A Quiet Beginning

On June 1st, 2017, Microsoft launched the Xbox Game Pass videogame service.  Launching with limited fanfare and 110 older games, it would have been hard to predict that this was the future engine powering what would eventually become Microsoft’s reconstructed vehicle for the gaming industry. 

Coming off recent cancellations of AAA games like Fable Legends and Scalebound, armed with only six internal studios and showing a light pallet of exclusive games in development at E3 2017, it was difficult to find signs that Microsoft was committed to competing within the gaming industry during that time. 

The outlook changed considerably later in the year when Phil Spencer would get promoted, moving the gaming division to its highest possible position within the company.  Moving gaming up within the organizational structure increases visibility and signifies more investment by the corporation yet the “how” or “what” was still unclear in light of the fact that Microsoft was launching new hardware without a significant exclusive big budget game, previously a standard for new console launches. 

Plan Revealed

On January 23rd, 2018 Microsoft pulled back the curtains on their plans with a written press statement from Phil Spencer.

“Moving forward, we plan to release all new Xbox One exclusive games from Microsoft Studios into Xbox Game Pass on the same date as their global release….We’ve only scratched the surface of the opportunity this new model brings to the industry and what we can deliver to our fans. We firmly believe Xbox Game Pass will be a catalyst to create new opportunities for game developers and publishers to innovate in the way games are developed and delivered, leading to entirely new ways to play.”

Phil Spencer

While the move, hot on the heels of their organizational restructure finally gave us major pieces to the puzzle, questions remained.

How impactful would this strategy be in light of the diminished quality of their 1st party?

Was this the result of Microsoft’s struggles within gaming’s traditional model?

Would they have put all 1st party games into the service if they were commercially and critically successful already?

Surprisingly, for a company as large and monolithic as Microsoft, they would quickly provide that answer.

During E3 of 2018, Phil Spencer would announce the purchase of five studios and that it was only the beginning of their acquisition spree.  Finally there was clarity in terms of commitment to gaming.

Of course, this led to the next question; Could this strategy result in a significant paradigm shift for the game industry? 

The Netflix of Gaming

In a January 2019 meeting with journalists, Satya Nadella, CEO of Microsoft, said that Microsoft was building the “Netflix of Games”.  Did Nadella really mean that Game Pass was going to be as disruptive and powerful as Netflix or was he merely using this terminology as a shorthand way to describe how the service worked? 

Stepping back to a September 2017 article by Fast Company, Satya shined a light on his personal history with the Netflix business.  In the article Nadella revealed that while he ran engineering for Microsoft’s Bing search engine, Netflix CEO and co-founder Reed Hastings would become his mentor. 

Hastings tells Satya “Hey, you can become an insider at Netflix, and just come and attend all my meetings and executive off-sites”.  For about a year, Nadella would take Hastings up on the offer.  Nadella would go on to reveal that even now Reed gives him ideas of what to do and what not to do. 

During the same year of this interview, Satya is positioning his own Game Pass subscription service.  Considering Nadella’s high level of insight and understanding towards the Netflix business model and it’s journey into the mainstream, it’s fair to believe Nadella greenlit Game Pass and promoted it to Microsoft’s investors with eyes wide open. 

While Microsoft’s gaming subscription model isn’t going to mirror Netflix exactly, as Sarah Bond stated in a recent interview with Forbes, the pillars that drove Netflix’s mainstream adoption appear very similar to what will drive gaming.

With that in mind, let’s take a look at Netflix’s growth and compare that to gaming’s potential version.

Netflix first launched as a DVD rental store. It wasn’t until 2007 that it would start to take the form of the service we know today.  In 2007 when Netflix first announced they would expand to streaming, they were at just over 7 million subs.  As shown here, the early going of Netflix was slow. 

Imagine it’s the year 2007 and somebody says to you that despite being at 7 million subscriptions after a decade of existence, this streaming and rental service would eventually reach over 200 million subscribers by 2021. Would you have believed them? 

We can see subscription growth milestones reached as the Netflix service crossed paths with worldwide technology advancements, improvements to the perception of their content quality and their expansion to new markets.  Let’s visit those same components within current status of Game Pass (as of the March 30, 2021).

The Content of Game Pass

First let’s take a look at the volume of content that is cycled through the service. Including those games from the combined EA Play subscription, Game Pass currently contains 370 console games and 382 for the PC.  A total of 699 unique games have entered the console side of the service while 480 have been available at one time or another for the PC.  PC Game Pass officially started much later which accounts for the majority of the discrepancy.

