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Phil Spencer, Executive President of Gaming at Microsoft, addresses the audience at the Xbox 2018 E3 briefing in Los Angeles, California on June 10, 2018, Photo: Frederic J. Brown/AFP via Getty Images

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Microsoft’s major court leak pierces through the hype

A look behind the marketing curtain

Nicole Carpenter is a senior reporter specializing in investigative features about labor issues in the game industry, as well as the business and culture of games.

The video game industry revolves around secrets — it often feels like everything about a game in development is closely guarded. It’s a far cry from the literary world, where books are announced and detailed in trade publications well ahead of publication, or in entertainment, where casting news trickles out over a course of years. Video game creation, design, production, and distribution comprise a volatile, ever-shifting process, and for the companies behind the biggest games, too much transparency would dissolve carefully crafted exterior narratives. That’s why it was such a huge deal when Microsoft accidentally uploaded non-public documents to a California court’s file repository last week.

The conversations recorded therein give us a glimpse behind the curtain of hype and marketing, into the reality of a corporation that wants to make more video games, but really wants to make more money. In short: This week’s massive leak reminded us that Microsoft is, after all, a corporation.

Xbox Series X controller Photo: Fabian Sommer/picture alliance via Getty Images

On Sept. 15, Microsoft sent the court dozens of documents, which contained hundreds of lines of redacted information, as part of the Federal Trade Commission v. Microsoft case. However, it also mistakenly included pages of company secrets attached to one of those documents. Said secrets had not been redacted, and anyone with a program like Adobe Acrobat could view them in full. That’s what ResetEra forum user LiC, who reportedly first discovered the hidden documents, did several days later. The California court has since taken down the entire FTC v. Microsoft file repository, but not before we got a look into the frank conversations that happen among Microsoft’s executive suite.

Microsoft’s confidential documents had a few bombshell reveals, like plans for upgraded Xbox Series X and S models, along with an updated controller; a “hybrid gaming platform” as its next-gen console targeting 2028; and the fact that Bethesda may be working on remasters of The Elder Scrolls 4: Oblivion and Fallout 3. But the documents also give insight into Microsoft’s priorities, concerns, and goals with Xbox writ large, and how big decisions at the company get made; in one email thread, Xbox boss Phil Spencer muses about buying Nintendo (“THE prime asset for us in Gaming,” he wrote in a 2020 email), and in another, he discusses how Xbox decides to close studios: “I don’t think we’ve ever closed a studio due to the studio’s [profit and loss],” Spencer said. As examples, he cited the exodus of leadership from Fable studio Lionhead, as well as Ensemble Studios “losing it’s [sic] passion” with Age of Empires.

There’s also a lot of discussion between executives about the subscription service Xbox Game Pass. In an email to other executives, including head of Xbox Game Studios Matt Booty and Xbox vice president Sarah Bond, Spencer discusses the impact of Starfield’s delay on Xbox’s overall health in 2022, calling the “huge hole with [their] games lineup,” among other factors, a “disaster situation.” Further down the thread, Bond responds with a chart outlining upcoming titles that Microsoft could seek to put on Game Pass — everything from Star Wars Jedi: Survivor (a “crown jewel” that could cost $300 million but earn a bad return on investment) and Baldur’s Gate 3, which ended up being misjudged by Microsoft (and everyone else, according to Larian Studios director of publishing Michael Douse). The chart ranked 18 games by both their “wow factor” and the likelihood of closing a deal, with expected rates ranging from $5 million for Baldur’s Gate 3, among others, to $300 million for Jedi: Survivor.

Astarion from Baldur’s Gate 3 Image: Larian Studios via Polygon

One particularly interesting thread, between Spencer and Jean-Emile Elien, a partner software architect at Microsoft, highlights just how intuition-based the Game Pass partner acquisition process is. Elien wrote to Spencer asking how Game Pass impacts the value of a studio, and how studios should measure the worth of their own game offerings. Spencer responded that he doesn’t know:

It’s some combination of attract and retain to our service. Different games perform differently, some are very high on play and therefore a higher impact on retention, others are good top of funnel for attract but don’t get much play. You need both. I’d be lying to you if I told you we had the excel sheet of the value of a game completely figured out. We are working with the MS chief economists on the value of content and they have a model that we’ve working but it’s not complete (and likely never will be).

