A mandate from parent company Microsoft to hit a profit margin of 30 percent may be partly behind Xbox’s decision to lay off hundreds of workers and raise the price of hardware and its Game Pass subscription service in the last year.
That report comes from Bloomberg News, which obtained details of Microsoft’s financial strategy from individuals “familiar with the business.” In fall of 2023, chief financial officer Amy Hood reportedly set a company-wide goal of 30 percent “accountability margins.” According to Bloomberg, this is the term Microsoft uses instead of “profit margins.”
The profitability of each Microsoft division is not public data. According to court documents from 2023, Microsoft’s profit margin ran at 12 percent during the first nine months of fiscal year 2022.
A 12 percent margin isn’t unusual for the video game industry, but a 30 percent margin is generally seen at high-performing companies, according to Omdia principal analyst Liam Deane. Recently-released data from Omdia shows the game industry’s gross profit margins ranked at nine percent in 2022 (they rose to 14 percent in 2024).
Xbox reportedly chased a 30 percent profit margin through layoffs and price hikes
The reported target goal for Xbox paints the company’s numerous layoffs, studio shutdowns, game cancelations, and price hikes in a different light. Many of the company’s devastating cuts took place after fall of 2023, when Hood reportedly issued the company-wide mandate.
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In the following months, some studio closings and game cancelations appeared to be tied to financial performance, but others took place without ever letting developers see their work hit the light of day. These closings before more bone-chilling if you consider that Xbox will only be able to hit that financial goal with more cuts.
“A 30 percent profit margin is well above the industry average but by no means impossible,” Deane explained to Game Developer, noting that Nexon, NCSoft, and CD Projekt Red hit that mark in 2024. “However, profit accounting for individual divisions within a larger businesses is murky since it depends heavily on notional allocation of costs between the division and the rest of the company, so a notional 30% profit margin for Xbox should probably be thought of more as an internal accounting target. It would not necessarily be comparable to an independent company posting those numbers.”
If you’re wondering why Hood and Microsoft leadership would make such demands, it simply may be that they don’t see those margins as unusual for the rest of the company.
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“Most of the markets that Microsoft is in are more profitable than games so the games business is always going to look sort of disappointing from the point of view of the Microsoft C-suite,” Deane pointed out.
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 sibling organizations under Informa Tech.