Xbox Game Pass profitability doubts silenced after it's partially blamed for 9,000 layoffs

Microsoft recently laid off 9,000 employees across its business, with many of them being part of its gaming division, Xbox. Following these firings, rumors have begun swirling about what put pressure on the company to let go of as many employees as it did. Fingers are being pointed at Xbox Game Pass, the seemingly too-good-to-be-true subscription model.

The rumors about Game Pass not being a profitable business model kicked into high gear when Arkane, the founder of Prey and Dishonored, Raphael Colantonio, said that "Xbox Game Pass is an unsustainable model damaging the industry for a decade," and the only way it exists is that its subsidized by Microsoft's "infinite money." Notably, the chief of Microsoft's gaming division, Phil Spencer, has previously stated in interviews that Game Pass remains a profitable part of the Xbox business.

However, that profitability was thrown into question following the comments from Colantonio, comments from Christopher Dring, the Editor-in-Chief of The Game Business, which were later rectified, and the general suspicion of how Microsoft is making any profit with titles such as Starfield releasing day-one on Game Pass, but having an approximate $400 million development budget. Dring previously stated that Game Pass is considered profitable because Microsoft doesn't account for the cost of developing first-party games, such as Starfield.

However, Dring later rectified those comments, stating that the information he had heard was from Microsoft, but 18 months prior, and that he had been explicitly informed that first-party games have their own profit and loss separate from Game Pass, as those titles generate revenue through other means. Moreover, Microsoft conceded that Xbox Game Pass does cannibalize its own market in the way of hurting retail sales of the same game. For example, DOOM: The Dark Ages showed very average numbers on Steam, yet Microsoft touting it had reached 3 million players 7 times faster than DOOM Eternal, the previous game in the series.

With this admission, one would assume Microsoft would be taking into account the potential cannibalization of sales of their own games. These rumors about the profitability of Xbox Game Pass have now been put to bed by Windows Central's Jez Corden, who recently wrote that Microsoft sources have told him that calculations are done on per-title retail forecasts, which include platform releases such as Xbox, PC, and now PlayStation sales. Those figures are then combined with Xbox Game Pass engagement.

2

Microsoft then adds the net result to Game Pass profit and loss (P&L) statements for that title, which means Game Pass is essentially charged forecasted "lost sales" on Game Pass platforms on a per-title basis. Moreover, engagement and churn (people unsubscribing from Game Pass) are also factored in as success indicators. Lastly, what Microsoft spends on acquiring content and marketing Game Pass is also factored into its P&Ls.

Corden writes that Microsoft doesn't factor in Game Pass cannibalization from the perspective of funding the game outright, as many of Xbox's first-party games are now being released on multiple platforms, i.e, PlayStation, Switch, etc. The sources informed Corden that because of these multiple endpoints for titles, it wouldn't make sense for the entire development cost of first-party games such as DOOM: The Dark Ages to be added on top of Game Pass, unless the game was only available on Game Pass.