Xbox Turns Down Netflix $500M Offer
darkhorizons.com
darkhorizons.com
Do you meam potential upcomimg game that may be vaporware for a decade or two?
so they switch course midway to focus at AI
It's like the entire company is only satisfied with being #1.
The whole thing is very confused and lacks consistency. The latest rumours are they are going to break up its Game Pass subscription offering so there are different subscriptions for multiplayer, cloud, games, etc. Isn't that the opposite of an effective subscription strategy?
Game revenues follow a power law type distribution so they're hurting indies and leaving money on the table.
Valve targeted the big releases / industry players specifically because the context in which Valve added that was where all the big players were making their own store fronts: EA Original/App Ubisoft launcher, Blizzard Battle.net. And Epic Game Store, where Ubisoft (or another big player I forget) was talking about abandoning their launcher for Epic which has a lower revenue cut like ~12%. So it seemed Valve made that change to shore up keeping the big industry players releasing on Steam.
Steam just sits back and takes money, for the most part. The hardware/software/advertising spend is probably a drop in the bucket compared to MS.
I think I understand why Microsoft costs are higher than others due to their a spending spree, so the break even is much higher.
You don't seem to understand the difference between the margins on a sale and the averaged margins once the studio development costs are included.
If the store takes 30% you are still left with 70% gross margins but if you have development costs, you maybe only have enough sales to break even or just barely be profitable. A 30% margin on the entire studio means the studio must produce guaranteed successes consistently.
It might also not be obvious but if Microsoft imposed 30% margins, those are a floor, whereas a fee reduces the ceiling. They are not the same even if we assume the target is met.
Only Xbox, the games console, is having a bad time, the publishing part is doing great with movie licenses, and all the studios that belong to Microsoft, regardless where they sell their games.
The next failure was Xbox Live. The video game market is a hit-based market with big tent-pole franchises doing large launches. For a modern example, look at the hype around GTA6. Launches sold games and exclusives sold consoles. Microsoft put huge game launches on Xbox Live for their relatively low monthly cost and lost millions on those launches.
They also bought a bunch of game studios which is a terrible strategy for a console maker. Meta made the same mistake with the Quest.
It's was never the lack of commitment to a strategy -- it was just having the wrong strategy to begin with.
In the XBox One gen they bet big on an ill-advised (but then-trendy) strategy to 'own the living room', devoting hardware CoGS to add TV / DVR features. It was a great strategy - for MSFT - but not so much for gamers. By 2018-19 it was clear they'd lost the hardware platform battle. The only bright spot was Game Pass which was working pretty well thanks to PC / XBox + web synergy. So, they went for a BIG strategic bet. An all-or-nothing, high-risk, high-reward gamble to move 'up the stack' from hardware by turning Game Pass into the "Netflix of Games". Forever being Pepsi to Sony's Coke wouldn't matter because content was where all the margin and sweet recurring revenue was anyway.
So MSFT spent over $100B acquiring game studios and... it didn't work. While it seemed like a reasonable bet in 2018-19, it's now clear no one can be the Netflix of games. The unit economics don't work because people watch a lot more new movies and shows in a year than they buy new games (the top ten console games capture over half the revenue). MSFT bet that a large number of gamers would keep paying >$20 - $30 / mo but after the COVID shutdowns ended, ASP growth stalled below $20 and the higher the ASP got, the more the churn went vertical. Oops!
Without that context, nothing makes much sense. But when you understand they're now dealing with the aftermath of that all-or-nothing gamble, it does. XBox isn't going away but MSFT is also done "investing big to win" in gaming. Now Sharma's job is to recoup as much of that $100B as possible by 1) Selling the shit out of all the evergreen hits they own like CoD, and 2) Milking their large library of non-hit titles to harvest as much revenue as she can while spending as little as possible.
The other subtext here is that if you manage to build a dominant multi-platform subscription business with a tens of millions of gamers paying $25-$30/mo and low churn. That's a high-margin business with flywheel effects that smell like Office365 and throw off enough cash to easily service that $100B in debt. But without that high, sticky ARR, gaming is a much lower margin business than any of MSFT's stable of winners like Azure. It's not that XBox is a bad business, it's that it's competing against much higher margin business units for each incremental dollar of investment.
