Microsoft’s Videogame Boss and the Long Battle to Reinvent the Company

A Microsoft Corp. lifer and a lifelong gamer, Mr. Spencer has been the chief architect and evangelist for a bigger videogame strategy inside a company that revived its fortunes in recent years largely by focusing on business customers. His plan has shifted videogames at Microsoft from its two-decade emphasis on its Xbox videogame hardware to a vision of assembling a roster of studios whose games can be played across a range of devices. And Mr. Spencer has tied his game ambitions directly into cloud computing, which Microsoft Chief Executive

Satya Nadella

has put at the heart of his broader vision.

“He does a great job of balancing business needs with the creative needs,” said Robbie Bach, a retired Microsoft executive who led the early development of Microsoft’s Xbox business starting in 1999. “That is the hardest thing to do.”

The deal for Activision, which is subject to federal antitrust review, would turn the Redmond, Wash., company into the world’s third-largest videogame company, behind China’s Tencent Holdings Ltd. and Japan’s

Sony Group Corp.

Microsoft would have more than $20 billion a year in gaming revenue, putting it on par with the Windows operating system that for decades was the biggest driver of Microsoft’s business.

The acquisition also would let Microsoft position its gaming business as an on-ramp to the metaverse, a future vision of the internet that has been heavily hyped within the tech industry. In October,

Facebook

announced its new metaverse focus and a new company name: Meta Platforms Inc. Videogames are in many ways an early version of the metaverse, with players spending hours absorbed in digital worlds where they spend money on digital goods and socialize.

As the gaming industry prepares for the adoption of subscription-based business models, acquisitions of gaming studios have been heating up. A week before Microsoft announced its acquisition of Activision,

Take-Two Interactive Software Inc.

said it had agreed to acquire mobile game maker

Zynga Inc.

for $11 billion. And this week, Microsoft console rival Sony said it would be acquiring Bungie Inc., the studio responsible for creating the Halo and Destiny franchises, for $3.6 billion. Videogame-industry mergers and acquisitions nearly tripled to $26.2 billion in 2021 from $8.9 billion in 2020, according to research firm PitchBook.

Mr. Spencer, 54, started at Microsoft in 1988 as an intern while in college. He spent his high-school years not far away, in a town on the southern border of Washington state, where he attended Ridgefield High—mascot “Spudder” named for the potato fields that used to cover the area. One of his first tech jobs was working at an electronics store called Computer Mart.

He earned a degree in technical and scientific communication at the University of Washington, then joined Microsoft full time. He worked as part of teams that developed Microsoft Money and other software.

All the while he remained an avid gamer—sometimes even when he was on the clock.

In his early days at Microsoft he was into Ultima Online, one of the first hugely popular multiplayer online fantasy games, which he was sometimes known to play at the office, said a former employee.

Microsoft, which had dabbled in games for years, launched its first Xbox console in 2001. When Mr. Spencer joined the Xbox team in that first year, the company owned around five studios to make games; following the Activision deal it would own 30.

He was already more into games than the average Microsoft employee, said people who worked with him. He would call colleagues into his office to show off new ones, they said, and sometimes play games on his phone during meetings.

In a 2020 podcast with Xbox employee Larry Hryb, Mr. Spencer acknowledged playing on the company’s latest Xbox console during videoconference calls that took place via the company’s Teams software. “When I’m working, don’t tell Satya, but there are many times where I’ll just flip over and I’ll be sitting on the Teams call and I’m playing with my Series S,” he told the interviewer.

“I wouldn’t be surprised if Phil has literally played every game that launched in the past year and has an opinion on it,” said Richard Irving, who spent 12 years working on the Xbox team before leaving Microsoft in 2016. “Phil at his core is a gamer.”

While he plays many games, his go-to in recent years has been Destiny 2, a multiplayer first-person shooter developed by Bungie, the company Sony recently said it is acquiring.

When not gaming, Mr. Spencer is known to play golf. He married his high school sweetheart and has two adult daughters. Colleagues under him have described him as a “low heart-rate kind of guy” and “very calming.”

In February 2014, Mr. Nadella took over as CEO, as Microsoft was struggling to find a winner in consumer technology. It was late jumping into the mobile internet and was losing to competitors in search and social media.

Mr. Nadella’s leadership team decided to focus on bringing big businesses to the cloud while squeezing out struggling consumer businesses such as the

Nokia

phone business it acquired in 2013 for $7.2 billion, said people familiar with the discussions.

Mr. Spencer became head of the videogame business the month after Mr. Nadella’s promotion. The gaming business was also suffering setbacks. The company’s latest console was losing out to Sony’s PlayStation. Gamers complained about the Xbox’s high price and the focus on its nongaming features, such as the ability to play TV channels and music.

“This past year has been a growth experience both for me and for the entire Xbox team,” said Mr. Spencer in a blog post when he took over. “We’ve taken feedback, made our products better.”

Microsoft scrapped plans for broader entertainment aspirations—including a TV and movie studio and a Roku-like streaming media box, said people familiar with the company’s thinking. The company considered selling the low-margin business of building the physical Xbox videogame consoles, they said.

