176. Microsoft's Complicated Paradigm Gamble

Buying an end-of-paradigm company is a known risk. It's days are numbered. Developing a new paradigm company is an unknown risk. It may not work at all. The first in has highest risk and highest cost.

Bellular just published a video on XBox and Microsoft, and it has a lot of good information that will be helpful to my readers if they want to check it out.

My long time readers know that I talk a lot about industrial paradigms. I even created a new model to explain how paradigm transitions occur in detail all the way back in 2012. That was called Moneyballification. I had already identified that consumer antagonistic interactive media business models were on their last leg due to inefficiencies relative to pro consumer technologies, and increasingly negative consumer sentiment against the old paradigm. By the next year in 2013 I was called upon by the International Consumer Protection and Enforcement Network (ICPEN, the world’s largest regulatory body) to advise them on IM anti-consumer behavior being directed at children. That third force (regulation) ultimately not only sealed the fate of the existing gaming paradigm, but also would set a hard date to its lifespan. The only questions were, how long until regulation forced the transition, and where would it come from? The existing industry put tremendous resources into delaying that paradigm shift, because avoiding innovation has been the culture in the USA during it’s post WW2 industrial decline.

I would credit this with the shift from a civilian economy to a military industrial economy. That was marked by President Eisenhower’s shocking warning he gave in an address to the country in 1961 where he admitted that the military had taken over the developmental focus of the nation.

What is a Paradigm Shift?

The term was introduced, not coincidentally, in 1962. From the wikipedia:

A paradigm shift is a fundamental and transformative change in the basic concepts, underlying assumptions, or established practices within a particular field, discipline, or way of thinking. The term was popularized by philosopher Thomas Kuhn in his book “The Structure of Scientific Revolutions,” where he described it as a process where the prevailing scientific framework (or “paradigm”) is replaced by a new one due to the accumulation of anomalies or evidence that the old paradigm cannot explain

You can see that this is still a fairly new concept and I hope my framework from 2012 helps leaders navigate a Shift.

A good example here would be the automotive industry, originally dominated by the Americans. Prior to the automobile, we had the horse and buggy as the primary land-bound private means of transportation. This was replaced by the air cooled carbureted internal combustion engine (ICE). Over the next century air cooled was replaced by liquid cooling, carburation was replaced by fuel injection, and ultimately the replacement of the ICE all together marked the end of the paradigm. The “electric vehicle” (EV) replaced the ICE.

For half of that century Americans were dominant because of their technology leadership. Then in the 1960s that leadership got replaced by weak leadership and instead of pushing for technological dominance, American industry shifted to protectionism. Note that tariffs are a form of protectionism. Regulation in general can act as protectionism, but when it favors the transition to a new technological paradigm, it has the opposite effect. This usually happens because the old tech is polluting or otherwise has some unsustainable public health detriment.

The Economics of Paradigm Shift

As I explain in Moneyballification a technology near the end of its paradigm has hit its peak profitability and is descending into perfect competition where profits approach zero. Insiders and especially domain experts (such as myself) can identify this process before it is apparent to investors or lay people. A good example would be when 2K Games tapped me in 2011 and 2012 to advise them on a possible Zynga Acquisition. My review (which took 4 days to produce) resulted in Zynga Analysis.

At the cusp of a Shift there are two possible approaches for industry leaders. They can attempt to delay the Shift and profit take as long as possible on the legacy technology, or they can accelerate the new technology with the intent of rendering their competition non-competitive.

• Delay: This involves all sorts of efforts to delay knowledge of and implementation of the emerging technology. Techniques could include “catch and kill” of patents and inventors to keep them silent. It can involve lobbying efforts to erect trade protections. Lawyers can be used to silence scientists and other experts. I call these various methods Caging and it’s not subtle when it’s being done. It appears subtle to those not Caged, because they won’t hear anything. A good example was how General Motors led the push to the EV paradigm with their EV 1 Project then killed that project, destroying evidence in the process.

