Jefferies Software Conference
Filter Events:
Jefferies Virtual Global Interactive Entertainment Conference
Who: Tim Stuart, Xbox CFO and VP of Finance and Operations
Event: Jefferies Virtual Global Interactive Entertainment Conference
Date: November 11, 2021
Hey, good afternoon, everybody. Thanks everyone for joining us at our Second Annual Global Interactive Media Conference. I'm Andrew Uerkwitz, Senior U.S. Analyst covering Interactive Media. With me today, it’s absolutely my pleasure to have Tim Stuart, Xbox CFO and VP of Finance and Operations.
Before I go into his background, I want to highlight that Monday is the 20th anniversary of the Xbox launch. And there will be a retrospective at one o'clock on Monday. I bring this up because I was actually – Tim, I was pulling your bio from LinkedIn, and I realized that you started in the Xbox group back in 2007. So you've worked on partnerships, hardware, M&A, software, long range planning. You've really seen a lot, along with all the tremendous change. So I really anxious to kind of talk about where this is going, where you've been and I'm sure the answer is going to be, you're just getting started, but Tim, thanks for joining.
Tim Stuart, Chief Financial Officer, Xbox
That was great. I always wish we could do these in person. I hope some day we're back to that. But yeah, we can definitely get a really good view of where we're taking the business here, where we've come from. This actually is my 20th year in Xbox if you can believe it.
Andrew Uerkwitz, Analyst, Jefferies LLC
Your LinkedIn didn't say that. Awesome.
Tim Stuart, Chief Financial Officer, Xbox
It's all my adult working life has been in Xbox and gaming. So we can go down that path, but it's great to be here. Thanks for the invite. It's always nice to talk to you.
Andrew Uerkwitz, Analyst, Jefferies LLC
Does that mean you, Phil and Aaron are like the OG guys?
Tim Stuart, Chief Financial Officer, Xbox
Yeah. We are in that list of OG, we've got this, we're actually doing something on Friday night with the kind of all the original Xbox folks here in Seattle.
Andrew Uerkwitz, Analyst, Jefferies LLC
That's really awesome.
Tim Stuart, Chief Financial Officer, Xbox
So it's going to be a good time to reminisce about the past.
Andrew Uerkwitz, Analyst, Jefferies LLC
Yeah, totally. Well, I want to get started. And let's start with the tough question, which is semiconductor supply chains, COVID shipping issues, where do we stand on Xbox sales. Is it still supply constraint? Are you selling them as fast as you can produce, what’s the update on the Xbox?
Tim Stuart, Chief Financial Officer, Xbox
Yeah. It's a tough spot, as you can imagine around the world, we're seeing whether it's constraint on inventory flow. So just getting units from China to Long Beach, California, there's backup there, getting substrate silicon components that's backed up as well. So, I'd say in over that 20 years, this has been one of the hardest in terms of inventory and console supply.
So what we're seeing is we're still selling every unit we have, every unit that comes in on the shelf for a few minutes or not even at all and sold to consumers. So it's a nice place to be from a demand perspective. We could be selling far more than we have. But I would say too, and I'm going to make a little bit of a leap here that also in our business, it's nice that we're not as tied to console volume as we used to be.
And the reason why I say that is as I use that content and services revenue as my North Star. And we think about cloud computing, which we'll talk about later. We think about sales of Forza Horizon or H4 on PC. We think about the ability for users to play games on their Xbox One and wherever they are. So while it’s super important to get consoles out there, we have a much more diverse consumer base than we've ever had on the devices that they play on.
So we have the ability, I don't want to say as a workaround, but an ability to get users, get customers, get games going outside of just an Xbox series S or X that happens to be sitting on a boat outside Long Beach.
Andrew Uerkwitz, Analyst, Jefferies LLC
Yeah. And I guess to that point, I mean we can bring in Forza, I guess, and then Halo at a couple of weeks. I mean, those are on Game Pass. So I guess your North Star probably is Game Pass subscribers. What's the – I mean, I'm sure three, four years when I am going to care about mix, but do you pay attention to the mix between subscribers on PC, subscribers on the new box, subscribers on the old one, does that matter to you?
Tim Stuart, Chief Financial Officer, Xbox
We do. We do. We think a lot about it in terms of how we're gaining new customers and it looks sort of from a customer user count, but just in kind of an enjoyment standpoint. And what I mean by that is, the majority of our business clearly today is console and it will be for the next couple of years.
