Parent company Microsoft's pressure to achieve 30 percent profit margins may be partly behind Xbox's decision to lay off hundreds of employees and raise the price of equipment and him Game Pass subscription service last year.
This report comes from Bloomberg Newswho received detailed information about Microsoft's financial strategy from individuals “familiar with the business.” In the fall of 2023, CFO Amy Hood reportedly set a company-wide goal of achieving a 30 percent “accountability margin.” According to Bloomberg, this is the term Microsoft uses instead of “profit margin.”
The profitability of each Microsoft division is not publicly available data. According to to court documents from 2023, For the first nine months of fiscal 2022, Microsoft's profitability was 12 percent.
According to Omdia chief analyst Liam Dean, 12 percent margins are not unusual in the video game industry, but 30 percent margins are commonly seen in high-performing companies. Newly released Omdia data shows the gaming industry's gross margins in 2022 were nine percent (rising to 14 percent in 2024).
Xbox reportedly achieved a 30 percent profit margin through layoffs and price increases.
The reported target for Xbox puts the company's multiple layoffs, studio closures, game cancellations and price hikes in a different light. Many of the company's devastating cuts occurred after the fall of 2023, when Hood reportedly issued a company-wide mandate.
In the following months closure of some studios and cancellation of games seemed to be related to financial performance, but other happened without even allowing the developers see their work come to light. These closures come ahead of even more daunting ones considering that Xbox will only be able to reach this financial goal through more cuts.
“A 30 percent profit margin is well above the industry average, but is by no means impossible,” Dean explained to Game Developer, noting that Nexon, NCSoft, and CD Projekt Red all hit that mark in 2024. “However, profit accounting for individual divisions within a larger business is unclear as it is highly dependent on the notional cost allocation between the division and the rest of the company, so a notional 30% profit margin for Xbox should probably be taken into account. rather, as an internal accounting purpose. This would not necessarily be comparable to an independent company publishing such figures.”
If you're wondering why Hood and Microsoft executives are making such demands, it's possible they simply don't consider such profits to be unusual for the rest of the company.
“Most of the markets that Microsoft operates in are more profitable than the gaming markets, so the gaming business will always look disappointing to Microsoft's senior management,” Dean said.
The game developer has reached out to Microsoft for comment on this story and will update it when the company responds..
Game Developer and Omdia are subsidiaries of Informa Tech..
