Amazon announced today that it has updated some versions of its Prime Video app to include direct access to its cloud-based Luna gaming platform.

The business goal is to solve Luna’s awareness problem and bring new users to the platform. Many Prime members don’t know the gaming service is included with their membership.

Consumers in the US and UK who have both a Prime subscription and a Fire TV can now launch Luna directly from the Prime Video app, where it can be found in its own dedicated tab in the UI. Prime subscribers who launch Luna in the app will get direct access to a library of both casual and mainstream “AAA” video games for no additional cost and without having to exit the app.

“Effectively, we relaunched last October, taking a bunch of the value of Luna that had been behind a paywall… We pushed it into the Prime membership, as a way of providing great value and trying to grow our business,” Jeff Gattis, GM of gaming at Amazon, told GeekWire.

Players on Luna can stream an assortment of games to their TV or browser via Amazon’s cloud servers, using a smartphone as a controller if they don’t have a compatible gamepad. Luna’s current library ranges from established mainstream hits like Indiana Jones and the Great Circle, Dispatch, and Fallout 4 to an assortment of casual-friendly exclusive titles like Amazon’s own Courtroom Chaos.

Since that relaunch, Gattis said, the company has “basically 5x’d” its player base.

“The question for us is, how do you build upon that?” he said. “How do we let 200 million-plus Prime members worldwide know that they have this great benefit where you can play $70 games inside your Prime membership at no additional cost? One of our biggest challenges today remains that people don’t know the [Luna] benefit exists.”

While Luna was previously available to Prime subscribers via web browser and a couple of other types of smart TVs, it was a standalone service that required users to seek it out on its own. By shifting it into its own tab on the Prime Video app, Amazon’s hope is to drive up awareness that, well, Luna is there at all.

“It’ll start on Fire TV, but obviously our end state is to roll out to more countries and more devices, both first-party and third-party,” Gattis said. “Eventually we’ll be everywhere that Prime Video is.”

The integration of Luna with Prime could also potentially bring back the largely-abandoned practice of video game movie tie-ins. Fans of this summer’s Masters of the Universe reboot can watch the film on Prime Video, then switch to Luna to play Masters of the Universe: Legends Unite, a strategic deckbuilding game that’s currently exclusive to Luna. This kind of transmedia synergy used to be a part of every big summer action movie, but it’s largely fallen by the wayside since the 2010s.

Luna originally debuted in 2020 as a subscription-based cloud service. Subscribers could pay a monthly fee for access to over 100 video games, which they could play through their browser by streaming them from Amazon’s servers.

Back then, Luna was Amazon’s entry into what was shaping up to be a publisher-driven “battle for the cloud,” with companies like Google and Nvidia all launching their own game streaming services. Over time, however, the cloud’s impact on gaming hasn’t matched its early hype.

More recently, the component crunch has driven up the price of consoles and graphics cards, and that plays into Amazon’s bet on Luna.

Gattis said the cloud has been “technology ahead of its time,” in part because the industry aimed it at the wrong people, pitching it as a direct replacement for consoles and gaming PCs.

“That’s a heavy lift to ask somebody like myself,” he said. “I’ve invested both emotionally and financially in my Series X console and my 5090 graphics card. I’m happy.”

Amazon is catering to everyone else: players unlikely to buy a gaming PC or a current-generation console, let alone the next generation of gaming hardware at even higher prices. For the first time, Gattis said, there are “a lot more people who are going to think about the cloud as a viable alternative to $1,500 hardware.”

In 2007, Microsoft’s Xbox 360 consoles started dying — overheating until three lights on the front blinked red, a defect gamers came to call the “red ring of death.” Microsoft’s response was to extend the warranty on every machine and take a charge of more than $1 billion to fix the problem, making it one of the costliest product failures in the company’s history.

Microsoft could afford it financially, but the bigger factor was strategy. Xbox was a bet on the living room, and for a company minting money on Windows and Office at the time, losing a billion or so was a justifiable cost of staying in the game.

Nearly two decades later, that patience has run out.

“Going forward, this cannot continue,” the new Xbox CEO Asha Sharma wrote in a memo to employees last month, offering a blunt assessment of a business that has spent more than $20 billion over five years, only to see its core revenue fall by nearly half a billion dollars, running at a thin 3% profit margin, by Microsoft’s own internal measures.

With thousands of layoffs expected to be announced across Microsoft as soon as next week, the Xbox division is likely to be among the hardest hit.

The cuts reach across the company — including sales and consulting — part of a restructuring that has become routine around the close of Microsoft’s fiscal year. But for Xbox, they’re an early step in a broader effort to reset the business, rein in costs, and position the division for healthier profits.

Microsoft CEO Satya Nadella has been blunt about it: the company has spent years subsidizing Xbox rather than profiting from it, and that era is over. The videos and livestreams of people playing Xbox games that fill YouTube generate more money than Microsoft makes from the games themselves, he noted in an appearance on the Hard Fork podcast.

