The picture finally comes into focus: Microsoft is reportedly pushing Xbox to hit a 30% profit margin — above the industry’s usual band — which helps explain the recent, seemingly impossible moves.

Players, developers, and other stakeholders have been stunned by Xbox’s abrupt strategy shifts. In recent months, the Redmond giant has redrawn Game Pass (with price hikes on select tiers) and shipped first-party titles to PlayStation and Nintendo. Alongside other deviations from the original playbook, these steps raised the question: why take such controversial actions? A newly surfaced detail largely solves the mystery.

Cuts, price hikes, cancellations — so the math works out

Per Bloomberg, citing people familiar with Microsoft/Xbox strategy, the tech conglomerate set a 30% profit margin target for its gaming division over the past two years. The catch: that goal sits higher than the industry’s norm and is typically sustainable only for the very top performers.

For context, S&P Global Market Intelligence pegs the sector’s average margins at 17–22%. Documents from the 2023 Activision Blizzard acquisition showed Xbox at 12% for the first nine months of fiscal 2022. In short, Microsoft asked the unit led by Sarah Bond to make an unusually large leap.

Was this a company-wide directive or one person’s call? Bloomberg reports the target was imposed in fall 2023 by CFO Amy Hood, whose team has since taken a much larger role in the games business — a backdrop that explains many of Xbox’s recent flashpoint decisions.

The profit-first tilt was evident: cost-cutting, price adjustments, and pushing titles to other platforms. That encompassed the Game Pass overhaul, higher prices for games/consoles/devkits, studio closures (e.g., The Initiative, Tango Gameworks), and cancellations of Perfect Dark, Everwild, and a ZeniMax Online MMO. Recently, Sarah Bond added fuel by calling exclusives old-fashioned.

The cost of the strategy: visible damage to the Xbox

Bloomberg’s sources say several new tactics are hurting the business. Following the ZeniMax ($7.5B) and Activision Blizzard ($69B) deals, leadership is scrutinizing performance more tightly while favoring AI investments over a “massive gaming division that isn’t returning big profits.”

The Day-1 Game Pass approach also carries a price: sources claim it depresses unit sales. To soften the blow, Microsoft pays developers a credit dubbed “member-weighted value”, calculated partly from total Game Pass play hours — a model that tends to favor time-heavy online multiplayer titles.

Even so, the company insists its commitment to fresh experiences hasn’t wavered. Bond says teams are already building the next Xbox generation, aiming for a “very premium, high-end” experience.

An Xbox spokesperson told Bloomberg they view the business as a whole, balancing creativity, innovation, and sustainability across a diverse portfolio — which at times means tough calls: pausing work that no longer fits and reallocating resources to higher-priority projects. Time will tell whether a 30% margin is attainable, even for an industry titan.

Source: 3djuegos