Barclays Global Technology, Media and Telecommunications Conference
Barclays Global Tech Conference Phil Spencer
Who: Phil Spencer, EVP, Gaming, Microsoft
What: Barclays Global Technology, Media and Telecommunications Conference
When: Wednesday, December 5, 2018
RAIMO LENSCHOW: So that's really good. That's a really impressive intro. I don't know how to follow-up on this one now.
PHIL SPENCER: I only intro with videos. That's the way I roll.
RAIMO LENSCHOW: Thanks for being here. I believe it's like the first time you kind of meet an investor it's kind of chill, like ask all these horrible questions. It's all good.
PHIL SPENCER: It's all good.
RAIMO LENSCHOW: Maybe start a little bit, give us a little bit of your background, how you got into where you are today.
PHIL SPENCER: Sure. I started at Microsoft in 1988 as a programming intern. I now run the Gaming organization reporting to Satya Nadella, our CEO. So I'm a member of the SLT overseeing gaming across all of devices, content, all the services we build.
RAIMO LENSCHOW: Yes. Perfect. And then talk a little bit about, as I think about Microsoft, you know, there's kind of Azure and Office and Office 365, and gaming kind of with Xbox it wasn't kind of at the real center and heart of Microsoft for a while. And that seems to be changing now. Talk a little bit about the evolution that you see and what role did Satya play in this as well?
PHIL SPENCER: Yeah. It's a good journey. I became the head of gaming at Microsoft a couple of months after Satya took over as CEO. And we started to have discussions about what gaming could mean at Microsoft. We started with defining the size of the business where I think any kind of startup business should start. When you look at today's world there are over two billion gamers on the planet, half of the connected world plays video games. It's $150 billion a year in revenue. And both of those numbers are growing double-digit.
And when you look at Microsoft, gaming really fits into our intelligent edge, intelligent cloud strategy. Almost all games that are built today rely on intelligent cloud in some way to deliver the services to their customers across all devices. And games are probably the number one form of entertainment on any edge device that a consumer owns, whether it's a phone, whether it's a PC, obviously whether it's a game console.
So when you look at a large TAM that gaming is and a growing TAM, Microsoft having brands and services and fans in the category and the strategy of where the secular trends that we see in the category aligning very well with Microsoft's strategy, it made sense for us to start to invest more heavily and in a more strategic way.
RAIMO LENSCHOW: And just to get us kind of all on the same page, some of them in the audience look a little bit older, can you talk a little bit about the evolution?
PHIL SPENCER: I think they look like a young vibrant crowd.
RAIMO LENSCHOW: Can you talk a little bit about evolution? We started, we had the consoles, we had the PC. How has the industry evolved over the last years?
PHIL SPENCER: Yeah. There's really been transformation in three important areas in gaming. If you think about content transformation, technology transformation, and business model transformation. And they're all happening simultaneously. I think a really good example is a huge game right now called Fortnite. I imagine most people have heard of Fortnite.
Fortnite was the game that was born on the PC many years ago, Epic Games, I was actually I Raleigh, North Carolina, yesterday meeting with them, we had been working with them for many years. They started this game development on PC. They decided they were going to ship this game on console and PC with a cloud-connected back-end. When the game came out literally a year ago and just started just taking over, they also ported the game to the phone.
So what you have today is a game that natively runs on phone devices, on PC, on console. All your players play together, which requires technology to connect those players regardless of what device they come from. The economy of the game spans all the devices. So if I get in and I buy their end game currency on an iPhone, I'm able to consume that currency on an Xbox or on a PC.
The game, much like every other form of media, natively lives in the cloud and the on-ramp to that experience is the consumer's choice. And we've seen this happening more and more across many games. A game that we own is a game called Minecraft. We acquired Minecraft a few years ago, one of the biggest games on the planet as well. And we have Minecraft players across all devices in all geos, and we learn a lot from watching what players want to do.
RAIMO LENSCHOW: And now first investor question, how is the monetization model changing for gaming? How do you make money with this?
PHIL SPENCER: The great thing about gaming today is all forms of monetization are actually growing and are very healthy, even the traditional retail model of somebody building a game and selling that game for $60. We just had a huge launch in our industry of something called Red Dead Redemption II from Take Two, and it was -- if I remember the stats, like the largest entertainment launch over this weekend doing something like $750 million in revenue in its first weekend. And that is predominantly a $60 transaction. Somebody buys the game and then they play the game. And we see growing in retail.
