Game Pass, or fail
Xbox's $30 solution to a billion-dollar problem
After spending last week in New Orleans, I have a clearer sense of the future.
For one, a tarot card reading revealed my own fortune. Evidently, I’ve come a long way, but am now in the middle of a reconciliation, and the road ahead is coming into focus. That is good to know. And, frankly, it is better guidance than I’ve gotten from any algorithm lately. New Orleans’ vibe has a way of reminding you of the cyclical nature of things. And beignets. Oh god. Beignets.
Another vision I gleaned there is the imminent manifestation of two distinct revenue models in gaming.
The first, direct-to-consumer monetization, has been gradually evolving as a necessary alternative to the iron grip platform holders have held over their ecosystems. The legal victories won by Epic Games’ Tim Sweeney against Apple and Google have cracked the walled gardens and started to oxygenate mobile gaming—a little, at least.
The court-ordered removal of ‘anti-steering’ clauses, which prevented publishers from guiding players off-platform for in-game purchases and offering them better value, initially resulted in a $4.1 billion windfall for mobile game makers. Since then, several firms have spun up alternatives. A newcomer like AppCharge raised $58 million in August to build the infrastructure game makers need to facilitate off-platform purchases. And we also heard from incumbent Unity last week, which launched a free payment product enabling ‘app-to-web payments’ together with Stripe. (N.B. Unity’s CEO is coming to my class in a few weeks, and, yes, the event is open to the public. Details below.)
The second, ad-based revenue, also seems ready for prime time. After years of trying to get in front of gamers, both publishers and advertisers appear poised to do so.
The latter, represented by a growing consortium of brand managers, is eager to, sigh, get in the game. The declining efficacy of increasingly toxic social media has turned their attention to more emotionally meaningful alternatives. In 2024, social media accounted for 19 percent of total time spent by consumers and 42 percent of total ad expenditure in the U.S., according to eMarketer. Gaming commands a comparable time share of 13 percent, but receives only 4 percent of total ad spending.
But more than merely stickering their logo all over, it is the newfound ambition to develop an integrated approach that leverages gaming as a growth driver. A few months ago, Julian Runge and I wrote a piece on that for Harvard Business Review. And then there’s Bastian Bergmann, who just published an entire book hammering the point home, titled: Press Play: Why Every Company Needs a Gaming Strategy. I strongly recommend it if you care about where culture and consumer attention are actually going.
Game publishers, on the other hand, find themselves in an obvious bind.
Hoping to offset the threat of additional regulatory speed bumps that could hinder their financial reliance on micro-transactions, they now lean more heavily into indirect revenue models. Firms like Zynga and Square Enix have recently expanded their commitment by partnering with Gadsme to offer in-game ads to mobile players. And on Friday, Xbox confirmed that its employees have access to an ad-supported version of Xbox’s Cloud Gaming service, according to Zachary Small from the New York Times. (You can find my prediction from July 2024 here.)
It’s all part of the broader push toward distribution innovation. To offset rising development and marketing costs, publishers are developing new strategies to generate income. Revenue models, however, are not business models. And so while novel ways to make money will help offset the suffocating dominance of Big Tech, creative firms will also have to overhaul the rest of their operations.
Maybe I’ll go back to New Orleans for another reading.
On to this week’s update.
BIG READ: Game Pass, or fail
“We are now the largest publisher after the Activision [deal] so therefore we want to be a fantastic publisher, similar to the approach of what we did with Office. We’re going to be everywhere, on every platform. We want to make sure, whether it’s consoles, whether it’s the PC, whether it’s mobile, whether it’s cloud gaming, or the TV, so we just want to make sure the games are being enjoyed by gamers everywhere.”
Satya Nadella, CEO, Microsoft. (Bolding added. h/t Stephen Totilo)
Xbox recently made its third major Game Pass overhaul in two years.
It is the most tangible proof that the firm is still searching for the right formula rather than confidently executing. By far the most telling change is its locking Call of Duty: Black Ops 6 behind a new $30-per-month Ultimate tier, a 50 percent price increase from the previous $19.99.
The growing evidence that premium subscription titles cannibalize unit sales, as reported by Bloomberg’s Cecilia D’Anastasio, tells us two things: first, Game Pass hasn’t delivered the immediate, explosive growth Microsoft anticipated after acquiring Activision Blizzard, and, second, it has realized its infrastructure costs don’t align with its pricing model. Worse, the rapid sequence of pricing updates makes for, as one former Xbox employee told me, “bad optics.”
This aggressive repricing reveals another uncomfortable truth: the service has what one might call ‘airline economics in reverse.’ In air travel, premium passengers subsidize economy fares. On Game Pass, every user effectively flies business class while paying economy prices, creating an inherently margin-thin model in which heavy users consume disproportionate resources without proportional revenue.
Microsoft is now trying to fix this structural problem by segmenting its user base. The $30 Ultimate tier targets power users—those who stream Call of Duty daily and download multiple new releases each month—whose infrastructure costs far exceed what the previous flat fee could cover. At the same time, management has also confirmed cheaper, ad-supported tiers coming for lighter users, particularly cloud-focused players.
It’s all part of Microsoft changing direction to accommodate a broader industry shift. It now aims to reach as many people as possible—or, in Xbox corporate speak, “reach people where they are,” which means abandoning its console-centric approach.
However, while subscriptions are a more established monetization strategy in other entertainment categories, such as streaming video and music, there is still precious little research on their viability and benefits in the context of console gaming. It partly explains why Microsoft seems to be making a series of uncertain decisions, leading critics to conclude its service isn’t performing well.
Based on data provided by Antenna (disclosure: I’m an investor), we can see that weekly signups for Xbox Game Pass have indeed been trending downward.
