The UK's big pandemic lockdown finally lifted in England this past week, allowing me to see an old friend for the first time in years. A busy chap with three kids, my pal doesn't get a huge amount of time behind the joysticks anymore, but he does jump on for an occasional run at FIFA and Call of Duty. I asked if he had Xbox Game Pass, given that EA Play is now included as part of the Xbox Game Pass Ultimate subscription. Despite being an Xbox player, I was surprised when he said that he didn't even know what Xbox Game Pass is.
Indeed, the world still doesn't know about Xbox Game Pass, despite some pretty hefty marketing from Microsoft. To explain it simply, I've often fallen back on comparisons to Netflix or Spotify, as a way to very quickly elaborate on its "all you can eat" subscriptive nature. However, some of the discourse on social media uses the comparisons to put down Game Pass, hiding behind a veil of "think of the devs!" while drawing comparisons to how little musicians are paid on Spotify, or how streaming services have slaughtered CDs, DVD, and Bluray sales.
Spotify added a donation button to its service last year, as musicians felt the pinch from live shows being canceled across the world. The Guardian called it a "tacit admission" that Spotify wasn't paying musicians the royalties they deserve. Some think Xbox Game Pass could eventually go the same way, lowering the value of games by dissuading purchases at retail, while they wait for a title to appear on Game Pass. Is this a possible scenario? Is it a comparable situation?
Let's explore the experiment that is Xbox Game Pass, and why at least in 2021, the comparisons to the Netflix and Spotify business models don't really hold up.
Xbox Game Pass has an upsell factor
One of the ways people try to discredit Xbox Game Pass and assume that it "doesn't make money" is to point to Netflix, Spotify, and other services that struggle to actually turn a profit. Spotify's losses hit €293 million euros in 2020, while Netflix enjoyed a healthy $2.7 billion dollar net income. Netflix has 204 million subscribers as of writing, and Spotify has 345 million active users, of which 155 million subscribe, with the remainder on a free ad-based model. The last figure we had for Xbox Game Pass was earlier this year, putting the service at 18 million, although I've heard recently that it has crossed the 20 million mark and may well be even further over that by now.
I've seen some commentators without evidence assume Microsoft is paying more than it's earning for titles to hit Xbox Game Pass. Let's assume conservatively that all Xbox Game Pass users are on the $10 dollars per month tier, at 20 million subscribers. That gives Microsoft roughly $200 million per month at least (not including Xbox Game Pass Ultimate) to play around with it.
Unlike Spotify, Microsoft doesn't pay ongoing royalties for downloads. Every contract is different, but I understand that Xbox Game Pass pays out an upfront lump sum to get the game into the service, with additional benefits negotiated on a per-contract basis. Microsoft knows how much it has to spend month over month, giving them a relatively easy spreadsheet to work with when it comes to acquiring content, which forms part of the user acquisition cost, not factoring in marketing.
Unlike Netflix and Spotify, Xbox Game Pass also has an upsell component. Although Spotify has started selling merch through the site, in addition to tickets to live gigs and vinyl records and so on, I'd bet money that the vast majority of users never even see this feature. By comparison, Minecraft Dungeons has several relatively cheap DLC packs that aren't included in Xbox Game Pass.
If you enjoy Minecraft Dungeons, chances are you might just buy those DLC packs on top of your Xbox Game Pass sub. Netflix also does sell some content at retail, but generally speaking, the app itself has no upsell features whatsoever. You pay your sub, and that's it. There are no microtransactions, no DLC content, and crucially, no retail sales attached. When you factor in upselling, the amount of cash Microsoft is generating from Xbox Game Pass is likely far higher than the subscription fees alone.
Xbox Game Pass is also more curated
People point to Xbox marketing CVP Aaron Greenberg's comments that Xbox Game Pass "wasn't a big profit play" to spin the business model as weak. Thing is, that's standard practice for any new business on this sort of scale, while it's in a user acquisition mode.
It's potentially complicated for Spotify, given that it doesn't pay a single lump sum for content generally, instead opting for a royalty-oriented model. Spotify also has no real way to make exclusive content, given the granularity of music in general. Spotify was a reaction to the rampant MP3 piracy of yesteryear, given how easy it is to shift music from one format to another in today's digital age. Ads and subscriptions alone don't seem to be doing the trick for Spotify, which has only seen a few months of profitability out of its entire 15-year life span. As more users come into Spotify, server costs and royalties go up too, which doesn't paint a rosy picture.
