Microsoft

Quick thoughts on the Xbox – Riot deal

by

Xbox announced a Game Pass deal with Riot Games (my previous employer, I left in 2019). The deal covers all of the live service games in Riot’s portfolio, across PC and mobile platforms.

I have a few thoughts in reaction to this news. The first is the surprisingly large value Riot is putting on the table. This is not a small experiment; Riot didn’t go the safe route of starting with one game and deciding to expand or not based on the metrics. And even if it were just one game, say League of Legends, the monetary value of “All champions unlocked” is not trivial. As a quick “valuation” exercise:

  • Buying them all outright (even though few players do this – you can earn soft currency and unlock champions by playing) is easily hundreds of dollars – you can google for various answers, players have done this math before.
  • An alternative comp is to look at Asia, where “all champions unlocked” is a B2B product that PC cafes in Korea and China pay Riot for. If you assume Riot charges a Korean PC cafe $0.2 for every hour of this service, and on average players play 30 hours per month (both of these are like 10-year-old stats in my head), then “all champions unlocked” is by itself a $6/month service.

However you look at it, it seems that Riot is offering a ton of value here – so much so that, if you are a dedicated fan of Riot’s games, you should sign up immediately for Xbox Game Pass just for the Riot benefits alone.

This sparks an interesting offshoot question – instead of working with Microsoft, why didn’t Riot roll out its own “Riot Games Pass” instead? I would imagine this scenario had to have been part of the internal strategizing. And that would feel more in line with the M.O. of the Riot Games I know circa 2015 – doing it alone, desiring total control of the player experience.

I don’t have any inside knowledge, so I can only venture some guesses based on looking at the exchange of value in this deal:

  • From a player acquisition perspective, it seems more likely that Riot is funneling players to Microsoft – League announced 180M MAU last year, although a significant portion are players from China, which Xbox Game Pass doesn’t officially serve; while Xbox Game Pass last announced 25M subscribers. But Riot does also gain a new channel where new players could flow in, and it may be a previously underserved (more console-oriented) player-base. Thus Riot stands to benefit from all future Xbox Game Pass marketing, as a % of future Game Pass subs could convert to Riot players.
  • Based on the above, I would imagine there’s a sizable monetary component to the deal, flowing from Microsoft to Riot. I’m not a BD person, I don’t have a good sense where to start to try to model this component. It could be a fixed per-year amount. It could be calculated based on actual player engagement (some sort of revenue share / pre-defined payout based on metrics). It could be a combination of the two.
  • To Microsoft, I also think there’s a Game Pass content strategy component to this deal as well – having popular live-service games, like Riot’s portfolio, acts as a natural buffer against AAA seasonality, and probably helps with smoothing out churn.

Another interesting part of this deal is the mobile games included. This has the effect of providing an off-platform (iOS / Google Play) way to monetize a mobile game’s content, though in the past this was usually done by the game’s publisher directly, as opposed to another platform like Microsoft here. It will be curious to see if there’s any response from Apple & Google, especially if Microsoft starts rolling up additional mobile games into Game Pass and could threaten to end-run IAP regulations.

From Riot’s perspective, I can also think of a number of risks to this deal that needs to be managed:

  • The monetary math: does the inflow from Microsoft cover the possible loss of all future champion revenue (to use League of Legends as an example)?
  • The game economy and player behavior implications: during my time at Riot, I felt the long-held internal view was that providing all champions for free (which is what DotA 2 does) has negative effects on players’ onboarding flow, matchmaking quality, sense of ownership and progression. This deal seem to override these concerns.

In summary: this deal took me by surprise, but I think it could make sense for both parties. It would be fascinating to follow how this impacts both companies going forward.

Microsoft’s cross-network play

by

A fairly big piece of news for gaming today: Microsoft has announced support for cross-network play on Xbox, including potentially other consoles. This is something console gamers have always naturally wanted, but to my limited knowledge never widely done (except in a few games?) in previous console generations.

First of all, as a gamer this is obviously a good development. A larger network of players to play with means better network effects, possibly longer lifecycle of games (because the population is larger), shorter matchmaking queues, less anxiety about which platform to adopt (and the herd mentality of following your friends), and probably a wider choice of games. So to be completely clear, as a gamer (and owner of a PS4) I’m happy for this and hope it becomes something material and not just a marketing bullet point.

