I know we’ve heard this before and this argument has been done to death. Recently an irrelevant washed up former Sony exec (you know who I am talking about) came out yet again and spoke against “Streaming services”
Now ignoring that Game Pass isn’t a streaming service…xCloud is and xCloud is free to use with Game Pass…however this was clearly a shot at Game Pass
I did a little number crunching and found something VERY interesting that I’d like to share
The Fortune Island DLC for Forza Horizon 4…not even the base game and Lego DLC…just this one DLC…sold to 16% of the 24 million players for Forza Horizon 4 before it launched on Steam…at 20 bucks a pop Fortune Island brought in roughly 76 million in revenue
Returnal, a full 70 dollar game, sold 560k copies at 70 bucks a pop not including physical retailer cuts…would of brought in 40 million worth of sales
So…a DLC outperformed a full 70 dollar game…remind me WHAT’S unsustainable?
What’s really funny? This same individual not too long ago said that modern AAA development is “unsustainable”
You’re preaching to the choir. The only reason this is even a discussion is because one side (the more popular side) doesn’t have it and we do. Now the thing is, Sony can emulate a game pass model, but they won’t; they don’t have the financial backing to do so. They’re sticking to their tried and true; traditional releases at their now $70 price hike and essentially squeeze all that it’s worth.
In my opinion, if a paradigm shift does happen in gaming (like game pass?), I don’t think MS misses it. Can’t say the same for PS.
I think what a lot of people miss with Game Pass is that it’s a strategy model not a service in a bubble.
When looking at its viability, a look of on-lookers assume the equation is:
Total venue from subscriptions - total running costs = profit
And with that equation, Game Pass will be profitable in its own right one day, if it isn’t marginally so already. It’s just a game of scale. The larger the subscriber base, the greater the monthly revenue and the running costs don’t scale in a linear fashion.
But that is likely not how MS is looking at it.
They will be interested in whether they make more profit off a Game Pass customer than a non-Game Pass customer. And as Sarah Bond keeps saying – Game Pass gamers spend more on gaming.
Again, people misinterpret this to mean ‘they buy more games’. Maybe they do, but I don’t think that is what she is saying here. She is saying they spend more on gaming.
the cost of their subscription, which is just more than two full-priced games a year for Ultimate subs.
any new releases they buy (Game Pass subscribers don’t stop buying the big must-have games)
any games they buy at a 20% discount through Game Pass
if Ultimate customers, any games they buy through Deals with Gold
DLC purchases and MTX
The whole package. It is 100% believable to me, and is in line with my own behaviours, that Game Pass gamers are worth more to them than non Game Pass gamers.
Since getting on board with Game Pass I game more than ever before, and enjoy gaming more than I ever did as I seldom play anything I don’t love just because I bought it and feel compelled to. Have I “saved money”? Not sure. I probably spend less on purchasing games, but once you add the cost of the subscription itself in, I probably spend more. I am constantly falling for games I never would have tried through Game Pass and, as they are not permanent fixtures, using the 20% discount to pick them up. I often buy games through Deals with Gold. And I’m still going to buy those big day one third party games just like before despite being a sub. I haven’t done the maths, but I am sure I spend more now, but I enjoy gaming more too.
That is the equation MS will be running when they say Game Pass is profitable. That a user joining Game Pass ends up with equal or more revenue going to MS than when they didn’t subscribe.
So, a long-winded way of saying “I agree”. Game Pass is definitely a model that works for them and makes their business overall profitable. And if they haven’t reached that ‘subscription revenue is greater than service running costs’ line in the sand yet, they will anyway. It’s just a matter of time.
Ok let’s say Game Pass is sitting at 20m users all paying $10 a month, which brings in 200m per month. Let’s take some drastic measures and cut that in half for 3rd party deals which will leave 100m per month. That means Xbox has 100m per month to fund games or 1.2B per year to fund games.
Microsoft could fund 1 100m game per month, or 5 mega AAA games at 240m a pop in a 12 month period. This factors in zero money being made from MTX or Game Sales. I know not everyone is paying $10 a month but I also know there is probably more than 20m users and they’re probably aren’t spending half of the revenue on 3rd party deals per month, also this doesn’t include the $15 Game Pass Ultimate users.
At 50m users spending $10 a month will bring 6B for Xbox and Microsoft, at 6B in revenue they could afford to spend 500m on 12 AAA games per year and at that point they could avoid 3rd party deals completely.
The difficulty is in working out of it’s profitable (in the very narrow revenue vs expenditure equation) today. And that’s a bit of a black box.
For the sake of a fun thought exercise and with tonnes a paper-thin speculation:
The latest figure for subs is 18m. We know it’s more now, but let’s run with that figure.
A GP sub will either be paying:
$15p/m – Ultimate
$10p/m – Console or PC
$5p/m – Gold conversion deal – the digital cost of Gold
~$3p/m – Gold conversion deal – my rough estimate for what MS ends up with from retail Gold codes
So if we just run with 18m, the LOWEST the revenue could possibly be:
Every single customer used a retail code and converted 2 years of Gold to Ultimate: $3 x 12 months x 18,000,000 subs = $648m per year.
The HIGHEST the revenue could possibly be:
Every single customer has full price Ultimate: $15 x 12 months x 18,000,000 subs = £3.24bn per year
We know neither is right. I think a conservative estimate would be something between $1.5bn and $2bn a year, based on 18m subs. Let’s be conservative and say it’s $1.5bn.
Working out their expenditure is even harder, as we have no idea what they are paying for deals and they likely vary widely.
