🎮 Calling 💩 on Xbox Game Pass Profitability
In Today’s Email
🚀 This week, we take a look at Phil Spencer’s announcements about Xbox Game Pass, and Eric breaks down some of the company’s claims.
On the go? Listen to one of our podcasts from this week, we’ve got
🎧 TWIG #207 Is the Microsoft Xbox really Pass profitable?
🎧 NEW SEGMENT: Eric Kress’ One on One with Wehype’ Robin Astrom
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Calling 💩 on Xbox Game Pass Profitability
Last week Microsoft Gaming CEO Phil Spencer spoke at The Wall Street Journal’s Tech Live conference saying that Xbox Game Pass is already profitable and accounts for around 15 percent of Xbox content and services revenue.
“Game Pass as an overall part of our content and services revenue is probably 15 percent,” says Spencer. “I don’t think it gets bigger than that. I think the overall revenue grows so 15 percent of a bigger number, but we don’t have this future where I think 50–70 percent of our revenue comes from subscriptions. We’re seeing incredible growth on PC ... On console, I’ve seen growth slow down, mainly because at some point you’ve reached everybody on console that wants to subscribe,” explained Spencer.
Microsoft revealed that it saw PC Game Pass subscriptions increase by 159 percent year over year and that more than 20 million people have streamed games on Xbox Cloud Gaming, up from 10 million earlier this year. PC looks like an obvious growth area for Microsoft. But there are hopes for mobile, too as Microsoft announced that it’s building an Xbox mobile gaming store to take on Apple and Google last month.
Spencer also touched upon pricing in his appearance at Tech Live. While Microsoft hasn’t increased the price of the Xbox Game Pass or its Xbox consoles, that might not hold for much longer, and Spencer hinted changes could be on the way in the future. This is in line with the macroeconomic situation where companies that possess the pricing power are making consumers carry the cost of inflation.
“There is so much bullshit in this announcement that it is hard to know where to start”, is how Eric Kress kicked off his analysis, "First off, there is no freaking way these subscriptions are profitable. No way by any reasonable measure. Between hardware costs, bandwidth costs, cost of studios, distribution, and engineering there is no way. None! Microsoft would have to be manufacturing a P&L that excludes all the indirect costs to make this thing profitable.
In the episode, Eric continued to make three critical arguments regarding Phil Spencer’s talk. These points potentially show that what Mr. Spencer said is contradicting the actions Microsoft is taking.
Firstly, Kress pointed out that Microsoft said that they have reached all the audiences they can reach. An audience that consists mainly of console players, with a rapidly growing amount of PC players. Yet if this is the case, why would Microsoft acquire Activision? Isn’t the whole point of the subscription service to attract a broader audience? And if the Xbox Pass has tapped out its audience, it would make little sense to spend $68.7 billion on content for a subscription service that was not growing.
Spencer also said that Microsoft has held prices on consoles, games, and subscriptions as long as they could hinting that after the holiday seasons the prices are likely to go up. This leads to Kress’ second point, which is that you don't increase prices on services that are profitable and certainly not on services that are showing slowing growth. Companies typically reduce prices to capture the biggest audience possible. If Xbox is increasing the prices, that could mean that they are not worried about the impact of the price increase on growth.
Kress’ third point was that Microsoft’s mobile expansion in the current environment is unrealistic. Firstly, there’s no guarantee that the audience is there. After all, there are very few truly cross-platform titles. Games that are essentially the same on both mobile and console, like Fortnite. Not games that have a different mobile version, such as APEX Legends on Call of Duty Mobile. Also, what is the likelihood that Apple or Google are going to ever be willing to host Microsoft’s service without taking another 30% cut? How does this cut affect the profitability of the service?
Overall, Kress made a very valid argument that we shouldn’t analyze the points made by Spencer but rather discuss why did he make these points. Especially since these public presentations where the business of Xbox is discussed are quite rare.
“This whole line of rhetoric and narrative is to position Microsoft with the regulators related to the Activision deal it has to be”, argued Kress, “They are trying to position the subscription service as tapped out. That it’s not going to change the landscape between Microsoft and Sony. Because if it would, that could influence the approving regulators who are carefully looking into Microsoft's acquisition of Activision, which is yet to close. I bet they are already adding this Verge article to the exhibits for the appeal to UK authorities” said Kress in his monologue”
Whether Kress’ argument is right or wrong, one thing is for sure: Xbox is an incredibly well-run professional organization with unrivaled public relationships and legal resources. Any public talk by Xbox officials serves a strategic purpose.
Thus the question is, what was the strategy behind announcing that the much-touted Xbox Game Pass’s audience has peaked and profitable? Is it to please the investors and analysts? Is it to influence regulators? Perhaps both? Do let us know what you think!
psst! If you enjoy these analyses, make sure to subscribe to the Deconstructor of Fun podcast!
🎙️ Deconstructor of Fun Podcast
🎧 TWIG #207 Is the Microsoft Xbox really Pass profitable?
Laura, Seufert, and Kress discuss TikTok's standalone gaming channel and evaluate whether the Xbox pass is profitable. The team also discusses Modern Warfare II topping $800M in sales, Rovio's new Barcelona studio, and Netflix's acquisition of SpryFox. TWIG wouldn't be what it is without a public apology. In this episode, Eric Seufert walks back his statements on Marvel Snap after being bombarded by product managers and designers around the world. Kress hit a D 365 of not drinking. Send him a congrats message on LinkedIn or via Slack, if you've gained access to the community
🎧 Eric’s One on One with Robin Astrom at Wehype
Kress sits down with Robin Astrom at Wehype to discuss how influencer marketing can be an alternative/supplement to traditional marketing and how it can help products and brands find audiences in a hostile user acquisition market. And how is it working with these Gen Z influencers…
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