But when I think about true growth in the business, when I think about what is a 200 or 300 TAM market size for console, 200 million or 300 million users on PC as well, when we think about 3 billion gamers in the world with access to mobile phones or smart TVs or PCs without GPUs. And I think about Game Pass, our subscription service with hundreds of great games, and really the fact that you can play on any device. That's the big growth unlocked for Microsoft. That's the big growth unlocked for gaming.
In Microsoft, uniquely differentiated with Azure, with our content pipeline, we closed ZeniMax here just a little bit ago, think about Minecraft, think about the acquisitions we've done. That's the bet that we're on and getting that Game Pass subscription count sort of regardless of what platform they're on is key. And all of them and this is sort of stating the obvious, but we kind of started it early with these sort of Minecraft acquisition where almost six or seven years ago now. When you think about the biggest games in the world, the Minecraft’s, the Roblox, the Fortnite’s, the Rocket League’s, they are device agnostic really. And that's the power of kind of gaming here at Microsoft is that device agnostic world, the ability for us to have a Game Pass subscriber and play wherever they are, and that's going to be that growth a lot for us in the future.
Andrew Uerkwitz, Analyst, Jefferies LLC
And what's amazing is – being, I guess my guess is with something like xCloud, you still are able to give your devs full freedom on what to build, how to build it and whatnot, as opposed to, I think that a lot of those games you mentioned, well, they didn't go to the lowest common denominator. They didn't go to a lower common denominator to get that cross platform feel. Is that the right way to think about it?
Tim Stuart, Chief Financial Officer, Xbox
Yeah, that's a really good way to say it. What we try to do, and this is kind of Microsoft's DNA as a platform company, but you think about going into developer whether you're Ubisoft or Activision or EA, or even the smaller folks, you think about the ability to create a game, I'll say design at once. Like that's kind of like code one's played everywhere kind of dream, but in reality, for us, you can create that Xbox code. That code can then go to a generally go to a PC. This is a minor modification, but go to a PC, go to an Xbox or even as we sit and put it in a cloud, we rack Xbox motherboards in the cloud.
So for someone to go into a fully game streaming scenario, they don't need to rewrite the game. The game literally works from what was designed for the Xbox console. Now works in the cloud. You can now play it on your mobile device. You can now play it on your PC without a GPU. You can play Halo at AAA quality experience, stream to your devices. And that's that new magical unlock of the content pipeline really starts to expand, customer enjoyment expands, the opportunity to play more games expands and that's where we're really going to drive growth going forward.
Andrew Uerkwitz, Analyst, Jefferies LLC
Yeah, and it's funny. I think I played Forza last night. Oh my God. Is that game amazing? I don't want to fanboy too much, but it's amazing. And this morning I did try it on xCloud. And I was – again, I was surprised by how well it ran and I should stop feeling surprised. But again, is that graphic intensive, reached 110 gigs on my computer for crying out loud, running smoothly on a mobile device. What is – are you uniquely, is Microsoft uniquely able to do that because of Azure and putting the Xbox’s in the cloud?
Tim Stuart, Chief Financial Officer, Xbox
I think so. I think it's the connection point. There's a couple of points within that, which are great. The connections of the teams, the gaming team with the Azure team, Phil Spencer and Scott Guthrie, they're on the SL and Microsoft Senior Leadership team together. They're driving these growth bets together. So you have kind of this nice product kind of product partnership, if you will.
The ability for us to really, again, as our DNA as a platform company, think about what it takes to get at the root of what streaming means. There's only a few major players in the world that have access to first-party cloud, which gives you two advantages. One of which is tech, the other of which is economics.
The ability for us to put our expense across both commercial and consumer workloads is really unmatched across kind of our competitors, but I'd say, lastly is the gaming DNA that we bring. We know what it means to have partners and customers and hundreds of millions of monthly active users. That's our gaming DNA as Xbox, the 20 years of that history goes into us building an experience like game streaming, where we know customers want low latency. We know what they can deal with in graphic fidelity. We know what games work on touch or controller inputs, or keyboard and mouse. That's again, one of those sort of uniquely differentiated experiences. So I think Microsoft really brings out to the table, unlike many other partners in the space.
