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  • Writer's pictureNick Campanelli

The Next Big Thing in Streaming

As opposed to the short life of Stadia as a gaming platform, other players in the space of video game subscriptions are making strides towards dominating the market.

None more so than Xbox Game Pass

Let’s start with some numbers. On the back of an increased interest in gaming through the COVID-19 pandemic, the number Game Pass subscribers has grown steadily. Reported by Microsoft in September 2020, Game Pass subscribers had jumped over 50% in less than 6 months – from 10 million to 15 million subscribers. More recent figures, though not officially confirmed by Microsoft, suggested subscribers were at 23 million in April 2021. Extrapolating these projections forward to September of this year, we might expect to see Microsoft release numbers close to 30 million, particularly with big game releases on the horizon.

With Xbox already monetizing a quarter or more of its 100 million active online users (Xbox Live) into a premium subscription, it is a good time to evaluate what is working well and where Game Pass may be headed.

So what’s working well?

1) Microsoft is focused on user acquisition. Microsoft may be taking a loss-leader approach to get new subscribers signed up. Our own research into subscription services suggests that once consumers are on board with a service, they are likely to stick around. This may be why we are still seeing tremendous deals to get people on board. How does $1 for the first 3 months sound?

Once users are onboarded, the stickiness of Game Pass comes through the games and progress users have saved in their library. Once they’re in, we presume they’re not a huge risk to unsubscribe. The dual function of this strategy works to leverage the existing Xbox owners and keep them on the platform (vs. moving to Playstation).

2) Microsoft has figured out the economics of game streaming at scale. In theory, Xbox Game Pass differs from other streaming platforms like Netflix and Spotify because the total cost of providing the service does not scale linearly with the growth of the service offering itself. Jim Ryan, the president, and CEO of Sony, believes that a subscription model is not sustainable, and said as much when asked about Game Pass. ““We have had this conversation before – we are not going to go down the road of putting new releases titles into a subscription model. These games cost many millions of dollars, well over $100 million, to develop. We just don’t see that as sustainable.” Microsoft, however, is betting the opposite.

At the current user base of, conservatively, 20 million, and the lowest priced subscription tier of $10/month, Xbox Game Pass is currently pulling in at least $200 million net revenue for Microsoft, every month! At this rate, Microsoft could produce at least 10 of these AAA games, think blockbuster titles like Halo, every year. Of course, there is more than just blockbuster content, with smaller indie games also licensed on the platform through a lump upfront cost.

Sustainable Growth

The key aspect of this strategy, for Microsoft, is that those costs are theoretically fixed.

Compare this with Netflix, who projects spending $17 billion on content in 2021, a number that keeps going up, and Spotify, who spends around 75% of revenue on royalties, a cost that is relatively fixed regardless of the size of the user base.

If Game Pass can continue to grow its user base, assuming costs to add content don’t balloon, it is easy to make an argument for how the Game Pass model will be quite sustainable at scale.

3) Microsoft can extract further value out of users. As potentially the most “successful” streaming services, in terms of usership and not profit, Netflix and Spotify are good comparisons for this point too. If I like a show on Netflix, I can’t purchase the DVD box set. If my favorite artist releases an amazing Spotify Sessions EP, I can’t purchase those songs to download for non-Spotify use.

On Xbox Game Pass, however, the games can be purchased, and additional downloadable content (DLC) can still rake in revenue for Microsoft and game studios. Furthermore, as compared against Spotify and Netflix, accused of killing sales of DVDs and CDs, respectively, the inclusion of content on Xbox Game Pass does not necessarily impact game sales. Take, for example, the Sea of Thieves, a game released on Steam in June 2020. Despite having been on Xbox Game Pass for several years as an Xbox exclusive, the game still made it onto Steam’s year end top sellers list based on revenue. This suggests that game studios and Microsoft can work together, meaning a stronger subscription offering.

4) Microsoft is focused on different types of gamers, not just the console players. Console players are obviously the current target of the Xbox Games Pass offering, but this group is relatively small, and is limited to people who can afford a $500 gaming console constrained by supply issues. The true potential for massive adoption is the estimated 2.5 billion or more gamers worldwide. Xbox Game Pass is targeting this market through the beta xCloud – gaming over the cloud on Android, IOS, and Windows PC. We can see Microsoft appealing to mobile gamers, specifically, in Asia through their partnership with SK Telecom. If this market can be successfully pulled into Microsoft’s subscription model, the limits of the Game Pass service are difficult to fathom.


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