Still, Mr. Spencer engineered a big gaming acquisition. In 2014, Mojang AB, the creator of the popular Minecraft videogame, approached him about a deal, said people familiar with the transaction. Mr. Spencer took it to Mr. Nadella and Microsoft bought the company for $2.5 billion.

Minecraft thrived, adding millions of new users. By 2016, it was seen by some company executives as one of Microsoft’s most successful acquisitions. Mr. Nadella asked: “Is there more money we can put into this?” according to a former Microsoft executive familiar with the conversation.

The Xbox group started reporting directly to Mr. Nadella in 2017. The group by then had grown to around 10 studios.

Mr. Nadella was focusing on cloud services for its big corporate customers, say people that were familiar with his thinking, and Mr. Spencer showed him how gaming could fit with that strategy by creating what they later dubbed a “

Netflix

for gaming,” a subscription service running on the cloud rather than on players’ consoles or PCs.

“We saw the same things happening in the game space,” Mr. Spencer said in an interview last year.

Microsoft had turned subscription-based cloud services into a huge new business and it decided to try the same tactic with gamers. In 2017, the company introduced Game Pass, a service offering a catalog of games for people to play for a monthly fee, instead of buying individual titles for around $60 apiece.

“We’ve only scratched the surface of the opportunity this new model brings to the industry,” Mr. Spencer wrote in a blog post soon after launching Game Pass.

Mr. Spencer was at the center of pushing this strategy forward. In meetings, Mr. Spencer’s staff would present arguments for why Game Pass wouldn’t work—publishers wouldn’t participate, or it would eat into profits—recalled Mr. Irving, the former Xbox staffer. But Mr. Spencer wouldn’t relent.

“He wouldn’t take no for an answer,” said Mr. Irving, who was present at those early meetings. “He was always trying to find a way to make it work.”

Sarah Bond,

a corporate vice president in the Xbox group, joined in 2017 right when Game Pass launched and has watched Mr. Spencer slowly build his vision piece by piece.

“He is an extraordinarily patient man,” said Ms. Bond. “He thinks of things in arcs of time far longer than me. He often encourages me to be patient.”

In 2018, Mr. Spencer unveiled streaming gaming to hundreds of company leaders at an annual retreat at a mountain resort in Washington. In a live demo, a player in North America on a Microsoft Xbox console, another in Europe on a PC and yet another on a cellphone in Indonesia raced each other in a Microsoft game that was running on Microsoft’s cloud.

It showed a future of gaming that functioned completely on the cloud, potentially creating a huge new group of consumers to target with Microsoft’s cloud-services infrastructure.

“From that moment on, the leadership at the highest levels of Microsoft were bought in,” said Kareem Choudhry, the corporate vice president of cloud gaming, who presented the demo. “We were just kind of off and running to the races.”

Using the cloud to play games is a tricky technical feat. Compared with streaming TV shows and movies, gaming requires vastly faster connectivity speeds to work smoothly. The game’s response to a player pressing a button needs to feel instantaneous for the player—and to any remote opponents playing along. Any lag is a matter of life or death for their virtual character as well as the popularity of a streaming game. Early efforts to make complicated games like Halo work entirely on the cloud failed because the infrastructure and internet speeds were still too slow. But in recent years it has become possible.

When Microsoft first started testing the service in 2017, the company zip-tied racks of Xbox 360 consoles to metal frames inside some of its massive data centers. The setup has evolved since then. Now, it uses specialized circuit boards sitting inside these data centers, which are essentially the innards of the Xbox. Microsoft says the cloud Xboxes are able to run faster in the data centers than in people’s homes because of the way they are cooled.

Mr. Spencer started pursuing more acquisitions as it needed original content to entice gamers to its subscription platform. By last year it owned a total of 23 studios.

Mr. Spencer’s opportunity to buy Activision, one of the largest gaming companies, arose late last year. Federal regulators were investigating the company over how it handled employees’ allegations of sexual misconduct and workplace discrimination, and The Wall Street Journal reported that Activision CEO

Bobby Kotick

had mishandled sexual-misconduct allegations. Activision’s share price tumbled nearly 30% between July, when the first regulatory investigation was made public and when the Microsoft deal was announced, making it a ripe acquisition target.

In response to the troubling revelations about Activision, Mr. Spencer sent a letter to Microsoft employees saying Microsoft was re-evaluating its relationship with the game company. At around the same time, however, he reached out to Mr. Kotick, whom he had known for years, starting a two-month conversation that culminated in Microsoft’s $75 billion offer last month, the Journal reported.

Mr. Spencer now faces the task of integrating a company that is still reeling from allegations of a toxic workplace culture. Where Microsoft has usually taken a hands-off approach with companies it acquires, analysts say, Activision may need more hand-holding.

Mr. Spencer said he is confident that Activision management is addressing the workplace issues.

“We see the progress that they are making, that was pretty fundamental to us deciding to go forward here,” he said.

If the Activision deal closes, Mr. Spencer’s group will control 30 studios, pushing the company closer to becoming the “Netflix for gaming.”

“Phil has been systematically putting the building blocks in place,” said S. Somasegar, a more than 25-year veteran of Microsoft who left in 2015. “He’s got enough now to take the next big step with Activision.”

Write to Aaron Tilley at [email protected]