In May of 2017, Game Pass began with 110 console games.  Since middle of 2018, nearly a year after the service launched, console gamers could expect more than 10 games in most months.  In June of 2019, Game Pass officially started for PC with 101 games. 

Most months, PC gamers could expect to see double digit game additions as well.  The reason for the large spike of games in November 2020 for console and March 2021 for PC was the addition of EA Play. EA Play is Microsoft’s first major publishing partnership and evidence of how it can integrate other smaller subscriptions in the future.

Having a lot of games to play isn’t that exciting if those games aren’t very good.  Using Metacritic scores to help us gauge their overall critical reception, we can see that the curation of Game Pass titles has resulted in better than average scoring games. 

In most months, the average Game Pass game has higher critical reception than the overall average Xbox One game during those same months.

Over time we can see the frequency of highly rated games (over 80 Metacritic) hitting the service is consistent.  The following chart excludes EA Play in order to measure the quality of games Microsoft curates for the service. The best month for Xbox gamers was June of 2019 with a total of 13 games having high critical reception.  Aside from the first month of the service, the best month for PC gamers was March of 2021 with 13 highly rated games due to the additions from Microsoft’s purchase of Bethesda.

Of course, quality isn’t only determined by Metacritic scores.  Another factor important to gaming enthusiasts is the age of the game.  Older games are more likely to have already been purchased or played by the time they enter the service.  While the majority of Day 1 games in the service tend to be from smaller developers, every year has seen a steady increase in games that launch day and date into Game Pass.

When looking at a blend of games that are more recent and well received critically, we still see a strong consistency in quality games.  Most months gamers on both PC and Xbox can expect to see two to three games that are both less than a year old and scoring over 80 Metacritic. Early 2021 results have shown even more promise.

Not all games that come to Game Pass stay in the service.  Only Microsoft 1st party games are guaranteed to stay permanently.  This is an important factor to consider because consumers need more time with games than they do movies.

When taking a look at the games that have left the service, less than 4% have left in under 6 months while approximately half have stayed over a year. Based on the trends so far, gamers can expect that once a third party game enters the service, they’ll have at least six months to play it before facing a choice whether to purchase it or let it go.

In recent years, Netflix has attempted to address criticisms that they didn’t have enough family friendly content, and similar criticisms can be drawn against Game Pass.  At first glance, Game Pass for both PC and console has a fairly good mix of games from ESRB. The addition of many sports games recently has broadened the number of quality E rated content.  

However when filtering for non-sports or racing games that come to the service in under a year with over an 80 Metacritic, the pickings are a bit slim when it comes to family friendly entertainment. For kids this means that if they aren’t into sports, they may have to settle for older or lower rated games more often than not.

One area of concern for some within the gaming community was that with a subscription service, Microsoft would lean heavily towards games as a service in order to drive engagement and microtransaction opportunities.  The data shows this hasn’t been the case with approximately 2/3rds of the games having no online multiplayer component at all.

Xbox Originals

An area of weakness currently is the Xbox equivalent of Netflix Originals.  Microsoft has published exactly 5 day-and-date games that have scored over 80 Metacritic since the service started.  Of those five games, only 2 (Gears 5 and Forza Horizon 4) would be considered big budget games with mainstream appeal. 

To consider the importance of this content, we can look to Netflix’s history.  In 2013 Netflix Originals received critical acclaim and they propelled the service from 30 million subscribers in 2012 to 70 million in 2015.  That equated to more growth in 3 years than they had in their entire existence up to that point.  For Microsoft to take that next step, they will likely need to replicate something similar with multiple games that have both critical and commercial appeal.

Recently Microsoft has landed head turning deals (with MLB The Show and Outriders) from their 3rd party partners. Netflix relied on partnerships with Disney to gain mainstream credibility while they were expanding their original content. While Microsoft has been on a studio buying spree in recent years to shore up their first party content, they’re likely a couple years from showing a consistent cadence. Continuing these third party relationships will be important for mainstream credibility to fill in the gaps.

The PC Gap…and Opportunity

While console gamers were energized seeing third party games like MLB The Show and Outriders announced for console Game Pass, PC gamers weren’t as lucky. In general the third party relationships with major publishers haven’t yet consistently translated to the Xbox Store on PC. When filtering out current games to only include AAA publishers (like Take Two, Capcom, SquareEnix and WB) or big developers (such as Bungie) there’s a notable gap between the two services.

