Discussion The Economics of #GamePass | Too good to be true, destined to fail

[Vash_the_Stampede]

Hey all

WHAT A LEAK! I've been spending a lot of time thinking about the economics of the video game industry, and Game Pass. I find it interesting that the smallest player - XBOX - is the only one pursuing this strategy while Sony says it is not doable.

I initially gave Phil Spencer the benefit of the doubt. but today's leak almost definitely proves that Sony is right. Moreover, I don't think XBOX will ever be able to scale the business to profitability.
Punclhine:

I will explain:

1. How and how much money does Xbox Game Pass makes per user per month

2. How much it probably cost Xbox to acquire content and why do I believe it is loss-making despite claims to the contrary

3. Why Playstation is CORRECT that the economics of video games do not scale to the current subscription model

4. Xbox will either never get meaningful AAA support and it will unlikely ever be profitable, even at scale

5. Xbox likely monetizes content at LESS than half the industry standard and has no cost advantage. This is an inferior business model

6. Best case Xbox GamePass and XCloud still look like a sub-scale version of the Apple App Store and Google Playstore.

1. How and how much money does Xbox Pass makes per user per month

XBox makes $10/month/user and drives increased engagement and monetization.

Now we know it is about $0.15 per hour from TWO different presentations.

Avg gamer plays about 40 hrs a month so TOTAL MONETIZATION IS ABOUT $0.40/hour.

$0.25 ($10/40h) from the subscription+ $0.15 engagement monetization

5643-EB4-D-95-D1-48-A0-9-F6-C-DBF86669951-F hosted at ImgBB

Image 5643-EB4-D-95-D1-48-A0-9-F6-C-DBF86669951-F hosted in ImgBB

ibb.co

3-AECD389-C52-B-477-A-8-D68-260-F9367806-C hosted at ImgBB

Image 3-AECD389-C52-B-477-A-8-D68-260-F9367806-C hosted in ImgBB

ibb.co

2. How much it probably cost XBOX to acquire content and why do I believe it is loss-making despite claims to the contrary

3rd party content, which is about 80% of gamer hours COSTS AS MUCH AS $1.00 per hour.

REMEMBER! Xbox has tied content spend to per hour engagement, not per game.

FC176-A9-E-74-BF-4778-8-EED-C00-DA0764-C97 hosted at ImgBB

Image FC176-A9-E-74-BF-4778-8-EED-C00-DA0764-C97 hosted in ImgBB

ibb.co

B53-B5-E00-6613-4-C73-AAF6-3-A3738-B6-FC16 hosted at ImgBB

Image B53-B5-E00-6613-4-C73-AAF6-3-A3738-B6-FC16 hosted in ImgBB

ibb.co

Even if content cost is half (or about $0.50/hr) bc indie's cost less, timing, etc.. that's still a ($0.10) per hour in gross profit.

We also need to add $0.06 or 15% of sales in costs for overhead, as we learned 1st revs have 85% GP% from the ZeniMax presentation.

Finally, consider customer acquisition costs. I’ll admit that i feel messy confident about this figure. If I assume a monthly churn of 5%-10% and an LTV of 2x-3x I get about $60.

IF a new user plays 40hr/month for 10-20 months before churning, he or she will play ~600 hrs so Xbox spends $0.10/hr in CAC.

FDCE8-D8-F-8-C90-4-C3-F-9-ACD-25491835-B97-A hosted at ImgBB

Image FDCE8-D8-F-8-C90-4-C3-F-9-ACD-25491835-B97-A hosted in ImgBB

ibb.co

D48-F2-A0-F-9-D16-48-B3-9733-43-E8-A5-A7-B7-AC hosted at ImgBB

Image D48-F2-A0-F-9-D16-48-B3-9733-43-E8-A5-A7-B7-AC hosted in ImgBB

ibb.co

3. Why Playstation is CORRECT that the economics of video games do not scale to the current subscription model

Let us put it all together
$0.25 in subscription fees
$0.15 in total monetization
$0.40 in revenue per hour

$0.06 in overhead costs
$0.50-$1.00 in content cost per hour
$0.10 in CAC

$0.26-$0.76 LOSS PER HOUR.

Here is how I think it looks with 25m subs.

EB36-E166-4-ACB-4-CC1-ACA7-FB572-C036698 hosted at ImgBB

Image EB36-E166-4-ACB-4-CC1-ACA7-FB572-C036698 hosted in ImgBB

ibb.co

A404-FB02-98-F2-4-C3-D-9268-BD9-FEB779-D45 hosted at ImgBB

Image A404-FB02-98-F2-4-C3-D-9268-BD9-FEB779-D45 hosted in ImgBB

ibb.co

F7-B9-C330-0-A0-E-44-E8-AF35-E9-F9070-EF524 hosted at ImgBB

Image F7-B9-C330-0-A0-E-44-E8-AF35-E9-F9070-EF524 hosted in ImgBB

ibb.co

The development/content cost is the key variable to argue over. 1st party won’t save it either. Starfield is probably a $200m-$300m game that will likely hit 20m users. Let’s say they play an average of 50 hours, 1000m of engagement vs $250m in cost is $0.25/hr. That’s probably the floor for costs, and ignore all the other costs.