At some point what you are asking is ‘Why do people like X” and that’s a hard question to answer. It’s going to be a very organic process for us.

To see so many candid exchanges all in one place, from a company that reserves its announcements for the biggest trade shows and staged events on the planet, is both shocking and surreal. Much of Microsoft’s secrecy is understandable, of course; timelines change all the time in game development. That chart of potential Game Pass additions, for instance, is only a year old, but the schedules of many of the entries have shifted in that time. Plans get scrapped and games get delayed, and the public never knows about most of it. If Microsoft doesn’t make promises, it doesn’t have to announce when it’s broken them. It’s a tenet of good PR.

But the documents also sheds more light on things the public partially knew. Microsoft has long been transparent about its investment in cloud gaming, something Spencer said the company sacrificed Xbox Series X sales for in order to focus on “long term goals” — this information was previously reported from a redacted version of the same document. But Tuesday’s leak shows Spencer talking about Microsoft’s $1.5 billion subsidy for its new consoles, the “largest hardware subsidy ever in the Gaming P&L [profit and loss].” (Microsoft sells its Xbox Series X and S consoles at a loss, meaning that Microsoft as a broader company had to subsidize the Xbox hardware business.) Microsoft, of course, never announced this subsidy publicly, which is not surprising — the company doesn’t want to highlight its losses. Internally, after the PlayStation 5 reveal in 2020, Spencer acknowledged that there were many hard discussions to come regarding pricing and P&L for the console. The email also opened a window into Spencer’s mindset that day, a peek into the intense competition between platforms:

Even as I type this I know I shouldn’t but I can’t help myself.

We’ve all lived with 7 years of starting off a generation with a price and performance (and messaging) disadvantage to PS4 with Xbox One. I have to admit this morning when I woke up knowing the PS5 reveal was today that the stress level was higher than normal. Now after almost 12 hours of soaking in their unveil, taking apart their specs and looking at the community responses I just wanted to say that I’m proud of our team.

We have a better product than Sony does, not just on hardware but equally important on the software platform and services on top of the hardware. We have the ingredients of a winning plan. I felt the feedback from the BoD [board of directors] discussion on being too confident and maybe this will just reinforce that perception, I get the need to be humbly confident but today was a good day for us.

We haven’t won anything. And I know we have hard discussions about pricing, P&L, investments etc. This mail isn’t trying to scoop any of that, those discussions really matter. But we can take confidence in our product truth here and I do believe any conversation needs to start with believing in that. This was a good day for Xbox.

A photo shows visitors in front of the Xbox booth at the Gamescom video game fair in Cologne, western Germany on August 24, 2023. According to the organisers, around 1,100 exhibitors from 53 countries will be presenting their products during the fair running until August 27, 2023. Photo: Ina Fassbender/AFP via Getty Images

Microsoft’s ambitions have been clear for a while, as the company beefs up its stable of studios to secure a future where its subscription platform and cloud services dominate the market. But it’s done so while painting the public picture of a company that, first and foremost, is doing it “for the gamers.” Spencer has said before that Microsoft wants Game Pass on “every device” possible; that would be good for the gamers, after all. The leaked documents, on the other hand, pierce through the marketing, hype, and public facade into a reality we all know, but few of us have seen in such frank detail: Games make money, so Microsoft wants access to more games. Industry consolidation is part of that, and Microsoft continues its massive push to make it happen.

In a 2020 email discussing Microsoft’s ZeniMax acquisition, Tim Stuart, Xbox chief financial officer, put it bluntly: “Catalog quality and diversity drives hours. Hours drives subs. We need catalog to drive hours.”