Satya Nadella's Vision For The Future Is Blowing Up While Phil Spencer Takes The Most Embarrassing Victory Lap

Let's Recall, Recall!

A few weeks back, I wrote an essay on why I found it impossible to be enthusiastic about the future of Xbox consoles and the Xbox ecosystem. Since publishing that blog, I have felt even more resolute about everything I highlighted in that essay. Not only have I been infuriated to see Phil Spencer be named the upcoming emcee of PAX West, but at the same time, he continues to fumble the ball on how to respond to scrutiny on the closure of Arkane Austin and Tango Gameworks. However, overall, Microsoft is quickly becoming one of the least defensible tech companies in the world. Maybe Spencer's inability to give solid answers about anything speaks to his company's growing culture of dysfunction. The clearest example by far has to be its ongoing Recall debacle. For those unaware, at a keynote address, Microsoft's CEO Satya Nadella revealed a new feature for Microsoft software and hardware called "Recall." Recall promises to help it improve Microsoft's Copilot AI system, already embedded into Windows 11. In the reveal, Nadella explained how Recall would take a snapshot of your device's screen, generally speaking, every five to ten seconds, which would inform its Copilot AI on your application preferences and OS usage habits. The conference in which Recall was announced took place Monday, May 20th, 2024, and Recall was meant to be available in a preview form the next day. That never happened, and Microsoft has even limited its future initiatives with Recall's preview build to its Windows Insider program.

t keepingTo suggest that shit hit the fan after Recall's announcement would be an understatement. Privacy experts around the world sounded alarms, and their concerns were justified. For one, the preview build of Recall, which people could play around with briefly, was discovered to be hosting the images Recall took in an unencrypted database. Within days, white hat hackers publicly disclosed how to compromise that database. Likewise, the UK's data regulatory agency announced it would formally investigate Microsoft's Recall feature to determine if it violates privacy laws. Microsoft is neither the first nor the last tech company with a stake in AI applications or systems facing growing scrutiny over privacy and copyright concerns, so none of this is surprising. Still, it is phenomenal work from its CEO to have kicked the literal hornet's nest and then have to do damage control in real-time. The fact that no one in Microsoft's upper management thought it was a good idea to make Recall an opt-in feature until AFTER THE BACKLASH speaks volumes on the lack of foresight from Nadella and his cronies as well as their inability to have the consumer's interest even the slightest bit. Sure, expecting as much is a fool's errand. Still, considering how shit of a job Microsoft has been doing keeping national security information under wraps, it bears repeating that there's no way Microsoft has figured out the "secret sauce" on how to do this while guaranteeing an acceptable level of personal security. This company literally just let Russian hackers take their entire source code.

The unfortunate consequence of Microsoft's perpetual fumbling with Recall is that it has completely overshadowed its admirable rebooting of its Surface Laptops. The devices meant to showcase Recall and a new version of Microsoft's AI, Copilot, are widely accepted to be good pieces of hardware even without Recall. With Recall on the back burner, the laptops launched without one of Microsoft's promised "core features" while also sporting state-of-the-art ARM-based processors. Nonetheless, the Copilot-focused laptops are being met with nearly universal praise, though reviews highlight the half-baked AI features as negatives. That hasn't stopped competitors like Apple from actively taking the piss out of Microsoft. Likewise, while the moderately rebooted Surface division has debuted well-made hardware under incredibly stressful circumstances, please don't take it as a sign that they still aren't under a massive pro-AI/Recall mandate. Microsoft just this week debuted a new onslaught of advertisements for its Copilot laptops, and guess what? Although Recall is still operating under a heavily limited preview filter and is delayed indefinitely, the ad shows people using it without a hitch.

I will concede that there have been some that have come to Recall's defense. Ed Bott of ZDNet made the fairly cogent point that with the ability to opt out altogether, Recall is not that different from tracking cookies. Nonetheless, their point that "There are still risks, but they're limited" is one I completely disagree with. Microsoft deserves less wiggle room with your personal information than most tech companies. At the start of the year, they publicly admitted that their Azure Team allowed a massive attack on classified information. They even admitted that publicly reported shortcomings about their security team were valid. That resulted in an ex-White House cyber security policy director declaring Microsoft a national security threat. The start of July marked another failure on their part to prevent those same Russian bad actors from hacking their database to access customer email information. That rap sheet only builds marginal confidence that Microsoft can secure screencaps from your desktop or laptop.

