Microsoft explains why Xbox is now a service-first business

Since the Xbox One's disastrous launch in 2013, Microsoft has pivoted away from traditional hardware sales and transformed its gaming business into a service. First, it used Windows 10 to unify PC and Xbox consoles on an OS. Then Xbox LIVE solidified this connection and laid the critical online foundation. Now the transformation is nearly complete thanks to Game Pass, a subscription service duo that is so powerful it's now the heart of the Xbox brand.

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In a recent interview with Barron's, Xbox CFO Tim Stuart delivered a statement that boils down the Xbox business to its purest form: "I like to talk about how engagement equals currency. If customers are playing, they're buying more things from our partners, they're buying more things from us, and their enjoyment goes up."

Stuart also says the dual Xbox Series S/X SKU launch bundled with Xbox All Access is a means to ramp up earnings growth. The Xbox All Access credit lease agreement locks consumers to the ecosystem by virtue of continued month-by-month recurring investments, which has become the hallmark of the Xbox business as a whole.

All Access promises rates like $25 a month payments for a Series S, and $35 a month for a Series X across a 24-month term. Rates depend on your credit, though. Altogether you'll spend $840 for an Xbox Series X and $600 for a Series S across a 2-year period.

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Read Also: Xbox All Access: Is it worth it? Only if you can get the best rates

"From a business side, we start to monetize and build a customer lifetime value much faster than a slow build over time."

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Microsoft's business can be summed up in one word: Services. Hardware like Surface devices and Xbox consoles play a part, but services reign supreme. It's only natural that the Xbox brand follows suit to compete with the PlayStation 4's 112.3 million sales.

Rather than focus on hardware, Microsoft doubled-down on services, and it's paying off big. This emphasis on services and competition has led to big innovations like Game Pass, the on-demand game subscription that now includes cloud game streaming to mobile devices.

Xbox Game Pass has consistently had a positive impact on Microsoft's gaming business. Since its launch in 2017, Game Pass has contributed to four years' of Xbox earnings growth. Xbox revenues grew 25% from FY2017 to FY2019, and as of last year the service had 10 million subscribers. It's a powerhouse for gaming.

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Xbox All Access accelerates this model by significantly increasing retention. Since leasees are making monthly payments and have their credit tied to the system, it's unlikely they'll deviate and move to another console like the PlayStation 5.

Since they've already paid for Game Pass Ultimate, they're also more likely to stay in the ecosystem and spend on in-game purchases and game sales.

Xbox All Access anchors consumers to the ecosystem in this way. Consumers are promised low-cost access spread over a period of time and once they're in, they're very unlikely to deviate.

This is why Xbox All Access is so powerful, but it wouldn't be possible without Game Pass and Microsoft's established serviced-based foundations.