3rd party developers have a total cost per game equivalent of $0.30-$0.50/hr and they expect to make 2x-4x their cost in gross profit. It is going to be difficult to get AAA content meaningfully below $0.50-$1.00.Xbox is stuck paying MORE per hour of content than their ~$0.40 monetization rated

XBOX will either never get meaningful AAA support because
1. they either can't afford to keep paying
or
2. they'll pay but unlikely ever be profitable since costs/hr> revenue/hr

5. XBOX likely monetizes content at LESS than half the industry standard and has no cost advantage. This is an inferior business model

The key here is that Xbox's monetization model has switched to engagement. Console games are just too expensive and users don't spend enough hours to support the current model.

889-A22-EC-5-E69-444-B-B5-A3-8-FC53-C1-FE48-C hosted at ImgBB

Image 889-A22-EC-5-E69-444-B-B5-A3-8-FC53-C1-FE48-C hosted in ImgBB

ibb.co

6. Best case XBOX GamePass and XCloud still look like a subscale version of the Apple App Store and Google Playstore.

Candy Crush has 250m MAUs (10x Game Pass) and monetizes at $0.35/user/month vs. GamePass MAUs at $16. Game Pass is too small to be a platform for Free-to-Play and too cheap to be a platform for console gaming.

IF they raise prices further, they'll price themselves out of the market.

This is a business model problem, not a scale problem.

 

[GamerJM]

What I'm getting from this



(Replace "fire this weapon" with "run Gamepass")

 

[Vash_the_Stampede]

What can I do a better job explaining?

 

[RennanNT]

The thing is, even without numbers it isn't hard to guess they make significantly less per user than selling copies. But also that if, for example, they got a third as much per user but at least tripled the number of users, GP would be a success in theory (which is why it makes way more sense for the company with low market share).

So I think you should focus on proving that either:

- GP + XCloud won't bring enough users from other consoles or mobile, nor will shift enough revenue from 3rd party software and PC stores to 1st party, to make it worth it.

- Even if they had succeeded in getting multiple times more users than otherwise, the higher cost would still keep it less profitable as going the traditional way.

 

[Haziqonfire]

This is not just a Game Pass problem but a larger problem with subscriptions. It's not really sustainable long term and we're already seeing the effects of this with services like Netflix.

Money isn't infinite and as you get more subscribers you need more content, it's just a vicious cycle. It's great Microsoft was trying to shake up the market and do something different but it'll be interesting to see how Game Pass evolves and if Microsoft continues down this path.

 

[Vash_the_Stampede]

This is not just a Game Pass problem but a larger problem with subscriptions. It's not really sustainable long term and we're already seeing the effects of this with services like Netflix.

Money isn't infinite and as you get more subscribers you need more content, it's just a vicious cycle. It's great Microsoft was trying to shake up the market and do something different but it'll be interesting to see how Game Pass evolves and if Microsoft continues down this path.

I think it’s the opposite with Netflix. US is very profitable for them while other streaming services struggle.

It seem it’s easier to leverage the cost of a movie/show than a game with a large installed base.

 

[Vash_the_Stampede]

Even if they had succeeded in getting multiple times more users than otherwise, the higher cost would still keep it less profitable as going the traditional way.

I did answer this question.

I think traditional monetization per title is maybe 2x-4x higher.

I don’t believe you can get the costs materially below $0.50/hr and the revenue materially above $0.50/hr. I think this is a bad business at scale. More scale via xcloud doesn’t solve the problem.

Xcloud will probably compete more and more with mobile. That’s also a losing strategy, imo.

 

[Haziqonfire]

I think it’s the opposite with Netflix. US is very profitable for them while other streaming services struggle.

It seem it’s easier to leverage the cost of a movie/show than a game with a large installed base.

I mean, to some degree - but look how often Netflix increases their subscription cost. It's not sustainable either long term. The film and music industries are both going through the same problems with streaming at the moment.

 

[TurtleRock]

Been saying this for years. The business model never made sense to me. Even if they are making a profit, they’re not going to make as much money as they were before. I was skeptical of a subscription model for video games since day 1.

Look at all the movie studios that gutted their profits to pivot to streaming. Sure they make money, but they don’t make as much money as they did with a traditional release model. Now they’re cutting costs, refusing to pay residuals, etc.

I should also note that the strikes are absolutely justified, but it’s also true that in the rush to make streaming services and obtain subscribers, they spent massive amounts of money chasing subscriber growth that never materialized to the point where it made up for the lost revenue from traditional tv and advertising revenue.

You can also make the same argument with newspapers, who thought that pivoting to digital was going to make up for the immense amount of advertising money lost from print. Every newspaper in the country believed that they would get more subscribers, page views, etc via digital media and advertising money would eventually exceed what print could pull in, and that ended up being a colossal failure.

The thing about video games is that it takes significantly more time to make content in this space. Microsoft is aware of this, which is why they went on their spending spree. But that doesn’t solve the problem of AAA requiring a large amount of people and money to make. They have a large catalog but their development pipeline is still slow. 3-5 major AAA releases a year isn’t going to keep people subscribed, especially when a company like Netflix releases dozens of shows per year and they’re still losing subs. Content demand simply cannot keep up with how people consume content in the subscription era.

At some point the subscriptions will stagnate and Microsoft, after all this spending, is going to cut costs. All of these studios they just bought are going to be the prime target for those cost cutting measures.