• Innovate: This means to invest heavily in the new Paradigm with the intent of capturing/leading the new market and rendering existing competitors non-competitive. This action is, of course, a direct threat to the ones holding market share in the current Paradigm. Developing a new Paradigm is not cheap, and while it may be obviously a superior technology, it will be unclear how long it will take to become profitable, how much resources that will cost, and ultimately how much more profitable it will be compared to the previous Paradigm. Your competitors will not stand idle, they will also attempt to sabotage your efforts as you are threatening them with bankruptcy.

Again continuing with the automotive analogy, when Tesla Motors began pushing the EV Paradigm which GM had tried so hard to delay 20 years earlier, there was tremendous resistance from industry. But once it became clear what the future looked like, a future without the ICE, Tesla became worth more than all the other American automotive companies combined. Those other companies had created their own obsolescence. They became Zombie Companies in the 1970s by continuing to make oversized cars, and again in the 2020s by clinging to the ICE.

Delay Tactics: Caging

I was the only source to predict the rapid decline in Zynga’s value prior to its IPO. It’s business model Paradigm was already obsolete in 2011, but they kept this secret and moved to cash out with an IPO. Those that did not read my Zynga Analysis lost their shirts on that IPO. This helped establish me as the top domain expert in IM. Microsoft affirmed this assessment in 2012 after an extensive scientific vetting process. This led to my being hired as their first game economist that year. By 2013 the international body had vetted me and tapped me as the top domain expert to advise them during the start of their online gaming regulatory effort. That is why I was summoned to testify at the 2013 ICPEN regulatory summit.

I was a regular on America’s National Public Radio as an expert source in late 2013 and early 2014. But something weird was already happening at Microsoft. In early 2013 their lawyers forbade me from talking about what I was doing at Microsoft, and wanted me to maintain that silence for 3 years after I left the company. Realize that when I say a company like Microsoft takes action, companies are not sentient beings. They are a collective of people. Individuals can take actions secretly that undermine the entire company, out of self interest. This happens frequently when company Morale drops to dangerous levels.

This can also happen when a discovery is made that might result in future layoffs (always the case in a Shift), if the people most likely to be laid off discover the news before it is widely shared.

The writing was on the wall by the end of 2013 due to the outrage of the regulators following my testimony in Panama. By mid 2014 I stopped getting calls from NPR, and major conferences such as GDC suddenly removed me from multiple speaking engagements on the topic of regulating children’s games even when I was double confirmed. No explanation was given. By 2016 my papers published at Gamasutra were getting censored. No explanation was given though the emphasis seemed to be on protecting industry from critical information. I would leave Gamasutra/Game Developer in 2018.

From 2001 to 2005 I had been a widely read (400,000 daily readers, 4th highest independent in the USA) gaming consumer advocate at UnknownPlayer. In 2005 I revealed that a “journalist” at a sister publication was actually a secret Ubisoft employee, and that was why they had exclusive access to the Shadowbane alpha test. A PR campaign was launched against me and all my papers were scrubbed from the internet. This was not a fun time for me, but it gave me the motivation to begin my quest to pioneer the field of game economics that same year.

After I left Game Developer in 2018 I stayed off of all social media and stopped writing. I had hoped to avoid a repeat of 2005. I moved to Australia in 2019 and tried to become as invisible as possible. Nonetheless, my papers all got deleted from the internet (again) in 2023.

That is when I created this substack with the help of the community that had saved copies of my papers in offline medium. I had no explanation at the time for a motive for such extreme actions. But some months later the EU’s Digital Fairness Act was announced. That was the regulation that I had contributed to in 2013. I didn’t know it was approaching deployment in 2023, but I suspect someone in the industry did know that information prior to it becoming public. My papers (especially those from 2013) are still the source material for the DFA and thus there is a motive to make them not exist.

This was classic caging activity. You could argue that there was also a racism component, which in the USA is very plausible. But I find the argument that this was Caging to be stronger.

Microsoft Grapples (Poorly) With the Paradigm Shift

Amy Hood was hired as the Chief Financial Officer (CFO) of Microsoft in 2013. Bellular points to her as the source of the catastrophic policies regarding XBox pricing and revenue goals. It’s possible she doesn’t even know I exist. But then again, if she doesn’t, especially since I was the domain expert at MS in 2013, that’s a major oversight. Granted, gaming isn’t really Microsoft’s core business so she had bigger things to deal with.