Nadella's Appointed AI Boss Cannot Dig Up

We have been talking a lot about Satya Nadella, but today, I want to introduce a name you will likely see a lot of in the coming years. Mustafa Suleyman is Microsoft's AI boss, and he recently had an interview with CNBC's Andrew Ross Sorkin, which set off some massive red flags. When pressed about the issue of large language models (i.e., LLMs) and AI systems like ChatGPT possibly violating copyright and profiting off of written, oral, and illustrative works without regard to the original author, Suleyman advocated that AI was above the law. Do you think that's an exaggeration? Here are his exact words to Sorkin on cable television:

"I think that with respect to content that's already on the open web, the social contract of that content since the '90s has been that it is fair use. Anyone can copy it, recreate with it, reproduce with it. That has been "freeware," if you like, that's been the understanding."

AND:

"There's a separate category where a website or a publisher or a news organization had explicitly said, 'do not scrape or crawl me for any other reason than indexing me so that other people can find that content.' That's a gray area, and I think that's going to work its way through the courts."

Consider what this means for you and me if Suleyman's ideas of fair use were the law. Every forum post, blog, review, and comment on this site you have made is "freeware" to help educate Microsoft's AI systems and chatbots. Sure, there's such a thing as "fair use," but that's something granted for recreational use and not to help billion-dollar enterprises unpin the entire field of journalism as we know it. That's not how that works. The good news is that you and I are not alone, as The Center for Investigative Reporting, the producer behind Mother Jones and Reveal, has announced a massive lawsuit against OpenAI and Microsoft. They claim that the auto-generated answers that ChatGPT spouts use their paywalled content, and that's not exactly shocking—The New York Times alleged as much when it opened a lawsuit against OpenAI and Microsoft. These lawsuits don't seem too frivolous as EU regulators are throwing in their lot on the side of the print publications. On top of that, it sounds like Suleyman's CNBC interview will be used as evidence against Microsoft in these lawsuits. Incredible. Amazing. You love to see it.

However, for slightly different reasons, the EU is interested in Microsoft's relationship with OpenAI, the outfit behind ChatGPT. Remember when OpenAI's board of directors tried to oust Sam Altman, which backfired spectacularly? Satya Nadella and Microsoft played a massive role in ensuring Sam Altman returned to his position. Besides a brief spike in their stock value when it initially seemed like Sam Altman was jumping ship to their company, Microsoft's reward was a non-voting position on OpenAI's board of directors AND Sam Altman back in the top position at OpenAI. The problem is that while this cozy relationship isn't an official "merger," regulators worldwide agree that Microsoft and OpenAI are collectively erring toward defining a monopoly in some critical areas of commercial AI. The funny thing about this is that while Nadella helped create OpenAI with an investment of $10 billion in cash and computing credits, OpenAI is seemingly not reciprocating what he has given to them for free. OpenAI reportedly pursued a deal with Apple and granted it a position on its board without Microsotf's permission, with Nadella seemingly finding out about it while casually surfing the internet.

Nadella's Decision-making Is About To Result In A $20 Billion Fine!

$20 billion. That's the amount of money CEO Nadella is looking at as Microsoft readies itself for one of the most significant penalties in the tech sphere from EU anti-trust officials. EU tech regulators signaled that Microsoft and Apple would face steep fines for not following the EU's Digital Markets Act, which stipulated that software companies could no longer bundle services with essential software (i.e., OSs) without such practices being deemed anti-trust. In Microsoft's case, its insistence on including its Teams networking and conferencing application in virtually every copy of Office 365 was declared anti-competitive even if alternatives like Zoom, Webex, and Google Meet exist. For Apple, the EU has repeatedly sided with Spotify and Epic in declaring Apple's "steering" tendencies on its App Store towards Apple-made applications for game or music streaming as anti-competitive. In Apple's case, they have already been fined approximately €2 billion, though they are appealing this fine and have responded to its warnings from EU regulators by completely ignoring them. Microsoft has done something similar with its bundling of Teams and will likely act as a case study to the rest of the industry on why EU regulators do not like outright non-compliance.

So, how did we get here? Also, didn't Microsoft comply with the EU's request to stop bundling Teams with Office 365 licenses in European countries? The answer to the latter question is, "Technically, yes, but that's not going to cut it anymore in the EU." Indeed, Microsoft did cease including Teams in Office 365 in Switzerland and all members of the European Economic Area (i.e., EEA). However, much like what it found with Apple, EU regulators found rampant abuse of application "steering" on the Windows Store and stated, "Microsoft may have granted Teams a distribution advantage by not giving customers the choice whether or not to acquire access to Teams when they subscribe to their SaaS productivity applications" and that its "conduct may have prevented Teams' rivals from competing, and in turn innovating, to the detriment of customers in the European Economic Area." And because EU regulators have the teeth and tools to make companies like Microsoft listen to them, their penalties can reach as much as 10% of a company's annual worldwide turnover, which is how we get to Microsoft's beefy $20 billion penalty.