Andrew Uerkwitz, Analyst, Jefferies LLC
Sure, sure. And now I do cover Netflix. And one of the things that often drive Netflix subscribers is new content, is your expectation that as you roll out Forza and then Halo, and then I mean, you have a massive catalog ready to come in the next couple of years, is that like – is that going to drive subs? Or is that the hope? And I know it sounds like a dumb question, but it comes from a place where I also know that people still buy a lot of games even if they're on Game Pass. And so is the data show bearing that out. It actually is driving subs or just driving deeper engagement with your current audience?
Tim Stuart, Chief Financial Officer, Xbox
Yeah. It drives both, Andrew. And this is a place that we're learning and growing as a company as well, some pieces of content drive a lot more hours of the existing base, some piece of content drive net new subscribers into Game Pass and so different pieces of content do that. And what we've seen over the last couple of years, which is, I think quite interesting is we need all of that to continue our growth that with Game Pass, as we go from 18 million to 20 million to 25 million to 50 million to 100 million, we're going to have to have that uniquely differentiated content based because what people are playing at 100 million, I think is a little bit different than what people were playing early days at 10 million, 10 million was kind of your Forzas and Halos and kind of that core zone of gaming.
But when we think about 100 million going into Africa, going into India, going into Southeast Asia, those markets are going to require new business models, number one. Number two is going to require a content pipeline and support staff. That's true, even in our bigger markets, whether it's U.S., UK and Continental Europe, titles and content pipeline that's required to have a subscription that is as big as that is going to be important.
Netflix is a great example. Netflix early on was asked kind of, I remember earnings call it was, when are you done spending money on content? And the answer, which seems kind of silly, but is real, is as long as the numbers are still going up, we're going to keep acquiring content because more and more people require more and more things. And that's really the journey we've been on, whether it was Minecraft in the early days or ZeniMax most recently expanding that content pipeline is required for the growth that we're on. And we've seen really good signals as a result.
Andrew Uerkwitz, Analyst, Jefferies LLC
And let me bring that around here, your M&A strategy, I mean, as you start to go into new geographies, does that require you to change your M&A strategy or like can you just talk about the evolution of your M&A strategy?
Tim Stuart, Chief Financial Officer, Xbox
Yeah, I think as we look forward into whether it's commercial deals or M&A or following the acquisition side of the house, it's really creating that robust content. And I think what I see too, as our robust content across devices, because again, what works the best or work well maybe on console five or six years ago will not work the best or works well necessarily on the PC or people who are mobile-first, if you're – Africa is a great example, again, something like 50% of the population is 25 years and younger with a growing disposable income and a high propensity to gaming, but they're not a console-first market. They're mostly a mobile-first market. And that's true for a lot of people in the U.S. too, in Asia, where there's not a Best Buy sitting on the corner, but there's a mobile phone in their hand or a low end PC.
So we will kind of continue to optimize our acquisition standpoint, which is for sure we need, let’s just call it, traditional console type things that we need to grow. We need great content there. But we also need to expand our thinking into more of a mobile-first audience, a more of a PC-first audience, a more of a geographically diverse audience. So that's the bet. And again, we want global gaming scale, not just U.S., UK, Europe scale and that's going to require us to go be continually acquisitive and continually growing that content pipeline they have.
Andrew Uerkwitz, Analyst, Jefferies LLC
One of your competitors talks about the rise in cost of making really great first-party content and kind of eludes to a subscription model is not profitable. What's your general response to a question like that or a comment like that?
Tim Stuart, Chief Financial Officer, Xbox
Yeah. Well, for sure true on the rising cost of AAA games, whether it's going to 4K resolution, 120 frames, like all the great stuff, you mentioned, Forza Horizon 5, one of the most beautiful games I've ever played, like ton of assets goes to the creation basically recreating Mexico and which is where the game is based in that game. So that is just a growing nature of the business – of content creation.
I will say what we've seen now, and this is true for Xbox and why I love our strategy that we're on is, we have this kind of diversity of business model. If you want to subscribe, that's awesome. We've got a great pipeline of games for you to subscribe, hundreds of great games to play. You will never be bored, “never be bored”. Took the bet, and I've liked the bet so far putting our first-party games in day and dates. We remember Phil and I go in to the offices of Amy and Satya and thinking through, hey, we're going to take what could be a cannibalization risk of, we're going to miss out on that day one revenue, but we believe subscription is the right path forward.
