[GameSpot] - Xbox Game Pass Is A New Paradigm

[343iBot]

Xbox Game Pass has been one of the biggest, most talked-about developments in the gaming landscape of the past five years, both for Microsoft and the entire industry. The subscription-based service has shaken things up in a meaningful way as it relates to how games are released and consumed. Game Pass has generally excellent consumer sentiment, too, so much so that "hundreds of games for one low price" has become a meme. But the service also has its fair share of critics, those who wonder and worry about Game Pass' impact on the gaming ecosystem as it relates to the devaluing of games--perceived or real--and if the subscription-based model is sustainable or only possible because Microsoft is literally worth more than a trillion dollars. Given that the service is so new, there is no long-term data available, and one can only speculate about the impact Game Pass might have in the future. But that hasn't prevented there from being a lively, ongoing debate and discussion about Game Pass, with headlines seemingly popping up every week with people weighing in.

The Numbers Are Hidden

Like most other entertainment companies, Microsoft keeps its business dealings and contract details hidden as it relates to Game Pass. This is a common practice, of course, but it also means we have no good way to think about or measure the economics and business realities of Game Pass. Phil Spencer and other Microsoft executives have gone on and on about how great a value Game Pass is, but what else would they say? And the company, despite its overall size, does seem to have placed real significance on Game Pass, with subscriber growth even representing one of CEO's Satya Nadella's potential bonuses. It is possible that Game Pass is a great value and it makes money and is sustainable, but how does it all work?

Speaking to GameSpot, Wedbush Securities analyst Michael Pachter offered some takeaways on Xbox Game Pass, acknowledging up front that he has never received confirmation of his estimates and is offering only general insight. Pachter said he believes one revenue stream for Game Pass comes through time spent playing games. Microsoft might pay publishers based on the number of hours people spend playing games on Game Pass, because "stickiness"--however gross a term it might be--is what companies love to see. More time spent on your platform instead of "bouncing" is good business.

"My best guess is that Microsoft 'pays' 65% of revenue out to publishers based on time spent playing each game. If Microsoft games capture 50% of game play, then they 'pay' themselves half of the 65%," Pachter said. "If EA's games capture 10% and Microsoft has 25 million users paying $100 per year (making this simple), Microsoft revenues are $2.5 billion and the amount available for revenue share is 65% of that, or around $1.6 billion. That means EA would get $160 million a year under those assumptions. It's hard to know what percentage of time is spent on any game, but Microsoft has the means to capture and verify to publishers, so that's how they get games."

Naysayers have pointed out that payment models based on hours played could create a knock-on effect where developers design and pitch games to Microsoft that are specifically focused on live service and longevity. That may be true, but Microsoft seemingly cuts deals in different ways for different studios at different times to suit its needs. There does not appear to be a one-size-fits-all model for Game Pass. For those games that are only on Game Pass for a set period of time, Microsoft might work out a separate type of deal where the publisher receives a minimum guarantee, Pachter said. But again, no official details are available because Microsoft doesn't disclose the specifics of its deals.

Game Pass Deals Are "All Over The Place"

Spencer himself has spoken openly about how there is no one defined path for the deals it makes for Game Pass releases. He told The Verge that Microsoft's Game Pass deals are "all over the place," and he understands that this might sound "unmanaged." In some cases, Microsoft will completely fund the development costs of a game, and the studio can go sell their game on rival stores like PlayStation and Steam, or at retail, while Microsoft enjoys the benefit of having another Game Pass game. "For them, they've protected themselves from any downside risk. The game is going to get made. Then they have all the retail upside, we have the opportunity for day and date. That would be a flat fee payment to a developer," he said.

In other cases, a game might be finished, and then Microsoft works out a straight cash deal to bring it to Game Pass, Spencer said. Still, other deals involve usage and how much monetization a game has through in-game sales. If this all sounds like the Wild West, it's because it is.

Spencer has been frank in acknowledging Microsoft doesn't have all the answers. "We're open [to] experimenting with many different partners, because we don't think we have it figured out. When we started, we had a model that was all based on usage. Most of the partners said, 'Yeah, yeah, we understand that, but we don't believe it, so just give us the money upfront,'" he said.

Where Does The Rubber Meet The Road?

I am a Game Pass subscriber and I enjoy the many benefits of the service, and I've recommended it to friends and family. But as an observer and someone who enjoys the finer, more granular details of how games make money, I'm intrigued by any situation where a company says, "This thing is great, all the time, for everyone." Where does the rubber meet the road? Who is getting the short end of the stick? We don't know. But Strauss Zelnick, the CEO of GTA parent company Take-Two, has questioned whether or not it's possible for everyone in the chain--developers, publishers, and consumers alike--to come out ahead with a subscription-based service like Game Pass.

