The Xbox One is failing. That’s not an opinion but a fact reflected by the cold hard numbers.
Microsoft may have stopped sharing Xbox One sales figures some time ago, but a recent report released by EA CFO Blake Jorgensen estimates that Microsoft has sold roughly 30 million Xbox Ones so far. By comparison, Sony has reportedly sold more than 73 million PlayStation 4s while Nintendo expects to sell about 37 million Switches by April 2019. Go beyond the numbers and you still have Microsoft’s self-admitted shortage of compelling exclusive games.
It’s not that Microsoft can’t change the Xbox’s fortunes. It can. Microsoft is worth almost 700 billion dollars and the Xbox brand generated $12.2 billion in revenue during the last fiscal year. If Microsoft really wants to, it theoretically has the resources needed to turn the next Xbox into the definitive console of its generation. But why bother with all that when the company could just devote those same resources to creating the fabled “Netflix of gaming” by expanding its Game Pass platform?
If you cringe when you hear the term “Netflix of gaming,” that’s only because you’ve been paying attention. It’s a phrase used to open eyes and help define the level of success that such a service is hoping to achieve, but it is basically meaningless. Actually, the phrase itself is somewhat harmful to the realistic chances of receiving such a service.
Bruce Grove, former general manager for a failed game streaming service called OnLive, once said that nearly everyone who has tried to create the Netflix of gaming has found that the revenue doesn’t scale with the operating costs. Simply put, games are not movies and TV shows. The amount of money it takes to run enough servers to support a full library of games for streaming is absurd.
The problem is that streaming is becoming the dominant way that many young Americans – and more and more people across the world – enjoy entertainment. 6 out of 10 Americans between 18 and 29 say they mostly use streaming to watch television. Spotify is credited with saving the modern music industry, even as music labels eat up most of the service’s profits. Major players in the film industry are still trying to figure out how to combat the popularity of streaming services and get people to go to theaters.
The rise of streaming is attributed to the value that consumers place on cost, choice, and convenience. Streaming services are cheap, offer plenty of entertainment options, are available on most devices you own, and simply do not work for games the same way that they work for other forms of media. That’s a problem that haunts those in the gaming industry who recognize the value of a true video game streaming service but don’t quite know how to translate the technology for this specific medium.
Game Pass offers one of the most elegant solutions to the video game streaming problem that we’ve seen yet. Rather than try to find a way to make video game streaming work, Microsoft made Game Pass a games-on-demand service. Anyone who pays the $9.99 a month Game Pass subscription fee can access a library of over 100 Xbox One and Xbox 360 games. Instead of requiring players to stream them and potentially encounter the connection problems that have plagued services like PlayStation Now in the past, Game Pass requires users to download the games to their consoles or external storage devices.
It’s an inconvenience compared to being able to instantly access a large collection of media via streaming, but focusing on that issue is a lot like going back to Middle Ages and complaining about the lack of cars. If the technology for reliable game streaming just isn’t there – and you aren’t able to create it – then what good does it do to lament the best available alternative?
Besides, the value of Game Pass has little to do with its current form and has much more to do with how Microsoft can use it to further its vision of a cloud-based gaming future.
It’s no secret that Microsoft is eager to move beyond video game physical media and the traditions of the industry. Remember that the original version of Xbox One would have allowed players to potentially resell digital titles as well as share them with up to 10 people. However, the controversy that surrounded Microsoft’s policies regarding online “check-ins” and the limited use of disc-based content meant that Microsoft eventually had to back away from those policies. That shaky start is often credited as the source of the Xbox One’s struggling sales figures.
That doesn’t mean that Microsoft has given up on its vision, though. Earlier this year, Microsoft Vice President Kareem Choudhry revealed that Phil Spencer, Microsoft’s head of gaming, has the entire team focused on cloud gaming. As Choudhry put it, “We believe there [are] going to be two billion gamers in the world, and our goal is to reach every one of them.”
Microsoft could be talking about gamers using cloud-based services like Azure or porting Microsoft Studios titles like Mark of the Ninja to other platforms, but when you hear people like Spencer and Microsoft CEO Satya Nadella talk about their goals, you get the feeling that they’re being cute. They really want every gamer using Microsoft technology.
If that’s the goal, then Microsoft cannot tie itself to the Xbox. Quite frankly, it’s become clear this last generation that Microsoft has lost interest in making the Xbox platform the traditional king of consoles. How else do you explain decisions like the Xbox One parity clause, which stated that games had to launch at the same time on Xbox One as other platforms or not at all? (This is no longer in effect.) Why else would Microsoft have been so slow in pursuing exclusives (and even canceling exclusives) while the competition built their empires around them? Why would Microsoft emphasize something like backward compatibility when other company’s metrics cast serious doubt about the popularity of such programs? Why is Microsoft so bullish about cross-platform play when it offers the company few tangible benefits?
Decisions like those don’t make sense if you’re trying to have the top console on the market, but they do make sense if you’re laying the groundwork for a service like Game Pass to become a multi-platform leader in digital delivery.
Those same developers that Microsoft chased away with its parity program would likely be more than happy to flock to Game Pass and enjoy the exposure it offers. That backward compatibility library becomes even more valuable when a section of it is offered as part of a low monthly subscription fee. The same goes for the few exclusives that Microsoft does lay claim to. While some consumers treat titles like Sea of Thieves as questionable $60 purchases, these same games are tremendous incentives to subscribe to Game Pass, especially when they’re available on the service at launch. (Would you rather pay $60 for a new game or $10?)
That last part is the key to understanding what Microsoft is building towards. Forget about becoming the Netflix of gaming. Hell, Netflix doesn’t want to be the Netflix of film and television. The service wants to be HBO. It wants to be Disney. Netflix wants to offer the great content that other providers of the past have offered, but it wants to do it in a format that its competition cannot match.
Microsoft cannot achieve that with Xbox, but it can achieve it with Game Pass. Already, we see Game Pass upsetting the dying physical retail gaming industry with the value it offers. We see Japan warming up to the idea of PC gaming – something Microsoft could cater to if it were to launch Game Pass on Windows – even as the country grows colder towards the Xbox. We see Microsoft’s “weakest exclusives” generating buzz for Game Pass while being scoffed at as system sellers — much like how some of Netflix’s worst-received projects have become some of its biggest hits.
Microsoft doesn’t want to win a console war and it doesn’t want Game Pass to be the Netflix of gaming. The company has entered a new battlefield where top-tier publishers offer their own digital services, such as Valve’s Steam and EA’s Origin platforms, in lieu of exclusives and where the current driving financial force of free-to-play titles no longer propels the gaming industry’s overall revenue. Microsoft wants to be the Steam of on-demand gaming before its competition even dreams of abandoning the comfort of its current success in favor of such a leap.
Microsoft can achieve all of that, but it cannot achieve it with the Xbox alone. No, the future of Microsoft truly is Game Pass.