For example, the deal Sony Pictures made which gave Netflix all global film and sequel rights to KPop Demon Hunters with zero back-end participation on the billions of dollars Netflix is now certain to earn from KPop is widely considered by experts the single worst streaming deal ever made. And that was just one unproven animated kids musical. XBox has proven mega-IP like Minecraft, Call of Duty, Warcraft, Halo, Diablo and Elder Scrolls as well as lots of unproven properties - any one of which might become the next KPop Demon Hunters.
Oh dear, someone forgot to read the article.
Well, lets take just one of those examples, Minecraft.
Cost apparently $150mil to make, and so far, has earned around $960mil. So if we use the usual doubling of the cost to get to the real cost with marketing and everything, it cost ~$300mil, so that is about $660mil profit.
Now of course that gets split, Xbox wouldn't get 100% of that, but still, even if it got 50%, thats still most of the way to the $500mil they turned down, on just ONE film, and only factoring in the theatrical release profit, not including any money it would have made on merch, or streaming, or anything else.
Good analysis but a 50/50 split after costs would be unusually high. That level of back-end usually requires investing significant capital in a film. It's a high-risk business like VC where most releases lose money which is (hopefully) offset by a few outsized hits.
The shape of a pure IP license deal is typically more like ~10% share after costs. But that's generally for a property like Fallout with at least some known value. Beyond their hits, MSFT has a back catalog of game titles with unknown cross-media potential large enough to make the likelihood of a break-out like KPop fairly high. I suspect the deal stalled at $500M offer / $800M ask over theatrical back-end with a minimum production guarantee.
But this isn't a normal IP license deal nor just a streaming rights or even a global distribution deal, it's an exclusive IP library production deal which has different dynamics. MSFT spent over $100B acquiring game studios in an ill-advised strategy to turn Game Pass into the "Netflix of Games". While that seemed like a reasonable high-risk, high-reward bet in 2018-19, it's now clear no one can be the Netflix of games. The unit economics don't work because people watch a lot more movies and shows in a year than they buy games. MSFT bet $100B that a large number of gamers would pay >$20/mo but after the COVID shutdowns ended, ASP growth stalled below $20 and the higher the ASP got, the more the churn went vertical. Oops.
Now Sharma's job is to recoup as much of that $100B as possible by 1) Selling the shit out of all the evergreen hits they own like CoD, and 2) Milking that huge library of non-hit titles to harvest as much revenue as she can while spending as little as possible. Netflix sees this and thinks "Let's toss in a low-ball offer and see how hungry they are for quick cash." But Sharma has already modeled out a revenue projection for her evergreen titles and knows what they'll make over the next 5-6 years (to within +/- ~10%). CoD gonna keep CoD-ing, she just needs to turn the crank competently and not fuck it up. Her only upside here is to find a way to harvest more than the 'expected value' from the pool of unknown-value IPs, which are essentially lotto tickets. In terms of cross-media value, most of the unknowns will be losers and the tricky part is it costs money to audience test each IP to get an educated guess on if it has cross-media potential and then a lot more money to produce any that look good.
My guess is the deal fell apart over minimum production guarantees (MPG). Netflix says "We'll give you $500M and cover all the development, production and distribution costs but we also keep ALL the upside." Sharma says "Do I look as dumb as Sony Pictures? :-) You'd be tying up exclusive rights to all my IP and you can control your downside costs by simply not testing or producing any but the safest-bets. If any of those become the next KPop, I'd like a little back-end upside and I want some guarantee you're going test at least half the back catalog and actually produce a couple of the unknowns so I at least have a chance one becomes the next KPop." Netflix does the math and says "You want us to guarantee spending ~$20M in development testing plus ~$100M in production on unknowns on top of $500M for rights? Hmmm, what's the price to just test, develop and produce as much or little as we want and still own all the upside?" MSFT comes back with "If promising to spend $620M feels 'too rich' then a full buyout to tie up our library, develop all or none, and keep all the upside is $800M. Alternatively, let's explore actually partnering. If you want a lower front-end price, cut us in on some back-end upside or put some more skin in the game with MPG. Or lets split the known and unknown IPs into two pools with different back-end/MPGs, or maybe a sliding scale, like you pay no back-end on anything until after you've earned 3X its prod cost?" Netflix: "Yeah, nah. $500M, take it or leave it."
