Feature Article

Microsoft's Secret Weapon For Next-Gen Is Xbox Game Pass

OPINION: If things go to plan with Xbox Game Pass, Microsoft won't need you to buy an Xbox Series X.

One of the key pillars of Microsoft's next-generation strategy is Xbox Game Pass, and it could be a game-changer for the Xbox Series X and Microsoft's overall ambition for the future of gaming long-term. Xbox Game Pass is so much more than a catalog of games you can play--it's also the foundation for where Microsoft believes gaming is headed in the future. And with the launch of Xbox Series X this holiday season, Microsoft has a chance to start this next generation on a much stronger footing than the current one and better set itself apart from its competitors.

Microsoft's bold new vision for the future of gaming is rooted in its past. Microsoft came up short against Sony in terms of current-generation console sales. Some estimates state that the PS4 outsold the Xbox One by a 2:1 margin. There are plenty of reasons for that, including Microsoft's hubris around the launch. After a strong Xbox 360 era, Microsoft announced policies around the new Xbox One that fans immediately and loudly rejected, including internet check-ins, a lack of used game support, and bundling Kinect with every system. The console retailed for $500 USD at launch, a full $100 above the price of the PlayStation 4.

In an interview just ahead of launch, I remember asking then-executive Albert Penello about the price gap, and he shrugged his shoulders, appearing confident that it would not make a difference. But it did. Even if some of these digital-centric policies might now be considered by some to be forward-thinking, 2013 was clearly not the time for those ideas to thrive. The Xbox One could never fully recover from its initial launch struggles, but things are different now, and Microsoft is putting itself in a very strong position as it heads into the Xbox Series X era and beyond.

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Selling a lot of consoles is good, of course, for bragging rights and revenue, but the real money in games comes from software and services. Phil Spencer, who took over the Xbox business from Don Mattrick, lays it all out in a 2019 interview with The Verge:

"The business isn't how many consoles you sell. The business is how many players are playing the games that they buy, how they play. I think it’s easy from the outside to judge the health of our business around how many consoles any company sells. In the end, how many subscribers you have to something like Game Pass, how many games people are buying, those are much better metrics on the health of the business."

Of course, Spencer would say this. Given the beating that the Xbox One took at the hands of the PlayStation 4, it makes sense that Microsoft would look to any metric beyond console sales to rate the success of its business. But Phil Spencer is not just in car salesman mode here.

It's a fact that game consoles are historically sold at a loss. This has been the case for generations of home consoles and this trend is expected to continue for both Microsoft and Sony with the new generation. Microsoft hasn't announced a price for the Xbox Series X, but the company is expected to lose money on every unit sold and make up the difference with revenue from software, services, and subscriptions. The future of gaming is about establishing a wide install base and creating an ecosystem where people can connect and play together, no matter what platform they choose to play on. Xbox Game Pass unlocks the first steps in this vision.

Phil Spencer has boldly claimed that Microsoft is intent on reaching the 2 billion gamers in the world. That's an impossible goal if the requirement is for people to own a game console. It just won't happen. But you can reach an audience that factors bigger than the current market of console-owners by making games available where the audience is--and that's everywhere. Xbox Game Pass allows for this, especially with xCloud scheduled to be integrated into the service later this year.

Once xCloud becomes folded into Game Pass, Microsoft will edge closer to creating the elusive and potentially lucrative "Netflix of Games." Currently, Xbox Game Pass subscribers must download games. And with file sizes for some larger games stretching beyond 100 GB, and possibly growing even larger in the next generation, this can be a long and laborious process that creates friction. Integrating xCloud will allow you to stream a service already available on console, mobile phones, and PC, increasing the addressable market for Xbox. Microsoft still wants to sell you a console, and for the next 10 years or so, a designated piece of gaming hardware will most likely remain the best and most reliable way to play games. It may always be the preferred way for some to play games. But Microsoft is planning for the future where it's not the only way.

Netflix is not a true parallel for Xbox Game Pass, however. Phil Spencer has been quick to point out that one of the key differences is that Xbox Game Pass gives you the option to buy games through the Xbox ecosystem, whereas Netflix's content is only available through the subscription fee.

"I love the fact that games are for sale and people can go buy them. We have no goal, there's no slide deck anywhere that says, 'Hey, we want to turn everyone into a subscriber, nobody should buy.' That why sometimes when people use 'the Netflix of games,' I bristle a little bit, because Netflix doesn't sell the content that's in Netflix," Spencer said in an appearance on the Gamertag Radio podcast (via USGamer). "For us, if people want to go buy their games, we think that's a really healthy part of the industry. If there's games that you're not gonna go buy, and you want to subscribe to get access to them, we see that as a strong part of Game Pass."