Netflix is producing cash, but also has a heap of debt to finance as it relies primarily on funding exclusive content with big budgets. The goal is that one day, Netflix will have so many users and so much income that it flips immediately into full profitability in a big billion-dollar-shaped way. Those shows were expensive to make, but once they're made, they add permanent value to the service. I can watch Netflix's exclusive shows forever, and there's frankly more content in there than I have time to consume. Beyond first-party content, you could argue that Xbox Game Pass feels a lot more curated than some of its competitors.
In some ways, the music industry is saturated. The sheer volume of content on Spotify, combined with the way we consume music, doesn't exactly lend itself well to profitability for the artist. I try to buy vinyl records for bands I love, and still, have a vast CD collection despite literally not owning a CD drive in my entire house anymore, but I like so much music that I probably only listen to the same bands a few times a year. In previous years, radio and TV effectively gatekept music, with discoverability hinging on the approval of a handful of media execs. The internet democratized music but, perhaps reduced its sale value in the process. There's simply so much music out there from independent creators on YouTube, Soundcloud, and beyond, that you could argue there's more supply than demand.
Spotify boasts literally millions of songs, whereas Xbox Game Pass features a couple of hundred games. Not only that, but these games rotate out of the service after a few months. The curation ensures that even the smallest indie games hitting the service have a chance to shine and be discovered by users hungry for new content. Xbox Game Pass is also beating Spotify and Netflix by creating full purchase incentives, via Xbox Game Pass' clever "buy to own" discount for titles that are exiting the service.
Xbox Game Pass quite possibly contributes to retail sales
Indeed, unlike Spotify killing CD sales and Netflix and Disney+ killing Bluray sales, there's evidence to suggest Xbox Game Pass is doing the opposite for games. Despite the fact Sea of Thieves, Age of Empires, Forza, Halo, and other games are available on Xbox Game Pass for PC for just $10 a month, all of these games hit Steam at retail, remaining in the top-sellers list for months after launch.
Like Netflix, Microsoft is investing a ton into exclusive first-party content via its partner studios. Still, those games operate on an old-school boxed-copy retail business model too, whereas Netflix was always streaming-first. If recent trends are anything to go by, millions will still line up to buy the next DOOM or Halo, whether they're in Xbox Game Pass or not.
Sea of Thieves is a game that launched with a relatively thin content slate. However, Xbox Game Pass access potentially helped buoy the game while it sailed to a broader feature set, finding a passionate and dedicated audience in the process. The ongoing nature of the game has led to repeated peaks of interest as new content is launched, which no doubt lead to additional subscriptions to Game Pass, and thus, complimentary retail sales as a result. Cross-play multiplayer with Steam means that I can enjoy the game on Game Pass, and potentially entice my friends to play with me by incentivizing them to purchase at retail.
Free-to-play games enjoy this virality and content sharing due in part to their low barrier to entry. It could be that Xbox Game Pass is creating a "free-to-play-like" virality for games that aren't free to play. Outriders too has launched in a pretty rough state, but still managed to top retail sales charts despite a high-profile day-one launch into Xbox Game Pass. Did Xbox Game Pass inclusion help market and boost interest in the game? It's certainly possible.
The comparisons should be retired
There are various other reasons why the comparisons to Netflix and Spotify don't really stack up. Microsoft has its own cloud provision, whereas Netflix and Spotify have to add additional overheads by partnering with third-party cloud providers. Netflix and Spotify are independent companies, whereas Xbox is backed by a trillion-dollar legacy tech giant, who just landed a $20 billion dollar contract with the Pentagon and spends billions of dollars on acquisitions like it's pocket money.
Xbox Game Pass for sure could have ramifications for the industry that nobody has truly foreseen yet. Consolidation and lack of competition can lead to stagnation and price gouging. You never really want any single company to have all the power, even if Microsoft has shown itself to be fairly responsible in its old age. Even still, every developer and publisher I've spoken to off the record about Xbox Game Pass has only had positive things to say about it. The deals help smaller teams cash flow their development and relieve financial pressure so they can focus on creating games we love.