We want that recurring revenue stream. We want that recurring engagement model and that's where it's paid off. And so I'd say in addition to that, when someone's in a subscription, they can also buy things on top of it. When we go to our third-party partners to put a game in the Game Pass, it's not just a commercial deal between the two of us. If you also get access to tens of millions of gamers that may not have played that game before and on top of that, you can now drive post-sale monetization.
Ubisoft as an example, you put Division into Game Pass. I guarantee millions more people play a game like Division than would have played otherwise, just because they already have it now part of their service. And I'm not using Division as some specific example, other than highlight the example. Unless we're playing Division, those now more millions of users are buying more maps and weapons and skins in the game, generating more top line revenue. And they're creating now fans of Division. So when Division 2 comes out, there's more people that want to play Division 2. So you get this great flywheel of access to content, increased engagement and increased engagement continues to drive more monetization and future engagement.
So it's a business model that I love, and I wouldn't actually – and this is maybe different Andrew than whomever you're talking to. I would say, we've thus far been on a growing profit trajectory, which Game Pass for us and the subscription models has helped drive that growing profit, just because it's one more way for us to monetize, but also more importantly, one more way for us to engage, because I say all the time, the engagement equals currency, you want to have people in the game and then we'll find a way to make the right business model around it.
Andrew Uerkwitz, Analyst, Jefferies LLC
Yeah. No, I completely agree. I mean, I can do the math, I know how to use Excel to come up with a profitable and I'm not surprised that's the case. And I think Live services plays a role and again, selling the title as well. It plays a role in it. So it definitely makes sense to me. Don't tell Yves that I play almost all the Ubisoft games on Game Pass. I'm actually finding Game Pass I always go there first now instead of Steam and other, because it's great to have.
Tim Stuart, Chief Financial Officer, Xbox
And you'll find it as maybe if you have kids or not, but if your kids are playing or your friends or whatever playing, they – like I said, they continue to monetize those games. So, if you’re over there, you put a game in, try more usage and hopefully you create more monetization on top of it.
Andrew Uerkwitz, Analyst, Jefferies LLC
No doubt. The other thing I wanted to kind of talk about as far as cloud goes, you have the backend, you're building a pipeline of titles. There's actually, what I find fascinating is even some of your titles now have touch controls. So you're really building it for mobile. Is there still – is your usage if we would have this conversation last year and you said, okay, I want to be – I want cloud to grow X like, is cloud engagement growing at the pace you thought it would? And if it's not like what's holding it back, is it just stereotype that cloud is not good?
Tim Stuart, Chief Financial Officer, Xbox
There's a couple, there's a lot of interesting angles in there. Number one is with cloud and I'll use Brazil as a good example. We launched in Brazil in a month or so ago, and users are queued up for hours and hours to get into xCloud service, what's limiting us there is capacity. We want to have, A, a good experience, but B, frankly, way more users are trying to get into the service than we actually have servers lined up for them to play. Now we're overflowing a little bit into other data centers as best we can obviously than the best experience is the more local one there in Brazil. What we've seen is really a world where for those non-console-first markets, but big gaming markets, Brazil is a great example.
They want to have access and play these games too. So for them, it's a great opportunity to subscribe to Game Pass, never need to buy a console and off you go playing on your mobile device or your PC. That's an awesome one. I think for us, it's really about rollout. It’s like we're putting more capacity in, we're getting users used to what it looks like to play, I believe the experience is there. So we're no longer in a world where it's hard to play. You mentioned you played Forza Horizon 5 on the cloud, for us Xbox.com/play. You can go stream every game or most every games in Game Pass.
We have a pretty good to quite good experience which is great. So I think it's going to be kind of, I think with any kind of new tech or new product that we roll out, it's a combination of awareness. Not everybody knows you can still stream games like this. It’s a combination of having the games they want to play. But for Microsoft or Xbox, this is again, relative to maybe Stadia or Luna or GeForce Now or something. We have that massive content that you can leverage. We have the massive Azure footprint – geographic footprint that we can leverage.
And I think when we have this meeting five or six years from now, we will see the majority of gaming done with some kind of cloud elements in it. Probably say, even for us, like on the console, you’ll be able to sort of say, while a game is installing or downloading, I can be able to stream the game and get going. So sort of I’m on my console, but I’m also using cloud. Let’s call it cloud enhanced abilities for you to enjoy the game.
