Game Pass and the Future of Xbox
Fulfilling the ambitions of Xbox past
It was June 2013 in Los Angeles and the Electronics Entertainment Expo, commonly known as E3, was abuzz with corporate drama and high tech pomp and circumstance. The games industry was putting their best foot forward during their annual time to shine for the national media spotlight. At the expo Sony and Microsoft unwrapped details on their highly anticipated new consoles: PlayStation 4 (PS4) and Xbox One. Gearing up for the PS4 launch in November Sony was hungry; they had dominated the console cycles of the mid 1990’s through the mid 2000’s with the PlayStation and PlayStation 2. Beginning in 2005 Microsoft had taken a huge bite out of Sony’s marketshare with the Xbox 360, a console built from inception to provide a great online experience for people to play games, hang out with their friends, and interact with other apps. The Xbox 360 led console sales in the critical US market and ended up selling roughly on par with PlayStation 3 worldwide. Coming into E3 2013 Sony was eager to take back the leadership role in the industry and was intent on doing so with a renewed focus on the core gamer. The PS4 hardware was the most developer friendly Sony console yet, in an attempt to bring more and better games to the platform. Sony marketing was crystal clear about who they were selling to: people who enjoyed playing games.
Microsoft, perhaps overconfident after the success of the Xbox 360 wanted to do more than appeal to just gamers. They were reaching for that siren song tech platform that has tripped up other companies before: multimedia dominance in the living room. With Xbox 360, Microsoft had solidified its living room beachhead with gamers and now wanted to expand into television shows and new mass appeal experiences like Kinect. They executed their strategy through initiatives like building an LA film studio to produce Xbox exclusive shows from producers like Steven Spielberg, and by attempting to redefine how users interact with their consoles and television by bundling a Kinect motion camera with every Xbox One sold. Amongst these announcements, Microsoft’s biggest news at E3 was that they wanted to redefine game ownership by introducing new onerous digital rights management (DRM) policies. The Xbox One would require users to have their consoles connected to the internet in order to play their purchased games (even in single player), placed restrictions on sharing games with friends, and used DRM to ensure customers could not re-sell their games. This customer-unfriendly approach went over poorly. When Xbox chief Don Mattrick was asked at E3 by Geoff Keighley how individuals who are unable to have their Xbox One connected online at all times will be able to play games, Mattrick responded “Fortunately we have a product for people who aren’t able to get some form of connectivity, it’s called Xbox 360”.
The poor PR generated by the Xbox One media blitz soured the public on Xbox One. Don Mattrick left Microsoft later that year to become the CEO of Zynga, the online social game developer. It is unclear if that transition was related to the Xbox One rollout. By announcing that Xbox gamers would need to adhere to strict DRM rules requiring them to always be online to play their games and awkwardly forcing Xbox into areas of little interest to the core gaming demographic, Microsoft created a self-inflicted wound and left a wide opening for Sony. Even though Microsoft quickly reversed their DRM plans after receiving negative feedback from the gaming community, the PR damage had been done. The PS4 and Xbox One both launched in late 2013, and the core gamer focused PS4 quickly took a wide lead in worldwide sales, which it hasn’t surrendered since. Phil Spencer, a Microsoft Studios veteran with strong gaming bona fides, was appointed by Microsoft CEO Satya Nadella in March 2014 to revive Xbox and recapture the success of the Xbox 360. Spencer has done a great deal of work earning back the trust and commitment of the gaming community with his humble and straightforward personality and fanhood of gaming. Xbox under Spencer refocused on games, leaving behind TV studios and Kinect for a focus on the gaming customer Xbox already had. Successful appeals to gamers included launching high end, cutting edge hardware like the Xbox Elite Controller and Xbox One X, and enhancing the value of Xbox Live and launching Xbox Game Pass.
Microsoft launched the Game Pass service in June 2017. Much like Netflix with TV shows and movies, Game Pass offered access to a library of games for a monthly fee. A Game Pass subscriber pays $9.99USD monthly to gain access to a library of 100+ games that are rotated in and out periodically by Microsoft consisting of a mix of older first and third party games, indie games, and older Xbox 360 games. While an interesting service, the intent of Game Pass was not clear beyond offering affordable access to a back catalog of games. Gamers tend to either stick to the largest multiplayer ecosystems (Overwatch, League of Legends) or the latest and greatest releases. Game Pass faced a challenging market. That changed in January 2018 when Microsoft made an announcement which may have substantial ramifications for the future of Xbox. Going forward, all new Microsoft first party releases (Halo, Gears, Forza, etc…) will be made available on Game Pass in parallel with launch at retail. When a new game costs $60USD, and monthly access to all of the games on Game Pass costs $10USD, all of a sudden the Game Pass value proposition becomes a lot more interesting.
