Microsoft’s Satya Nadella Wants Xbox to Conquer Cloud Gaming

Satya Nadella has never considered himself a “gamer,” but Civilization did manage to capture the attention of the Microsoft CEO for a stretch when he was younger.

He spent his time—unsurprisingly—empire building and strategically planning. “Then I somehow got all the cheat sheets,” he says. “And it became boring.”

“Civ,” as hardcore fans like Nadella and Facebook’s Mark Zuckerberg refer to it, requires careful thought, as players take on the role of world leaders vying to become the envy of all other nations, either by military might, technological supremacy, or through plain ol’ riches.

Now as Microsoft’s Xbox console business comes under attack from industry newcomers—invaders like Amazon and Google—Nadella finds his video game empire in a fight for its survival. In its latest earnings report, Microsoft said Xbox hardware revenue declined 48%, which gaming analysts attribute to the fact that its current flagship console, the Xbox One, was released nearly six years ago. In video game time, that’s equal to 12 Assassin’s Creeds.

And this time around, for Nadella, no cheat codes or power-ups will save the day. In the face of losing not just a video game, but video gaming, what is a talented strategist (or cheater) to do?

Ever the tactician, Nadella is changing the rules, instead. By unveiling the video-game streaming service Project Xcloud, he’s saying the console doesn’t matter as much moving forward. “I may start on a phone; I may go to a console; I may end up on a PC—but your game catalog should be available,” he says. “Your friends you play with should be there, wherever you’re playing.”

In this edited interview with Fortune, Nadella talks about partnering with Microsoft’s long-time video game foil Sony, dealing with toxicity in video games, and which game is his current favorite Xbox title. (And no, it’s not Civ.)

Fortune: When you first became CEO, you hedged by saying gaming wasn’t core at that time. What changed?

Nadella: I wanted to acknowledge that gaming is an important thing, and instead of trying to draw a direct line to what the rest of the company was doing at that time, we can still love gaming for gaming’s sake. Since then, what has changed is the connected tissue of this company, which is the cloud.

Why do you need to have a gaming distribution business as well as a separate Azure business in which you sell developer tools and computing power to game publishers?

For us, we will have both. The number of people who use Azure as the cloud backend for their game development is growing—our partnership with Sony [as an example].

That was surprising.

It’s a beginning for us. First of all, it’s all driven by Sony. They looked at who are all their partners that they can trust. In fact, it turns out, even though we’ve competed, we’ve also partnered.

What do they trust?

Basically and fundamentally the fact that we have a business model in the areas that they’re partnering with us, where we’re dependent on their success. So we will do the best job for them, whether it’s in cloud or whether it’s in A.I. or what have you, in order to make sure that Sony can succeed with their own IP creation.

Sony is going to be using Azure?

That’s a core piece of the partnership. They also have—beyond gaming—other assets, like interesting devices and silicon (chip) businesses, which could be interesting in the context of what we’re doing in Azure.

Overall, if you look at all the parts of these businesses, whether it’s in entertainment, gaming, or the camera businesses, all of these things can use more cloud computing power. But they can also go-to-market with Microsoft in some industrial cases, especially for their things around cameras.

With Amazon and Google getting into the gaming business and pushing streaming, it seems that hardware devices will become less relevant. Will the streaming software platforms eventually determine how games are played and how content is distributed?

Our general point of view is that you’ve got to put people at the center, and then everything else that people use becomes relevant. So I don’t sort of make statements like “devices are not relevant” or “software is all relevant.” The mere reality is that we move between devices.

Even in gaming, I may start on a phone; I may go to a console; I may end up on a PC—but your game catalog should be available. Your friends you play with should be there, wherever you’re playing.

So to me, being able to think about both the market in that expansive way, but, most importantly, think about the use cases for the people in such a way that you’re not bound to only one device or one [software] input—that’s the other thing.

With the idea of playing games across multiple platforms getting more popular, what will gaming be like five years from now?

Each of the platform companies will make their own sets of decisions. The way I look at it, in a world where people are going to play more across more platforms, the opportunity is for us to expand the market—if you really open up. But each player will make their own decision.

There’s things you can’t control and you just have to live in the world with it.

That’s right.

What did you think of the gaming business and Xbox prior to becoming Microsoft’s CEO?

Xbox has a long tradition in our company. I’ve always known the people who have been running that, over the years. Even when I was running Azure, some of the core hypervisor and security work, we would share. In fact, I don’t know if this story has been told, Azure Sphere [Microsoft’s security software for managing Internet-connected devices] comes out of the security work out of Xbox.

In some sense, the entire notion of how do you have the “hardware root of trust” [an IT security feature] docked to a cloud service with a secure channel backed to the update? That’s entirely, one of the things the Xbox has.

When Xbox was introduced, it was pitched as a gateway to the living room. What you are doing seems like a different view.

The living room is not the only place where people play games—the living room is a super important place where they play games.

We still love our console, we’re going to have another console. We’re going to keep at it, because we think that there are people who want to play games on the console.

And it just so happens that people love to play games on PCs. We didn’t have much of a value proposition to them other than saying we have the Windows operating system, and we’ve done everything we’ve can to serve developers there. But we’re now going to do even more on the PC.

With Xcloud, we can reach anybody on a mobile phone to play AAA games [gaming’s equivalent to Hollywood blockbusters]. It’s more of an extension than to say what we were doing [in the living room] was wrong or not or didn’t make sense. It’s just that hey, it has become clearer and bigger, we have been able to really jump on that.

A vocal minority in gaming has a toxic aspect to it. Do you worry that will harm Microsoft’s reputation?

Absolutely. I mean look, toxicity is not just limited to gaming. When I think about Internet safety and the need for tools around moderation, investments by us around moderation—this is what we are doing with the Xbox ambassadors.

That’s all super important stuff. Whenever you have a community that’s an online community—whether it is Yammer inside Microsoft or whether it is Xbox Live and the community outside—they all have to basically be governed by certain norms or civility, and we have to do that.

One of the things I realized is we can’t just complain about what the world looks like. You’ve got to start by saying, ‘Okay, can the people who are creating these communities first, live the values?’ And through that, make sure that the physics of the local interactions is what is reflected in the broader community.

With so much scrutiny on the tech companies, is this the right time for Microsoft to make a big effort to be a larger consumer tech company?

I mean we are [a consumer tech company]. The question is—because I think there’s a [misconception] the press has gotten—are you a consumer company or are you an enterprise company? We have tremendous success in the enterprise, but really, the way I’ll always see it is we are focused on users who we can do unique things with in both work and life.

There are a billion users of Windows—they use it at work, they use it at home. Therefore we always had dual use. I look at, can we do more things around productivity across work and life? What can we do in gaming, obviously, which is entertainment? These are categories we’ve always been in.

It doesn’t take anything away from our success in commercial, but it also gives us a huge opportunity in what the world views as a consumer business. So be it.

Do you play games?

A little bit. I’m not a big gamer, I will say that. There’s an Xbox game, which is a cricket game that I love [Nadella is referring to the Don Bradman Cricket gaming franchise]. It’s actually a pretty decent game.

Did you play games growing up?

Not really, but I loved Civ.

That was your favorite?

Yeah for a while. And then I somehow got all the cheat sheets, and then it became boring.

Then you just cheated on your empire building.

That’s right (laughs).