 

[Heron]

Going to be honest - I found all this quite hard to understand.

I would find this a lot easier to read if you provided the actual sources for your numbers in the text itself, or said where the slides you've included are actually from. Like that 3rd image - where are those figures from? You can't just label something LTV to CAC and expect everyone to understand what it's about. (Although I think CAC is probably cost to acquire content? Or customers?) Also, that first slide is very difficult to read. Do you have that in a better resolution? I don't understand a lot of the acronyms on it. PUU?

I'm also not sure why the amount cost to acquire content per of hours players spend is the correct way to judge whether this is financially feasible. The service is charged on a monthly basis, no matter how many hours a user uses it, and the money Xbox pays to devs is also not charged on an hourly basis. So while usage and "cost to acquire content per hour users play" is an interesting engagement metric, I don't see how it's the determinant financial metric. As long as their monthly GP revenue beats their monthly GP expenditure, they're profitable - no matter how many hours users are spending. So why the focus there? Honest question - trying to understand.

In general I do agree that Game Pass may not be a feasible business model and provides lower profits than a direct digital sale model, but with a caveat, in that it may be necessary to attract customers in the first place.

Personally, I reckon I have played about 1,600 hours of Game Pass games over the past three years. I paid $181 in total for those three years. That's about 10 cents an hour for a very high quality entertainment product. Insane value for me, completely unsustainable for Microsoft. Sure.

BUT - having me move to the Xbox platform from Playstation (which I did entirely BECAUSE of Game Pass) meant that they took some profit from the hardware they sold me, and then a cut of any other purchases I made. Res Evil 8 wasn't on game pass - I bought that for $70 digitally. I reckon I've spent at least $300 on other games (all digital). So Xbox probably took 30% of that. Not a lot, but $100 more than they would have otherwise have gotten. Is this additional spending factored into your argument at all?

I think there IS a scale at which this business can work, and I can't understand from your post why you think otherwise. Surely if they were to double their users with the same cost to acquire content they're getting closer to the industry standards?

Overall, I'd love if you could make the numbers a little more clear where they're coming from.

 

[Deleted member 1005]

Maybe stop with the “PLAYSTATION IS RIGHT” stuff, they copied Game Pass to a T last year. They wouldn’t have revamped PS+ if they thought it was a failing model that would die in a few years. It makes your argument come across as console wars more than anything else, honestly.

Also lol at not getting meaningful third party support. They’ve had Red Dead Redemption 2 and GTA V on the service, in GTA’s case multiple times. That’s about the biggest third party you could get on board. Atlus is bringing 2 brand new games to Game Pass in November and February. This month we see Lies of P and Payday 3, both big third party titles. How is this not meaningful?

All in all this was a very difficult read as someone that couldn’t care less about the “economics” of a subscription service that benefits me regardless of how much it loses money for Xbox.

 

[Pokemaniac]

It always intuitively made sense that Game Pass has some sketchy economics behind it.

 

[big lantern ghost]

I'm also not sure why the amount cost to acquire content per of hours players spend is the correct way to judge whether this is financially feasible.

This is where I get lost, personally. The premise on which the profitability is being judged seems shaky.

 

[JorgenRaft]

Smaller publishers or indies are one thing, but I just don't think it makes sense to have AAA games on a subscription service, day one.

Legacy content the way Nintendo does it? Totally makes sense and seems sustainable.

Older AAA games with availability on the service in a specific smaller window like Sony does it? Sure, probably also makes sense.

But either Microsoft, the developers, or both seem to end up losing money with the way Gamepass works for day 1 AAA games. Look at how many people dropped 100 bucks just to play Starfield 5 days early. Easier said than done, but just make games that people will want and they will buy the games.

 

[ohlawd]

Maybe stop with the “PLAYSTATION IS RIGHT” stuff, they copied Game Pass to a T last year. They wouldn’t have revamped PS+ if they thought it was a failing model that would die in a few years. It makes your argument come across as console wars more than anything else, honestly.

Also lol at not getting meaningful third party support. They’ve had Red Dead Redemption 2 and GTA V on the service, in GTA’s case multiple times. That’s about the biggest third party you could get on board. Atlus is bringing 2 brand new games to Game Pass in November and February. This month we see Lies of P and Payday 3, both big third party titles. How is this not meaningful?

All in all this was a very difficult read as someone that couldn’t care less about the “economics” of a subscription service that benefits me regardless of how much it loses money for Xbox.

"Too good to be true destined to fail."

Why is this console war bullshit even on here. I think it's hard to read too. If the way of doing business is only Sony's way then Nintendo and Microsoft's Xbox wouldn't have been allowed to pivot and they'd either be dead or be close to. I hope Game Pass works out well for MS. 1. the service has served me well 2. it'll be another cost effective way to play games without resorting to the default charge of $70 for one single game

 

[jnWake]

Maybe stop with the “PLAYSTATION IS RIGHT” stuff, they copied Game Pass to a T last year. They wouldn’t have revamped PS+ if they thought it was a failing model that would die in a few years. It makes your argument come across as console wars more than anything else, honestly.

Did they really? It seems to me Sony went for a less aggresive take on the GamePass model, not focusing on getting everything there DAY ONE ON PS PLUS like MS is doing for example.

