How Microsoft Lost Hollywood

Former Microsoft CEO Steve Ballmer spent more than a year luring his friend Nancy Tellem to Microsoft to head up a new division that would deliver original television shows to Xbox users. Before she officially committed in September 2012, the one-time president of CBS wanted to be sure the software giant in Redmond, Wash. was serious about Hollywood.

Mr. Ballmer repeatedly insisted to her that the company was promising hundreds of millions of dollars in investments. In fact, Xbox Entertainment Studios, as the new original content division would be called, was going to be a pillar of the November 2013 release of Xbox One, which Microsoft was pitching less as a gaming device and more as an all encompassing entertainment hub. It would go head-to-head with subscription services like Netflix by offering some free and some paid premium original content to Xbox users.

But the hopes never amounted to much. The effort was stymied by a rigid corporate structure and culture at Microsoft that was ill-prepared to take on the demands of a content studio, according to interviews with people involved in the effort. By the time the unit began winding down in July, nearly two years after it launched, it had released only one show for Xbox users: a reality series about street soccer timed to coincide with the World Cup.

Ultimately, the initiative was a victim of cost-cutting and a new CEO with a new agenda. But its struggles along the way show how hard it is for tech companies to break into financing and creating content, even with gobs of cash. It’s also a cautionary tale about the consequences of branching out beyond a core business. (This article is the third in an The Information series on the deep divide between the technology and media industries. Here are parts one and two.)