Speaking during an earnings call, Zelnick said subscription-based services like Game Pass can make sense for older catalog games--which is why we've seen Take-Two release some of its games on Game Pass before, including GTA V and GTA: San Andreas more recently. But he wondered if it makes sense for new releases. "For any business model to make sense in the entertainment business, it has to work for the creators of the entertainment as well as the consumers of the entertainment. I think catalog can make sense for the publishers, it can make sense for the consumers who are avid, who really want access to a lot of product. But if you're getting into frontline product, then the economics are much more difficult to make sense of," he said.

Zelnick observed that "consumption patterns" for a streaming service like Netflix--which offers linear entertainment--are different from interactive entertainment like games. And as such, thinking about Game Pass as the "Netflix of Games" might not be appropriate.

"Consumers who are involved with interactive entertainment have different consumption patterns than those involved with linear entertainment. Linear entertainment consumers consume something like 150 hours of programming a month. That's probably well over 100 different titles. In the case of interactive entertainment, consumers are consuming something like 45 hours a month, and that may be one, two, three, four titles. But it's certainly not 100 titles. So from a consumer point of view, it's not clear that a subscription model really makes sense, for the bulk of consumers," he said.

Another gaming higher-up who is less-than-enthusiastic about subscription services is Graeme Struthers, the co-founder of Devolver Digital. He told GameSpot that his main concern is that subscription packages may become so stuffed with games that subscribers might have difficulty finding something to play (anyone who has used Netflix is aware of this phenomenon).

"The world of subscription is a worry. And we're active in these areas, so we can't stand on the sidelines and just complain about these things. Game Pass, PlayStation Plus, and Apple Arcade, they are things we are participating in," he explained. "You do wonder if it's going to lead to a situation where there is so much content that you kind of fall off the edge. That's the one that keeps us up at night."

A Real Impact

Microsoft's own data on Xbox Game Pass suggests that the service has a measurable and real positive impact. ID@Xbox boss Agostino Simonetta told GI.biz that subscribers are playing 40% more games, which includes titles outside of the Game Pass library. Additionally, 91 percent of polled subscribers said they played a title they otherwise would not have tried were it not in the catalogue. Microsoft's data also says members are playing 30% more games than before subscribing.

Anecdotally, I have observed myself that I am much more keen to try a game I would have otherwise passed on because it's part of my Game Pass membership. This creates a snowball effect whereby I'm led to even more types of different games outside of my normal areas of interest. Extrapolating from there, it's not hard to understand and buy into Microsoft's vision for Game Pass, which is that it helps people discover and play more games than they might otherwise have. More people playing more games is good business for Xbox. Add on to this how Game Pass now supports cloud gaming (in an imperfect, incomplete way for now) and the attractiveness of the offering only grows. If I'm curious about a particular game but don't want to wait what could be a long time for a download to finish, the ability to boot it up in mere seconds is very appealing.

Perhaps an even more exciting corollary of Game Pass is that it creates a new paradigm where no one strictly needs to own an Xbox device to be an Xbox customer. Thanks to Microsoft's continued push into the PC space and with cloud streaming, anyone with a mobile phone or tablet is a potential Xbox customer. And with cloud streaming now available on Xbox consoles, people with an original Xbox One model don't necessarily need to upgrade their hardware to play the latest games. Thinking about it that way, the costly investments into getting Game Pass off the ground today could indeed pay lucrative dividends further down the road.

Xbox Game Pass As An "Amplifier"

NPD analyst Mat Piscatella tells GameSpot that Game Pass can act as an "amplifier," with positively received games enjoying greater adoption and sales. Data and commentary from Microsoft and third-party publishers has shown that games that launch into Game Pass do not necessarily see their sales diminish--and, in fact, the opposite may actually be true. One might expect a game released on Game Pass would decrease sales, but this isn't always the case. The indie game Descenders saw its sales quadruple after it arrived on Game Pass, for example. Of course, there may be some confirmation bias here, as developers aren't exactly coming forward to share stories of how poorly their games sold after coming to Game Pass. It's reasonable to assume that, of the hundreds of games on Game Pass, not all have succeeded.

"My current position on Game Pass and sales is that it acts as an amplifier. If a game is released on Game Pass and receives good player feedback, incremental sales can likely be expected," Piscatella said. "For games on Game Pass that receive negative feedback a downtick in expected sales is likely. I think launching on Game Pass is a net benefit for many (but not all) games right now. That might change in the future, and success for games launching on Game Pass is surely not guaranteed."

How Will Game Pass Affect Halo Infinite?

Halo Infinite's release in December is a momentous moment for the series, as it's the first mainline game to launch during the Game Pass era. It's the first in the series that you don't actually have to buy outright to play, and this is to say nothing of its free-to-play multiplayer mode which doesn't require Xbox Live Gold, Game Pass, or even a console to play. Microsoft's Forza Horizon 5 enjoyed a tremendously successful launch, reaching 10 million players and setting new Xbox records, and it would seem that Halo Infinite--given its size and stature--has a chance at doing even better thanks to Game Pass.