In reality, straight buyouts are very rare even on single-title, distribution-only deals. They were probably already deep in negotiating pool splits, back-end rates and sliding MPG scales with Netflix hoping MSFT would make a Sony-sized IP mistake and MSFT trying not to become the industry's next cautionary tale. Even the infamous Sony/Netflix KPop deal was something like $125M to buy a 'first-look' right on just a sub-pool of unknown IPs in development with a buyout option on any that they liked for exclusive worldwide distribution (theatrical & streaming) with no back-end - and not just on the first release but all derivatives, forever. IIRC, exercising the distribution buyout on a movie required an additional upfront payment based on a percentage of the production cost Sony had spent, which was around $20M for KPop. In the midst of COVID shutdowns, Sony thought they were turning long-shot option rights on a pool of unknown, low-budget probable 'dogs' into a little guaranteed cash. I mean a niche animated musical targeted at teen girls in Asian markets? Some (now-former) junior Sony exec is like, "Sure, Netflix. If you can sell that to your boss and get a check here by the end of the quarter, we'll let you own ALL that upside (muffled giggling)." For over a century now, the lesson to never give up ALL the back-end keeps being re-learned in Hollywood.
I think Sony cutting that deal with NetFlix was a special brand of dumb because Netflix has compiled more and better viewing habit data for longer than anyone ever. Giving NetFlix a 'first look' deal that lets them test your pre-release movies in their secret 'Magic Analytics Black Box' is a great idea, IF you keep some back-end on the first release AND all the sequels and ancillary. You share a little in Netflix's upside on a mega-hit but, most important, NetFlix activating their option is an invaluable signal that lets you double down early on any property the NetFlix 'Magic Box' thinks is a winner. So... all we really know here is MSFT is dumb enough to make a huge $100B strategic mistake but that's STILL not quite as dumb as Sony Pictures. :-)
My eyes are about to roll out of my head. Stale intellectual property can make unexpectedly good money for a little while, but this ain't exactly Mickey Mouse. Even Mickey Mouse is out of steam by now.
Microsoft is rejecting the deal simply because they can afford the loss even if they let everything under "Xbox" rot. They will only accept someone willing to overpay.
Hasn't Mickey Mouse been out of steam since the 50s? He is a normal guy and you need to base any short about someone else to make it interesting. Like the squirrels or Donald Duck...
This may yet come to pass.
The architectural differences that made a console more compelling than a standalone PC are largely gone. (Nintendo is a bit of an exception here, but they were always playing a different market than Sony and MS anyway)
This means it's harder and harder to say "here's a unique experience you only get on Xbox" (or Playstation for that matter)
The price advantage is going away fast, especially with talk that next-gen consoles will top USD 1000.
All they have left is their prestige first-party products, which they don't seem to really know how to use effectively. Some of them have solid cultural penetration, and could spawn broader media franchises with the right handling.
Part of the sales pitch is you need more than just a torrent client to pirate.
Now in the world of AI I think this moat is evaporating. Hypervisor exploits are dropping like rain and determined individuals can vibe code a reasonably performant emulator in a couple of weeks.
In that world the only reasonable edge you have left is high prestige exclusives and merchandising/physical sales.
Nintendo has this cornered, one of the few companies who can pull off a rabid fan base buying a console they already own because this time there’s a triforce on it.
Meanwhile Sony and Microsoft are diluting their own IP and going full digital. Writing is on the wall if you ask me.
They’re gaming appliances and that will still be a huge draw.
PS: Sony gave up PC publishing, so that argument no longer holds. It was a dumb move as you said.