There's no guarantee that EU regulators will impose the harshest penalties against Microsoft or Apple. Still, all insiders indicate they are "done" with Microsoft and Apple completely ignoring their orders. With Microsoft also incurring the wrath of EU watchdogs with its AI software, there's no way they will get the benefit of the doubt when it comes to Teams. This debacle represents a massive failure on Satya Nadella's part. First, with AI vastly inflating Microsoft's company-wide value and revenue, there's something poetic about Nadella's AI-driven pivots resulting in his company's anti-trust penalty ballooning. Second, Nadella was primarily in charge of ensuring his company followed the EU's stipulations after their first warning, and he ultimately failed in that core regard. Instead, he directed his software team to see if they could circumnavigate the EU's mandate by using steering techniques he KNEW he wasn't supposed to use; it's a classic case of getting caught with your hand in the cookie jar. What does any of this information have to do with gaming? Microsoft will likely fight and appeal their regulatory forfeiture tooth and nail, but the likelihood of their appeals working is low. This inevitable scenario means that Microsoft is bound to stomach a massive fine, resulting in cuts to its ancillary divisions rather than having its leaders held accountable.

If only this screw-up meant the death of Teams. That will never happen, considering Teams still nets Microsoft heaps of cash and is currently only facing regulatory scrutiny in the EU. Microsoft is unlikely to let Teams go because it has invested billions into the application. Nonetheless, there's no doubt that if Microsoft is forced to make people pay to use Teams, it will not be nearly as enticing to other businesses that use it as a default, and that would represent a blow to its near-universal ubiquity. That's a problem for every division of Microsoft because if the company loses one of its golden geese, there'll be Hell to pay. Less money from Teams means Xbox and Game Pass have less discretionary spending. Worse, because there's no precedent of Microsoft holding its leaders accountable, any ding to its gross revenue will lead to even more studio closures or layoffs. A minor conspiracy theory whirling around the internet posits that Microsoft might dump its hardware, Xbox included, to lower its company revenue and asset valuation to lower its penalty. Even as an Xbox pessimist, I find this idea patently ludicrous. Microsoft is not forgoing Xbox to reduce its liabilities. Nonetheless, there is something to be said about the fact that it is willing to fight to the death for one of the most universally reviled conferencing apps.

Spencer's Embarrassing Victory Lap

A friend of the site, Lexi, recently took to Twitter/X to share Phil Spencer's salary for the last fiscal year, which recently ended for Microsoft. Spencer made $10 million before stock options. After letting approximately 1,900 employees go, he pocketed millions while avoiding formal repercussions from the Xbox Series S/X's dwindling relevancy. Instead of holding himself accountable, he took to the internet to reveal that Microsoft would have a massive presence at the upcoming Gamescom gaming convention in August despite Nintendo and Sony announcing they would not be at the event. Spencer has stated to various publications that Microsoft's Gamescom booth will be its largest yet. It will also have many titles shown during its showcase last month, as well as "new" titles it has yet to reveal to consumers. Spencer and Bond have also told Xbox enthusiasts such as Parris Lilly of Kinda Funny that their showcase in June was only some of what they wanted to share. I like Parris; he seems nice and has guested on the site, but I don't entirely buy what he's saying. Could some games have been cut from Xbox's recent showcase that deserved to be there? Sure, but does that mean the company was "holding back?" No. Regardless, this hype-mongering reeks of Spencer and Xbox attempting to do a victory lap after they held what many consider their best summer conference in years. They don't deserve to take a victory.

Remember that the layoffs are still coming at Xbox. In one case, they laid off a senior member of the Xbox team while they were vacationing with their family! On top of that, all of the Xbox divisions and their supporting game studios have curiously seen paperwork that offered voluntary severance agreements (i.e., golden parachutes), and most of these passive-aggressive attempts to off-load senior producers have been targeting ZeniMax. What does any of this mean? Despite Phil Spencer's posturing, everyone and their grandmother know that more layoffs are coming, and we will continue to get these mealy-mouth responses from him, Matt Booty, and Sarah Bond on why they were done. Now, this next wave of layoffs isn't altogether targeting designers and underperforming studios; instead, it is trying to move high-paid senior management positions off the books. It also appears that Microsoft is moving internal Q&A in Activision-Blizzard to third parties, which has been a move predicted by many as it represents a trend seen across the entire gaming industry. Nonetheless, Microsoft can barely form a coherent message about its previous studio closures, and that seems to be staying the same for a while.

