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Xbox CFO on gaming content, business models, and generative AI

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The gaming industry is booming. A 2021 Accenture report estimated that the full value of the gaming industry was more than $300 billion. Video games inspired the popular HBO television show “The Last of Us,” and “The Super Mario Bros. Movie” made more than a billion dollars at the box office. Gaming is also the way most people are interacting with the metaverse, through platforms like Fortnite, Roblox, and Minecraft.

The gaming industry’s successes and challenges can provide lessons for other industries, as evidenced by the remarks of various experts at the 2023 MIT Sloan Gaming Industry Conference. Like gaming, many industries rely on intellectual property, and the way gaming takes advantage of network effects and user-generated content is applicable to many platform businesses.

In a keynote presentation at the conference, Tim Stuart, chief financial officer of Microsoft’s Xbox division, talked about the importance of new and diverse content, how the company is experimenting with new business models, and how generative AI will affect the gaming industry.

Gaming business models

Like other industries, gaming is focused on reaching users, including through new avenues such as mobile and cloud gaming.

Gaming companies also have to balance business models with game design. Game designers are encouraged to think about the business model from the start, such as whether a game will be free or have advertising, and how to build an ecosystem around the game, Stuart said.

At the same time, gaming business models are shifting. Sales used to be linear: Companies would sell a console and game discs and hope to keep people coming back to buy new games.

With interactivity and more flexible ways to access games, key performance indicators now include hours played and revenue per hour, Stuart said. “You want to get players in the ecosystem, you want to get them playing the games, and then that generates more dollars,” he said.

At Microsoft, that includes the introduction of Xbox All Access, which allows users to pay a monthly fee in exchange for a console and access to hundreds of games. After a set time, the console is paid off and belongs to the user.

“That’s innovation that we will continue to see,” Stuart said. “I think we are going to move away from those big upfront purchases to more of the subscription models, advertising models, free-to-play models — more of a consumption-based approach.”

Microsoft also offers Game Pass, which allows subscribers to play a rotating set of Xbox games. “When players become Game Pass subscribers, they play more games and they spend more hours,” Stuart said.

$300b

A 2021 Accenture report found the full value of the gaming industry was more than $300 billion.

Under these models, people may not be purchasing games, but they tend to purchase more things within games, Stuart said. The games included with a Game Pass subscription also draw more users and make more money, which is especially beneficial for independent or up-and-coming developers.

These broader models help Xbox “attract, engage, retain, [and] monetize” users, Stuart said.

Content is key

In gaming, as in other industries, content rules everything. “If you don’t have good content, you can’t be successful in this space,” Stuart said. “With content, there’s a bunch of stuff that goes around that — smart game analytics, smart personas, smart marketing, [a] smart finance business. That all wraps around that content at the center.”

Companies also need new intellectual property in order to grow, Stuart said. When companies expand through acquisition — Microsoft, for one, has purchased several smaller gaming companies — “the talent is what you’re buying: the ability to go build your games, the new ideas that get created,” Stuart said.

Companies need to offer diverse content to reach hundreds of millions, or even billions, of users, Stuart said. This has fueled Microsoft’s acquisition strategy, including its bid to purchase Activision Blizzard, which has games that are popular on mobile, such as Candy Crush. (The $68.7 billion deal, which was announced in January 2022, was delayed by regulatory challenges but is moving forward.)

Gaming also benefits from user-generated content. While there must be some limits on what people can make, user-generated content is good for both gaming companies and players, Stuart said.

With user-generated content, companies end up with “thousands of people creating content. This iterates and creates designs far faster than hiring a limited number of engineers,” he said. At the same time, anyone can become a game designer, even people who don’t work in the industry, and make money for their work.

YouTube, Twitch, and TikTok accounts that people dedicate to their gaming represent another type of user-generated content. These accounts help to grow a gaming community, which is vital to a game’s success, Stuart said. The best sign that a new user will continue using a game is if they’ve made a friend online.

“Finding ways to create those network connections between people will make the CFO very happy,” Stuart said.

Generative AI and gaming

The power of generative AI to help people create games will likely be “magical,” Stuart said, as users tap the power of ChatGPT and other readily available tools. “I think that’s going to be a world where we go from 2 [million] to 3 million core game developers to 200 million game developers that can now use AI as a tool,” he said.

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AI can also help with game testing and adapting content for different areas, Stuart said. For example, bots can play a game level and determine where gamers get stuck, where they spend money, and where things break.

The technology won’t completely replace humans who work on games, Stuart added. “This isn’t about ‘AI is going to take all our jobs.’ I don’t think that is going to happen,” Stuart said. “It’s going to open up the funnel of who can actually create games, and you’re going to have people whose jobs in the next level are going to be about how to use the AI, how you make it fun, how you think about network and social connections.”

There is work to be done on regulation and intellectual property ownership, such as who owns things created by AI tools. Stuart noted that for user-generated and AI content, blockchain could play a role in ensuring that people are paid for what they create.

The freedom for more people to create games, or to play them in different ways, is part of what’s powerful about gaming, he said: Users can choose their own level of engagement and what works best for them. “People can play free-to-play versions of Fortnite, or they can spend a great deal of money within the game,” Stuart said. “That’s really where the magic of our industry can take over. It’s not about [a] money grab. … It’s really about [engaging] that player for life.”

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