In-game monetization or free to play games or low-price games that actually have an in-game economy, which is what Fortnite is, also growing tremendously. One thing we added in the last year was a gaming subscription where I'm actually able to pay $10 a month and I get access to over 100 games. So for people who, whether they get their music, their video, they become very accustomed to getting their media, building their library through a subscription, and we're seeing very good growth in Game Pass, our game subscription. So we see subscription growth. We see in-game monetization growth. And retail continues to be a great way to sell games both digitally as well as packaged products.
RAIMO LENSCHOW: Like for us, remember, when an Xbox game out like years and years ago, it was like, oh, there's Xbox and the hardware sale and they're losing money and that world has changed.
PHIL SPENCER: Yeah. We had our highest revenue year last year with over $10 billion in revenue in the gaming category. We're seeing software and service growth double digits. And the business is performing very well. It is an activity that the youth on the planet love. It is what they're engaging in.
The other secular trend that we see, and people have probably seen this with services like Twitch and Mixer, is not only do people play but they actually watch other people play. And it's become the socialization of gamers to watch other people play. And I get asked, what is this watching video games? And I'm old enough to remember the advent of Sports Center on ESPN, a channel where people didn't actually have live sports, it was the channel I was going to go to watch sports highlights. And I remember there was some skepticism of whether a channel like that is going to work. It seems like it's worked out okay. And you see in the video game space people watching streamers play as they talk about their experience is growing tremendously as well. And I think there's real monetization capability there that we haven't even tapped yet.
RAIMO LENSCHOW: $10 billion, that's 10 percent of Microsoft. So that's not a small number.
PHIL SPENCER: Yeah. Amy Hood, our CFO, she likes to tell me I'm made the spreadsheet now. And she says that could be a good thing, and I'm on the spreadsheet. So she's going to pay attention. But the support we've had from the company has been incredible. We've acquired and started seven new first party studios in the last year. We obviously don't do that without tremendous support from Satya and Amy. We understand content is a critical component of what we're trying to go build and the support from the company has been tremendous.
RAIMO LENSCHOW: Let me kind of stop you for one second. In terms of how games are played, and I think I get it, but tell me when I stated in college it was PC, and then the consoles came out. Now we have mobile. How is that line kind of blurring at the moment? Dose that all come together eventually? How is that going to play out?
PHIL SPENCER: Yeah. It's a great question. The business grew up as what I would call a per device business. I would build a game for a specific device. That device has a certain gaming demographic and it was very much a per device model. Today our whole model has shifted to per user, because gamers play games on any device. If they're sitting out in the audience and somebody boring is on stage, they might be playing a game on their phone. If they're sitting in class and they've got their PC open, maybe they're playing a game on their PC. They go home, there's a big television on the wall, they want to sit down and they want their experience to span all of those screens seamlessly.
So our transition over the last few years has been very much from a per device of I'm a PC gamer, I'm a console gamer, I'm a mobile gamer to I'm just somebody who likes to play games across any device. The video we showed there of Project xCloud is us really looking at the body of content that we have on our platforms today and how do we bring that content to any device that somebody is looking at?
We focus first on Android phone because there's a billion Android phones on the planet, and it's a place that the content that we've natively built up over the past decades on our platform hasn't been able to reach. But we look at cloud streaming as a way over years where we're going to be able to bring content to customers on any device that they have regardless of the local compute capability. Again, building the experience around the customer, giving the customer choice on where they want to play.
And obviously when you look at that, we'll have multiple business models that will work with streaming, but the connection of streaming with a subscription model makes a ton of sense. You see it in music. You see it in video. So you can look at Project xCloud and you can look at something like Game Pass and you can see there's natural synergies between those two things.
RAIMO LENSCHOW: To make that success, if you think about it you have the consoles and you're really strong there. But then you have PC games and mobile, like PC you started a little bit, mobile kind of is still I think at the moment a little bit work in progress. How do you kind of make sure you play, or do you not need to play, because actually as long as you get the experience for any device, it kind of works. How do I have to think about that?
PHIL SPENCER: Three or four years ago there was a big focus on I'll just use mobile, because it's probably the easiest example. Who are the big mobile studios out there and what are the great mobile games. And maybe there should be acquisition M&A that we do in a pure mobile category.
I'll use Fortnite again, Fortnite being one of the biggest games on the planet, or even Minecraft our own game, another huge mobile game, but also huge PC, big on console. We ship it on Nintendo. We ship it on PlayStation. It's on all the platforms. Those games are they mobile game; are they PC games; are they console games? In the end they're just games. And I think more and more you're going to see less content that's tailored to only one device, because it subsets the market and the technology that we're building allows you to bring that content to every screen.
