Xbox Shifts Its Stance 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 for many was that, for the second consecutive quarter, Microsoft failed to meet its Game Pass subscription growth targets. 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. The comments accompanying the news were more significant, with Phil Spencer estimating that Game Pass will account for around 15% of Xbox's content and services revenue, stating that the company doesn't envision a future where 50-70% of its revenue comes from subscriptions. This seems low, given the significant investment in games and developers for Game Pass. Xbox has successfully positioned Game Pass as the industry's flagship subscription platform, with a strong brand and messaging. It has also become a system seller, with half of the cheaper Xbox Series S buyers being new to the Xbox ecosystem. Despite these successes, Game Pass has faced obstacles, including a spotty release schedule, the reluctance of AAA publishers to include their titles in the service, and the rise of free-to-play games. Microsoft is attempting to incorporate free-to-play into Game Pass, such as through its partnership with Riot Games. The reality is that, for many casual gamers, a subscription service may not be the best option. These factors may have contributed to Microsoft's more subdued tone regarding Game Pass, particularly on consoles, where growth is slowing. This shift in tone may not be drastically different from previous statements, as Microsoft has consistently emphasized that subscriptions will not become the dominant business model. The company's comments should be considered in the context of the ongoing Activision Blizzard acquisition, which is being scrutinized by regulators worldwide. By revealing that Game Pass accounts for only 15% of its content and services business, Xbox is highlighting that even if Game Pass becomes the most popular subscription service, it's just one aspect of the business. Microsoft is also addressing concerns by discussing its plans for PC and mobile. The company announced 159% growth for Game Pass on PC, which aligns with indie publishers' comments about the service's increasing popularity. On mobile, Microsoft expressed a desire to challenge Apple and Google's control, with Call of Duty mobile being a key area of interest. This strategy is consistent with previous analyses, which suggested that the acquisition would bolster PC Game Pass and provide a viable competitor to Steam. Through this acquisition, Microsoft aims to increase competition on PC and mobile, rather than just focusing on the console space. While this argument is compelling, there are still concerns about the potential impact on the PC market and the company's ability to compete with Apple and Google on mobile. As the industry continues to evolve, Microsoft will need to balance its competitive ambitions with the need to support developers and create opportunities for growth.