Game Pass isn't sustainable and needs changes as analyst finds continued evidence of sales cannibalization

Alinea analyst Rhys Elliott echoes my own thoughts on Game Pass: launching big marquee games day one into the service is not sustainable long-term.

2

Xbox's current issues are the result of multiple years of unfortunate events--the Xbox One, COVID-19 disruptions, bad investments, overspending, economic turmoil, the current hardware crisis, etc--but one business decision has had affected Microsoft's software the most: Xbox Game Pass. After years of steady pricing, Microsoft was forced to raise subscription prices, and millions of people dropped the subscription. This shows the volatility of Xbox's business model--putting a lot of the weight on a subscription--and after years of risk, Xbox was hit hard when so many people left the service.

Now fast-forwarding to present day, it appears that Game Pass needs an overhaul. High-level sales analysis from firms like Alinea highlight Game Pass' cannibalization effect that has reduced sales in favor of cheaper access via subscription. According to Alinea head of market analysis Rhys Elliott, Game Pass is essentially not really a sustainable solution for Xbox in its current state.

"The day-one launches on this list clearly pulled enormous audiences while leaving real money on the table, especially the third-party titles selling six to ten times better on PlayStation.

"The one unambiguously smart inclusion, Cyberpunk, worked precisely because it had nothing left to cannibalise.

"That's the line Microsoft has to walk now. Game Pass is brilliant at putting games in front of millions of people, and genuinely good for players. I know I've been getting damn-good use out of my subscription this year.

"It's great for consumers. But it's not really sustainable.

"At a 3% margin, with first-party tentpoles minting money at full price elsewhere, the math on giving those tentpoles away on day one gets harder every quarter. Pulling Call of Duty was the first move. It won't be the last."

This aligns with our own observation that Game Pass essentially lowers the front-end value of key first-party games, especially at launch, and it does so on Microsoft's home turn (Xbox and PC). These are the principal users that may be more likely to play Xbox games because they own the platform, but Microsoft has converted these users into digital-first subscribers that, unfortunately, when put into the ecosystem in this way, could apply their newly-learned consumer behaviors to competing services like PlayStation Plus.

Another stark reality is that the games that are being produced for the service simply cost too much to make, and Xbox is just not making enough profit from what it's doing. That's supported by the 3% margin that was confirmed by Xbox CEO Asha Sharma.

Microsoft is expected to make some changes to Xbox Game Pass in the coming months, but nothing has been announced, and right now the group has to try to put out the reputational fire that's resulted from its new wave of studio layoffs.