Business aspects of Subscription Game Libraries [Xbox GamePass, PSNow]

[Eolirin]

.My issue, really the main issue why I can't see gamepass ever becoming profitable is that they are throwing away their biggest source of profit: selling digital first party titles. Once they recover the development cost, the marginal cost of each sale is close to zero, is almost 100% profit. Yet they are going to offer those for "free"? So Fallout,Doom,Halo, etc. What used to be 60-70$ games are going to be given away for 15$ a month? I cannot see the economic rationale unless huge number of subscribers sign up, probably over 200M.

MS isn't giving their first party titles away for free, they're still selling them. And I don't mean via Game Pass subs. Sea of Thieves recently sold over a million copies on Steam in something like a few days, despite being on Game Pass and there were more players on Xbox than there were Game Pass subs a while back when they talked about stats. Grounded, Halo MCC, and Flight Sim have all topped the Steam sales charts. It's a misconception to think that Game Pass is an all consuming business model even for day one first party titles, it isn't. There are also additional revenue streams via microtransactions and expansions.

And there's no reason to think that Netflix's licensing situation is comparable to Xbox's either. Game Pass and Xbox aren't threats to large content producers, the types that would have leverage. They're necessary and useful revenue streams because those content producers only have so many platforms for their content and almost none of them have competing platforms. That's not the case with TV and Film. MS has way more leverage.

And Netflix needs several orders of magnitude more content to service their user base, which is also more global and needs content production tailored to many different regions. Film and TV is also consumed much faster and is usually much more expensive per hour or content produced than games. It's not the same situation.

You shouldn't just assume licensing costs will scale the way you're describing. It's certainly something that could happen, but it's hardly a given.

 

[Deleted member 11852]

hmm... typically the licensing fees must be much higher on video than on games. Games has to be done on a per hour basis of play. It's not the time of thing where you can watch it once and consume everything, that's not really generally what happens.

Devs who ave spoken out show this is not the case. If you want to get your spreadsheet at least remotely realistic, it has to be evidence-based.

 

[zed]

Did you also factor in ppl getting it without paying fullprice?

I don't know any libraries near me who stock video games and I've never met a single person who's ever used a library to rent a game.

the funny thing, back with video shops were a thing, often I would go to a town and the biggest selection of Dvds was in the library (~30% would be the typical films you see in the shops) but there would be bugger all ppl getting them from the library (I would cause Im a devourer of films), ppl would just get all their rentals from the videostore. Strange mentality. One stage there nearly my entire cassette collection was music I'ld copied from CD's from the amsterdam library

 

[iroboto]

Devs who ave spoken out show this is not the case. If you want to get your spreadsheet at least remotely realistic, it has to be evidence-based.

jskdlfjsdkljf

what do you got for me to look at? I don't think all deals are the same, that's sort of the issue we're at. But if you have an idea to layer in we can put something there

 

[AzBat]

Devs who ave spoken out show this is not the case. If you want to get your spreadsheet at least remotely realistic, it has to be evidence-based.

You know the saying "put up or shut up". Seems appropriate here.

Tommy McClain

 

[Deleted member 7537]

MS isn't giving their first party titles away for free, they're still selling them. And I don't mean via Game Pass subs. Sea of Thieves recently sold over a million copies on Steam in something like a few days, despite being on Game Pass and there were more players on Xbox than there were Game Pass subs a while back when they talked about stats. Grounded, Halo MCC, and Flight Sim have all topped the Steam sales charts. It's a misconception to think that Game Pass is an all consuming business model even for day one first party titles, it isn't. There are also additional revenue streams via microtransactions and expansions.

And there's no reason to think that Netflix's licensing situation is comparable to Xbox's either. Game Pass and Xbox aren't threats to large content producers, the types that would have leverage. They're necessary and useful revenue streams because those content producers only have so many platforms for their content and almost none of them have competing platforms. That's not the case with TV and Film. MS has way more leverage.

And Netflix needs several orders of magnitude more content to service their user base, which is also more global and needs content production tailored to many different regions. Film and TV is also consumed much faster and is usually much more expensive per hour or content produced than games. It's not the same situation.

You shouldn't just assume licensing costs will scale the way you're describing. It's certainly something that could happen, but it's hardly a given.

