Hello, my fellow tech enthusiasts! It seems that Microsoft has been making some interesting tradeoffs when it comes to their Xbox Series X / S sales numbers. According to an email exchange between Xbox chief Phil Spencer and Xbox CFO Tim Stuart, Microsoft has been sacrificing console sales in order to invest in cloud and gaming content.

Spencer admits that there was a “yield miss for Scarlett,” the codename for the Xbox Series X / S consoles, but it wasn’t the main factor in the console scarcity during the initial launch period. Instead, Microsoft had cut the compute units on its Xbox Series X silicon down to 52 from 56 to improve production yield, but still missed its target for hardware production.

It turns out that Microsoft had a strategic bet on cloud and was holding back chips for this purpose. Less than a year after the launch of the Xbox Series S / X, Microsoft upgraded its Xbox Cloud Gaming servers with custom Xbox Series X hardware to improve frame rates and load times. The email exchange between Spencer and Stuart references a tradeoff on spending money on Xbox console volume or content and cloud bets.

Spencer believes that their investments in content and xCloud are critical to realizing their potential in gaming. He also points out that Amazon Luna and Google Stadia do not have the console strength that Microsoft has, giving them an advantage when it comes to developer engagement, gaming community, and catalog of content.

While Microsoft was originally working on a dedicated version of Xbox Cloud Gaming last year, they are not currently working on it due to being more clear on the costs related to Xbox Cloud Gaming and the popularity of the service. Additionally, Microsoft had announced a dedicated Xbox streaming device in 2021 before making changes to the device in May 2022. Project Keystone, as it was referred to internally, was then spotted on Xbox chief Phil Spencer’s shelf in October before being confirmed as being reworked due to its price.

Overall, it seems that Microsoft has a long term ambition in the cloud and gaming content space, and is willing to make tradeoffs in console sales to achieve this goal. What do you think about this strategy? Let me know in the comments!