 

[blue2425]

Ignore

 

[JorgenRaft]

I think the only way Sony would do "day 1 on PS+" with their first party games is if any of their upcoming multiplayer games do it.

 

[Thunder84]

but just make games that people will want and they will buy the games.

I wonder if this was a big reason for why they started Game Pass. The trust in Xbox’s game development was (and still is, frankly) low. Getting people invested in their ecosystem via Game Pass sounds like a good way to attract new users. Once they’ve built up a significant player base, they shut down Game Pass, and they now have the player base they need to stay profitable and successful. On paper, it sounds like a decent plan.

 

[JorgenRaft]

I wonder if this was a big reason for why they started Game Pass. The trust in Xbox’s game development was (and still is, frankly) low. Getting people invested in their ecosystem via Game Pass sounds like a good way to attract new users. Once they’ve built up a significant player base, they shut down Game Pass, and they now have the player base they need to stay profitable and successful. On paper, it sounds like a decent plan.

Yeah, that's kind of how I pictured it in my head as well. Enticing a bunch of people to join the ecosystem with a crazy deal and then pull the rug from under them by axing Gamepass (or changing it drastically) and hoping a large amount of them are just committed enough to the brand by then to stick around.

 

[AngryAlchemist]

I wonder if this was a big reason for why they started Game Pass. The trust in Xbox’s game development was (and still is, frankly) low. Getting people invested in their ecosystem via Game Pass sounds like a good way to attract new users. Once they’ve built up a significant player base, they shut down Game Pass, and they now have the player base they need to stay profitable and successful. On paper, it sounds like a decent plan.

The sad thing is I don't think they can just shut it down without getting a lot of backlash at this point. It's become such a central part of their marketing. I don't think shutting it down would destroy the brand either, but.

It's also sad because honestly, I could see MS's output being pretty decent by the end of this gen. It will take years of course, and there's no denying their developers / franchises are past their prime critically in a way. But a lineup of a decent Halo singleplayer, decent Bethesda RPG, new Doom game, Horizon etc ... doesn't sound that bad. Especially if Indiana Jones ends up being good. And Fallout 5 seems closer than expected based on the leaks. Since purchasing Bethesda, it's become that much more obvious they're undervaluing their IP too much.

 

[ngpdrew]

I wonder if this was a big reason for why they started Game Pass. The trust in Xbox’s game development was (and still is, frankly) low. Getting people invested in their ecosystem via Game Pass sounds like a good way to attract new users. Once they’ve built up a significant player base, they shut down Game Pass, and they now have the player base they need to stay profitable and successful. On paper, it sounds like a decent plan.

This is a ludicrous plan that wouldn't look good on even the best stationery.

 

[blue2425]

This is a very confusing writeup if I am being completly honest. Either that or your making calculations that I am struggling to see how the source document is relevant or should be used to begin with. I'm going to post all of my concerns, perhaps its addressed in your post and it needs to be explained to me better.

• Your calculations ignore growth. If I understand correctly Gamepass has grown to 30mil. Your calculations assume Gamepass will stay at the old sub number of 25mil.

• You stated the following "1st revs have 85% GP% from the ZeniMax presentation." Where is this document? Because that sounds like it should only apply to Zenimax and thats assuming that document is not an estimation and/or outdated information. I am not sure how something that applies to ZeniMax would also have the same metrics for a studio like Mojang or Double Fine. I don't think this is something you should be using in trying to determine profitability across all of Gamepass.

• You stated "1st party won’t save it either. Starfield is probably a $200m-$300m game that will likely hit 20m users. Let’s say they play an average of 50 hours, 1000m of engagement vs $250m in cost is $0.25/hr. That’s probably the floor for costs, and ignore all the other costs." Here, I wish I understood your posts because it sounds like your assigning 100% of Starfield costs to Gamepass? If so, why? Starfield appears to have sold fairly well outside of Gamepass on Xbox and Steam. How come costs aren't accurately allocated to those revenue sources? How are you accounting for the revenue from people that before spending any engagement in Gamepass invested in Starfield's early access. I can't stress enough that you should be more clear and what your attempting to convey because it seems like your taking some Gamepass metrics across all games, funneled it into one game in Starfield? and then made a broadstroke conclusion about Gamepass as a whole? That seems very flawed and beyond messy math, so maybe I am misreading something.

• Also, when you are doing an analysis like this, in order to be accurate, you should use multiple examples and go through in as much detail as possible. There should be an analysis for games like Pentiment and HiFi Rush. More importantly there should be a VERY thorough analysis on games where engagement actually has a more accurate representation like games with recurring revenue. Which is another problem I have with your assignment of costs. 1st party games like Minecraft and pretty much all of ABK (if acquired) will easily have 70-80% of thier revenues outside of the Gamepass ecosystem, so why is the majority of those development costs being assigned to Gamepass based on your methodology?

• You stated "XBOX will either never get meaningful (3rd party) AAA support" This is the only thing that I actually agree with barring MS doing some YOLO deals. The issue I have, is that your using the source document and your statement to show that Gamepass is unsustainable. How? Based on what we know and the source document, MS isn't doing these deals so there is no loss or negative impact to be had. This part of your analysis section makes no sense as it pertains to your economics."