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The key metric to success for Xbox in this new world is Xbox Live users. That's more important than the number of consoles sold. An Xbox Live Gold user is either paying Microsoft at least $10 every month or $60 a year (at least), and this is the kind of steady, recurring revenue that any business wants to see. Every person on earth who owns a connected device--a phone, a tablet, a PC, or a console--is a potential Xbox Live user, and Spencer's new vision for Xbox is making a run at bringing them into the Xbox fold. It's a big and bold move, and Xbox Game Pass is central to that goal.

Xbox Game Pass only works if Microsoft has a steady flow of games to support it. And to that end, Microsoft is bigger than it's ever been in terms of its game-development footprint. The company now operates 15 internal studios as part of its Xbox Game Studios label, and this is to say nothing of the third-party companies that Microsoft works with. Microsoft has been planning for this moment and investing in its future with its series of acquisitions and the formation of new studios like The Initiative.

Microsoft has never had more game development talent under its umbrella than it does right now--all 15 of Microsoft's internal game studios are working on next-gen projects currently. If Microsoft, under the direction of Xbox Game Studios boss Matt Booty, can successfully line up production pipelines and schedule out releases from its internal teams (and others) on a regular cadence, it could create a Netflix-type scenario where there is always something new and interesting on the horizon.

Just look at what's been announced so far. Halo Infinite, the flagship launch title for Xbox Series X and no doubt one of the biggest projects across the entire gaming industry right now, will release on Xbox through Game Pass. Obsidian, the Microsoft-owned developer of Fallout: New Vegas and The Outer Worlds, is making a delightful-looking, colorful, Honey, I Shrunk the Kids-meet-Rust game called Grounded, while Ninja Theory is supporting its melee-focused hero shooter Bleeding Edge and developing a sequel to its acclaimed game about mental health and Norse mythology, Hellbade.

Then you have Turn 10, which is all but surely making a new Forza game for Xbox Series X, while Rare is following up Sea of Thieves with Everwild, a fantastical adventure game. The Initiative, meanwhile, is creating a new game with an all-star team of talent that includes Red Dead Redemption's main writer. This is just what we're currently aware of in terms of what the Xbox Game Studios are working on, but it's clear Microsoft spent what must have been many millions of dollars to scoop up studios to fill out its portfolio across genres to appeal to the widest possible audience. This was all made possible with the financial backing of Microsoft, a trillion-dollar company whose CEO, Satya Nadella, believes in Phil Spencer's vision for Xbox and is willing to put up the money to support it.

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With every first-party Xbox game launching into Xbox Game Pass, the program becomes a must-have offering for those who play enough games on Xbox. At $15/month for Xbox Game Pass Ultimate (which includes a Gold subscription that's needed for online multiplayer and offers a monthly rotation of free games), you can get your money's worth quickly, but that's not a complete or a fair representation of the overall Xbox Game Pass value. Microsoft's own recently released data shows that Xbox Game Pass subscribers are playing more games, making more friends, and trying genres they might have otherwise overlooked. Anecdotally, you might see the same results.

I tried the XCOM-style Mutant: Year Zero, which is out of my normal shooter/sports game wheelhouse, and I quite enjoyed it. For any platform, from Xbox Game Pass to Netflix, the main goal is to draw people in and keep them consuming content--and spending money. The early results show that Microsoft is succeeding in this department, with 10 million subscribers and counting. (Sure, Microsoft offered a sweet deal--$1 for 3 months--to grow the base, but 10 million is still a strong achievement and it speaks to the growth trajectory of the service).

Another benefit of Xbox Game Pass is how the new subscription model could lead to more creatively unexpected games from people and teams we might have otherwise never heard of. Like Netflix, which is greenlighting and funding the kinds of TV shows and movies that traditional studios might not take on for a variety of reasons, Xbox Game Pass is seemingly setting up something similar and allowing developers to take greater creative risks. A developer can launch their game into Xbox Game Pass with the understanding that the built-in audience from day one is already millions-strong.