Xbox Game Pass is helping me discover games that I may not have ever known even existed previously. Xbox Game Pass is also improving access to games for poorer families who perhaps can't shell out $70 dollars (or more in some countries) per game. Through cloud streaming, Xbox Game Pass will also bring games to the broadest gaming audience in history, all on a single codebase.
Of course, it's our duty as members of the gaming community to be skeptical of any major shifts brought about by trillion-dollar corporations. At the very least, though, it's time to acknowledge that Xbox Game Pass stands alone, and is not really comparable to Netflix, Spotify, or any other streaming service that came before it.
I think through years of bad behavior by corporations we've come to expect some sort of "gotcha" moment from things that seem too good to be true. Could it be that, maybe, just maybe, Xbox Game Pass actually has no downsides? Only time will tell.
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Jez Corden a Managing Editor at Windows Central, focusing primarily on all things Xbox and gaming. Jez is known for breaking exclusive news and analysis as relates to the Microsoft ecosystem while being powered by caffeine. Follow on Twitter @JezCorden and listen to his Xbox Two podcast, all about, you guessed it, Xbox!
Let's say Microsoft has an average user retention of only 4 months and between regular game pass and the higher sku ultimate you have an average of $12 per month per user... 20 million subs x $48 per user = 960M in revenue Microsoft could take 240M (25%) of that and stick it in their pocket... take 360M (50% of the remaining 75%) and allocate that to 3rd party content licensing and take the other 360M and put that into 1st party AAA development and marketing. There is a reason why all of the sudden Microsoft is signing deals for day 1 AAA releases now. Their costs for 3rd party content remains static @ 200-250 games, so as subs and revenue grow they can cut bigger and bigger checks to those 200-250 devs/publishers. The checks were meaningful enough that Microsoft started getting day one release from indies last year.... the checks are now large enough that they are starting to entice AAA publishers. Any publisher with a service based multiplayer game that doesn't have a blockbuster marketing budget behind it will have to strongly consider the benefits of releasing direct to game pass.
The large third party developers/pub already have their models and distribution channels. Netflix shovels out crappy shows and tags OLD third party movies/tv series which are not worth anything except small revenue to the publishers. There is no real reason for third parties to release day 1 as day 1 is where the money is made, someone has to eat the costs. The reason why Netflix subscriptions took off is many people got tired of paying live tv which is really the hook for cable. So, a family went from paying $50-150 a month to $15 a month and got cheap entertainment. There is no real connection to netflix, cable tv is a subscription service as well. Its bad Microsoft marketing, which isn't working by looking at Xbox numbers. Netflix has made money from selling stock, matter of fact, it was all red until a year ago... when they had to stop production of their crap ware. Obviously, people were willing to pay $15-20 for TV programing, but most people are lucky to complete 1 game a year. Sales of Xbox have steadily gone since the release of Game Pass.... last year was the worse year for Xbox sales in unit sales.... in its history (generally speaking if we take an average of 6m of original Xbox sales). BTW, you can get all those Game Pass games on PC for free with no end date, see youtube. Not sure why anyone would pay for something they are giving away for free. Each his own. This is just bad strategy on top of bad marketing. Hey, look you can play a billion games for $1, does it matter if its one billion or one trillion? Nobody plays that many games.... however, a family of 5 can easily consume 5,000-10,000 hours of new movies/tv shows per year. As far as MP, its all Free 2 Play now. <--------- Satya was a pretty wise decision maker until he went with Spencer... literally makes zero sense. There is no reason for MS to really be the middleman for third party games.... generally speaking for the large publishers it just adds cost.... long term. I expect Microsoft to continue to lose market share.... 2.2:1 last gen.... to 3 to 4:1 this gen, this doesn't even include the huge market Nintendo is gaining. Large publisher.... maybe if they get their act together... middleman.... those days are coming to a close. I would say the same thing about PS Now, its fine if someone wants to be a subscriber but its only going to be a small revenue stream in the long run i.e. Blockbuster/Family Video. Day 1 sales is where its at... old media is not worth much. <----- Heck, I play quite a few games and I can't even keep up with the amount of games that are completely free or part of an existing program or F2P. LOL There is a reason why Xbox sales continue to go down - continuous changing strategy, lack of commitment, continuous abandonment, etc.
wrong reply connection. sorry.
