Xbox is changing its tone on Game Pass

Microsoft’s latest financial data and subsequent comments from Phil Spencer during the Wall Street Journal Live event felt like a shift in tone.

The big takeaway for some is that Microsoft fell short of its goals for Game Pass subscription growth for the second straight quarter.

I hesitate to draw any conclusions from results published in the last six months. Not only has there been a significant shortage of big titles, but it also covers the first full summer after lockdown if people actually go on vacation. It was inevitable that video game goals would be missed, and Microsoft isn’t the only one experiencing it.

What was more striking, however, were the comments that came alongside the news. Estimating that Game Pass will probably only account for about 15% of Xbox’s content and service revenue going forward, Phil Spencer stated, “We don’t have that future where I think 50% to 70% of our revenue will come from subscriptions come.”

15% sounds low when you consider the billions of dollars Microsoft has spent on games and studios to expand Game Pass

15% sounds low when you consider the billions of dollars Microsoft has spent on games and developers, all in the name of Game Pass. Wasn’t that the dream?

Xbox did a great job with Game Pass. The branding and messaging surrounding the service has made it the industry’s flagship subscription platform. It might not have the most users, but every other service – from PS Plus to Apple Arcade – is compared to it.

And it’s also become something of a system vendor. For the first time since the PS2 with its DVD player, a gaming console has a killer app that isn’t a specific video game. Microsoft announced during its financials that half of those who bought the cheaper Xbox Series S machine are new to the Xbox ecosystem, and it’s easy to imagine that Game Pass played a role in unlocking some of these new players .

Despite these achievements, Game Pass’s momentum has been held back by a number of obstacles. First, there’s the patchy release schedule – partly due to COVID-19 and the subsequent shift to hybrid working. This should be a temporary situation, but the ideal of a regular cadence of big games falling into Game Pass is far from ideal. And it’s a situation complicated by the fact that AAA publishers are unwilling to bring their big new titles to the service.

Next, there’s free-to-play. Game Pass’ true competitor isn’t its $70 games, it’s that the biggest titles out there – like Fortnite, Call of Duty Warzone, and Roblox – are all free. Microsoft is trying to figure out ways to get free-to-play working within Game Pass, such as through its partnership with Riot Games, but it’s yet to figure it out.

And then there’s the reality that for many people who only play a handful of games a year, a subscription service just doesn’t make much sense.

These are all legitimate reasons why Microsoft might be downplaying Game Pass’s potential, especially on consoles, where Spencer says growth is slowly slowing.

For many people who only play a handful of games a year, a subscription service just doesn’t make much sense

That might sound negative and mark a significant shift in tone for Xbox, but the truth is that it’s not radically different from what we’ve heard before. In an interview we did with Sarah Bond last year, she told us that Microsoft doesn’t expect subscriptions to become the dominant business model. And it’s something the company has reiterated, though 15% still seems lower than many were expecting.

And you have to consider the background against which these comments are made. Microsoft’s major acquisition of Activision Blizzard is currently under scrutiny and debate by regulators around the world. And some of the data that Microsoft is disclosing is undoubtedly related to it.

One of the biggest concerns for the UK regulator (CMA) is Game Pass and Microsoft’s potential dominance of gaming subscriptions and streaming. By revealing that Game Pass accounts for only 15% of its content and services business, Xbox is pointing out that even if Game Pass becomes the most popular subscription service in games, it’s ultimately just a business model and not even the biggest.

Another message for regulators came in Spencer’s comments on PC and mobile.

Microsoft announced that Game Pass on PC has grown by 159%, consistent with recent comments we’ve received from indie publishers about the service’s growing popularity. to speak anonymously GamesIndustry.bizan indie publisher predicted that Game Pass would soon become Steam’s main competitor, not Epic Games Store.

And speaking of mobile, Spencer spoke of a desire to end Apple and Google’s control, even stating that Call of Duty Mobile is more interesting to Microsoft than the high-profile console versions.

Microsoft wants to take the conversation away from consoles and Game Pass and offer a broader view of the gaming business

That’s not too different from our own analysis of the acquisition earlier this year. With the acquisition of Blizzard, Microsoft will have big PC brands like Diablo and Warcraft that – alongside Call of Duty – will bolster PC Game Pass and provide a viable competitor to Steam. And through titles like Candy Crush (and Call of Duty), Microsoft will have a significant presence in the mobile space to build a business there.

By talking about it, Microsoft is responding to concerns that this acquisition could hurt competition in the console space by highlighting how it will boost competition on PC and mobile. So it’s not just about competing more closely with Sony, but also with Apple, Google and Valve.

It’s a compelling argument, but there are still some doubts and concerns. When it comes to PC, Game Pass is no comparable competitor to Steam. And some of the indie publishers we spoke to are concerned about what a popular PC subscription service could mean for premium indie titles. One publisher even pointed to Netflix’s impact on cinema, particularly its smaller theatrical releases.

These fears are not currently supported by the data, but the industry (including Microsoft) will be aware. Microsoft will want to ensure that competing with Steam creates more opportunities for developers, not fewer.

As for mobile, it’s not clear how Microsoft plans to seriously compete with Apple and Google. Candy Crush and Call of Duty combined with Xbox game streaming would give the company a strong presence on mobile that it didn’t have before. But it doesn’t feel deep enough to offer any significant competition to Google Play or the App Store.

Nonetheless, through the latest results and Spencer’s comments, Microsoft is trying to steer the conversation away from consoles and Game Pass and present a broader view of the gaming business. A view that will hopefully show how Activision Blizzard’s $69 billion acquisition will make the market more competitive, not less.