Andrew Uerkwitz, Analyst, Jefferies LLC
So just run the tutorial, while you’re downloading the game. That’s really nifty. And I guess along – I guess the last question along those lines, I would also add that Microsoft probably has the patience to let this grow because you – because you’re doing so many other things as well, some of those other ones don’t. The pushback I would have as a video game analyst would be five years from now some of your games will have live services. You’re starting to really get into – like, if Halo’s really successful, some of your third-party partners may not be super happy. Are you worried about that? Are you trying to balance that? Or you’d just say, look, this is our business model, we’re going to have 100 million people. If you want to put it here, you can put it here.
Tim Stuart, Chief Financial Officer, Xbox
Yes. It’s going to be a balance for sure. Now, of course, any platform like Xbox requires success of your partners as well. So you’ve got to have the Ubisoft’s and EA’s and Activision’s and Take-Two’s and Epic’s and the list goes on and on. Hundreds of partners and developers and publishers, you need to have them being successful and they need to be making money. Like that’s sort of help promote them as well. Our job as a platform and I truly believe this is the cliché of rising tide lifts all boats is actually true. The more gamers we can bring into the ecosystem, the more games we can get in, the more people playing, the more people engaging is great for our partners and great for us.
Yes. We’ll balance it like – I hope Halo’s huge. I’ve played Halo Infinite and that’s already thus far I’m quite impressed and want to balance that for sure. And for someone that’s like a bigger part, they can decide to be in Game Pass or not, they can – we want them on the platform for sure. But I think in the end, when we think about a growing user base, higher modernization, it’s a $225 billion industry and growing that number is kind of first and foremost for us. And then people will find their way through to play the games they want on whatever devices they want. Our goal is to have as many partners and gamers in our platform as possible.
Andrew Uerkwitz, Analyst, Jefferies LLC
Got you. One of the – what – you have I think, remind me 23 studios.
Tim Stuart, Chief Financial Officer, Xbox
Yes. It’s getting close to – yeah, I think that’s last summer, we announced. Yeah.
Andrew Uerkwitz, Analyst, Jefferies LLC
Sorry. They’re all working on really great content, but one thing you are missing and as xCloud on mobile gets bigger it’s kind of the traditional mobile game or mobile style games. Is that any interest of you guys that kind of more casual, like fast paced stuff that people play?
Tim Stuart, Chief Financial Officer, Xbox
Yeah. It’s a great question. It’s actually something that we talk about quite the gaming leadership team. And we kind of – the way we frame it, Andrew is more about the type of game we call it, social casual, I think is what most people like, the social casual game, maybe less about the specific device it’s played on. Like you’ve got to have a mobile game, but it’s really that social casual thing. And so we know that that’s an important part of the portfolio, especially as you move into a mobile device as a primary gaming part of your – part of the business. ZeniMax has some good mobile games, Fallout Shelter and some of the things they’ve worked with. So we’re getting the DNA sort of into the team of what it looks like to build a good and having and sort of operate a good mobile game.
But I think that’s an area that we’re going to continue to look at whether inorganic or organic is that more social casual space? One another things we like to point out is, and it kind of flies below the radar, I’m not making an announcement or anything like that, but the amount of people that play our casual suite, Solitaire and other things like that, millions of people play one of the biggest PC games in the world actually. And then of course the bigger ones League of Legends and stuff, but kind of people that play Solitaire is huge.
So the reason why I bring that up is because that’s where we want to build from. It’s the notion that you need those social casual experiences to really make it to – there are a lot of people that want just kind of a 5 to 10 minute quick and I’m in and out on. And that’s a place that we are admittedly not well sort of exposed to now. But we’ll continue to work on that and focus there.
Andrew Uerkwitz, Analyst, Jefferies LLC
Got you. Okay. That makes a lot of sense. By the way, the Solitaire and auto downloads, that thing has like slowed by computer downs so many times because it auto downloads updates, oh my gosh.
Tim Stuart, Chief Financial Officer, Xbox
Yeah. I’m like, what’s going on here? Yeah.
Andrew Uerkwitz, Analyst, Jefferies LLC
Yeah, like what’s going on, I go to my Xbox, it’s like, Solitaire has update, your casual game suite has update. And when I think about the interplay between Xbox on the console and PC, do you think there will be – is there any shifts we could see there? Are more people playing on PC than before because of the Xbox app, because of xCloud or Game Pass for PC or is that shift pretty solidify – or that mix pretty solidified?
