Xbox: How a $100B Failure is Finally Winning Over Gamers

[00:00:00]Once, one man bought eight Xbox 360s in a row. He wasn't a collector. He just wanted to play his games, but the first seven stopped working. Each one flashing the same three red lights before cutting out. That hardware failure cost Microsoft almost 1.15 billion. They managed to buy back the trust once, but over the next 20 years, Xbox would fall down the same hole not one more time, but two. One day, no amount of money will be able to pull it back out. Why does this keep happening?

[00:00:40]Well, that starts with a loyal fan base and a race Xbox was far too desperate to win.

[00:00:50]The original Xbox came out on November 15th, 2001, and was Microsoft's answer to the dominant PlayStation 2. People loved it.

[00:01:00]>> [music] >> It had PC-like architecture, an Ethernet port, and a big internal hard drive. And it had Halo: Combat Evolved. Then, in May 2005, Sony announced the PlayStation 3, and that brought Microsoft's plan for the next Xbox forward. The original Xbox was popular, but they still lagged behind Sony in terms of sales. They desperately wanted not only to compete with the new PlayStation and Nintendo's Wii, but beat them. That turned out to be a bad idea. The Xbox 360 launched in November 2005 at the same time as the new PlayStation and was an immediate hit. By mid-2007, Microsoft had sold 11.6 million units, near its 12 million goal. Sony had only sold about 5.5 million PlayStation 3s. For the first time, the brand had the momentum over Sony, having built goodwill with players over years with the original Xbox. The 360 became the center of people's living rooms and the core of their basement dens. But despite a great start, things didn't go well for long. Within days of the 2005 launch, owners flooded forums with reports overheating and crashing. This was the red ring of death. When three flashing red lights appeared around the console's power button, you knew a fatal system error was on the way and soon the console became completely unworkable.

[00:02:43]Some people bought more consoles or exchanged them within their warranty, but pretty soon enough was enough.

[00:02:52]Lawsuits were filed, the first in Illinois in 2005 and then California in 2006, the latter seeking $5 million in damages. In December 2006, Microsoft quietly extended the warranty from 90 days to 1 year, an early sign it knew something was wrong. Microsoft knew that the people getting hurt by the console were the ones who loved it and that motivated them to do something about it.

[00:03:23]But ultimately, they didn't do enough to stop it turning into a billion-dollar emergency.

[00:03:33]It turned out that the rush to beat the PlayStation 3 had led to a design flaw.

[00:03:38]First, they'd made the unit as sleek and compact as possible, but that left almost no room for airflow. So, the graphics processing unit or GPU got incredibly hot during gameplay and the console's small, loud internal fans weren't enough to cool it down. Then, according to test engineer Paul Wang, they used lead-free solder to attach the GPU directly to the motherboard after European environmental laws banned lead-based solder. While that wasn't entirely their fault, it didn't contribute to the third issue, broken connections. The unit heated up, went on, then cooled, went off, and this led to the motherboard expanding and contracting. That broke the lead-free connections inside, leading to the shutdowns. Xbox had a problem.

[00:04:36]On July 5th, 2007, entertainment chief Robbie Bach and CFO Chris Liddell announced a $1.05, $1.15 billion charge and a full 3-year warranty for any red ring of death failure. They agreed to reimburse owners who had already paid $139 or more for out-of-warranty repairs.

[00:05:01]Xbox chief Peter Moore later described sitting across from CEO Steve Ballmer and saying that without the fix, this brand is dead. At its worst, failure reports reached nearly 30% of owners.

[00:05:17]But these moves and a redesign fixing the issues helped continued strong sales and that pulled the 360 back out of the hole. Climbing out cost a fortune, but it didn't hurt Microsoft's share prices and the success of it set up a trap for later. It taught the company you can always buy your way out of a hole. Six years later, they'd find out how wrong they were when Xbox dug a second hole.

[00:05:50]In May 2013, Microsoft announced the next generation of their Xbox, the Xbox One. This time, there'd be no red rings of death, no overheating, and they hoped no billion-dollar lawsuits. The first thing that seemed strange was the launch. The gamers who'd stuck with Xbox through the hard times [music] were waiting to see the next advance in their favorite console, and instead, they got a reveal for anything but. The interactive entertainment president at the time, Don Mattrick, spent most of the presentation talking about how the console could integrate with live television cable boxes, handle Skype calls, and track fantasy football stats.

[00:06:37]Pretty quickly, it became a joke on the internet, with Microsoft's embarrassing Xbox One reveal videos making supercuts of the executive saying, "TV, sports, and Call of Duty." back-to-back, over and over. They also forced unwanted hardware on gamers. The new console came with a mandatory Kinect camera that raised the price. Worse still, they had to agree to a rule that required an internet check-in every 24 hours or games would stop working. And it was much more expensive. While the Xbox 360 retailed at $299.99 for the core and $399.99 for the premium version, the Xbox One started at $499 on its launch in June. Don Mattrick told the users to deal with it, saying the price was low given the value of the unit. That was made worse when Sony released the PlayStation 4 for $399.

[00:07:42]In response to the poor reactions to the internet check-ins, he said, "Fortunately, we have a product for people who aren't able to get some form of connectivity. It's called Xbox 360."

[00:07:55]That did not go down well within the community. Gamers flooded forums and retail sites to cancel their Xbox One pre-orders, shifting their money directly to the PS4. Fortunately for him, he'd already resigned even before the launch, announcing his departure in July 2013.

[00:08:17]Someone else had to come in and clean the mess. As far as shares are concerned, it didn't much harm Microsoft. They stayed steady at $34 to $35 a share, but it did help Sony indirectly, pushing the stock from 382.52 yen, or $3.87 per share, to 393 yen, or $4.14.

