Analyst: Xbox will start relying more heavily on ads for indirect monetization

SuperData founder and entertainment industry expert Joost van Dreunen argues that Microsoft could become a pioneer in the dedicated gaming space by relying more heavily on advertising to help grow Game Pass and the Xbox business.

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Ads are likely coming to Xbox in some form--after all, Microsoft did buy Xandr back in 2021, and they also acquired King's lucrative adtech platform as part of 2023's ABK acquisition. So...when will Microsoft start employing this technology into its more widespread ecosystem, like, say, its console market? That's a tricky question to answer, and Microsoft doesn't yet have the solution, although there have been rumblings that a free ad-supported version of Xbox Cloud Gaming could be offered this year.

Games analyst and scholar Joost van Dreunen has some ideas on this topic, and in his latest Substack newsletter, van Dreunen waxes intellectual on the traditional media business and how Microsoft will have to try to evolve the formula to eke out more success with Game Pass.

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In the newsletter, the insightful numbers-cruncher shares a look at what could happen with Xbox's future, using key examples in entertainment history of indirect monetization, with mentions of how radio, television, and even the internet all managed to generate billions in profit through passive monetization--that is, something like advertising.

As is usually the case, this edition of the newsletter is packed with interesting views that help contextualize the video games industry against the larger global macro-environment that houses media, both interactive and static.

"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."