Microsoft (NASDAQ:MSFT) is asking its Xbox gaming division to deliver profit margins “well above the industry average,” according to a report by Bloomberg on Thursday.
The report, citing sources, said that over the past two years, the company executives have set an across-the-board goal of 30% “accountability margins,” a term the software and tech giant uses in lieu of profit margins.
The gaming division, which includes dozens of studios, responded by canceling products, raising prices, and slashing thousands of jobs, sources told Bloomberg on the condition of anonymity.
S&P Global Market Intelligence analyst Neil Barbour told Bloomberg that the new goal is at the outer range of what a gaming studio can typically reach in a boom year.
S&P Global has estimated that the average profit margin in the video game industry has ranged between 17% and 22% in recent years.
“A 30% or better margin is usually reserved for a publisher that is really nailing it,” Barbour told Bloomberg.
Sources told Bloomberg that moving forward, the company may prioritize games that are either cheap to make or deemed more likely to generate significant revenue windfalls over riskier bets, and Xbox’s floundering hardware division may face “a significant rethinking.”
The recent shopping spree to bolster its gaming division, notably the $7.5B deal for game publisher ZeniMax and the $69B purchase of Activision Blizzard, led to increased scrutiny on Xbox from Microsoft executives, the report said, citing sources.
Xbox’s current strategy, which requires all games to appear on the Game Pass subscription service on the same day of their arrival in stores, has also hurt sales in the division, sources told Bloomberg. The strategy may make it even more difficult for the studios to achieve a 30% profit margin, the report said.