So what you're seeing -- and you also see things like free to play games working on console, which traditionally console was the world of retail. Mobile was the world of free to play. And you'd say PC was somewhere in the middle. Now you see business models are working across all the devices, because again you're actually focused on the same customer, who becomes accustomed to that business model across all the screens.
RAIMO LENSCHOW: So the whole like if I talk to a hedge fund and they're all Microsoft needs mobile gaming content and now you're going to buy the next big one, actually, the world has moved on in a way.
PHIL SPENCER: Yeah, I mean it may be just because I was in North Carolina yesterday, but you can sit there, you can look at PUBG, you can look at look at Fortnite, you can look at Minecraft, you can look at these huge games and the games do very well on mobile. They're incredibly strong on mobile. But that's not to the expense of the other devices where they do well.
You look at these games that have tens of millions, if not hundreds of millions, of monthly active players across all these devices, and we know because we run Xbox Live, we think about content as a critical, critical asset. Gamers play games. The community around these games, allowing people to be connected to their players and their friends and their content across all the devices is why we invest in Xbox Live and Mixer, our video streaming platform, and then cloud. So we think about it as three Cs, content, community and cloud. Cloud is the way we can deliver community and content to a player on any device.
I'd say I'd hesitate to look for a game studio that's only capable of building on one device, because gamers play games on all devices. And I think you're missing out on an opportunity if you're not thinking about games that can work everywhere players show up.
RAIMO LENSCHOW: Okay. Let's change gears a little bit. So I've got three little daughters. I'm all concerned about what they do and how they play. And talk a little bit about the social and regulatory risk that is kind of coming with the industry, or is it there, is it changing, is it coming? How do you think about that?
PHIL SPENCER: Yeah, it's one of the things that our team takes very seriously. We ask ourselves what does it mean for Microsoft to be in this category of entertainment, what should we stand for. I think the kind of cultural push and input that Satya has had into the company has been written about many times. And we think about Microsoft playing a role in the gaming industry as a way for us to be leaders. And I'm proud of the work that we've done around parental controls, around toxicity online, around different topics that we need to address ultimately as a society, but it can show up in multiple forms of entertainment.
We're in the gaming space. I think about how many kids have their first computing experience grabbing mom or dad's iPhone and playing Minecraft on that device. And I think our responsibility as the shepherd of those kids coming into a new social platform, a new game play platform, potentially seeing other players, so the parental controls work that we do is critical. I also think there's a positive, very positive, aspect to this.
For example, one of the things we've done with Minecraft is we have a complete focus on Minecraft in education and we've had over 60 million kids take coding practice in Minecraft using the educational work that we've done there, because as kids, I mean, I started in this space, because I played videogames as a kid. And I remember my mom telling me these videogames are going to be the end of you. And it's turned out okay so far.
But, I think a lot of kids are really -- they learn. They get interested in STEM. They get interested in technology. They get interested in how these games are built. And I think it's important that we make sure gaming is safe and inclusive for everybody. But it's also a great way for us to take the interest that youth has and actually show kids how games are built and that's a stepping stool on to many different career paths.
RAIMO LENSCHOW: Yeah. Okay, great. So as a parent I can kind of somewhat feel --
PHIL SPENCER: Well, I'll say if you have kids that play set up a parent account on Xbox Live. You should do it. You should understand what your kids are playing, just like you should understand what your kids are watching on YouTube. You should understand who your kids are messaging on Facebook. It's no different than any other form of media.
The parental control system we have, not to get all soapboxy about it, allows you to set timers on when your kids can play, screen time. So you can say, hey, when you get home from school do your homework. The box isn't actually going to turn on. You can do that. As a parent you can approve everybody who gets to play with your kids online. So make sure you're diligent. I'm in the gaming space, so I focus on this. I think as parents we should, because I have two daughters, as well. And it's important that we understand in an online world who our family is interacting with and we work more and more to give people the controls for content and community so that they can curate that experience to their desire.
RAIMO LENSCHOW: Okay. Let's shift gears again. You started talking about content earlier and how important it is to have content. Talk a little bit about your situation in terms of like your own content. I don't know also how the third parties that you get in there, and there is going to be a follow-up question on Fortnite, but let's start with that.