• You stated "Console games are just too expensive and users don't spend enough hours to support the current model." The issue I have with this is that this is not a Gamepass model issue. This is an industry wide issue. Devs have stated multiple times AAA gaming is not sustainable (at least for the insanely high profits the corps want). We see this reflected in increases in Subscription services, prices of games, layoffs, and developers like the one from Child of Light stating that Ubisoft doesn't see a good enough profit for a sequel. Its why nearly every major publisher is investing heavily in GAAS and announcing/engaging in mobile pushes. Its why some companies like Ubisoft is now publishing games on Steam while other companies are now looking to invest more in film/TV. Publishers are desperately looking for other revenue streams. Sony is the prime example of this. Purely on the 1st party software side, Nintendo curbstomps Sony (and MS I believe) in profitability but as soon as you add that PS+, COD and Fortnite revenue into the mix they leap frog over Nintendo in financial performance. It is not a surprise that Sony is now investing heavily in GAAS and looking more and more at PC/mobile opportunities. Sony knows what makes the big money for them and its not thier AAA singleplayer games. Bottomline, we see MS doing the same thing as the rest of the industry, just with a different approach. Its why MS desperately wants ABK. MS doesn't need a slice of the mobile pie when a crumb can get the results they desire...of course that's.assuming they execute ABK operations effectively.

• I do have more questions but since I don't fully understand what your saying and could be typing a whole lot of nothing I am going to stop my wall of text here. But I will say this, when doing an analysis try to present it in the most bias free way possible. Your analysis should strive to focus on the issue/question at hand, your facts and sources, your analysis of the issue given the facts/sources, and your conclusion. Nothing you stated about PlayStation added anything meaningful to your analysis. You didn't even do a comparative analysis of PS+ and how combined with their 1st party is supposedly better than MS overall gaming approach. If you are not going to do that, then why is Sony here?

 

[Thunder84]

The sad thing is I don't think they can just shut it down without getting a lot of backlash at this point. It's become such a central part of their marketing. I don't think shutting it down would destroy the brand either, but.

It's also sad because honestly, I could see MS's output being pretty decent by the end of this gen. It will take years of course, and there's no denying their developers / franchises are past their prime critically in a way. But a lineup of a decent Halo singleplayer, decent Bethesda RPG, new Doom game, Horizon etc ... doesn't sound that bad. Especially if Indiana Jones ends up being good. And Fallout 5 seems closer than expected based on the leaks. Since purchasing Bethesda, it's become that much more obvious they're undervaluing their IP too much.

It definitely wouldn’t be an immediate shutdown. Probably a long-term death, start by stopping with 3rd party deals, then stop putting major AAA 1st party games like Starfield on there, and then kill the service entirely.

 

[Deleted member 1005]

Did they really? It seems to me Sony went for a less aggresive take on the GamePass model, not focusing on getting everything there DAY ONE ON PS PLUS like MS is doing for example.

Keep in mind that at the beginning Xbox Game Pass didn’t have day 1 games either. While they aren’t pushing first party titles day 1 to the service right now (which will almost certainly change with their push into GAAS), they aren’t shy about getting third party titles to be day 1 on the service, like Stray, Humanity, and most recently Sea of Stars.

 

[Samus95]

You basically need an entire Gen before you can even try to remove gamepass

Rember the Gamepass is the obly reason why they have not completly lost Europe

 

[GamerJM]

"Too good to be true destined to fail."

Why is this console war bullshit even on here. I think it's hard to read too. If the way of doing business is only Sony's way then Nintendo and Microsoft's Xbox wouldn't have been allowed to pivot and they'd either be dead or be close to. I hope Game Pass works out well for MS. 1. the service has served me well 2. it'll be another cost effective way to play games without resorting to the default charge of $70 for one single game

I don't really know what you mean by "If the way of doing business is only Sony's way then Nintendo and Microsoft's Xbox wouldn't have been allowed to pivot". Game Pass is something only Xbox is doing, not Nintendo or Sony. Sony has launched a program that's sort of like a lite version of Game Pass. Nintendo isn't really doing anything like either of them.

It's not console wars bullshit to be skeptical of the same business model that led Netflix to enshittify itself over the last decade and lead to a situation wherein only certain kinds of movies can be profitable and also everyone has to subscribe to several different streaming services to watch everything they want to watch. I don't care what corporation is doing it, I'm skeptical of any kind of monetization model that seems unsustainable from the outside looking in.

 

[YolkFolk]

This is not just a Game Pass problem but a larger problem with subscriptions. It's not really sustainable long term and we're already seeing the effects of this with services like Netflix.

Money isn't infinite and as you get more subscribers you need more content, it's just a vicious cycle. It's great Microsoft was trying to shake up the market and do something different but it'll be interesting to see how Game Pass evolves and if Microsoft continues down this path.

I can see a time where big titles release at retail first and then come to Gamepass like 3 months later. Similar to how Marvel movies are released at the cinema and come to Disney+ a bit later on.

 

[Imitatio]

All in all this was a very difficult read as someone that couldn’t care less about the “economics” of a subscription service that benefits me regardless of how much it loses money for Xbox.

While I agree with parts of the rest of your post, this point doesn’t make a whole lot of sense when you’re the one entering a thread about the topic of “economics” — hard to blame the OP for that one, really.