I love seeing articles praising Xbox gamepass. Not being in a bubble or a fanboy, but its the literal only thing that’s got me excited about the future of gaming in ever. Just a few things I want to add. 1) I’m surprised you didn’t mention Xbox/Microsoft’s recent release of Gamepass stats. From what I read (unless the internet is lying (in which case why am I here?)): “Game Pass subscribers spend 20% more time playing games, play 30% more games, play 40% more genres and, crucially, spend about 20% more on gaming overall”. The important part is the 20% more spent on gaming overall. Assuming that this was only released with stats from the Microsoft store, that’s insane for Microsoft considering they get a 30% cut (last I checked) on all game sales on their store. Even with the 20% discount most games on Gamepass will end up costing more than the $10 entry price (completely ignoring dlc sales). I imagine this is also a big reason why they want day one releases (to give more incentive for gamers to buy games are near full retail price or more with dlc packs). This is a big reason why I don’t see Microsoft upping the price ever. Unlike Netflix and Spotify they can increase revenue on the service just by letting people buy games from their store. 2) The success of gamepass can’t just be measured in terms of active subscribers. Essentially Gamepass is just a giant marketing push. A plan to increase exposure of the Xbox logo on as many markets and platforms as possible (console, pc, and mobile). Going back to the 30% cut if a person learns about xbox and its killer gamepass and just buys a series S and starts buying OTHER games on the Xbox (games not on gamepass or other day one releases) Microsoft wins. There’s a massive benefit to owning the entire ecosystem and not just the streaming part. 3) Game Pass quests. People don’t talk about these enough, but the quests are genius. For one, they incentivize not only trying and playing new games, but me playing on my Xbox daily. Before the quests there would be long stretches of time when I just wouldn’t feel motivated to play any game (I was burnt out or lazy or both). But with gamepass I get an incentive everyday just for turning the console on and opening a game. This is a MASSIVE benefit gamepass has over everything else. Once you get this massive library, you’re actually encouraged (and rewarded) for using it and trying new games (often indies). Personally with my video streaming (hulu, netflix, hbo max, disney+, paramount+ (My family and I share different ones)) I’ll spend most my time not watching anything or rewatching favorites. With gamepass, I’m always trying new games. On top of that, Gamepass got me into the Microsoft rewards program as a whole and made me want to use Bing over google (insane right?) and the Microsoft store for shopping more. That’s something Netflix could NEVER do 4) xCloud. Microsoft is looking to give console gaming to the massive mobile gaming market. That’s great, but not what I think their end goal is. Phil Spencer has mentioned being able to buy game on Xcloud and access your full library through there. When Xbox manages this I think they’ve one. For their first party titles (and some third party (if not all eventually)) they’ll be able to promise owning a game on Xbox, PC, the cloud, and being able to pick up where you left off an play anywhere. That’s just unbeatable. Also if they are able to create a full store experience on the cloud then revenue should shoot up a ton (assuming the 30% gaming cut). They've always wanted the mobile app store market.. The console gaming market is in the millions, but mobile is in the billions. With 10% off dlc and 20% owning the game there should be a ton of sales through X loud. Microsoft might be able to accomplish what stadia wanted with sales while giving gamers the subscription catalog they wanted. Not to mention all the new to console gamers introduced to Xbox who are willing to shell out a mere $300 on a series X (and everything else with Microsoft loops). 5) This goes into why I love it personally. It doesn't push exclusives. With Game Pass there is still merit in Microsoft and third-party developers supporting multiple platforms and making games available outside of the service. This goes into why I hate streaming service originals and Apple Arcade exclusives (and PlayStation and Nintendo as a whole). I CRAVE and need freedom and options. I don't want there to be only one choice for me to enjoy something through. Microsoft put minecraft dungeons on multiple platforms and turned on cross play, who else would do that? All their games are on PC and any gamepass game you can buy to own. I just love that. I'm not forced into paying for a subscription service until the end of time for certain content (or even forced to buy an Xbox). It's JUST a choice of that creates a ton of value
Fantastic comment. Insightful and clearly written from personal experience.
Thank you for sharing it :)
Game Pass is a subscription service for content. So is Netflix. So is Spotify.
That is *all* they have in common. Games =/=Video =/=Audio.
The content is different, the consumption pattern is different.
And as pointed out, the upsale potential is unique to GamePass as is the discount for buying games, whether leaving or staying.