PHIL SPENCER: Yeah, you know, when I think about who I see as our long-term competitors over the next decade in this gaming category, I think you're going to see the big tech companies that Microsoft competes with in many different areas entering. And you see it. Amazon has Amazon Game Studios. They have for a while. AWS has a very large workload in the gaming space. Google has just started working on Project Stream. And they are -- you can see the work that they're starting to do to enter this category. Tencent is a huge gaming company.
So when I think about some of the strengths that we have as Microsoft, we've been in this space for almost two decades now. We have long relationships with the best content creators on the planet. And their content runs on our platform today. So we did some work early on to allow older Xbox games to work on today's Xbox. And our fans love that feature. And it made a ton of sense, in terms of we sold more games, we drove more engagement on the platform. That was great.
When you look at a service like Project xCloud, then you start putting the map together and say, okay, now we have thousands of pieces of content from our partners. They've already built this content and I can basically stream it to any player, anywhere, with any device, which opens up a huge new markets for them.
The third-party relationships that we've built in not only the games that are under development today, but the past two decades of games that they've built on our platform we're unlocking new business opportunity for that third-party content. We know that our system really only works if third parties are monetizing well on our platform.
Our first parties are important here, but the third-party relationships are a critical, critical aspect. And we have strong business relationships with EA, Activision, Take Two, Capcom; you can go through the whole list. And we've had long, long relationships and they've shipped hundreds of pieces, thousands of pieces of content on our platform.
Our first party content capability, as we're building new business models like Game Pass and adopting new services are really the creators of the flywheel. We're going to invest ahead of the curve in the market that we see getting created and subscription is a perfect example. There are obviously subscription models in other forms of media that you can use as an example. But investing in your own content to attract players to your subscription service and the flywheel that gets created as you see millions of people coming into the subscription, and you invest to continue to get fresh new content there, is probably the most important thing in growing that service.
RAIMO LENSCHOW: And how do you -- so with Fortnite, we were all sitting as a team and we were like how does Phil think about Fortnite and why can we not do Fortnite. But, if you think about that on the one hand you're benefitting, it's nice to have first party content. On the other it's like why can we not do that. How do you think about that kind of success of a game versus not success of the game and success of your content versus others?
PHIL SPENCER: Yeah, I think, Fortnite having such huge success on our platform is a perfect example of a strong platform. So I would start by saying do we have the biggest games in the world shipping on our platform natively, like did we have to do extra work to make that happen. And we did not. Epic, who built this game, and we all know there are tens of thousands of games in development as we sit here, building a strategy around us being able to pick the ones that are going to be the hits is not a strong strategy. Us being a platform that all of the creators target and ensuring that when the successes happen, they happen on our platform is a good strategy.
So the thing I love about Fortnite is that it happened on our platform. It happened on other platforms, as well, but we were able to reap the benefits of Fortnite's success without us actually investing in Fortnite as a specific form of content, because Fortnite in a lot of ways looked like other games that were on the platform and maybe somebody out there has the crystal ball on what makes one form of entertainment successful over another. That's not our strategy.
Our strategy is to have the best place for all creators to create their content and make sure they have the monetization tools to go and drive a great business for us. Ad new will get our fair share of that through the business relationship that we have.
So I see Fortnite as a massive success for us, because it happened without us actually having to go do any special work to have it happen on our platform. And then the game monetized so well and found so many customers on our platform.
RAIMO LENSCHOW: Okay. That's great. And then just as part of monetization, let's talk a little bit about Game Pass. So that's kind of -- subscription is kind of the way forward. How do you differentiate that against like what Sony does or EA does? How does that all fit together?
PHIL SPENCER: So for us it's all about how we reach 2 billion gamers. If you build the market around a couple hundred million people that are going to own a game console, or a high-end gaming PC, then your business model diversity can actually narrow, because your customers are narrow. But when you think about reaching a customer with this content, where their only compute device could be an Android phone, you think about what are all the ways that that person pays for content if they do it all today.
So we need to make sure we're world class at free-to-play content, but we also look at subscription as a much-lowered barrier way for a customer to build a library of content. So we built Game Pass and it started on console. It will come to PC and eventually it will come to every device. We use the flywheel that we have with customers on an Xbox to start the growth in Game Pass, but if somebody is sitting back and taking a longer-term view of where our business is going, you should look at that as a business model that we think scales to billions of people, not hundreds of millions of people like retail does.
So for us growing Game Pass early, we're seeing the success in Game Pass today, it's ben critically important. We're seeing content investment, first-party studio investments we're making now are all about accelerating the flywheel of customers coming in and we're seeing that work.