 

[Christer]

As others have pointed out the maths and accounting in the original post is a bit hard to follow and even if it is generally a fair picture I do think that it is inherently going to be hard, even for Microsoft themselves, to calculate their return on investment for Gamepass titles. We shouldn't take these kinds of back of the envelope calculations as the truth about a very large and complex business operation.

They have pivoted to a more holistic approach to their business, viewing it all as one ecosystem that they want as many people as possible to be locked into. As far as I know the bottom line is that the Xbox business is profitable. And sure, in the logic of large corporations, the return on investment in the business and growth need to be at a certain level to justify to investors why they didn't just invest the funds into a stock portfolio. But even so I find it hard to believe that Microsoft would exit a profitable business and a strong position on a gigantic market such as gaming.

I also find it hard to believe that the top management of not just the Xbox division but Microsoft as a whole would switch to a business model that can't be profitable at any scale. I think that it is quite reasonable that the service will be profitable at some point, given enough growth. And where that point is and if growth at expected rates is possible is hard to know. Probably not where they are right now, that's for sure.

Many mistakes have been made though, largest among them believing in the Silicon Valley hype around cloud gaming, which is years and years away from being as seamless and friction free so that it can drive growth in the market.

 

[ohlawd]

I don't really know what you mean by "If the way of doing business is only Sony's way then Nintendo and Microsoft's Xbox wouldn't have been allowed to pivot". Game Pass is something only Xbox is doing, not Nintendo or Sony. Sony has launched a program that's sort of like a lite version of Game Pass. Nintendo isn't really doing anything like either of them.

It's not console wars bullshit to be skeptical of the same business model that led Netflix to enshittify itself over the last decade and lead to a situation wherein only certain kinds of movies can be profitable and also everyone has to subscribe to several different streaming services to watch everything they want to watch. I don't care what corporation is doing it, I'm skeptical of any kind of monetization model that seems unsustainable from the outside looking in.

I interpreted Sony's way as pursue high tech consoles, crazy high game budgets and be the one stop shop for games. Nintendo can't do the first two so they pivoted away from that after the GameCube. We're almost 20 years removed from that and they aren't returning. Microsoft can't do the last and clearly doesn't see its feasible to always compete with Sony in securing exclusives and its clearly worked in the latter's favor because they've successfully shut out a lot of genres out of Xbox. It was a good thing Bethesda got acquired by Microsoft because we know from the trial that Sony was planning on making Starfield timed exclusive. For example, a Bethesda fan isn't going to wait a year for game to come to their platform of choice. They'll just buy the other console that gets games on time.

 

[Deleted member 1005]

While I agree with parts of the rest of your post, this point doesn’t make a whole lot of sense when you’re the one entering a thread about the topic of “economics” — hard to blame the OP for that one, really.

I initially clicked on the thread hoping that there would be useful information about the economics of Game pass, but what I got was "Playstation was right" and a post full of the negatives of Game pass without any of the positives, which comes across more biased against Xbox than anything else. So yes, as someone that couldn't care less about the economics of Game Pass, it was a hard read as I left the thread more confused than I was going into it.

 

[Vash_the_Stampede]

I initially clicked on the thread hoping that there would be useful information about the economics of Game pass, but what I got was "Playstation was right" and a post full of the negatives of Game pass without any of the positives, which comes across more biased against Xbox than anything else. So yes, as someone that couldn't care less about the economics of Game Pass, it was a hard read as I left the thread more confused than I was going into it.

I put together an analysis of

• unit economics of subscription vs. engagement
• cost of content to Xbox
• cost of content to the publisher regardless of how it’s monetized and the implication it has to the limits of scale
• break even point between GP engagement and traditional monetization
• Est. customer acquisition cost inclusive of churn

And all you got was “PlayStation was right?”

I think people who view this analysis through “console warrior” glasses are idiots.

I think economics of Xbox game pass is the biggest financial riddle in gaming. I think figuring it out is fun. I think figuring it out with missing and imperfect information is really fun.

 

[Machrider]

It's gonna be funny when Apple sneaks up from behind everyone and Apple Arcade ends up with the biggest subscriber base that even has a lot of AAA console/PC style releases in the years to come.

 

[Deleted member 1005]

I put together an analysis of

• unit economics of subscription vs. engagement
• cost of content to Xbox
• cost of content to the publisher regardless of how it’s monetized and the implication it has to the limits of scale
• break even point between GP engagement and traditional monetization
• Est. customer acquisition cost inclusive of churn

And all you got was “PlayStation was right?”

I think people who view this analysis through “console warrior” glasses are idiots.

I think economics of Xbox game pass is the biggest financial riddle in gaming. I think figuring it out is fun. I think figuring it out with missing and imperfect information is really fun.

When you yourself said "Playstation was right" multiple times when they are going after the exact same program that Xbox is going for with Game Pass, your entire "analysis" comes across as biased.

Even without the nods to Playstation, your post is so incoherent that it really is difficult to read even if I try my hardest. There's no formatting, so your points all blend together and make something that is already a hassle to understand even more of a hassle just to read, and some of it is straight up not true, such as your "they will never get meaningful third party content" line. Today we found out that another 3 third party titles are coming to game pass from 2 of the biggest publishers in japan. Like I said in my original post, that's pretty meaningful.

