Why Game Pass May Never Be on Rival Consoles

For decades, Microsoft held a privileged position in the tech industry, with its Windows operating system being a crucial component of personal computers. The company didn't manufacture computers itself, instead licensing its software to other manufacturers. This model allowed Microsoft to reap significant profits without bearing the risks and costs associated with hardware production. The company's dominance in the PC market was unparalleled, and its influence extended far beyond the tech industry. However, the PC manufacturing business was cut-throat, with many companies facing significant challenges and some even ceasing operations. Despite this, Microsoft's impact remained minimal, as manufacturers continued to pay for Windows licenses regardless of their individual successes or failures. Today, Microsoft's business is more diverse, with Windows licenses being a relatively small part of its overall revenue. The company is now focused on cloud services, AI, and other emerging technologies. The model that built Microsoft into the giant it is today - selling a dominant, high-margin operating system for computers built by other companies - is still an enviable position. It's a strategy that many companies would love to replicate. The closest modern analogue to this model is Google's Android operating system. Microsoft's Game Pass is an attempt to achieve something similar in the videogame market. The service is the central pillar of the company's broader strategy to transform Xbox into a software and services offering rather than just a console. When Microsoft's CFO, Tim Stuart, commented on the company's desire to see Game Pass available on all devices, including consoles from rival companies like Sony and Nintendo, he wasn't saying anything new. However, the fact that the idea is being reiterated by Microsoft's CFO is still interesting, as it speaks to the company's strategic thinking about games and the challenges it faces in achieving this goal. Putting a version of Game Pass that relies exclusively on XCloud onto devices like smart TVs is a realistic aspiration, at least in the medium term. New regulations on app stores in the EU may also provide a route for doing something similar on smartphones. However, the idea of Game Pass running on Sony and Nintendo hardware is a harder sell, with obstacles that go far beyond financial considerations. The issue of revenue sharing is often cited as a major hurdle, but it's not the only challenge. Companies like Sony, Nintendo, and Valve are not like PC manufacturers in the Windows era; they don't derive their profits from margins on hardware sales. Instead, they sell game hardware cheaply and make back their money on software sales. If allowing Game Pass on their hardware displaced more software sales than could be covered by a hypothetical 30% cut of the revenue, it would be a terrible deal for them. Even if Game Pass did pay for itself, it could still be a terrible deal, as it would effectively commoditize their hardware. As Game Pass becomes an increasingly important conduit for people to play games, the choice of hardware would matter less and less. This scenario would destroy a significant part of the brand loyalty that Sony and Nintendo have spent so much time building up. It's not just Sony or Nintendo that stand to lose out from Game Pass becoming increasingly ubiquitous. Valve seems more open to the idea of Game Pass on the Steam Deck, but the notion has still caused disquiet among many developers. The extent to which Game Pass cannibalizes sales in other channels is still unclear, but developers seem to have found that putting a title on Game Pass still allows them to enjoy solid sales on Steam. Allowing Game Pass onto the Steam Deck wouldn't end that, but it would erode it, pushing more consumers towards a game subscription model that creators are comfortable with as long as it provides additive revenue. The movie and TV industries are currently struggling to recover from years of missteps with streaming services. These industries have locked themselves into business models that are inherently less profitable for almost everyone involved. With the land grab phase ending and investment drying up, these models are proving unsustainable, and companies are desperately trying to cut costs. The music industry has done something similar, providing a cautionary tale about the dangers of transitioning to a subscription-based model. Tim Stuart's ambition for Game Pass makes perfect sense for Microsoft, especially given the risks and challenges associated with the hardware business. However, it would be madness to expect the rest of the industry to fall in line with a plan that's not in their interests today and may end up being hugely destructive down the line.