It's a risk, for sure, and success for smaller, lesser-known titles could depend on how Microsoft and Game Pass present and recommends games to people based on personal preferences. But it's apparently already working based on the recently released Xbox Game Pass data. It appears some developers are already looking at Xbox Game Pass to try to cash in on this new trend. Take, for example, the indie game Moving Out, from Australian developer SMG Studio. The game was surprise-released on Xbox Game Pass in April alongside its paid versions for PS4, PC, and Switch. It's too soon to say if it was a successful move, but it's an intriguing data point to consider when looking at the overall appeal of Xbox Game Pass to developers and consumers alike. One game that has massively benefitted from releasing on Xbox Game Pass is Bohemia's DayZ. The studio recently announced that "hundreds of thousands" of new players jumped into the survival game after it was added to Game Pass earlier in May.

"Xbox Game Pass is a great opportunity for us to open the game to a different audience, and to let a massive number of new players experience DayZ in all its crude harshness and beauty, together with the veterans," Bohemia publisher director Vojtěch Ješátko said in a news release.

Microsoft appears to be the only one of the Big Three platform-holders to make such an aggressive push into a subscription offering. While Sony's full PS5 plans have not become clear yet, the existing PlayStation Now program doesn't offer what Xbox Game Pass already does. The Last of Us: Part II is not releasing into PlayStation Now for subscribers. Spencer previously spoke about how Microsoft sees Amazon and Google as its main competitors in the gaming space, not Sony or Nintendo. That's not as incendiary a comment as it might seem. Right now at least, Microsoft is the only one of the Big Three that is making a dedicated push into a subscription offering of this nature and scale, so it makes sense that Microsoft would be considering Google and Amazon--with their own vast server and network capabilities--as their top rivals instead of their traditional competitors.

I do believe in Microsoft's vision for the future of gaming, but I am still left with some lingering questions. I wonder if subscription services like Xbox Game Pass will end up devaluing games in the long-run, and if so, if that is a problem for Microsoft or its development partners to bear. The latest GDC State of the Industry survey showed that more than a quarter of surveyed developers believe a subscription model erodes the value of a game, puts a greater emphasis on advancing the interests of AAA games, and pushes away smaller-tier games that often get overlooked. Some developers are already feeling this pain. The co-founder of Devolver Digital, Graeme Struthers, tells GameSpot that "the world of subscription is a worry."

Devolver is supporting Xbox Game Pass-as well as PlayStation Plus and Apple Arcade, but at the same time, he said he has concerns. "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," Struthers said.

We may never fully or completely understand the economic realities of Game Pass. Microsoft does not share any key data about revenue-sharing or its specific agreements with studios related to bonus payments or funding. Microsoft paying for exclusives--or buying entire studios as has been the case in the past--to help bolster the Xbox Game Pass catalog might be an attractive proposition for developers who are understandably looking for comfort and sustainability in a historically volatile industry, but I do wonder whether the rise of Xbox Game Pass and other subscription offerings will having a lasting unforeseen consequences on the games industry in the long run.

"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." -- Devolver Digital co-founder Graeme Struthers

Looking at other entertainment industries that have shifted to a subscription model, like the music business with the rise of Spotify and Apple Music, there are countless stories of artists earning less and less compared to the direct-sale model of the past. At the same time, subscription services in the music, movie, and TV fields have opened up all manner of new possibilities for new content that we might have otherwise been denied, not to mention affording consumers the easiest path to accessing content.

With its deep pockets, Microsoft can buy up games and studios and put them to work on Xbox Game Pass titles that will keep users engaged with the service, which is the top objective to begin with. People often observe that Netflix is willing to pay for more content--whatever it is--just to have more for the purpose of keeping users on the platform for as long as possible. It certainly seems possible that Microsoft might adopt a similar strategy with Xbox Game Pass. Gigantic titles like Halo Infinite, Red Dead Redemption II, and others may pay for the more niche titles. But they all have value in terms of keeping users plugged into Xbox Game Pass.

There is also the matter of, as a consumer, further ceding ownership of your games to a monolithic company that can change its policies whenever it pleases to achieve whatever goals it has that have nothing to do with you. I also wonder if a subscription model is truly sustainable. Netflix is billions of dollars in debt right now as it borrows more capital regularly to fund more exclusive content as part of a model that some analysts and media-watchers claim to be problematic. The Xbox team has the backing of the wider Microsoft--a trillion-dollar company--but questions remain about the long-term sustainability and viability of a subscription program in games.

There has never been a games subscription program as big and ambitious as Xbox Game Pass. Would Microsoft have pursued such a bold strategy had the roles been reversed and it was Xbox that came out on top this generation? We can never know, but it certainly feels like a watershed moment for gaming--and that's something to be excited about at the start of a new console generation.

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