“No one can accuse Microsoft of not having invested for the last 25 years,” Nadella said. “And now we have to turn this into a sustainable business.”

Long-term strategic bet

Turning it around means breaking a pattern that runs through Xbox’s history.

Xbox launched in 2001 and lost money for most of its first decade. Microsoft absorbed the losses and stayed in — going up against Sony’s PlayStation and Nintendo — because it saw a strategic prize in owning a piece of the living room, and later mobile. Online gaming also gave the company early experience running services at scale, which fed its cloud ambitions.

Over time, the goal shifted from selling hardware to selling subscriptions.

Xbox Live, launched in 2002, turned online play into recurring revenue. Game Pass, which arrived in 2017, let players pay a monthly fee — the top tier is about $23 — for a library of games, including Microsoft’s own new releases the day they come out. The idea was to get people paying for Xbox everywhere: consoles, PCs, phones and the cloud.

And when growth stalled, Microsoft doubled down. It paid $7.5 billion in 2021 for Bethesda, the studio behind Fallout and The Elder Scrolls, then $69 billion in 2023 for Activision Blizzard (whose games include Call of Duty, World of Warcraft, Diablo and the mobile hit Candy Crush) the largest acquisition in Microsoft’s history.

A series of economic headwinds

In recent years, almost everything about the economics of gaming has turned against Xbox at the same time.

Hardware loses money, and AI is making it worse. Microsoft sells consoles at or below cost, banking on games and subscriptions to make up the difference. But AI data centers are consuming so much memory and storage that chip prices have spiked. That has forced Microsoft to raise Xbox console prices, most recently a $100-to-$150 hike this summer that it blamed directly on component costs.

Xbox lost the console war. By most estimates, Sony’s PlayStation 5 has outsold the Xbox Series X and S more than two to one. A smaller base means fewer game sales and subscriptions to offset the upfront hardware losses. That has left Xbox a distant second for the entire generation.

Revenue is shrinking. Even setting aside the games it gained from Activision, Xbox’s annual revenue has fallen nearly $500 million over five years — while the money going into the business keeps climbing. It has been investing more to earn less.

Microsoft’s most recent quarterly filing shows gaming revenue of $16.8 billion for the nine months through March, down about $1.1 billion, or 6%, from a year earlier.

Game Pass cuts into sales. Handing subscribers a new game the day it launches undercuts the roughly $70 they would have paid to buy it. The service delivers steady subscription income, but thinner economics on the games themselves.

Activision didn’t fix the margins. Even with one of gaming’s most profitable businesses folded in, Xbox earns only about 3 cents of profit on every dollar — well under the 17 to 22 cents typical in the industry. If the biggest acquisition in company history can’t move the margin, little will.

Every spare billion is flowing to AI. Microsoft is pouring more than $100 billion a year into the data centers and chips behind its AI push, trying to capitalize on the boom. Against a risk and payoff that big, a gaming business that barely breaks even feels like yesterday’s strategic bet.

What’s next for Xbox

The cuts have already started. In recent weeks, Microsoft has signaled plans to close or sell some studios, including Ninja Theory, maker of the acclaimed “Hellblade” series.

Shedding staff, studios and marketing will lift Xbox’s profit margins in the near term. What it won’t do is fix the underlying problem: a business can trim its way to a better number only so much before it has to generate more revenue.

Sharma’s plan, so far, is to concentrate on Xbox’s biggest franchises, funding blockbusters like Halo and Fallout while pulling back elsewhere. It’s leaning on Game Pass and releasing most of its games on PCs and rival consoles from Sony and Nintendo, reaching players well beyond Xbox’s shrinking base, even as it holds back a few new exclusives like Gears of War to give owners a reason to stay.

Microsoft is also rethinking the console itself. In her memo, Sharma described a “hardware component crisis” that has left the company unable to make as many consoles as players want, and called for “a new business model and partnerships” for its hardware.

How far the reset ultimately goes is an open question. The Information reported that Microsoft has weighed making Xbox a standalone subsidiary, a joint venture, or a spin-off, though nothing is imminent.

Whatever happens next, it’s clear that times have changed. In 2007, as the red ring of death crisis emerged, Peter Moore, who ran the Xbox business at the time, and his boss Robbie Bach went to then-CEO Steve Ballmer to ask for the money to repair and replace the failing consoles.

Ballmer didn’t flinch. “What’s it going to cost?” he asked, as Moore later recalled.

Told it was $1.15 billion, Ballmer said, simply: “Do it.”

Moore credits that decision with saving Xbox. There would have been no Xbox One, he said, without Ballmer’s willingness to spend more than a billion dollars to protect the brand.

Nearly two decades later, Microsoft is done writing that kind of check.