Tim Stuart, Chief Financial Officer, Xbox
Yeah. For – I’ll say for the Microsoft gaming lens. We’ve seen a significant growth in our PC presence, and that’s a very intentional strategy. If you look back five or six years ago, we really didn’t have a big PC play. I mean, we have like Age of Empires III, of course we have PC games, Flight Sim in the early days. And I’m going to make a point about Flight Sim here in a second. And that was really when we look back four or five years ago, we were probably a little bit under exposed in a good way. It’s a near adjacent – it’s adjacent to the console, a lot of similar gamers. And we see a lot of overlap of PC – people that play console and PC.
But as Microsoft, traditional PC company we really didn’t have a big exposure to the gaming element. It was either kind of Steam or pick your other thing. So we’ve made a big – a pretty big bet on, okay, we’re going to make a little bit of a strategy shift. We’re going to go into Steam. We’re not going to be scared of other stores. We’re going to go create native PC content. We’re going to double down and you’ve seen us, we launched Fight Sim just a little bit ago, we launched Age of Empires just this past week, Forza Horizon 5 coming to PC, Halo being day and date on PC. Very much a strategy shift over four or five years ago, like I said. And I’d say, we’ve grown – number one, grown our base. Number two, have been impressed with where it’s come from and to, and I’d say, we’re just getting started.
We’ve got Game Pass for PC as well. So if you’re a PC native player, you can subscribe to Game Pass and get all of our first-party games day and date, plus other great games like Back 4 Blood’s in there, great, great PC content. And so that’s really – I’d say we’re still early on the bet, but that’s I think the right bet to be on, because if we’re going to be in the gaming space and be truly a global player, you’ve got to have calls of presence. You’ve got to have PC presence and you’re going to have mobile device presence as well. And that’s the jury that we’re for sure on.
Andrew Uerkwitz, Analyst, Jefferies LLC
Yes. I’m going to actually plug though, don’t get the PC Game Pass, get the Game Pass Ultimate because you get the xCloud with it and everything else.
Tim Stuart, Chief Financial Officer, Xbox
I appreciate that. I love the ARPU shift there, we’ll get a little higher revenue.
Andrew Uerkwitz, Analyst, Jefferies LLC
But I actually think it’s a little bit better value myself, but...
Tim Stuart, Chief Financial Officer, Xbox
Yeah. It’s an interesting one. And the reason why we have it is because for sure, if you are a gamer that wants to be able to stream, and you’re a multi-device gamer, Ultimate’s the one for you. You get all, basically all skews there. What you find in skew creation to which I’ve loved is gamers that are PC first, they don’t want to feel like they’re paying for things they don’t want – they don’t need that could be the console piece, that could be the copies, even though the value could be there you could say.
And so what we’ve seen has a very specific push from us that says, if you’re a PC gamer and you’re a PC first, we’ve got a skew for you for $9.99 a month in the U.S. that works great. And you’re going to have a great set of games. That little shift in our sort of focus of that PC first audience, I think has really paid off in just the last few months.
Andrew Uerkwitz, Analyst, Jefferies LLC
Yes. No, I think that makes a lot of sense actually, because I feel like my view is kind of gamers – the core gamers will continue to kind of push for the latest and greatest tech. And that’s driving a shift to PC. But the cloud I think is going to make so much sense that eventually no offense you may not be selling Xbox’s 10 years from now.
Tim Stuart, Chief Financial Officer, Xbox
Well, that’s an interesting – as I think about there’s a lot of business model conversation we can think about relative to customer acquisition costs, it’s no surprise today. We lose money on every console we sell. And as I think about rolling out the cloud, I don’t want to trade one cac for another cac, but if you’re in a world where a customer subscribes the Game Pass, plays our game, buys PSM and personalization on top of those games and they never had to buy a console to do that. And for a lot of those scenarios, you’re actually better off economic – we’re actually better off economically. I actually love that scenario too.
Now that being said for now, and for the foreseeable future, if you played the best game experience, having dedicated compute in your living room or house or whatever, right, where you go, the Xbox Series X, the world’s most powerful console, you want to play it at 120 frames a second in 4k, the cloud’s not delivering that in the next could of years. So I love the opportunity for us to have those options where if you want the best you got it. But I think four or five years from now, there’s very much scenarios that say, I don’t even have a console sitting next to my TV, I just play. And I think that’s going to be a world that we see.