[00:08:44]The first fall broke the hardware. The second broke the promise made between the business and consumer about what that hardware was for, breaking faith with the gamers who'd forgiven them in the past. The man sent in to win those gamers back would spend a decade making promises he couldn't keep.

[00:09:08]The new CEO was a friendly face. In March 2014, Phil Spencer was named head of Xbox. He was inheriting a brand gamers were abandoning. He began by ditching the Kinect, cutting the price, >> [music] >> and recommitted turning Xbox back into being a games company. He wanted to buy the lost goodwill back, but goodwill alone couldn't close a gap that wide because they'd lost a huge chunk of the last generation who were now locked into PlayStation's ecosystem. So, Spencer pushed a new paradigm, Game Pass, a subscription offered below cost to build a library and win players. Xbox later pushed back hard on the idea that it was a loss leader designed to reel people in, but it's hard to see [music] it as anything else at first. But now they had a library to fill. And to do that, Microsoft started buying the studios players loved. When Microsoft bought ZeniMax, home of Skyrim and Fallout, in 2020 [music] for 7.5 billion, Spencer told players, "Our plan is to leave it alone." In June 2021, CEO Satya Nadella and Spencer declared Microsoft all in on gaming, pitching cloud, subscription, and creators as the future.

[00:10:36]Spencer said Game Pass had passed 18 million members and was reshaping how the industry saw Xbox. [music] But, as is so often the case, that promise to leave studios alone had a short shelf life. Microsoft then bought the studio behind Call of Duty and World of Warcraft, Activision Blizzard, for 69 billion dollars in 2023. Then they laid off 1,900 people from its gaming workforce. While that was happening, the Xbox Series X S >> [music] >> sold roughly half the units of the PS5, with the gap widening to a three-to-one margin in 2023. Excluding Activision, Xbox gaming revenue was actually down about 5% year-over-year.

[00:11:29]The cost of the bet was about to land on the studios that players were promised would be protected.

[00:11:40]In May 2024, Microsoft shut down Arkane Austin, Tango Gameworks, and Alpha Dog.

[00:11:48]These were studios that it acquired in 2021 under the same ZeniMax umbrella.

[00:11:54]Exactly the kind of studios Spencer had promised to leave alone. Head of game studios Matt Booty said they needed smaller games that give us prestige and awards. In response, a Tango Gameworks project manager posted photos of their award for Hi-Fi Rush's awards after Booty's comments and asked, "Not enough?"

[00:12:18]Spencer called the layoffs very hard, but said he had to run a sustainable business, "making decisions that frankly are not decisions I love."

[00:12:29]But that meant they had no one to make exclusive games, so no reason to buy an Xbox over [music] anything else. The cuts cast a shadow over games shown days later, including the troubled Perfect Dark, which itself would be canceled. A 2019 Booty email had described a goal to spin Sony out of business. By 2024, a former employee told IGN, "It's no longer Xbox, but Microsoft gaming." So, first they failed with the hardware.

[00:13:02]Then they broke a promise to the gamers.

[00:13:05]And now it was the turn of the developers. The lead they had over their competitors was squandered. With PlayStation 4 outselling the Xbox One two to one. Just 58 million units to Sony's 117 million. Each mistake alienated more of the people who built and bought Xbox. Then the man who made the promises walked out the door.

[00:13:36]On February 20th, 2026, Microsoft announced Spencer would retire after 38 years. It was a sudden announcement that shocked the industry.

[00:13:47]>> [music] >> Xbox president Sarah Bond was expected to take Spencer's place, but instead she also left the company. While Matt Booty was elevated to Chief Content Officer.

[00:13:59]One of the triggers might have been that Xbox was, once again, starting to struggle. Still reeling from the third betrayal and wider issues within Microsoft like still undisclosed impairment charges due to the fall in the value of assets, gaming revenue had fallen about 9.5% in the last quarter of 2025, and Xbox content and services revenue dropped 5%.

[00:14:27]Worse still, hardware revenue had bombed, falling by 32%.

[00:14:33]So, they needed a steady hand. Asha Sharma from Instacart, Meta, and Microsoft's AI group, who had no gaming background at all, took over and said her first job was understanding the soul of Xbox. She hired analyst Matthew Ball as Chief Strategy Officer and pledged to recommit to our core Xbox fans.

[00:14:58]Rebranded as Xbox, cut Game Pass prices, and promised to focus on human-centric AAA content over [music] AI productions.

[00:15:09]And she announced the next generation of Xbox, code-named Project Helix, and set to come out in 2027.

[00:15:17]She said the next 100 days were about resetting the business, and that her mandate was not 30% accountability margin, but to be the number one gaming company. Among US gamers, Xbox's [music] buzz score rose from 8.5 in February 2026 to 20 by May, with value, satisfaction, and consideration all climbing. She also talked about having more exclusive content, noting that some of their biggest games like Forza, Gears of War, and Halo now ship on PlayStation. But, [music] whether that particular genie can be put back inside the bottle is hard to know, because it's hard to see where the new exclusive content will come from. While things seem better and trust is growing, [music] the closed studios and laid-off staff who they need to create that exclusive content do not just come back and start working again. Whatever the brand scores do, Xbox keeps digging the same hole, shipping or promising things before the foundation is ready. And every time, the people who believe them pay first. A billion dollars bought the hardware back. It never bought back the studios or the faith.

[00:16:35]The man on his eighth console and the studio staff on their last day are in some ways the same. They're Xboxes on people, those who paid for the hole.

[00:16:45]Sooner or later, their faith could be gone, and faith is one thing you can't buy back, at least not a fourth time.

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