But sure let's just go with me being an idiot if it helps you feel better.

 

[Vash_the_Stampede]

Imagine you’re a AAA devloper

1. You can sell into the future 100m unit installed base of PlayStation
2. Maybe couple hundred million unit PC tam (PC monetizes at a lower ARPU)
3. Eventually the 100m-1,000m install base of apple devices

Then Microsoft knocks on your door and says how much do we need to pay to add your game into our service?

Well, you’re gonna think about how much unit sales you’ll lose and Microsoft will need to match that number.

Microsoft wins when engagement is bigger than your estimate. Microsoft loses/overpays when the platform fails to drive enough engagement/retention/new users.

Why would the smallest platform (25m-30m) ever win? They are structurally disadvantage and/or will always need to overpay.

It's gonna be funny when Apple sneaks up from behind everyone and Apple Arcade ends up with the biggest subscriber base that even has a lot of AAA console/PC style releases in the years to come.

It's gonna be funny when Apple sneaks up from behind everyone and Apple Arcade ends up with the biggest subscriber base that even has a lot of AAA console/PC style releases in the years to come.

 

[Vash_the_Stampede]

your post is so incoherent that it really is difficult to read even if I try my hardest. There's no formatting, so your points all blend together and make something that is already a hassle to understand even more of a hassle just to read

I agree. I rushed it out to start a conversation and I sacrificed readability. I’ll eventually re-write it so it’s easier to follow.

And I’ll incorporate the questions/feedback/concerns/counterpoints.

 

[Vash_the_Stampede]

I agree with the points raised in this longer form discussion

 

[Adulfzen]

a lot if not most of those subscriptions devalue art and the media they have, heavily exploit the workers and artists involved (resulting in the recent strikes we've seen from WGA and SAG AFTRA) and eventually become less and less of a good deal for consumers.

It isn't even without getting into how those companies rely more and more on algorithms to determine shows/movies profitability resulting in less and less of chances given to shows to grow and develop into mainstream successes. a good example was Breaking Bad that wasn't really a breakout success until season 3 or 4 (honestly forgetting the exact details but I'm sure there are interviews spelling it out exactly).

quite frankly I don't see a long term future for a lot of those services or at least I don't see profit seeking companies to see enough of a return eventually if they can't keep exploiting the hard work of the artists they're taking value from (despite there being a lot of cash).

And I honestly also don't see consumers to keep paying for services with ever increasing prices and more and more fractured offerings as everyone is trying to get a slice.

 

[fiendcode]

I agree with the points raised in this longer form discussion

Just to note this is (infamous right wing sexist) Colin Moriarity's PlayStation podcast, that only ever broaches discussion on other platforms when there's a negative spin to be had. And it's posted (now taken down) by a pretty toxic PS fanboy account.

Thought you'd like to know since you're so against any Console War Lens being applied here.

 

[Zemya]

Gamepass has put Xbox back on the map after the... 4? 5? Terrible years of Xbox One, per-title profit is higher but boxed copies sales in the last 10 years for them can't compare to Sony/Nintendo.

I don't think raising the prices again by 1/2 dollar monthly will sway people away from it.

 

[Soul Skater]

It's gonna be funny when Apple sneaks up from behind everyone and Apple Arcade ends up with the biggest subscriber base that even has a lot of AAA console/PC style releases in the years to come.

Apple arcade is likely an easier sell to mobile developers given how badly the mobile market had been devalued to the point where an absurdly high number of users would not bother with your game at all if it wasn't free to download to start. Question is do we want similar race to the bottom mechanics to happen in the console/pc space where the overall market is devalued due to all the different subs out there gamers are similarly unwilling to buy $60/70 games anymore

All in all this was a very difficult read as someone that couldn’t care less about the “economics” of a subscription service that benefits me regardless of how much it loses money for Xbox.

Had Phil Spenser not been in his emails talking like a cut throat capitalist out to collect the skulls of all his enemies like some sort of gaming CEO General Grievous fawning over his imaginary career moment of a hostile takeover of Nintendo I might agree but there's a difference between a pro-consumer business model and Microsoft trying to cynically disrupt their competition because they've got the deepest pockets after they calculated they couldn't win in a "make good games and sell them to people" competition.

 

[Deleted member 1005]

Apple arcade is likely an easier sell to mobile developers given how badly the mobile market had been devalued to the point where an absurdly high number of users would not bother with your game at all if it wasn't free to download to start. Question is do we want similar race to the bottom mechanics to happen in the console/pc space where the overall market is devalued due to all the different subs out there gamers are similarly unwilling to buy $60/70 games anymore


Had Phil Spenser not been in his emails talking like a cut throat capitalist out to collect the skulls of all his enemies like some sort of gaming CEO General Grievous fawning over his imaginary career moment of a hostile takeover of Nintendo I might agree but there's a difference between a pro-consumer business model and Microsoft trying to cynically disrupt their competition because they've got the deepest pockets after they calculated they couldn't win in a "make good games and sell them to people" competition.

You're talking like Playstation and Nintendo execs aren't talking just like Phil Spencer in emails and meetings. The only difference is that Xbox's leaked, PS and Nintendo's haven't. I guarantee every company that has had even the slightest possibility of buying Nintendo has talked about buying nintendo at one point or another, including Sony. Let's not act like Microsoft is this maga evil corporation while everyone else in gaming is holier than thou, they are all garbage in one way or another.