Given the new reality into which Halo Infinite is launching, Pachter believes unit sales will be down substantially compared to previous games, but that's no longer how Microsoft measures success anyway. These days, it's all about engagement. And by that metric, Halo Infinite might become the most-played Halo game ever--it's already off to a fantastic start, too, with its multiplayer beta being widely enjoyed and attracting a lot of interest, particularly on PC. Companies love to see recurring revenue as opposed to cyclical spikes. So the tradeoff for Halo Infinite specifically is that Microsoft will give up a massive surge in revenue during one period in favor of engagement and revenue over time with its new seasonal, live-service approach.

"The impact on Microsoft sales [of individual games] is very high for its first-party titles, but it converts a sporadic revenue stream into a regular revenue stream," Pachter said. "For example, most past versions of Halo sold around 8 million units in their launch quarter, but this version is going to be offered free to 25 million Game Pass subscribers. It's anyone's guess how many of these 25 million would have bought Halo if Game Pass didn't exist, but I would guess 8 million of them. Is it better to have 25 million people enjoying Halo or 8 million? Microsoft thinks the former. I'm sure they will still sell 2-3 million units, but it's highly unlikely that sales of the game hit a record."

Pachter said he believes most publishers "don't see the value" in the subscription-based market. If a publisher feels confident it can charge full price for a game and see a huge windfall all at once, then sticking to the traditional release model makes the most economic sense. But, as is increasingly becoming common, games are being designed with live-service and ongoing monetization elements. Pachter said GTA Online and FIFA's Ultimate Team modes are prime examples of this, with publishers reaping the benefits. But overall, Pachter said he's not surprised to see most publishers sticking with the traditional release model instead of opting to cut a deal with Microsoft for Game Pass. "Most of the publishers are skeptical, hence the slow adoption of the service (even with minimum guarantees) for new titles," he said.

Is Xbox Game Pass Burning Cash?

There are those who believe that Microsoft is burning through cash and hedging its bets that Game Pass will eventually become a sustainable and profitable business, even if it loses money at the start. With Microsoft regularly offering subscriptions for only $1, it makes sense that people wonder if Game Pass is actually turning a profit. Xbox marketing boss Aaron Greenberg said in 2020 that Game Pass is "not a big profit play" right now for Microsoft. The thinking is that the investments Microsoft is making in Game Pass today, or at the time in 2020, will eventually pay dividends if it all goes to plan. Netflix, many may recall, was massively in debt at the beginning and is now an entertainment titan with more than 200 million subscribers and an endless feed of new content.

With no balance sheet to look at for Game Pass, we can only take Microsoft's executives at their word when it comes to the financial perspective of the service, and Spencer recently told Axios that Game Pass is "very sustainable" already. In his vague statement, Spencer didn't say how the service is sustainable, or for whom it is sustainable, but he wants to dispel the narrative that Game Pass is a cash pit right now. "I know there are a lot of people that like to write, 'We're burning cash right now for some future pot of gold at the end.' No. Game Pass is very, very sustainable right now as it sits and continues to grow," Spencer said.

Spencer isn't the only high-ranking Xbox executive to discuss the economic impact of Game Pass. Xbox VP Sarah Bond told GI.biz that she understands the concerns some people have about how sustainable and profitable Game Pass might be. Like others before her, Bond didn't give away any specifics, but maintains that Game Pass is "really beneficial for all games," and when engagement goes up, so does overall spending.

"And frankly, people wouldn't be bringing us better and better games and launching them in Game Pass, if it weren't economic for them. There is a logic to it," she said.

But Bond, and other Microsoft executives, don't strictly believe that Game Pass--and subscription models in general--will become the lone way people consume games. She pointed out that even with Game Pass, there are still transactions that can occur whether that be through in-game monetization or a player choosing to buy a game outright. She observed that, like movies and video before it, there will be multiple business models existing at the same time for games.

"When we started [with Game Pass], we studied what happened in video and music. And we found that both models still existed. One didn't take over the other," she said. "I think they settled to like 60/40. It was different to before, but you had both business models living together."

Whether or not it is a profitable business, Game Pass is here to stay. It is Microsoft's key weapon for the next generation of gaming, and the signs suggest it will only grow bigger and play an even more central role in the future of how games are bought and sold. Whether or not Game Pass is sustainable or profitable is understandably low on the importance scale for many people. As long as Microsoft keeps making great games--and with its ZeniMax acquisition most recently, in addition to all the other studios it's acquired or started in recent years--the future seems very bright for Xbox games and Game Pass going forward.

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