When it comes to PS5 vs Xbox Series X, gamers are continuing to buy Sony’s curvilinear console by a margin of more than two-to-one (opens in new tab). The reason why is somewhat bewildering. At the moment, neither system has any killer apps, apart from the recently released Ratchet & Clank: Rift Apart.
Sony is clearly riding the coattails of its past systems, which is why PS5 restocks continue to remain elusive. The Japanese game publisher has established itself as a maker of industry-defining titles. From Shadow of the Colossus to The Last of Us, Sony has been able to offer gamers what Microsoft has not. Xbox head Phil Spencer admitted as such during a video interview with Fortune Magazine (opens in new tab): “We have work to do there. We haven't done our best work over the last few years with our first party output.”
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While Microsoft is aiming to make Xbox Series X the home of killer exclusives, thanks to the massive $7.5 billion purchase of Bethesda, as well as a host of other studios (opens in new tab), that vision is still some time away from fruition. To close that gap, Microsoft has turned to Xbox Game Pass, a Netflix-like subscription service that brings gamers tremendous value. For between $10-15 a month, gamers will have access to all brand new Xbox exclusives, as well as a trove of other games from third parties. It’s such a good deal that it’s pulling some gamers (opens in new tab) away from PlayStation for the first time. It’s apparently forcing Sony to work on its own equivalent service.
Netflix, but for video games
Even then, there’s still not a ton known about how Game Pass operates. How is Microsoft able to court so many games to its service? How is putting every one of its $100 million-plus games on the service yield a return on investment? Why do some games stay for a long time while others rotate out? It all comes down to understanding the subscription and streaming markets, and Microsoft is betting big that a Netflix-like model will prevail over traditional $70 game purchases.
“The model is they've got you basically for life,” said Paul Dergarabedian, senior media analyst at Comscore. “Because the ability to get everything you need is predicated on continuing your subscription.”
Sure, gamers could jump into the next Forza or Gears of War only paying $10 for the month and cancel, but that’s seldom the case. Once a consumer finds value in a subscription service, often they don’t leave, or forget to cancel. In the case of Netflix, this churn, or when subscribers cancel their subscriptions, is surprisingly low.
Antenna and MoffettNathanson Research found that only 2.5% of Netflix subscribers churned (opens in new tab) in the fourth quarter of 2020. Given that Netflix has over 207 million subscribers, losing that small percentage allows it to fund and cancel shows like Jupiter’s Legacy even though the first season cost $200 million (opens in new tab) to make. As of publishing, Game Pass has 23 million subscribers (opens in new tab). Although, that may include some who got in at an introductory rate of one dollar their first few months. And Microsoft did announce that it’s creating an Xbox streaming stick and integrating Xbox Game Pass streaming into televisions, which should only increase its potential pool of subscribers.
Xbox Game Pass is great for taking a risk
One of this year’s Xbox Game Pass launch-day releases was The Medium, developed and published by Poland’s Bloober Team. The game, which landed in between a lower-budget indie title and a major AAA game, seemed to fit nicely in the Game Pass model. It maybe was a game that wouldn’t have fared well at a retail $70 price point, but one that likely wouldn’t have been profitable at $20 either.
Regardless, The Medium has been a sales success (opens in new tab) for Bloober Team, turning a profit less than a week after release. It’s uncertain if that had to do with individual $50 sales, or from what Microsoft doled out through Xbox Game Pass. Likely, it was a mix of the two.
At the moment, The Medium still is available for Xbox Game Pass subscribers. Unlike Microsoft-published titles, it’s unclear if The Medium will stay on Game Pass indefinitely.
“The ‘new game on Game Pass’ isn’t going to happen unless Microsoft owns the developer,” said Michael Pachter, a research analyst at Wedbush Securities in an email interview with Tom’s Guide. “That’s what happened with The Outer Worlds, but you don’t see games launch there and stay there for more than a month (if that) from other publishers.”
The Outer Worlds was developed by Obsidian Entertainment, which is a studio that’s now owned by Microsoft, meaning the game will stay on Game Pass indefinitely. If Microsoft wanted to land a third-party exclusive, compensation would be based on how large the Game Pass subscriber pool is.
“The price in such a case would be negotiated, but typically will be a guarantee based on the number of Game Pass subscribers,” said Pachter. “When [Microsoft] had 1 million, they probably were able to get an exclusive for $10 million or less, but now that they’re 18 million, the price would be prohibitive.”
Xbox Game Pass is more than just newer games though. It has a trove of older titles, going back to the original Xbox. Obviously, for these games Microsoft isn’t paying publishers the high rate it would be for newer titles, especially potential exclusives.
“For older games, they pay out an estimated 65% of their take for content,” said Pachter. “Assuming that they charge $10 per month on average, they pay out $6.50 per month [to publishers], based on minutes played. Thus, if a game equals 10% of minutes spent, the developer would get $0.65 for their share [per subscriber].”
Interestingly, just like on Netflix, publishers will release titles on Xbox Game Pass as a way to promote newer titles. For example, Yakuza or Assassin’s Creed games could make their way over to the subscription service to help get people invested into a franchise before the newest iteration drops. This happens often on Netflix as well where older Marvel movies will appear prior to the next major summer blockbuster. In these instances, the payout model might be different.
“Any piece of content that's tied to a new, that may be in the library that's tied to a brand new piece of content, you generally do see that stuff resurface when it's around the time that the new movie, or streaming series is about to drop because it all ties together,” said Dergarabedian.
Microsoft will keep the inner workings secret
Unfortunately, not much is known about how these deals work. Netflix is notoriously tightlipped about everything from metrics to studio deals. Assuming a new Assassin’s Creed game is coming out in 2022, it wouldn’t be too surprising to see much of the franchise appear on Xbox Game Pass for gamers to jump into. Whether Microsoft is paying more or Ubisoft is lowering its residuals is unknown. What’s unfortunate is when an 80-hour Assassin’s Creed title leaves the service before gamers are finished completing the game. Once the game is off, gamers will then have to buy the game separately to continue from where they left off. This rotation of content is how subscription services tend to work.
At the moment, the Yakuza series is all on Game Pass. We actually argue that Yakuza is the perfect series for Xbox Game Pass. Still, Yakuza likely won't stay on Game Pass forever. Like Netflix, Microsoft too signs rights deals with publishers which attaches some sort of expiration date. Of course, subscription services gain and lose rights all the time. For example, Netflix paid WarnerMedia $100 million (opens in new tab) back in 2018 to extend Friends until 2020. Microsoft could also choose to sign a new deal with a publisher to extend rights if need be. But because of how the subscription market works, fans will have to get used to the idea of games rotating out. At least Microsoft gives a discount to gamers wanting to buy.
“For Xbox Game Pass members who want to keep playing a game after it leaves the catalog, they can buy it and save up to 20% off the price of the game, as well as 10% off related add-ons,” said a Microsoft spokesperson.
Unlike movie theaters or retailers, understanding how subscription services like Netflix and Xbox Game Pass operate will remain difficult. Effectively, Microsoft has created its own walled garden, and to understand its internal machinations will require admittance from the company itself, or a leak from an insider. While there will continue to be a lack of transparency around Game Pass, it should remain the best value in gaming. That’s assuming Microsoft doesn’t start slowly raising the price every few years like Netflix.
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