 

[Soul Skater]

You're talking like Playstation and Nintendo execs aren't talking just like Phil Spencer in emails and meetings. The only difference is that Xbox's leaked, PS and Nintendo's haven't. I guarantee every company that has had even the slightest possibility of buying Nintendo has talked about buying nintendo at one point or another, including Sony. Let's not act like Microsoft is this maga evil corporation while everyone else in gaming is holier than thou, they are all garbage in one way or another.

I don't think anyone else is holier than though. Honestly I think I still hate Jim Ryan and how Sony is behaving right now like 100x more than Phil. Like yeah I can only imagine what that dude's emails contain; but even though it is only their emails that leaked they are also really the only ones spending hundreds of billions of dollars acquiring studios consolidating the industry in order to feed their subscription service which I think is bad for the industry overall especially when the money they are using to do it isn't coming from the industry they are competing in right now. Yes the others have similar anticompetitive moves throughout history; yes the others have acquired studios to add to their first party lineup but the levels and scale we are talking about here is not close and I don't think that's unfair to say.

Ultimately I just don't like this strategy and wish they had tried to just be better at the business model that had been working for basically everyone else than moneyhatting a fast track evolution of the entire industries' financial model.

Like yes it's cool to have games day 1 on GP from third parties and others; but it would have been cooler if MS spent literal AAA game budget money on a new studio making a new game than just trying to lure people into playing their game on xbox rather than buying it day 1 elsewhere.

 

[Vash_the_Stampede]

Just to note this is (infamous right wing sexist) Colin Moriarity's PlayStation podcast, that only ever broaches discussion on other platforms when there's a negative spin to be had. And it's posted (now taken down) by a pretty toxic PS fanboy account.

Didn’t know who he was. Thanks for letting me know.

 

[Deleted member 1005]

I don't think anyone else is holier than though. Honestly I think I still hate Jim Ryan and how Sony is behaving right now like 100x more than Phil. Like yeah I can only imagine what that dude's emails contain; but even though it is only their emails that leaked they are also really the only ones spending hundreds of billions of dollars acquiring studios consolidating the industry in order to feed their subscription service which I think is bad for the industry overall especially when the money they are using to do it isn't coming from the industry they are competing in right now. Yes the others have similar anticompetitive moves throughout history; yes the others have acquired studios to add to their first party lineup but the levels and scale we are talking about here is not close and I don't think that's unfair to say.

Ultimately I just don't like this strategy and wish they had tried to just be better at the business model that had been working for basically everyone else than moneyhatting a fast track evolution of the entire industries' financial model.

Like yes it's cool to have games day 1 on GP from third parties and others; but it would have been cooler if MS spent literal AAA game budget money on a new studio making a new game than just trying to lure people into playing their game on xbox rather than buying it day 1 elsewhere.

In today's landscape, you really can't just "build a studio from the ground up" at the scope Microsoft would need to have a successful release schedule. We've seen numerous "built from the ground up" studios come around recently, hit a snag and fall into a decline because one flop can do enough damage to nearly kill a company. This isn't the early 2000s anymore, studios can't just push game after game after game in hopes that they get a hit.

Microsoft buying studios is them trying to bolster the first party lineup that had been deemed subpar or downright bad by a lot of people ever since the early 2010s. They tried just doing deals with studios like Armature, Remedy, Insomniac, and Platinum, but it wasn't enough. Recore was subpar to most people, Quantum Break took way too long to actually release and it didn't really set the world on fire, Sunset Overdrive was great but Insomniac was always going to go back to doing Sony stuff the moment they could, and Platinum couldn't get Scalebound out the door.

Now they have studios like Obsidian who pushed out two great games last year, Tango that pushed the beloved HiFi-Rush early this year, Playground that has pushed out the best reviewed and some of the most played titles on Xbox, and BGS which just put out a great single player RPG. It's a complete shift in how Xbox operated prior to these acquisitions, for the better.

Should Xbox have gone all in and purchased Bethesda and Activision? In my opinion, yes. These are publishers that were looking to be sold, and if anyone was going to buy them, I'd prefer it be Microsoft with their over 2 decades of experience in the gaming industry instead of companies like Amazon or Google that would squander them just so that they can say they spent however much to own a big gaming company without care for the people that play games.

 

[Vash_the_Stampede]

In today's landscape, you really can't just "build a studio from the ground up" at the scope Microsoft would need to have a successful release schedule. We've seen numerous "built from the ground up" studios come around recently, hit a snag and fall into a decline because one flop can do enough damage to nearly kill a company.

You’re absolutely right. At least, if you’re targeting AAA.

Collectivity we should list 10-20 efforts to launch a new AAA IP and see many have succeeded

Let’s say it’s a 1/3 chance to win big and each try is 4-years of effort and $200m development budget.

So base case scenario, you need to spend $150m/ year across 3 teams for 4 years to launch 3 AAA new IPs

Lets at two flop, selling only a couple million, and the 3rd reaches 10m + sales. You probably breakeven, or worse, depending on the marketing budget.

Who wants to sign up for this venture?

Really makes you admire CDPR and CP77. They saved that fucker lol

So, the question: is the base rate for success of new AAA IP materially different than 1/3?