Andrew Uerkwitz, Analyst, Jefferies LLC
I’m going to go back to M&A thing only because I’ve gotten about a dozen emails and people just keep pounding me to ask the question. You have made some large-scale M&A. What’s the M&A environment look like out there. Multiples of some of the big – some of the big guys are very low. On the other hand, your pipeline of content is tremendous. How are you thinking about your pipeline? How you think about the M&A environment? Just any updates there from your traditional answer.
Tim Stuart, Chief Financial Officer, Xbox
Yeah. I’d say a couple of things. Number one is, I’ll go back to the – we have to continue to grow, which means we have to continue to grow in more content. Now, I don’t see any – I’d don’t say, they’re not directly related. We can grow without making big moves. But again, back to that goal of, we want to be a truly a global scale player for Microsoft. The growth plan requires a content pipeline that is bigger than us today. That can be organic or inorganic depending on what the best plan is. When I look out in the market, valuations are high right now, too. You can say that for almost any industry. So I’m not making any kind of claim on gaming one way or the other.
Andrew Uerkwitz, Analyst, Jefferies LLC
Yeah. How about through Ubisoft then?
Tim Stuart, Chief Financial Officer, Xbox
I’m not making any specific.
Andrew Uerkwitz, Analyst, Jefferies LLC
Yeah, I’m just making a joke. I’m making a joke.
Tim Stuart, Chief Financial Officer, Xbox
Like I will say, and this isn’t any one specific company to, as Microsoft, we have assets in place to run – publishing and run the development networks in our platform. For some of these bigger companies, you may not need a lot of the infrastructure that comes with a big company like that, publishing arms, big overhead business or whatever it is. Nothing that’s not – and I’m not pointing one way or the other and saying, what we’ve traditionally focused on is great teams that have the ability to have great new IP that are run by great leaders and visionaries. That’s kind of our goal.
And if you look at ZeniMax being there, like you’ve got Todd Howard’s of the world that does. If you look at Ninja Theory, great leaders there, if look at Obsidian and you look at inXile, these are great leaders that have the ability to create great games. And that’s the kind of first and foremost function of those – kind of publishers and developers. It’s the ability to create great games. Now, that’s not saying we won’t do something big because you can take big swings at the plate and make some pretty big changes, pretty good sort of opportunities.
Andrew Uerkwitz, Analyst, Jefferies LLC
Yeah. No, it’s funny. I’ve actually been pleasantly surprised about how many of the major game directors and writers and whatnot at ZeniMax have not left. They seem to be extremely happy.
Tim Stuart, Chief Financial Officer, Xbox
Right. And I’ll make a point on that one too is having something like Game Pass gives the opportunity for a company like Obsidian with Grounded, or think like Psychonauts 2 a game like that, like these games now much, like I’ll say like Tiger King or something on Netflix, or even Squid Game, Squid Game like $12 million to create it and 200 million people watch it. Like having something like Game Pass allows us to create – to take bets on these “smaller, smaller players”, and have their hits actually come to see the light of day in a much, much bigger way than what had been otherwise. So we look at two way, you don’t need to go make a huge splash with a big game. You can find those diamonds in the rough from great creators and Game Pass and that subscription service allows them to reach new audiences that they never would have seen before. And that’s kind of that magic of finding those great creators as well through acquisition or otherwise.
Andrew Uerkwitz, Analyst, Jefferies LLC
Yeah, no, it’s interesting. Because our thesis on Netflix is partly that is that they don’t need to buy something big because they have such a large audience. Then you find really great creators, their content won’t get lost in the sea that is Steam right or not, and it will be front and center. And my guess is at Xbox or on Game Pass, that’s something can very similar happen as well.
Tim Stuart, Chief Financial Officer, Xbox
That’s right. It allows again, it’s like, let’s say a smaller team at ZeniMax within Bethesda they’ve got a great game they’re working on. That’s not massive blockbuster kind of thing, but you can roll it out into Game Pass from the creators of X, Y, Z. And you can make – you can have hits out of what is smaller teams.