Finally, the ratio of First party to Third party content is different for all three. Of note, a good portion of the GAMEPASS content, and a big part of its value proposition, is the backlist and backwards compatible content. All of which is essentially free (for first party) and found money for third party as these games have earned out all they were going to earn under the traditional model and often have to compete with themselves via cheap used game sales. Finally, GAMEPASS draws and locks in gamers to the XBOX platforms.
The value proposition goes three ways, to developers, gamers, and Microsoft. A better comparison to GAMEPASS would be AMAZON PRIME, which generates massive profits because it drives sales and locks shoppers to the Amazon ecosystem. And both are routinely underestimated. Anybody who wishes to pretend GAMEPASS isn't profitable or sustainable is welcome to it; the longer the naysayers keep to that mindset, the longer GAMEPASS sails with minimal competition. Just remember that network effects are a big part of gaming. The more subscribers they sign up, the easier it will be to add subscribers; success breeds success.
"Anybody who wishes to pretend GAMEPASS isn't profitable or sustainable is welcome to it; the longer the naysayers keep to that mindset, the longer GAMEPASS sails with minimal competition." Well, Microsoft doesn't provide profitability on individual products or divisions, but we do know (although not exact) that Xbox was losing huge amounts of money during original Xbox and Xbox 360 days. (I would refer to google search, multiple MS executives have said there were massive losses) $4-7 billion on the original Xbox and financial analysis during the Xbox 360 years with loses somewhere around $2 billion PER year was possible. As far as GamePass, I would say its an impossibility to be profitable, as they are mostly giving away the service for free. Also, you can actually sign up, download the games on PC and keep the games forever and then ask for the refund... the games are still playable forever. Long term sustainability would be based on cost to produce the service versus number of subscribers and subscriber fees.... so right now there are missing components. "Finally, GAMEPASS draws and locks in gamers to the XBOX platforms." Yet, Xbox units have basically continued to tank in sales since the launch of Game Pass.... last year from what I can tell was worst than even the original Xbox days. Xbox is steadily declining in units and market share and have been... Game Pass has not only not stopped it... its actually increased during that time period. Everyone and their mother has a rental service which is what this is to EA Access to Playstation Now to Ubisoft Uplay.... nobody really cares. Its like getting excited that another blockbuster opened up down the road.... nobody cares. <------ Media is very cheap after the initial release 3-6 months. For the record I thought the early years of Xbox (2001-2007) were awesome, once Nintendo started cleaning up shop with two Gamecubes duct taped together... Microsoft than went into the chasing game. Chasing the next big thing.... at that time it was casual gamers, then it was motion control games, than stupid tv stuff, etc. For Microsoft to make money in gaming they will need to abandon the middleman for everyone approach and compete in game development. Microsoft is going to have to publish to other non-MS places i.e. Steam, Playstation, Nintendo, iOS, etc. Netflix is junk, why in the world would one want to be the Netflix of gaming? LOL I equal Netflix to bad quality of entertainment.
Stick to that line.
I dont pay a cent (well initially I did) for Game Pass PC. I just search on bing, gain the points, and have enough to use the points every month (I dont own an xbox console). Value for money that's for sure and I hope it doesn't change, but I honestly don't think MS can keep it going forever without alot more subscribers. Its also obvious I'm not the only one doing this so the percentage of non paying customers would be nice to know. How many subscribers they have by years end will be very interesting, especially with rumours of a Sony alternative floating about.
All that surfing, does it perchance bring ads into your peripheral vision?
It's got you using Bing instead of Google or whatever.
(Bing is the second largest search engine worldwide, with a 2.71% market share. Microsoft generated $7.74 billion in search advertising revenue in the 2020 fiscal year. Bing is available in 105 languages and 238 countries. Bing has a market share of 36.96% among US console users.) Have you ever heard the expression "TINSTAAFL"? "There is no such thing as a free lunch."
Or maybe, and more directly applicable: "If you're not the paying customer you are the product." Try looking at the chain in the opposite direction: to get GAMEPASS you search with Bing so you are exposed to Bing ads which brought MS almost $8B in 2020 or about 4 times as much as GAMEPASS did in 2020. All those clicks are real money to Microsoft's pockets instead of Google's and yet another way GAMEPASS brings money to MS. If you use GAMEPASS, you're paying.
There's no free lunch: you pay with cash, clicks, or eyeballs, but it's all money to MS.
Mr Nadella thanks you. 👍
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