There is a pattern emerging within Xbox Game Pass – a renewed exploration of unique, focused, “indie-like”, experiences. Bleeding Edge, Psychonauts 2, Grounded, and Sea of Thieves come to mind, but a quick browse of Game Pass right now demonstrates just how wide a net Microsoft has cast in terms of bringing a variety of games to their subscribers. The question I’m here to answer is: Why?
The revenue model for video game creators used to be similar to the traditional consumer goods model – build a product, stick a price tag on it, and hope that people buy it. This made logical sense, especially when most games (at the time) were sold as physical products on store shelves. This pricing model continued (mostly because of tradition and consumer expectations) well into the digital sales era of the 2010s. As time went on though, due to rising costs in development and in a revenue model where recouping the costs of the game are tied directly to the games themselves, this encouraged development teams to double down on:
- AAA, mass market development, with heavy marketing, trying to guarantee millions of day one sales
- Micro-transactions within the game, making each game its own perpetual revenue generator
To be clear, there is nothing fundamentally wrong with AAA development, micro-transactions, or the traditional revenue model. All of those models are all in use today and will continue to be in use far into the future, to varying degrees. While different micro-transaction models continue to spark debate in regards to the morality of such actions, the debate over those practices is a discussion for another time – today’s focus is simply on academics.
One of the biggest challenges in game creating/publishing is mitigating risk. There is nothing guaranteed about game sales, or market acceptance of ANY title. There are obvious near-guarantees (such as Call of Duty), but those are the exception, not the norm. When it comes to new games (or new IPs) there is a lot at stake regardless of cost. A game that costs an indie developer one million dollars shares the same fundamental risks as a AAA title that requires one hundred million to produce: It needs to recoup its costs and make a profit in order for the studio/game to stay in business. If we had to define the history of gaming, ranging from 1980-2020, it would definitely be product focus. (The product/game was directly responsible for turning a profit.) It was also a time period of sharply rising cost (more expensive per game).
The End of an Era?
It doesn’t take an MBA, or several years of business school, to understand the risk associated in tying revenue completely to the product (game). I think most people understand that if a game fails to recoup its own costs, or can’t maintain some level of profit margin while its being supported, then the product will eventually be reduced in scope, reworked, or canceled completely. I’ll say it again: It doesn’t matter if it’s a small indie game, or a massive AAA product – failing to generate positive revenue margin is almost always the end of the product, or worse, the end of the studio.
Over the last couple of years, we’ve witnessed the beginning of a new shift in the way publishers & developers harness revenue generation: The gaming world is partially shifting to a reoccurring revenue model based on service (instead of product). (Note: This is a different form of reoccurring revenue apart from what micro-transactions generate.) There are several examples of reoccurring game service revenue models today, but to name a few:
- Xbox Game Pass & Xbox Game Pass Ultimate/PC
- EA Access / Origin Premier
- Uplay Plus
- PS Now
- Apple Arcade
What do all of these services have in common? They shift the value transfer from the product to the service. In other words, the consumer pays a supplier (e.g. Xbox Game Pass) a fee (e.g. $15 a month) for access to a catalog of value, as opposed to a single item of value. Using Microsoft as an example, they in turn use that revenue to build/expand a catalog service that consumers will (hopefully) find value in over the long term. This shift in revenue generation has significant impact on the way developers & publishers approach game creation (more on that in a moment). Make no mistake, the rise in these service oriented catalogs is not some fluke or “extra” revenue stream, it is where the games industry is heading (albeit some companies/platforms will take time to get there). The gaming industry as a whole is slowly but surely shifting away from a product oriented model to a platform & service oriented model. (No, not all games will be played through services. The traditional sales market will almost assuredly always exist.)
Gaming Services Will Produce (or Showcase) Diverse Games, More Often
There are two major aspects of gaming services that need to be considered:
- Successful subscription-based catalog services produce reliable, reoccurring revenue. This type of revenue stream is much easier to model and demonstrate value to shareholders & stakeholders.
- Successful game services reduce the need for individual games to be mass consumer-oriented blockbusters. The revenue is no longer tracked (directly) per product, but instead at the subscriber level. (Note: There is an indirect tracking of revenue value, usually based on downloads or active players)
The combination of these two factors creates a mutual benefit for the Xbox division (within Microsoft) and developers. Put simply, Xbox wants to demonstrate steady & reliable revenue to shareholders. Gaming social spaces can “hate” on big corporations all they want, but the reality a company like Microsoft must live in, is a reality where they must demonstrate steady (non-volatile) revenue. At the same time, Game Pass needs a variety of games to demonstrate value to potential customers and developers have more freedom to explore different experiences. The end result is an ecosystem where the service will, and should, cater to a variety of tastes. The pressure to produce market-tested, risk-mitigating, “safe” games is significantly reduced in service oriented gaming ecosystems.
All Xbox Studios games are coming to Game Pass subscribers. In combination with a multitude of games from other developers, the Xbox Game Pass library will constantly rotate titles, keeping the selection “fresh.” It’s also important to note that it will be impossible for all game services to find a foothold in the market. Like all products and services, some will turn a healthy profit, and others will struggle.
In conclusion, we can expect Xbox Game Pass (and its variants) to shift revenue generation in a way that is beneficial to publishers, developers, and consumers. When developers have room to experiment, we can expect a higher, and more interesting variety of games. We can’t expect perfection, and ultimately some games will fail to impress, but make no mistake, game services will change the gaming industry for the better.
What do you think? Do you agree? Do you disagree? Are you looking forward to any games coming to Xbox Game Pass? Come visit us on Twitter.