RAIMO LENSCHOW: Yeah. Mike is going to kill me if I ask you that, but if you think about like in that respect listening to you on Game Pass, but also listening to you on content, so on the investor side you have to buy EA because there's so much content, but it doesn't sound like that's necessary.
PHIL SPENCER: You've seen the studio. I don't know if you've seen it. If you watch the studio acquisitions we've done, we're focused on teams. We're focused on creative teams that we think can build very interesting content to help the flywheel Game Pass grow and our platforms grow. We're probably less interested in management teams and infrastructure and things that we already have inside of our organization. And you can just look at the track record. We've added seven studios in six months. And if you look at them I think you'll see certainly in the valuations, but more importantly the creative team that we're picking up knowing that we can then plug them into a Microsoft infrastructure, an Xbox infrastructure, to help those teams succeed with more solid funding, alignment towards goals around Game Pass, reaching gamers everywhere, and we don't have to pay for some of the things that some of the bigger publishers have that we probably already have under our roof.
So, yeah, our focus hasn't been on going out and kind of adding duplicative function that we'd be paying for that I don't think we need, but more how do we find the creative independent teams out there. And I feel really good about the path that we're on right now.
RAIMO LENSCHOW: Okay. Last question from me, as I think about, you started to talk about streaming next year in the cloud, talk a little bit of what you do there, and then also how much extra commission do you get, because you must be driving Azure traffic like crazy and the Azure team must love you, because there's so much that needs to be coming their way if you are successful here.
PHIL SPENCER: Yeah. If you go and you watch that video again, one of the things to take notice of is the silicon we're using to stream these games is actually the silicon from our console. And it turns out that consoles have very compatible kind of design criteria to what a blade in a server looks like. You want high power to energy use, low-price, cooling is an issue, all the things that these devices care about in the home work really well on a server blade.
The thing that's interesting for us as we roll forward is we're actually designing our next gen silicon in such a way that it works great for playing games in the cloud and also works very well for machine-learning and other non-entertainment workloads. So as a company like Microsoft, we can dual-purpose the silicon that we're putting in. We have a consumer user for that silicon and we'll have enterprise use for those blades as well.
It's all in our space around driving down cost to serve, and your cost to serve is made up by two things, how much was the hardware and how much time was that hardware monetized? So we can monetize that hardware over more cycles in the day, in the 24 hours, through game streaming and other things that needs CPU and GPU in the cloud, and we will drive down the cost to serve in our service.
So the design as we move forward is done hand-in-hand with the Azure silicon team. And I think that creates a real competitive advantage. If you look on the map of where Azure lives today on the planet, it lives really close to a lot of people who don't play our traditional games today. This is about global scale through the infrastructure that Azure has built and making sure that our silicon and the work that we're putting into those data centers is used for multiple uses inside of Microsoft.
RAIMO LENSCHOW: And now this is the last question, on the personal, but how do you solve that? It sounds pretty cool, but it's almost an issue of network latency to kind of make the gaming experience a little bit cranky. How do you solve that? Are we at that point already that we are able to solve that?
PHIL SPENCER: Yeah. We're using -- I've been on the road for ten days now. I've been playing a ton of games on my Android phone streamed. I go to different parts of the planet. Right now our servers are in our data center in Washington as we're testing, which is still about five hours from our Redmond Campus. The thig about Azure is the global scale of where Azure is. Scott Guthrie, Jason Zander, the team that's been building out Azure has really built a global strength in Azure in terms of where our data center and our edge nodes are. And we're putting them close to places where people will want to go play, and specifically players we don't reach today.
I love the fact that I see Azure instances on the continent of Africa, 1.2 billion people on the continent of Africa and the average age is, what, about 20-21. Now that's not a huge gaming market for us today, but if you think over the next decade the demographic works. If you look at India and you start looking where Azure has data centers today, they have a lot of data centers. When you look at Southeast Asia, these are places we're going to want to deliver content to customers that know what our brands are. They know what this IP means. But they're not able to go play those games today on the devices that they have.
Putting the data centers closer to the players is how we work on latency among other kind of magic software solutions that we'll put in place, but the global scale of Azure is a huge benefit to us in this space.
RAIMO LENSCHOW: Perfect. That's a perfect closing statement. I know our time is up now, but that worked really well, Phil. Thank you. Thanks for being here. That was really insightful. Thank you.
PHIL SPENCER: Thank you.
January 30, 2019 2:30 PM - PT
Microsoft Fiscal Year 2019 Second Quarter Earnings Conference Call