The Sharma memo
Xbox's new CEO gets to work
The SuperJoost Playlist is a weekly take on gaming, tech, and entertainment by business professor and author Joost van Dreunen.
After announcing the next console, Xbox Helix, just weeks into her new job, it is clear that the recently appointed CEO, Asha Sharma, isn’t wasting time. Despite an initial wave of skepticism, the new leader of Microsoft’s $25 billion gaming empire seems undaunted.
In a leaked memo obtained by The Verge’s Tom Warren, Sharma writes that Xbox’s Game Pass subscription “has become too expensive for players.”
Following a recent increase to $30 per month for its highest tier, demand appears to have soured. The $30 tier was built on the assumption that heavy users, willing to pay more for premium experiences, represented the bulk of the customer base. The memo suggests that this assumption did not hold.
So what could a cheaper, more valuable service look like?
One version I’ve suggested a few times is an ultra-low tier priced at around $5.99 per month. Giving players access to an entire library of games for the price of a single premium title is one way to reset the value equation. Price alone, however, doesn’t solve the underlying problem. Research on subscription models in the console industry has found that while subscriptions change purchasing behavior—subscribers buy fewer individual titles—they do not meaningfully expand the overall market. Adding more games to a library does not attract players who weren’t already gaming. Subscriptions excel at retention. They perform much worse as a driver of growth.
This is the bind Microsoft has been in. Game Pass was built on the Netflix-for-games thesis, and that thesis has a structural ceiling. This points toward the second version of a cheaper, more valuable service, one that doesn’t rely on subscription revenue at all.
The economics of direct monetization in gaming have always been hostile to scale. Microsoft’s own internal documents, leaked in 2023, revealed the math behind this problem. Generating $7.8 billion annually across 100 million Game Pass subscribers would require an average monthly revenue of just $6.50 per user, well below the $9.26 Xbox was actually earning at the time. The only way to close that gap without pricing out the mass market is to find revenue that doesn’t come directly from the player.
As video games have become a more mainstream form of entertainment, they have come to behave more like media businesses. As such, they’re now coming up on the same financial logic that has built every major advertising-supported media business in history. Television didn’t charge viewers. Radio didn’t charge listeners. The internet didn’t charge readers. Each of them subsidized access through indirect revenue and captured scale that direct monetization never could.
Gaming has resisted this logic longer than any other mass medium, partly out of cultural pride and partly because, for a long time, the premium audience was large enough to sustain the business. That time is ending. The players willing to pay $30 a month for a game library are not enough. The three billion who won’t pay anything at all are the actual market, and the only way to monetize them is indirectly.
The Advertising Play
I have argued several times (here and here) that Xbox will start relying much more heavily on advertising. Under Sharma, Xbox is more likely to behave like a scaled platform business, monetizing audience attention rather than just access to content. Microsoft has been signaling this direction for some time now. It has consolidated its ads business to combine console, mobile, and LinkedIn, for one. (More on this another time.)
The economics behind this shift are starker than most people appreciate. Gaming captures less than four percent of digital advertising spend while commanding roughly thirteen percent of consumer time, a tenfold gap between attention and monetization. Every other platform that has reached this level of sustained audience attention has eventually closed that gap. Streaming platforms resisted advertising until they didn’t. Ride-sharing apps added it. Smart TVs built entire business models around it. The pattern is consistent enough to be called a law: ads eventually reach all addressable surfaces. Or, as Eric Seufert likes to say: everything is an ad network.
(BTW, check out my recent conversation with Eric on AI on his podcast here!)
What’s changed is the audience.