Those concerns aside, the enthusiast side of the industry hasn't strictly held back in its praise for what some consider incredible Xbox gaming titles shown during the 2024 Xbox Showcase. This fanboyism is part of why Phil Spencer was announced as the keynote speaker for PAX West 2024. Now, PAX has dabbled in the console wars before and even had Reggie Fils-Aimé do a panel that was just him shooting the shit and telling stories. That said, it feels gross seeing someone who recently approved of the layoff of thousands of employees get another chance to dodge criticism while spouting propaganda. Reggie was given the opportunity to headline a panel because it took place shortly after he retired from Nintendo. Spencer continues operating under the shadow of closing down Tango and Arkane Austin. Conventions like PAX are no stranger to needing to take sponsorships and money where they can get them. I get that, but this feels different. With Xbox transitioning from its moderately successful summer showcase to Gamescom and then to PAX, it seems they are using gaming conventions to wave away their growing problems.

Xbox's Amazon Deal Is Big, But Not As Big As They Think

To briefly act as a devil's advocate for Microsoft, they need a big event like Gamescom. They have been teasing new AAA games that were not announced at their summer showcase for ages, and some significant open questions about their hardware and Game Pass warrant a more prominent stage or platform. Speaking of Game Pass and Xbox's increasingly streaming-oriented future, they recently launched a new partnership with Amazon that's bound to make higher-ups happy. Xbox Cloud Gaming is now going to work on Amazon Fire TV devices. For those of you with a Game Pass Ultimate subscription, this game streaming service is bundled in your tier and allows you to play a selection of Game Pass games on compatible devices. It is a service that works remarkably well on Android phones even though the number of playable games is far from that on Game Pass.

I am not against more people being able to play games wherever they please. While this is terrific news, it is not groundbreaking and is unlikely to do anything to change the trajectory of Xbox's gaming fortunes. Samsung Smart TVs and Smart Monitors got Xbox Cloud Gaming support in 2022 and Meta Quest VR headsets in 2023. There was no gaming trickle-down economics for Xbox to gobble up after making deals with Samsung and Meta. Likewise, while Amazon is undoubtedly happy to approve Microsoft's app, they already have a preferred video game streaming service that they VERY CLEARLY steer all Amazon Fire users to use, and that's Amazon Luna. Yes, Luna is a joke, and it is embarrassing how Amazon is convinced they are a relevant figure in the game streaming sphere. Nonetheless, people use it, and Amazon's devices constantly communicate the existence of Luna the minute you boot them up or when you use Amazon Prime. The number of Amazon Fire Stick users navigating Fire OS and thinking, "Man, I could go for some Halo right now," is not 0; I will give you that. But is this a game-changer? No.

Do these streaming initiatives on third-party platforms make the money you think they do? Next week, Netflix is ending its basic ad-free plan as it continues to buck predictions that its password crackdown initiative and price increases would gut its growth. However, think for a minute about Netflix admitting that its cheapest ad-free tier wasn't as viable as they thought it would be. As a thought experiment, consider how much content you can get on Game Pass without ads. Microsoft's incredibly affordable Game Pass tiers with massive, fluctuating libraries with no ad breaks are an anomaly. Disney+, Hulu, Max, and more all have shitty ads that break up your experience. Playing games with ad breaks makes me want to throw up, but Microsoft has pigeonholed itself. Game Pass has become its future, but they debuted the service at such a low price that it is wild to think about these days. The enshittening of Game Pass will get here. I know it; you know it; your father's uncle knows it.

Nonetheless, their target remains "growth," and you can't have that growth if you announce a new batch of price increases. However, we all know price increases to Game Pass are coming; it is simply a matter of when. That uncertainty and the need for clarity on Xbox's hardware ambitions, especially if they genuinely want to bite the bullet on making a Steam Deck-like device, makes things immediately and uncomfortably murky with Xbox. The gut-wrenching studio closures that stem from management having clear buyer's remorse is the next part of what makes me a pessimist about Xbox's future. And my lack of trust doesn't just extend to Phil Spencer. The bones are rotten at Microsoft. While they are figuring things out with hardware at its Surface division, what its CEO has cherry-picked to be the company's future presents a dire and depressing future.

And I swear to God, this will be the last time I write about Xbox and Phil Spencer unless something massive happens.