According to Statistica, the number one PC game store-front Steam increased to 120 million active users in 2020. This number is more than double the estimated sales of Xbox One consoles last generation. In addition, the growth rate for Steam has impressively increased over 40% in four years counting back to 2017. While Steam isn’t the only storefront, it does give us a strong indication of the growing number of paying PC gaming customers.

This evidence of PC growth combined with relatively limited growth of traditional consoles the past 20 years highlights a key reason why Microsoft has been investing in big budget PC centric games like Flight Simulator and Age of Empires. Closing the gap in quality and increasing the energy for PC announcements will help Microsoft take advantage of a demographic that currently has a lot of unrealized potential for Game Pass adoption.

International Appeal

In order for Game Pass to grow Internationally, Microsoft will have to invest in content from creators around the world.  Currently the portfolio consists heavily of content from Western developers.  North America and UK alone make up about 56% of current Game Pass content. 

In more recent years, Phil Spencer has been making public overtures to developers from Japan to broaden the appeal of their portfolio and has shown recent success bringing games from major Japanese publishers to the service. This trend will have to continue as content from Eastern developers will be essential if Microsoft hopes to establish the worldwide appeal they weren’t able to achieve with the Xbox console in the past.

Technology

As of today, the primary opportunities for Microsoft’s Game Pass adoption are on Xbox consoles and Windows 10 PCs.  Many large corporations have positioned themselves to take advantage of 5G which will increase bandwidth while reducing latency critical for high quality game streaming. 

At the current time the United States, which is Xbox’s primary market, is still dealing with data caps and slow progress on a 5G infrastructure.  As such, a future in which streaming could be a mainstream way to consume games may be years away. 

On the other hand, countries like South Korea have made great progress.  Streaming may be Microsoft’s opportunity to expand Game Pass into markets which have good internet infrastructure yet lack Xbox console presence.  Cloud enabled games may play an important role in global adoption of Game Pass despite some barriers in Western markets today. 

Of the games added in recent years that are still in Game Pass, the majority have been converted to be cloud ready. Recently Microsoft also announced touch controls would be available on 50 Cloud enabled games as well. The following graph excludes EA Play although EA is also making their most recent games cloud ready.

On April 19th, Microsoft announced a partnership with Rainway. Rainway enables low-latency streaming through browsers such as Safari, Chrome and Edge which will allow Microsoft to circumvent restrictions on iOS devices. What this means is that every gaming consumer in the world who has a device with browser access will also have access to Xbox game streaming. Where the worlds internet infrastructure is up to standards for game streaming, Microsoft appears ready with the games, services and technology to meet those gaming customers.

Paradigm Shift on Course

When we look at Game Pass relative to Netflix as a change to the way consumers engage with creative content, it’s most important to focus on the trends. We saw that Netflix didn’t achieve it’s worldwide mainstream status overnight. Over time Netflix needed to establish partnerships, improve the quality and diversity of their exclusive content and be ready to capitalize on technology advances to reach their success.

Today the market for gaming subscriptions is still immature and Game Pass is relatively young when compared to it’s TV streaming equivalent. The technology needed to reach billions just isn’t in place yet. The question we initially asked can only be evaluated based on Microsoft’s direction and the trends we can see with Xbox Game Pass today – rather than where it stands at this snapshot in time alone.

Satya Nadella announced it had reached 18 million subscriptions a few months ago, less than 4 years into the lifetime of the service. These results put them on a much swifter upward trajectory than the early years of Netflix. The perceived quality of the content will be most important and with that in mind, Game Pass is already in strong shape.

In addition, the arrival of new content on a consistent basis and the quality and frequency of newer or bigger budget titles is trending upwards. There are still questions abound as to whether the teams at Xbox properly can address quality for younger and international audiences, but Phil Spencer is on record that they recognise this is a gap in their portfolio.

Microsoft and the Xbox team have added top studios and talent on a consistent cadence, and show no signs of slowing down, however patience is still needed to determine whether results live up to the potential. We also see some disparities in quality between the console and PC side of the service, and it’s an area Microsoft will need to focus on.

While Microsoft still has work to do, the “Netflix of Games” appears poised for it’s next major turning point -and while it still might only be scratching the surface, the Xbox team seem pretty confident that it may live up to the lofty moniker Satya Nadella delegated to it.