Satya Nadella was made CEO at Microsoft in early 2014. He likely also doesn’t know I exist. I would imagine both Nadella and Hood know very little about gaming, that’s not why they were hired. But that begs the question, why was Nadella spending so much time hanging out with Bobby Kotick? As I’m researching this paper I suddenly realize that Kotick had a major speaking and advisory role in the movie Moneyball. As you must know, this movie transformed many industries, and especially gaming. And not necessarily in a good way. I write about Moneyball extensively, in 2012, again in 2012, in 2017, and I reference it regularly in my more recent papers.

Misinformation about the use of data explained in that movie influenced many if not every industry in the USA. None was more affected than gaming. This would ultimately lead to my 2017 Data Implosion prediction paper that explained how misuse of data was going to devastate the interactive media industry. Which it did. We are all paying the price for that.

I have a horrible feeling in my stomach as I write this. All roads seem to lead to Bobby. How one man could do so much damage to an industry that my whole life is dedicated to, it’s soul crushing. But at least it explains where Nadella got the idea to buy Activision/Blizzard/King (ABK) when he did, at such an impossibly overpriced valuation given that the whole company was on fire.

Bobby, I’ve underestimated you.

This changes the narrative of this story a bit. I think it is fair to say that Nadella did not do his due diligence (his job) because he trusted Bobby. A huge lapse of judgement. The Wall Street Journal published an investigative report about sexual harassment allegations against and around Bobby in 2021. Bobby should have been radioactive, even to lay people who didn’t know anything about him. That story broke on November 16th 2021. The “hostile” take over of ABK was announced on January 18th, 2022. That wasn’t a hostile takeover. That was about as incestuous as it gets. Bobby only had 2 months to convince Nadella to buy him out so that he could golden parachute away from accountability. Bobby is a smooth operator, Nadella didn’t have a chance. But he should have chosen his friends and nepotism much better from the start.

So here we are. Sure Amy Hood is making decisions she’s not qualified to make regarding XBox, at least not without expert advice. It’s clear Microsoft is getting all sorts of advice from people who have self interest, not experts. That’s nepotism. Hood likely is under orders from Nadella so that’s her partial excuse.

The end result is XBox is toast, though I already predicted that back in July in my The Force Wars Have Begun series. There I explained explicitly that we aren’t observing “layoffs” in the traditional sense. We are observing divestiture.

Thus now it’s clear (at least to me) that Microsoft is holding the bag at the end of the Paradigm shift, and why. This situation is even more odd because Microsoft is attempting to be the vanguard into the AI space, which is a new Paradigm. New Paradigms are high risk, high reward. I’m generally an advocate for pursuit of new Paradigms, especially if they are science based. Here it is, except that seemingly all the science regarding externalized risks to society is being ignored. This was made painfully clear when Microsoft fired their entire AI ethics and society team in early 2023, before the ABK deal had even been finalized.

So now we have cognitive dissonance on a planetary scale:

• Microsoft spends almost 80 billion dollars on ABK. Then decides that their gaming sector is a total loss and begins divestiture. According to Bellular, Nadella was actually considering divestiture in 2021, right before he got Bobbied.

• Microsoft is going “all in” on AI, even to the extent of removing ethics and danger to society entirely as decision affecting factors. They are even funding nuclear fusion development in an attempt to make the math add up if they can make simultaneous (unbelievably expensive) breakthroughs.

Now I would imagine Nadella is in a tough situation here. How does he explain throwing away $80B on something he is then going to shut down, at a time when he is so desperate to “win” the AI race that he’s willing to throw the entire species under the bus if that’s the cost?

I think Satya and Bobby are very close friends. And friends take care of friends. Right Jeffrey?

He’s put me in a very difficult situation. I feel objectively obligated to help them with this problem if they ask me. But I’m not trusting MS, the whole situation seems unsafe. Of course, at this point that’s an extremely remote possibility, unless Nadella gets replaced by AI. Then it becomes a very good possibility, as I explain here. And here. My last paper on Self Interest and AI perfectly explains why AI would be an upgrade versus Nadella. In my fantasy Utopia world, an AI CEO of MS would even rehire the AI ethicists.

Yes, I’m a game developer. I do live with one foot in reality and one foot in fantasy.