There has been so much Microsoft news over the past week that I don’t really know where to begin. I could have written about all the Microsoft 365 and AI changes, but news of Xbox Ally pricing and the huge Game Pass price hike has really put Microsoft’s gaming strategy in the spotlight.  

Also this week: Microsoft is shifting around more employees, vibe working comes to Word and Excel, and Microsoft embraces Anthropic’s AI models.

When Microsoft first revealed that it would be giving day-one Game Pass releases to all of its own Xbox games back in 2018, it suddenly turned the subscription service into a must-have for many fans. It was lauded as “the best deal in gaming,” with memes about just how good a value Xbox Game Pass was. 

But after a massive price hike this week, the top Xbox Game Pass tier is now $29.99 per month, adding up to a steep $360 a year, which is more than the $299 debut price of the Xbox Series S. It comes at a time when Microsoft is also increasing console prices and trying to convince people to buy a $1,000 Xbox Ally X handheld.

So, why are we suddenly in an Xbox $360 era? Microsoft obviously didn’t explain it during its announcement, but I suspect some of the price hikes are related to its costly acquisition of Activision Blizzard.

The stunning 50 percent increase has left many Xbox fans questioning the value of Game Pass. Microsoft didn’t even soften the blow with a discounted annual option, and the more affordable plans aren’t appealing as they don’t come with the main perk: day-one games. Some loyal fans think they’re being milked dry as Microsoft moves from attract mode to extract mode for Game Pass. 

This year looked like it would be a great one for Xbox and Game Pass, but now everyone is turning against them. GameStop is mocking Xbox, and even Santa is pissed. It’s inevitable that such a price jump will result in mass cancellations, particularly as price hikes are the main reason people have given for unsubscribing from the service this year. Microsoft’s own account page for managing Game Pass has slowed to a halt this week, perhaps an early sign that a lot of people are trying to cancel their subscription.

And you can hardly blame them. Coupled with the price of an Xbox Series X increasing by $150 in just six months and Microsoft trying to convince everyone that a phone or a laptop is suddenly an Xbox, it’s a confusing and uncertain time for the platform.

Microsoft’s latest gaming challenges can be traced back to 2022. At the beginning of that year, the company announced a massive $68.7 billion deal to acquire Activision Blizzard, a move that has reshaped its gaming business. That same year, Microsoft also set an ambitious goal of reaching 100 million Game Pass subscribers by 2030, fueled by studio and content acquisitions and a plan to expand the Xbox playerbase far beyond the console.

But the division's fortunes started to slip later that year. Starfield and Redfall were delayed, in what Xbox chief Phil Spencer called a "disaster situation" for Game Pass. A year later, the service got its first price hike, and Xbox console prices rose outside the US, too.

When the Activision Blizzard deal finally closed in late 2023, even more pressure was placed on Xbox’s margins. Microsoft’s gaming business suddenly had to justify this giant acquisition through new growth, and the cost cutting and price hikes began. 

Sweeping layoffs hit first in early 2024, followed by studio closures. To boost Xbox revenues, Microsoft announced that it would start bringing some Xbox-exclusive games to PS5 and Nintendo Switch. It was part of a strategy shift to grow the company’s gaming business beyond Xbox hardware, but also a final admission that Microsoft had lost the console wars.

Naturally, Game Pass had to change, too. After months of turmoil, Microsoft hiked the price of Game Pass Ultimate last year and access to day-one console games was limited to its most expensive tier with the introduction of a new “standard” subscription. Even the $1 Game Pass trial went away.

Microsoft now finds itself this generation's loser, saddled by a hugely expensive acquisition, under duress from tariffs on its console hardware, and trying to find more ways to make money. A price increase to Xbox games had to be quickly reversed, and now it’s Game Pass Ultimate subscribers that will have to pay up instead.

Microsoft is also increasingly looking to PC or cloud for growth, but it’s bumping the price of PC Game Pass just as it gets ready to launch the Xbox Ally handhelds with Asus. The $1,000 pricing for the top Xbox Ally X is already a clear test of the appetite for pricey next-gen consoles, and I have a feeling that it won’t be long until there are further PC Game Pass changes. Microsoft didn’t mention the PC Game Pass price increase in its blog post this week, and it feels inevitable that it’ll eventually rug pull day-one games for PC players just like it did for console subscribers last year.

The other intriguing aspect of this price increase is that Microsoft has promised that Xbox-published games will arrive on the more affordable Xbox Game Pass Premium tier within a year. The big exception is Call of Duty titles, which won’t be available on Premium. I wouldn’t be surprised if Black Ops 7 preorder numbers are down this year, particularly with Battlefield 6 on the horizon. If they are, that will be putting further pressure on Game Pass, particularly because Microsoft had a long debate internally over the revenue impacts of putting Call of Duty on the service.

As Microsoft pushes forward with its Xbox Everywhere strategy, the challenge of its shift to PC with next-gen consoles looms large. Everything about Xbox is changing rapidly, and the expensive era of Xbox hardware and subscriptions could leave even more fans, and even retailers, looking elsewhere.

Microsoft unified its Windows teams again this week, and Satya Nadella appointed a new CEO to run Microsoft’s biggest businesses. Both of these changes are linked to Microsoft’s AI efforts, and are part of even more unreported changes inside Microsoft.

Windows chief Pavan Davuluri, who was just promoted to president of Windows and devices earlier this month, is now looking after all of the Windows engineering teams. This is a reversal of Microsoft splitting the Windows team up in 2018, and it means the leaders of the teams for Core OS, Data Intelligence and Fundamentals, Security, and Engineering Systems all now report up to Davuluri.

“This change will increase agility and simplify our end-to-end work across Windows + Devices, as we support over 1 billion Windows customers and deliver our vision of Windows as an Agentic OS,” Davuluri wrote in an internal memo. 

I think this will result in a Windows 12 release, or whatever Microsoft calls it, being even more focused on AI features. I’d be surprised if Microsoft requires an NPU for the next version of Windows, but I think most of the new features it builds will need that additional hardware to work well.

AI is also continuing to reshape the rest of Microsoft. Nadella is effectively deputizing some of his responsibilities so he can focus more on technical and engineering work. Judson Althoff, who led Microsoft’s global sales organization for the past nine years, is now Microsoft’s new CEO of commercial business. He will also be responsible for the operations and marketing teams that help sell Microsoft’s software and services to businesses, but not the engineering teams that help build them.

Althoff has just returned from an eight-week sabbatical, and many Microsoft employees had presumed he would be leaving the software giant instead of taking on an expanded role. Althoff will still report directly to Nadella, but I can’t help but feel like Nadella’s delegation is similar to when cofounder Bill Gates stepped down as CEO and took on a chief software architect role instead. It’s not the same situation, but the parallels are there. 

Microsoft is also reshuffling some of the engineering teams responsible for Azure and its cloud work. The Microsoft 365 engineering teams responsible for Microsoft’s core collaboration and communications tools are moving from Rajesh Jha’s experiences and devices team to Scott Guthrie’s cloud and AI organization. The security teams responsible for identity, network access, and Microsoft Threat Protection are also moving from the Microsoft Security division to Guthrie’s org. The Azure Core team is also picking up some groups from experiences and devices.
Microsoft is consolidating a bunch of teams responsible for its sovereign and specialized clouds into a single team within cloud and AI that will be led by Douglas Phillips. This cloud work is key for Microsoft, particularly as many of its lucrative enterprise and government contracts rely on Azure security being the best it can be. “In a time of radical technological transformation and a high-threat landscape, it is crucial to continue bringing teams closer together to optimize how we operate,” Philips wrote in an internal memo this week.

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