From a strategy perspective though, there are some intriguing questions, with the obvious one being why.

First, it’s important to acknowledge the macro-context that Microsoft is in – it has lost its dominance in computing, and is dangerously close to becoming another legacy tech company that will live on for decades but is completely irrelevant to most consumers1. And in this context there’s been a big turn-about at Microsoft at embracing other people’s platforms, from the new love shown to Linux to a bigger focus of Office on iOS. This Xbox announcement follows this pattern 2

Second, there’s also the macro-context of the smartphone revolution and the future implications for games. Consider this data-point3:

Supercell had 180 full-time employees in 2015. In comparison, and per Wikipedia, Activision-Blizzard, had 6,690 employees in 2015; EA, 8,400. This sharp contrast speaks not only to product strategy but also market characteristics: the power of mobile scale and the app store. A casual prediction: the first game with a billion monthly active players4 is not going to be a PC or console game – that number is reserved for mobile because of the install base involved.

The point is, in this context of a broader shift-to-mobile for the entire tech ecosystem, being the market leader in console actually amounts to very little, and it’s arguable that for consoles to have an independent future (and not just be subsumed into the mobile ecosystem entirely), perhaps it’s not a bad idea to ditch the barrier to entry that is compatibility. Again, being in 2nd place this gen, Microsoft has less to lose and more to gain with moving in this direction first; though Sony should think hard about whether it really wants to turn down the friend-request.

Third, and extrapolating from the second point, if the major console platforms became buddies, and also had full cross-play with PC, this “circle-the-wagons” move is likely to the benefit of most parties in the “traditional” game development space. And with both Microsoft and Apple wanting to make Windows / Mac more like mobile (the “walled garden” app stores), PC could look very similar to console from an user-experience perspective anyways.

Interesting times:)

  1. BTW, this is a perfectly valid business strategy, it’s just a far-cry from Microsoft’s lofty ambitions in the past. ↩
  2. One of my favorite business school professors, who specializes in teaching strategy in the TMT space, had a very snappy summary about platform compatibility/interoperability – the market leader generally has little incentive in offering compatibility with a competing platform, whereas the followers have a ton of incentives to offer compatibility. This can be broadly observed across tech sectors, and Microsoft’s recent moves certainly exemplify this point. ↩
  3. The financial metrics may not be apples-to-apples comparable, but it is still good reference. Alternatively can also compare top-line revenue. ↩
  4. See this reference on the 12 pieces of software that have 1B users. ↩

Microsoft’s future

by

I don’t think I’ve ever written a post on Microsoft (it’s usually Apple or Google), but the past 10 days they’ve certainly been interesting to watch.

First off, Microsoft announced a major corporate restructuring and strategy update. For a company of its size, this is certainly not a trivial matter. What was interesting to me was how similar in theme the restructuring strategy had with some recent discussions on Asymco about functional vs. divisional organizations:

Horace Dediu’s core argument is that a functional organization is better at creating and responding to disruptive innovation, as opposed to a divisional organization. The divisional organization is symbolized by old Microsoft, with large business units with independent P&Ls, whereas the functional organization is best represented by Apple – there are products, but no product P&Ls, and resources are organized by functional expertise (engineering, marketing, etc.) and allocated to different products/projects based on strategic vision. With these analyses in mind, the Microsoft reorg looks promising on paper – it is meant to tear down walls internally, so that the company can reorganize itself around future growth initiatives, instead of clinging on to dying (slowly) cash-cows. Obviously, the reorg will not happen overnight, and results won’t show at least a few years down the road (if you think of initiating a new project from scratch).

The other interesting piece is Ben Evans’ blog post, The irrelevance of Microsoft. The charts are compelling, especially this one:

In classic strategy terms Microsoft is a horizontal integration player (while Apple is the typical vertical integration player). Therefore it is truly alarming (for Microsoft) to see its share of platforms drop from a monopoly status (which is the end-goal for any horizontal play, and a key criteria for generating profits for that strategy) to something similar to a vertical integration player (which can be perfectly healthy and profitable with 20% share). Given how Android has the lion’s share of that chart now, and the fact that Android is a free beast (both price and otherwise) that Google doesn’t have strong control over, it seems a renewed horizontal strategy from Microsoft would have some really steep hurdles. I wouldn’t be surprised if Microsoft goes down a more vertical path.

