00:00Pretty much across the industry of technology, you see companies trying to rethink where they're spending money.
00:07A lot of this is fueled because they're spending so much on AI and building out data centers and infrastructures
00:13that they're taking a closer look across all divisions.
00:17So today, Xbox is the one that we see really kind of getting that hammer.
00:21They laid out a plan to cut about 20 percent of staff over the next year and broader at Microsoft.
00:28It's a plan to cut about 6,400 people, again, just kind of trimming both an Xbox and sales, trying
00:35to reorient for what they say will help, you know, them grow in this next era.
00:40Brody, what is the rationale for Microsoft keeping Xbox?
00:44The CEO of the Xbox division wrote in a note to staff this morning, and this is based on your
00:50reporting, that Xbox is operating at margins 3 to 10 times lower than comparable businesses.
00:56I mean, financially, it's not keeping up.
00:57So why does Microsoft want to keep it?
01:00It's a good question.
01:01Microsoft really has traditionally struggled with consumer businesses.
01:06You know, every time they've kind of tried to spin up, say, like a smartphone or things of this nature
01:11over history, it hasn't always gone super well.
01:14Xbox, they've been traditionally committed to because it was this unique blend of hardware and software, and they found a
01:20niche in it.
01:21And, yeah, today is them trying to reorient that business into something that they can keep and grow for the
01:27long term.
01:28So you see them spinning off a lot of studios, talking about how owning content makers maybe isn't a business
01:35they want to be in, but owning the platform is something they're still interested in doing.
01:41How much is Xbox?
01:43Do we know of their total revenue?
01:45Like, how material is it for the financials of this company?
01:49It's a decent chunk of revenue, right?
01:51I mean, the issue is the profit.
01:53You know, a lot of people buy video games.
01:55A lot of people buy consoles.
01:56But, you know, Microsoft has really struggled to make it super profitable.
02:00I think a lot of people forget about the Activision acquisition a couple of years ago.
02:05I mean, I think I was thinking like $69 billion.
02:08It was one of the biggest tech acquisitions of all time.
02:10And yet, a couple of years later, we find that the margins haven't kept up.
02:15The growth isn't quite what they hoped it would be.
02:18Of course, we have the component crunch, right?
02:20A lot of things like chips and memory have increased in price, which kind of accelerate all of these issues.
02:27So, it is a material business for Microsoft.
02:29It's not something they're ready to throw away, but it's something that they feel they need to really kind of
02:34take a closer look at.
02:36I know you don't cover Sony per se, but how do Xbox's fortunes compare with, say, the Sony PlayStation?
02:43A lot of console makers are struggling right now because of that memory crunch.
02:48Because AI has essentially messed with the supply chains for a lot of different components that go into computers and
02:55infrastructures.
02:56And so, if you're a console maker that's already running at pretty slim margins, then all of a sudden your
03:02memory chips double in price.
03:03That's going to make everything tough.
03:06And more broadly, content makers are needing to compete against a wider variety of content that's able to be created
03:14with AI.
03:15I mean, as it relates to AAA games, they're not being created with AI.
03:19But there's just so many more places for eyeballs to be focused on these days that if you're selling content,
03:25it's a more competitive market.
03:28Microsoft stocks down 20% year-to-date.
03:31It's rare that you see that kind of performance out of Microsoft.
03:35What's the feeling within the offices that they're Redmond, Washington?
03:38I mean, do they talk about their stock?
03:42Do they ignore their stock?
03:44How do they kind of just talk about it, think about it?
03:47When you ask an executive, they say, oh, I don't care about the stock price.
03:51I focus on executing.
03:52You ask an employee, and they say, what the heck is going on with our stock price?
03:57And that's consistent across all companies.
04:00The big thing for Microsoft, and you can see this with other hyperscales, you can see it with Oracle very
04:04well, is that on one hand, Wall Street is worried about all this spending.
04:08Is it going to pay off all the data centers?
04:10On the other end, there are traditional software businesses that have really created the cash cow that is Microsoft.
04:17Does that last in the age of AI?
04:19So they kind of have these two concurrent fears, which are leading to, yeah, some weakness for a stock that
04:24has been just a pretty consistent, safe harbor and so much choppiness over the market of recent years.
04:30Brody, I know you cover Microsoft, that company is going to be reporting its quarterly results at the end of
04:36this month.
04:37Will this Xbox closure, do you think, result in some surprising financials on earnings day?
04:43What I would expect to hear them talk about is ongoing focus on margins, which, you know, is corporate speak
04:50for we're planning to fire 20% of people at Xbox.
04:54You know, I think we'll hear them talk about how, look, we're spending a ton of money on our data
05:00centers, on our chips, our capexes in the past hundreds of billions of dollars a year.
05:05But we're doing what we can to trim costs everywhere, and we're going to make sure that we're really getting
05:10an ROI out of every dollar.
05:12I think that will be the high-level message, and if you poke underneath it, you see phenomenon like the
05:17cost cuts today.
Comments