Xbox Shifts Focus on Game Pass

Microsoft's latest financial reports and Phil Spencer's comments at the Wall Street Journal Live event marked a notable change in tone. The key takeaway was Microsoft's failure to meet its Game Pass subscription growth targets for the second consecutive quarter. However, it's essential to consider the context, including the lack of major titles and the post-lockdown summer, which inevitably led to missed targets. Spencer's comments that Game Pass will account for around 15% of Xbox's content and services revenue going forward were particularly noteworthy. This figure seems low, given Microsoft's significant investments in games and developers for Game Pass. Despite this, Xbox has successfully established Game Pass as the industry's flagship subscription platform, with a strong brand and messaging that has made it a system seller. The service has attracted new players to the Xbox ecosystem, particularly with the cheaper Xbox Series S machine. However, Game Pass has faced obstacles, including a spotty release schedule and the challenge of free-to-play games, which are the real competitors to Game Pass. Microsoft is trying to find ways to incorporate free-to-play games into Game Pass, but it's still a work in progress. The company is also aware that subscription services may not be suitable for casual gamers who only play a handful of games per year. These factors are legitimate reasons for Microsoft to downplay Game Pass's potential, especially on consoles, where growth is slowing. This shift in tone may seem negative, but it's not drastically different from what we've heard before. Microsoft has consistently stated that subscriptions won't become the dominant business model, and the 15% figure, although lower than expected, is still a significant revenue stream. The comments come as Microsoft's acquisition of Activision Blizzard is being scrutinized by regulators worldwide. By highlighting Game Pass's relatively small contribution to its content and services business, Xbox is demonstrating that even if Game Pass becomes the most popular subscription service, it's just one business model among many. Spencer's comments on PC and mobile also sent a message to regulators. Game Pass has grown by 159% on PC, and Microsoft aims to compete with Apple and Google on mobile, particularly with the acquisition of Activision Blizzard, which will bring major PC brands like Diablo and Warcraft to the table. This move will bolster PC Game Pass and offer a viable competitor to Steam. Microsoft is arguing that the acquisition will boost competition on PC and mobile, rather than harm it on consoles. While this argument is compelling, there are still concerns about the impact on premium indie titles and the ability to compete with Apple and Google on mobile. Microsoft will need to ensure that competing with Steam creates more opportunities for developers, not fewer. Ultimately, Microsoft is shifting the conversation away from consoles and Game Pass, presenting a broader view of the games business, and hoping to demonstrate that the Activision Blizzard acquisition will make the market more competitive, not less.