Andrew Uerkwitz, Analyst, Jefferies LLC
That’s right. And you’re putting it front and center people see it. They’ll try it and play it. Yeah, no, I think it makes less sense to me. I guess, the last thing, I just want to wrap up on is that as you start to think about the cycle that we’re in do you – I guess, as far as your internal targets for Game Pass game sales have you had to make any sort of adjustments because of COVID putting delaying things or boxes not getting shipped on time. And is that – has that changed any of your internal planning processes? Just kind of talk to me how you’ve been managing kind of through COVID.
Tim Stuart, Chief Financial Officer, Xbox
I think a couple of things that are really front and center. I think the console generation as a result is going to be a little flatter and longer than what we’ve seen in the past. I will say you can make up a number here, but we could’ve sold – pick a number, 5 million more units between launch and now if the supply was there, because for sure I know the demand is there. And so you can say, you’re not going to get those big kind of initial console spikes that we would have seen in the past, early in a generation. So I think it’s going to be flattered, but the demand won’t go away and they’ll be longer. COVID has created this sort of secondary demand for gaming, which is now more people are playing more than it, what we see in our data.
And being back in school and otherwise more gamers have been created over the last couple of years than probably we’ve seen ever in the history of gaming. And those gamers are sticky. They’re now staying, they’re playing Minecraft for the first time, enjoying it, sticking around, and they’re moving over to Halo, assuming you’re of age and you can do your thing. But that’s kind of the gamers have come in that are new we’re seeing that and now they’re finding through something like Game Pass, tons of great games through our recommendation engines or what their friends are playing that they can now play.
So I think the two things – two points that are the console generation curve and just overall gamer population is growing, which is going to be great for the industry over the next decade. And my last point is a risk to that is we do see the ability for game creators and studios to build games is harder. They’re not in the office together. I truly think that game creators need to be in a room, in an office, in a group setting to create and ideate and create awesome new things. And you are seeing – that’s not just from us, but you’re seeing game delays in the industry.
Andrew Uerkwitz, Analyst, Jefferies LLC
Yes, everybody.
Tim Stuart, Chief Financial Officer, Xbox
Everybody, so I think – and I’m not speculating here one way or the other, but the old days of that – remember the TV writers strike, where you kind of had sort of TV content that was delayed for awhile, you could start to see a little bit of content delays happening. I’m not making any announcements relative to our games or not, we’ve got our dates we feel good about. But I think as an industry as a whole, we’re going to have to work through what it means to be in new hybrid office like environments or what it means to be back in the office going forward.
Andrew Uerkwitz, Analyst, Jefferies LLC
Well, I mean, you got to feel pretty good about your slate, Age’s IV, Forza and then Halo coming out this holiday season.
Tim Stuart, Chief Financial Officer, Xbox
Yeah. I love this quarter for us not about financial thing, but just it’s going to is a great quarter in terms of a one, two, three punch for Game Pass subscribers. And if you’re not in Game Pass, it’s a great way to play. And you’ve got a great slate of ZeniMax and Bethesda titles coming right around the corner, and then you’ve got it – then we sort of recirculate all the great stuff from Obsidian and InXile, I just think it’s a great time in gaming and Microsoft, like I said, is uniquely differentiated in the space right now.
Andrew Uerkwitz, Analyst, Jefferies LLC
Yes. The only thing I wish is whatever Todd Howard needs to get Starfield out next year, give that man, whatever he needs, I’m dying to play what he builds next.
Tim Stuart, Chief Financial Officer, Xbox
I did a good conversation with Todd yesterday on Starfield awesomeness. So I’m excited like you are on that one.
Andrew Uerkwitz, Analyst, Jefferies LLC
Yeah. That one just looks pretty good amazing. Tim, as always it’s a pleasure. I look forward to talking to you next quarter. Anybody has any more questions shoot them over to me. I will send them to Microsoft. But again, Tim thanks again. Appreciate it.
Tim Stuart, Chief Financial Officer, Xbox
It’s great Andrew. I always appreciate talking with you and the team here. So I look forward to coming back and like I said, hopefully we can do this in-person.
Andrew Uerkwitz, Analyst, Jefferies LLC
The in-person, one of these days in-person.
Tim Stuart, Chief Financial Officer, Xbox
Thanks a lot.
Andrew Uerkwitz, Analyst, Jefferies LLC
All right. I appreciate. Thanks Tim. See you.
Upcoming Events
Bank of America Global Technology Conference