> This means it's harder and harder to say "here's a unique experience you only get on Xbox" (or Playstation for that matter)
That’s also been the case for a very long time. That’s why they sign deals for exclusives.
On the other hand it seems to work for Nintendo which keeps their consoles intentionally underpowered and don’t try to compete with the AAA game expectations with the majority of their titles.
Look at all the amazing stuff in the indie space. Let your developers go wild and make neat games that don’t cost $200 billion each.
You could have so many test exclusives like the more fun and experimental stuff we had in the PS1/2 era.
You don’t have to give up the big games. Just don’t focus entirely on them.
Same problem movie studios have. They chase the “sure things” and just pump more money in to be “more sure”. It’s all more fragile than ever.
You're out of touch.
Step outside an echo chamber and you'll see that in most countries, including East Asia and the Middle East, if you take a walk around any big mall, you don't see kids pestering their parents to buy them a PC. They ask for a PlayStation or an Xbox or a "Nintendo" (yep that's what people still call the Switch)
In conbinis, there are Xbox and PlayStation gift cards hanging from the shelves, in the local currency.
There are accessories for PS/Xbox/Switch everywhere, more than PC gaming accessories.
And it's not because the PC stuff gets sold out while the consy stuff gathers cobwebs: If that was the case the consoles would stop getting restocked after a few months, but they keep stocking newer stuff. Meanwhile I have to hunt around and specifically request for Razer or Mad Catz or other PC-specific brands.
> The architectural differences that made a console more compelling than a standalone PC are largely gone.
If you go hang out at someone's home, nobody says "Let's go to my bedroom desk and play something on the PC", no they crash on the couch and turn on the TV and fire up FIFA or some other normie shit.
This is still the case in the U.S. for the most part. The point is moreso that barrier to entry is lowering. The SteamDeck is a PC/console and a good example of a possible trend in that direction.
Hell I saw PlayStations in barbershops in Vietnam! There's no way you'd see a PC in those environments.
The Steam Deck certainly reduces the gap, but I've yet to see it penetrate "normie" social circles, and it's still rare in random gaming shops compared to console stuff. Have Valve released their OS for other handheld manufacturers to use? That's probably the only way to end Windows' dominance and improve the coolness factor of "PC" gaming.
Sure, there are advantages to using a keyboard+mouse in a FPS game but it’s a much different gaming experience than a handheld controller.
I will never forgive Microsoft for killing SideWinder.
But I don't get why HN is randomly shadowbanning half my comments and not the other half! This one wasn't shadowbanned.
This one came pre-flagged.
Since you mention conbinis, I'm guessing you're in Japan. Having just been there, game software is receding from the smaller hobby stores, and then in the tech stores like Bic Camera, the PC gaming stuff is one floor down.
I use that word for any similar convenience stores in all East Asian countries now ^^
No, the main driver is still there. People do not want to build and maintain PCs. Your 14-year-old nephew doesn't want to do it, either. People want to turn on a box and play a game. I am technical and I want absolutely nothing to do with maintaining a PC. I'll take the console experience every single time.
And you don't need to build a PC to have a PC.
Since the PS4/Xbox One, they’ve been similar enough in underlying architecture that engines like Unreal have been able to smooth over the differences enough to make multiplatform technically viable. It’s meant companies like Capcom with RE Engine have made a huge success out of selling across all platforms, including PC. That freedom for publishers is a problem for console manufacturers who have fewer 3rd party exclusives as a result.
With the notable exception of the original Xbox, which used mostly standard PC hardware [0] and ran mostly standard Windows [1].
[0]: https://en.wikipedia.org/wiki/Xbox_technical_specifications
[1]: https://en.wikipedia.org/wiki/Xbox_system_software#Original_...
The advantage of consoles are:
- No minimum/recomended config to check and insurance that a game or an accesorry bought for a console gen will work well for that console gen. In term of game compat this is something Steam tried to with the steam deck but has no way to enforce really and the biggest one imho. When you buy a brand new "budget" computer in the price range of a console you usually knownyou won't be able to play some of the upcoming AAA titles at least woth decent graphic quality.
