Microsoft has reportedly set unrealistic profit targets for Xbox

It has been clear over the past two years that Microsoft is looking to squeeze more profit out of Xbox, leading to a long list of game cancellations, studio closures and thousands of layoffs. This week, new details on Microsoft's business plans came to light, with the company setting what appears to be an unrealistic profit target for the Xbox division. 

Bloomberg's Jason Schreier has heard from multiple sources familiar with Microsoft's strategy, who have stated that the company has set a massive 30% profit margin target for the Xbox division. The problem? This is significantly higher than the industry average, with S&P Global Market Intelligence estimating that the average profit margin across the games industry falls between 17% and 22%. One analyst told the outlet that a “30% or better margin is usually reserved for a publisher that is really nailing it”.

This unrealistic target is believed to be the core reason behind the recent rounds of studio closures, game cancellations and price hikes.

There is a bit more to the story though, as Game Pass also plays a crucial role here. Games that release day-one on Game Pass typically see less store sales. Microsoft accounts for this with its internal studios by using a weighted calculation that takes in factors such as ‘hours played' on Game Pass. This formula is something that can unfairly punish single-player games that have limited replay value and encourages studios to focus more on titles that keep players engaged for longer periods of time, like multiplayer live-service games.

Moving forward, the report claims that Xbox will be focusing more on games that are either cheap to make or deemed more likely to drive significant revenue.

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KitGuru Says: Given this current financial situation over at Xbox, I have real concern for some of the smaller teams that Xbox acquired, like Double Fine and Compulsion Games. 

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