It's easy to overlook now, but Microsoft's Xbox is one of the most unlikely success stories in the history of the video game industry.
The home console graveyard left in the wake of Nintendo and Sony's rise to dominance in the 1990s was filled to the brim with bright and promising products, from Sega's trio of Genesis, Saturn and Dreamcast consoles to SNK's Neo Geo to the Atari Jaguar. None survived past 2001. Yet the Xbox stands tall today as one of the three pillars of the console business and now a cornerstone of Microsoft's multi-platform gaming strategy bridging consoles with PCs and now the cloud.
Today marks the original Xbox console's 20th anniversary, two decades after the release of the infamously ugly black box, its unergonomic "Duke" controller and the first entry in Bungie's iconic Halo series. That Microsoft pulled it off, and weathered so many storms along the way, is a stunning feat of technical acumen, savvy business bets and plenty of good fortune.
The Xbox was a pioneering console everyone thought would fail. When Microsoft first began entertaining the idea of a video game console in the late '90s, it had little experience in developing consumer hardware outside PC peripherals.
- After a fateful meeting between Microsoft CEO Bill Gates and Sony CEO Nobuyuki Idei, in which Idei rebuffed Gates' offer to use Microsoft tools for the PlayStation 2, Gates believed the video game industry was becoming a threat to the PC market. So various internal teams inside the company, began pitching Gates on a play for the living room, according to Bloomberg's oral history on the creation of the Xbox, despite near-universal skepticism that a U.S. business could break Japan's grip on the market.
- The first Xbox was the brainchild of Kevin Bachus, Seamus Blackley and various others affiliated with the company's DirectX platform. The group, which beat out competing teams with its Windows-centric vision, conceived of a home console that would use PC components and software like a hard drive disc and an Ethernet port, accoridng to VentureBeat's two-part series on the Xbox origin story, though an Xbox running Windows never got off the ground.
- Though Microsoft priced its first Xbox at $299, the device cost about $425 to manufacture. The differential would ultimately lead to a massive $4 billion loss on the original Xbox, but Microsoft had established a foothold in the console business.
- The saving grace of the original Xbox was Halo, a revolutionary first-person shooter from then Chicago-based studio Bungie. Microsoft product planner Jon Kimmich scouted the developer as a potential acquisition target in 2000, and Halo ultimately premiered alongside the Xbox a year later as an exclusive launch game. The series has since sold 81 million units to date.
The golden age of Xbox was still a rollercoaster. Microsoft launched the Xbox 360 in 2005, both $200 cheaper than Sony's eventual PlayStation 3 and a whole year earlier. It proved a colossal advantage, as the Xbox 360 moved tens of millions of units and became synonymous with the new era of online multiplayer for consoles.
- While many PC gamers had been enjoying online multiplayer since the earliest days of gaming, console gamers were largely stuck playing couch co-op and split-screen multiplayer. The Xbox 360 changed that with Xbox Live, just in time for mega-hits like Activision's Call of Duty, Epic's Gears of War and Halo 3. It was also an early haven for indie games, which for the first time you could download directly onto the console's hard drive.
- Yet Microsoft's eagerness to best Sony on launch timing and price almost completely derailed the entire Xbox business with the onset of the "Red Ring of Death," or RROD, a near-fatal hardware flaw in the design of the Xbox 360's chipset that began bricking consoles. The estimated number of consoles affected was anywhere from 23% to as high as 54%, according to Edge Magazine's in-depth report on the Red Ring of Death.
- Microsoft put together a pricey recall effort to protect the Xbox brand and ensure consumers were made whole, while also developing a new and improved chipset to avoid the RROD.
- "I presented to [then Microsoft CEO] Steve Ballmer: 'This is going to cost us $1.15 [billion] to fix this — to protect the brand, to protect our reputation, to keep this business going,'' game exec Peter Moore, then the head of Xbox, told Edge. Ballmer approved it, and the recall initiative helped consumers largely overlook the disaster.
Microsoft's Xbox 360 follow-up was nothing short of a disaster. In 2013, Microsoft and Sony were neck and neck in the console business, with Nintendo a distant and forgettable third after the Wii U flopped. But Microsoft took a bold gamble with the Xbox One by positioning it as an all-in-one entertainment hub.
- The runup to the console's launch was an absolute mess. Xbox chief Don Mattrick, who had helped shepherd the Xbox 360 to more than 75 million units sold, fumbled the messaging around the Xbox One, creating a public relations nightmare when consumers believed Microsoft was implementing an online check to kill the used game market.
- The always-online debacle, coupled with its TV focus and the bundling of the Kinect motion sensor, soured the Xbox One launch, despite Microsoft's eventual reversal at E3 2013.
- The company's sales never caught up to the PlayStation 4, which ended up dominating the decade with a slew of high-profile exclusive games and nearly 120 million units sold. That's estimated to be more than double what the Xbox One sold, though Microsoft never disclosed numbers.
Microsoft executed a stunning turnaround for Xbox. But the plan took much of the last decade, and only showed signs of progress a few years after Microsoft promoted Phil Spencer in 2014 to lead the division. Spencer began a strategic effort to completely overhaul the platform by bringing it closer to the Windows ecosystem, establishing the Xbox Play Anywhere initiative for cross-platform play and purchasing, and eventually overseeing the creation of Xbox Game Pass in 2017.
- Though Microsoft tried to compete with the PS4 by introducing more powerful mid-generation hardware, the company knew it needed more. So Spencer went on a buying spree starting in 2018 to flesh out the company's exclusive games lineup.
- The approach culminated just months before the launch of the Xbox Series X/S with the purchase of Bethesda parent company ZeniMax for $7.5 billion, giving Microsoft access to an enormous portfolio of lucrative game series like Elder Scrolls and Fallout.
- Microsoft now operates nearly two dozen game publishing and developing subsidiaries under the Xbox umbrella. Meanwhile, Xbox Game Pass has grown to tens of millions of subscribers as of 2021.
The future of Xbox looks radically different from the platform's past two decades. While Nintendo and Sony have kept their focus on exclusive console games and closely guarded intellectual property, Microsoft has embarked on a bold and ambitious multi-platform, subscription-driven approach that's shaken up the entire game business.
The best example of Microsoft's recent success is this month's launch of Forza Horizon 5, which Spencer said was the strongest Xbox Game Studios launch in history with more than 4.5 million players in less than a week. It helps, of course, that the game is available for Xbox Game Pass subscribers on the Xbox Series X/S, older Xbox One consoles, mobile phones via the cloud and Windows PCs.
The company's biggest hits from here on out are likely to look a lot like the launch of Forza Horizon 5, where the game's success is measured not by how many copies it sells but how many people play it regardless of what screen they're using. Two decades ago, Microsoft wanted in on the console business and was willing to spend billions for a seat at the table with Nintendo and Sony. Now, the Xbox platform is changing the game, and it could take years for the industry to catch up.