available on competing platforms Nintendo and Sony for the first time last year, a move aimed at expanding returns.
The announcement that Microsoft is targeting a profit margin of around 30% for its Xbox division comes as a result of accumulated investments over years, with the company seeking to show tangible results after acquiring more than one major game publisher for over $70 billion.
Microsoft is putting pressure on the gaming division to demonstrate its ability to generate returns on those investments. The company has been trying for years to compete with major companies in the sector like Sony, but has been unable to keep up with the same trends, prompting it to innovate new services like Game Pass, launch new games, and acquire different companies, though it has yet to see the desired results from these moves.
Microsoft’s overall profit margin across its various sectors is about 40%, which drives the company to raise the performance of the gaming division to approach this level, even though the current rate is higher than the average in the gaming market, which typically ranges between 17% and 22%. A company like Nintendo exceeds a 30% profit margin thanks to a business model different from other companies in the market.
Regarding the feasibility of Microsoft achieving the 30% target for the Xbox division, it was stated that “this is theoretically possible, but very difficult in practice.” The current trend in the gaming industry is toward producing realistic games that mimic cinematic films, making their development costs extremely high.
Gaming companies and their audiences have become accustomed to this type of production, making it difficult to retreat from it, which leads to higher costs and lower profitability. The challenge facing companies today is to reconsider game development methods to reduce costs without compromising product quality.
Microsoft has resorted to quick solutions such as employee layoffs, directing work teams toward artificial intelligence, and focusing on service-based games that achieve greater profits with lower development costs. These steps are effective in the short term, but in the long term, game development methods must be studied more deeply to deliver products that satisfy the audience without excessive spending.
Some successful games like Overwatch – whose production company was acquired by Microsoft – are not expensive to develop compared to massive story-based games and rely on the “game as a service” model, where they continue to generate profits for many years rather than being limited to sales after launch.
Regarding the impact of this trend on creativity, it was stated: “Unfortunately, this is true. We will see less innovative games and more focus on projects that guarantee quick profits.” Microsoft will focus on repeating successful experiences like Call of Duty, which is released annually with limited changes and achieves steady profits.
The company has also begun reviewing its strategy related to the Game Pass service, explaining that it has “taken a step back after experience proved that the subscription model does not achieve the desired results as expected.”
Regarding whether Microsoft is trying through the next generation of Xbox devices to return to competing on the hardware level, it was clarified that “Microsoft has clearly stated that it is no longer competing in manufacturing devices, but rather competing for user time.”
The company seeks to transform from just a hardware manufacturer to a comprehensive platform available everywhere, so that users can play on any device – whether it’s a TV, cloud, or mobile phone – without being tied to a specific device.
This direction represents a “radical shift in the company’s business model,” pointing out that the old model was based on selling devices and exclusive games, while “Microsoft today seeks to expand its user base regardless of the platform or device used.”
Microsoft will continue