- availability in retail stores
- ability to sell games in the second hand market but I don't think this is something that is here to stay with the disappearance of physical medias
This is why I've never gotten any of the more recent consoles (since the N64 or so)... many of my friends have them, and every time we try to turn them on to play a game they start updating and rebooting and updating... I can play games on my computer, which I have other incentives to keep up to date, so the maintenance time is amortized; just double click and it works.
My take is that almost nobody has a standalone PC anymore, especially kids. Kids these days all start with iPads, them maybe they move up to Macbooks once they get to high school or college. Other than the local LLM fanatics I see here on HN, I have no idea who's buying those PC towers anymore, they seem like fringe relics from the past century.
Consoles slowly started losing that plot after the launch of Xbox and GPU development mess of PS3(the PS3 CPU was supposed to be the world's first APU but Kutaragi dropped the ball big time) and now consoles are just a Nespresso experience, with just marginally cheaper hardware tied to proprietary full-priced game discs, which is not worth much.
OS argument is practically valid but... Frankly IMO that's more of a disadvantage of PCs coming from horrible near nonexistent engineering discipline of software engineering than an advantage of consoles.
I’m sure if they are forced to (legally or otherwise) they can find a solution, but it would be a thorny thing to split.
[0] https://www.theverge.com/games/962837/microsoft-xbox-spin-of...
But it is similar to Fallout in that it was able to break out of its universe. Andor is enjoyable even if one hates Star Wars; Fallout is enjoyable even if you dislike gaming.
Regardless, I think the cracks are showing in all entertainment industry. I don't understand why anyone has been buying an XBOX after the 360 given home computing accessibility only got better around the time that generation ended. The line between a console like an XBOX and PC was already extremely blurred back then, and it still doesn't make sense to me to buy a gaming device where your software is tied to a specific generation's hardware. I just wanted to say that since while I don't think this licensing would be a good deal for either party, I resent Microsoft's arrogance about how they think their place in this industry is permanent.
There are many valid reasons people still buy consoles. It's cheaper than a gaming PC, easier to use, has optimization for games, and consoles usually have many exclusives. I have both and I still prefer my PS5 over my PC.
"[Netflix] recently made an offer to exclusively license Xbox titles from Microsoft for film and TV adaptations: $500 million for seven years."
Source: https://puck.news/newsletter_content/what-im-hearing-the-pet... (full text shows in reading mode)
Unfortunately, the right hands potentially no longer exist. The current generation seems largely unable to produce good things, with few exceptions (notably Andor)
Babylon 5 demonstrated that you can keep absolutely everything else crappy (effects, costumes, heck acting and even cinematography), so long as you're good at conversations in rooms.
The Halo universe offers a lot to mine from, just like the Star Wars Universe did for Andor. It's just waiting for the chosen one writer to be allowed to do the job. Who's the J. Michael Straczynski or Tony Gilroy for the Halo universe?
In theory you can make any sci fi show about future humans and a couple other species going to war. Should be straightforward.
But getting the balance of that universe right in terms of little details is tricky: Halo has done the heavy lifting already.
Are they? I thought after the pro league failed it's transition to SC2 and the GSL ended that it mostly went to streaming platforms.
Same old story, right?
But getting the balance of technologies, motivations (e.g. jihad-dynamics), and nitty-gritty details (e.g. the splinter factions) right is the trick: it's much easier to do wrong than to do right.
(I even like some kids' shows too, like Tales of Arcadia and Miraculous Ladybug, just for having consistent tech/magic systems... also Daniel Spellbound)
I know of some much older shows with incredibly huge lore, like Star Trek and Stargate, and I do love reading about them, but I'm still struggling to get started with any of their shows/movies themselves, they feel a bit dry.
It wasn't anywhere near the (low) quality of Halo season 1. Did they continue to show Master Chief's face in season 2? Because that alone ruined it for me. And they didn't even get his appearance right!
For 12 years of rights.