There are, of course, silver linings. Freed from internal pressure from other divisions, there’s no reason why Office cannot extend to both web and mobile leveraging its own network effects, and continue to be a lucrative cash-cow as the monopoly player in the productivity space. Xbox + Kinect are a strong contender for control of the living room (despite some of the initial gaffes with the Xbox One). And Windows Phone does enjoy some Machiavellian benefits as the third platform in mobile – it will continue to get support from telcos who want to limit Android/iOS.

Microsoft is diversified enough that it will have some time to figure out its relevance in the post-PC era. And even if it doesn’t, it will still be around for a while (at least in tech time – a decade in tech feels like an eternity). Let’s see how this plays out.

 

Interoperability as signal of relative market performance

by

There were two thematically similar pieces of news today – the first, Blackberry announced that it would add the once-popular BBM messaging service to iOS and Android; the second, Microsoft announced that outlook.com now supports chatting with Google accounts.

Going back a few years, both pieces of news would be bombshells, with bloggers likely proclaiming that hell has frozen over. In today’s tech scene, both are of minor note.

In grad school, a tech strategy professor had made the observation that efforts at providing interoperability usually make strategic sense for players who are trying to catch up. For market leaders, generally there is little strategic rationale to support your competitors’ platforms. The classic example of this would be productivity software, most famously office suites. Even today, there are a few competitors to Microsoft Office. Supporting Microsoft’s document formats are a core feature; it would be a non-starter to try to get adoption when you don’t support .doc / .ppt / .xls. Conversely, there is usually no reason at all for Microsoft Office to support competing office products’ proprietary formats. (Office may support some open standards, but that’s another story)

So one way to read these pieces of news today, is to see them as signal that Blackberry and Microsoft have on a strategic level acknowledged the dominance of its respective competitors. For Blackberry, even just a few years ago BBM was seen as a crown jewel, a killer app for its loyal user-base. To add cross-platform support would be like opening the floodgates for a mass exodus of users. – Well, that exodus happened anyway. For Microsoft, its web services have long offered some forms of interoperability (e.g. facebook chat support on Windows Messenger), but outright admitting that Gmail is more popular seems to be a first (just the title of the linked official post itself is revealing).

To extrapolate on the observation, Rene Ritchie made the observation that “as of today, every major mobile competitor… also makes apps for iOS“. This is obviously tied to Apple’s vertical integration business model, which is asymmetric compared to Google / Microsoft’s more horizontal play (hence, it is a much bigger deal for Apple to even consider making its software available to other platforms). And you can also make the comment that Apple doesn’t really have proprietary killer apps that would benefit from being cross-platform. But at least partially it is also a signal of Apple’s platform strength.

Career advice from Qi Lu, President of Microsoft Online Services

by

Qi Lu, President of Microsoft’s Online Services Division, was at Berkeley this evening to have a casual talk with students. He gave a very interesting recap of his own career so far, why he joined Microsoft last year, and what he envisions his division to accomplish. And he shared plenty of career advice.

Qi gave two reasons on why Microsoft, which are essentially his core career principles: first, to be in a position where he can have profound and enduring impact; second, to be able to work with and learn from great people. As for his vision for Online Services, he says their mission is to “computationally understand user intent,” or, in plain-speak, to “build a human mind reader” (so that we don’t need to tell the computer what we want to search, the computer will be able to read our mind and know what we need). It is an extremely ambitious and perhaps “geeky” vision, but Qi’s passion comes across so strongly that I can’t help but also become excited at this vision.

As for career advice, Qi was like an encyclopedia of idioms and metaphors-

  • Chance favors the prepared. (Always work hard.)
  • Opportunities are like buses – if you miss one, there’s always the next one. (So don’t worry and always look ahead!)
  • No bus will take you straight to your end goal. Think about “will this bus get me closer?” instead of “will this bus get me there?” (Think about your career in phases, and work towards intermediate goals which will help you get closer to your long-term goal. I really, really liked this metaphor.)
  • Keep your head above the cloud, and your feet on the ground. (Have the big vision, and work hard consistently.)
  • Make yourself uncomfortable. (Push yourself out of your comfort zone – if you’re comfortable, you’re not learning.)
  • Be good at letting things go. (Be willing and open to sharing.)

These bullet points don’t do him justice. He is such a great speaker and it seems as if he just oozes intellect and wisdom. Needless to say, I’m a fan.