Thursday, July 17, 2014, 6:27 PM ET|Posted by Will Richmond
Microsoft will close down its Xbox Entertainment Studios (XES) as part of a broader, 18,000 employee headcount reduction it has announced. I, for one, am not surprised by this outcome. A year-and-a-half ago, at the D: Dive Into Media conference, I watched an interview with Nancy Tellem, head of XES (and former head of CBS Entertainment) and Yusuf Mehdi, Xbox's chief marketing and strategy officer, that left me wondering whether the company really understood what role it wanted original programming to play or how it would be differentiated.
Basic questions on whether originals would be included in the current subscription service or cost extra, whether they would be ad-free or ad-supported, exclusive to Xbox or available elsewhere and more were essentially left unanswered, creating a very unfocused vibe. But, since it was still relatively early days for XES, I was inclined to cut them some slack.
In the intervening time XES did in fact manage to announce and launch some new shows, including an ambitious slate at this year's NewFronts. A subset of these will live on to completion, with the best bet for success the "Halo" TV series. From my perspective though, it still somehow never became clear exactly how they would be differentiated or how they were tied into Xbox.
Further, the Xbox-as-entertainment-platform positioning was rebuffed by its core gamer audience (surprise, surprise!) and XES also lost its senior executive air cover, with both CEO Steve Ballmer and Xbox head Don Mattrick departing. Along the way, long-form, premium-quality original programming has proliferated from both online outlets and TV, making it harder than ever to attract audiences. Finally, with Microsoft's Sept. 2013 acquisition of Nokia for $7.2 billion and its other well-know travails, the pressure for XES to prove its worth clearly mounted.
Ultimately, new Microsoft CEO Satya Nadella determined that creating its own original programming just wasn't worth it, given the myriad other priorities the company has. And once again we have a lesson (albeit not an expensive one in Microsoft terms) of how precarious the premium original programming business actually is - it's hard to create hits, hard to craft a business model and harder than ever to build an audience. Only those who have demonstrated expertise, clear strategic rationale and deep resources should give it a shot.
Yesterday's news that 21st Century Fox is seeking to acquire Time Warner was yet another reminder that companies which have demonstrated success with long-form, premium-quality content - and have rich libraries - are more valuable than ever. At a minimum, this is why media M&A will be accelerating. The good news for Microsoft is that if it still believes it should offer premium content on Xbox there is a lot of it around, always looking for more distribution.