Microsoft adding first party content can be seen in a similar light to when Netflix began producing in house hits like House of Cards and Orange is the New Black. Whereas previously Netflix was an attractive service providing access to a back catalog of movies and TV shows, Netflix had begun to produce its own hit television, changing the TV landscape. Likewise, now that Microsoft is promoting its first party games on Game Pass, it goes from a “nice to have” to potentially the only thing you need to play games on Xbox One.
To understand Microsoft’s business, it’s important to note that the company has traditionally made most of its money selling Windows and Office. During the past decade that balance has switched from selling software to offering services. Microsoft has had three CEOs since Bill Gates and Paul Allen founded the company in 1975. First, Bill Gates from inception until 2000, then Steve Ballmer until 2014 when Satya Nadella took the reins. Nadella has taken radical steps to move away from a business about Windows to a company focused on ecosystem agnostic platforms and services.
Thus today the two primary growth drivers of Microsoft are Azure, a cloud computing service that competes with Amazon Web Services, and Office 365, a service subscription to access Microsoft Office apps like Word, PowerPoint, Excel, etc. The key takeaway is that Microsoft’s core business has moved from selling software to providing services. This transition is certainly not unique to Microsoft. The tech industry is full of other other companies focusing on services like Google, Salesforce and Netflix, to name a few.
Xbox is an interesting part of the Microsoft product portfolio. The videogame business has traditionally been a function of selling consoles (hardware) and games (software). Typically, the console maker (Microsoft, Sony, Nintendo) makes little to no profit on the console sale, in hopes of making up the difference in high margin software sales over the life of the console. That business mix has shifted over time with services like Xbox Live and PlayStation Plus becoming increasingly significant revenue streams for Microsoft and Sony. However, selling consoles and games has been and still is the bread and butter of the videogame business, similar to selling Windows licenses and software to run on Windows, like Office. And just like the PC side of Microsoft shifted its business model from customers owning software to customers subscribing to services, Xbox is also primed for change. And Game Pass could be the catalyst.
After Microsoft’s announcement, anyone can order an Xbox One off Amazon, subscribe to Game Pass and never “buy” a game yet have easy and legal access to enough high quality games to never need to purchase a game at retail. If a subscription service like Game Pass takes off, the ramifications for the video game industry could be tremendous. Just a few to ponder:
- If customers are engaging with more of their games over a subscription service, they are likely buying less games. If they are buying less games, they are spending less at retail and accelerating the decay of the already pressured games retail industry. This would have an acute effect on game specific retailers like Gamestop and would also impact Best Buy, WalMart, and others.
- If retail channels dry up and the primary method of accessing console games is through subscription services like Game Pass or download via the Microsoft or PlayStation digital stores, this reduces the power of publishers like EA, Activision, and others. If the primary channel of game sales is via Microsoft or Sony channels, Microsoft and Sony gain increased power to influence pricing, release dates, and other factors.
- Microsoft Azure provides outsourced processing power to customers on demand. A user doesn’t need a supercomputer or in house data center, they just need an account with Azure and they have their processing power when they need it, where they want it. PlayStation Now and other services have done some interesting things in the gaming space by outsourcing gaming hardware into the cloud and allowing a subscriber to play games without a console. These novel efforts have had little commercial success to this point due to reasons including high prices, lack of content, poor technical performance, etc. Microsoft is one of the only companies in the world that has the hardware cloud, experience, and money to possibly pull off a gaming streaming service well and get it into the hands of the mass market. Imagine the next Xbox existing not as a traditional console but an Xbox device similar to an Amazon Fire TV or Google Chromecast along with a Xbox Game Pass subscription.
- That aforementioned cloud gaming service could instantly provide a large catalog of games to customers for a monthly fee. Instead of paying $500USD for a new Xbox One X and $60USD a pop for each of the latest and greatest games, a gamer could pay $100USD for a USB dongle + controller and $15/month for a subscription to Game Pass. This would lower price barriers and allow a far greater number of people to play Xbox. Assuming that the service is easy to use and functions just like having a game console under your television, it could be extremely attractive.
- A service where all of the processing power comes from the cloud would eliminate the need for new console launches, as the user would not own the hardware processing the games. That hardware would be owned, maintained, and upgraded in the cloud by Microsoft. Games could operate like streaming movies or music, where the hardware on the user end largely becomes immaterial and the focus is on the user interface and content.
There are not an insignificant number of “if’s” in that imagined future, but if Microsoft could pull off a true “Netflix for games” like service they will have taken Xbox and transformed it from a device and software business into a true platform and service business. A future gaming experience where the user is always online, where customers don’t own their games but instead pay a monthly fee for access to them, and where they are unable to sell used games back to Gamestop. A future in some ways similar to the intent of the DRM that Don Mattrick was proposing in June 2013, but through the enticement of exciting new technology that enhances the experience for gamers, rather than a tomorrow dictated to customers whether they like it or not by the Microsoft executive suite.
This article was written by Super Jump contributor, Mike Bruner. Please check out his work and follow him on Medium.