Game Pass guarantees 5 new games a month and is often over 10. Let’s say 8 is an average. But what’s the average cost? I imagine MLB the Show, Outriders, Back for Blood and the like cost them tens of millions a piece, but covering the dev costs of an Indie game? That’s usually going to come in $250k-$500k. What about old games that have passed their sales cycle, what does the publisher and MS agree is the value there? Honestly don’t know. The publisher wasn’t going to sell many more copies, so less than a $1m a piece surely?
Let’s just put our finger in the air and make a total guess that between indies costing a few hundred K and the odd blockbuster costings tens of millions, an average of $1m a game – that’s $96m a year using our 8 games a month average. That fits into the conservative estimate of $1.5bn revenue neatly.
But what about first-party development? The key question is, how many sales of these games do they calculate they lose by putting them on the service? If everyone who played them was a sub, you would have to include the full expenditure on all development as a Game Pass expense, but in reality they still have plenty of other monetisation avenues:
Sales on console
Sales on PC
If we say they are pulling in $1.5bn (I suspect more) and that they are spending $96m on third party deals (I suspect less), then they have $404m left.
If we take a AAA game to cost $80m to develop, that is the budget for the full cost of 5 AAA games.
With 23 studios and more than 23 games in development, I find it hard to believe that the value of sales lost due to game pass does not exceed the revenue left over once third part deals are factored in.
So if I was asked to take a guess, I would say that in these narrow terms (revenue from subs – running costs = profit) the service is not yet profitable.
But like I said, the money Game Pass subscribers then spend – on buying games at 20% discount, buying new games, buying accessories, buying DLC, MTX and so on – that is what makes the strategic model profitable overall regardless.
Of course, this is 100% speculation and based on an 18m sub count that I suspect is low. I could be way out on any one estimate (or multiple estimates) and the whole thing falls apart. Just a little mental exercise for the fun of it.
Another huge thing for MS and GP is getting people who don’t spend much on games and the console to constantly pay $10 a month. People might not think about it but I would argue there is a large % of games who only buy Cod or Fifa and maybe 1 or 2 other games per year. If MS can get those people to sub to GP that’s a massive increase in revenue for them.
Even without the DLC sales a game maintaining a 4mi MAU 2 years after release (and that was 2 years ago when it was at 12mi players) alone showcase how sustainable it is since most of those players are subscribing to the service.
That’s the beauty of the system. The player gets hooked and keeps giving you money from the subscription, and can more easily engage with extra content since the consumer didn’t need to pay the full price for the game
Lot of people miss that Xbox are selling games still. On Xbox and PC. And sometimes even on other platforms.
So they compare gamepass economically to Netflix. When it’s an entirely different model. Xbox have multiple revenue streams including currently Xbox live. And sales. So profitability is a much more complex question. Does the service cover the costs of 3rd party deals and their entire studio portfolios - almost certainly not. But it doesn’t have to.
Current AAA development model is not sustainable, but it is (currently) profitable. Sustainability is about keeping the business up in the long-term. Profitability is about making money now.
Development costs of AAA games kind of double with each console generation… but price do not increase that much. Current AAA games are profitable because the small price increase and other monetization schemes (DLC, mtx, battle passes) have been enough so far, but these will not be enough if development costs keep increasing (which will inevitable increase).
Game pass is yet another mechanism to keep development profitable for some time, but this is not making the service sustainable. At some point in the future (in 10-20 years?), you will need to either increase price (will customers accept that?) or you will need to increase your user base. But increasing your user base will make content more expensive (msft pays third party devs proportionally to the number of users in the service) and will require to add more content that appeals to these… which will make the service costlier for MSFT.
So… game pass is not yet the solution to AAA game development, even though it might be profitable right now.
Shawn is currently working for / advising a “metaverse solution” company… which kinda is a more sustainable approach to game development. See fortnite, for example, that blends games with a social network that then is utilized as a marketing tool. You can recoup costs with mtx+dlc+battle passes, and then with different marketing deals that brings more money to the dev/publisher. So, obviously, shawn’s conversations will go around the sustainability of the AAA game development model, which inevitable derives the (business) conversation to the metaverse. He is not talking to fans, but managers and heads of game studios.
Also, notice that Phil Spencer and Matt Booty have been recently talking about supporting “creators” (or the idea that “everybody can be a creator”). This is their vision on how to materialize the metaverse thing into a service like game pass. But it is still an idea in development.
The people who say gamepass isn’t profitable are simply full of it, especially people who imply they’ve “done the math” but never show it (coughColinMoriartycough).
The more interesting discussion, in my opinion, is what will happen when gamepass & Xbox’s install base increases closer to Sony’s. The genius of gamepass is how it takes advantage of having a lower install base, where Microsoft doesn’t have to pay as much for gamepass rights because the devs are losing a smaller piece of the pie. This is also why Sony can afford to buy exclusivity from devs despite being a much smaller company (they have the bigger install base).
If Xbox gets to a point this gen where the number of xbox players are much closer to playstation players, it’ll make it costlier for Microsoft to keep the gamepass pipeline full. That said, if this comes true, Microsoft is also making a boatload more money from subscriptions, so it’ll likely net out in the black.
If Xbox went 100% in on a subscription model I could see the argument that they would be burning money for a long time. The people that argue this point miss that Xbox is also selling full priced games, DLC, micro transactions etc. Game Pass is just another revenue stream and will eventually be the number 1 money maker alongside other ways to make $.
This is why microsoft is being (and will continue to be) active on acquisitions. Cost of first party content does not increase with the number of subscribers. We have seen this with Netflix, that has increased the number of original content as they increased their user base. Main difference is the time required to make games vs films, which forces msft to be more active now in preparation when the number of subscriptions grows.
It’s already happened. Pretty much everything on Gamepass will dominate anything that’s $70 now it’s in the 25m+ range. Even minor titles like Grounded are putting up large numbers without any advertising.