So, several points:

I'm not denying the existence of alternative revenue streams for MS, but as Gamepass grows in popularity there is no reason whatever to buy the game on Steam. Are digital purchases of licenses going away? No. But the subscription model is always going to do better because it makes economic sense for the user.

• Look at digital movie sales*:
  • 2013 sales: 1.19 B USD
  • 2019 sales: 2.6 B USD
• Now let's look at subscription services sales:
  • 2013 sales: 3.16 B USD
  • 2019 sales: 15.9 B USD

In 2013 digital movie (VOD) revenue was 46% of the suscription services revenue, now it's 16%. So as Gamepass becomes a huge part of MS gaming revenue then its profitability becomes the big objective.

And for the licensing cost, look at Spotify, the cost structure is very similar to Netflix. I really can't see how gaming is going to be somewhat different unless 3rd party publishers decide to give away money for free. But it never happens, why? because competition. If you create a new service that generates a RoIC way above your WACC then competitors are going to flood the market, you will need to fight with other service owners to get titles on your platform and margins will come down.

* https://variety.com/2020/digital/news/2019-us-home-entertainment-market-25-billion-1203463878/
https://www.wsj.com/articles/sales-of-online-movies-surge-1389110682

edit: I really don't get that somehow gamepass is this new business model that has never been tried. I think suscriptions services, licensing cost and others are very well known.

 

[Deleted member 11852]

what do you got for me to look at? I don't think all deals are the same, that's sort of the issue we're at. But if you have an idea to layer in we can put something there

This just one episode, these four (journalist, game actor, game director, composer) do these shows almost every week and often talk about the economics and inner working of the game industry. I have genuinely learned more abut the games industry since watching these podcasts than in the decades prior. So much good stuff and the only lines they don't cross are hard NDAs.

 

[Johnny Awesome]

I agree with those here who point out that GP is similar to Netflix, but not exactly the same. Like Netflix I think a strong 1st party is key to profitability (and so does MS apparently, given their studio acquisition rate).

 

[Deleted member 11852]

I agree with those here who point out that GP is similar to Netflix, but not exactly the same. Like Netflix I think a strong 1st party is key to profitability (and so does MS apparently, given their studio acquisition rate).

Yup. Microsoft cannot be reliant on third party content for GanePass, the costs are completely out of their control.

 

[RDGoodla]

A game provides much longer time of entertainment than a movie and music.
Actually customers will feel satisfied with several high-quality games.
That's why game industry may still rely on retail sales rather than subscription.


Nintendo probably already builds the best business model of the industry:


>5-7 very good exclusive games a year.

>No need to cut price of first-party games.

>First party games sales account for most revenue of their platform.

>Profitable hardware sales.


Animal Crossing is a typical case.
One very good game can satisfy customers for a long time, and boosts the sales of the whole ecosystem for one year or more.

 

[Eolirin]

So, several points:

I'm not denying the existence of alternative revenue streams for MS, but as Gamepass grows in popularity there is no reason whatever to buy the game on Steam. Are digital purchases of licenses going away? No. But the subscription model is always going to do better because it makes economic sense for the user.

• Look at digital movie sales*:
  • 2013 sales: 1.19 B USD
  • 2019 sales: 2.6 B USD
• Now let's look at subscription services sales:
  • 2013 sales: 3.16 B USD
  • 2019 sales: 15.9 B USD

In 2013 digital movie (VOD) revenue was 46% of the suscription services revenue, now it's 16%. So as Gamepass becomes a huge part of MS gaming revenue then its profitability becomes the big objective.

And for the licensing cost, look at Spotify, the cost structure is very similar to Netflix. I really can't see how gaming is going to be somewhat different unless 3rd party publishers decide to give away money for free. But it never happens, why? because competition. If you create a new service that generates a RoIC way above your WACC then competitors are going to flood the market, you will need to fight with other service owners to get titles on your platform and margins will come down.

* https://variety.com/2020/digital/news/2019-us-home-entertainment-market-25-billion-1203463878/
https://www.wsj.com/articles/sales-of-online-movies-surge-1389110682

edit: I really don't get that somehow gamepass is this new business model that has never been tried. I think suscriptions services, licensing cost and others are very well known.

The barriers to entry are much higher in this space. Competitors can't just flood into the space, in addition to building studios which takes many years, you need a delivery platform and online infrastructure. Unlike Netflix having to deal with Disney and Warner Media, none of MS's competitors in the gaming space have the finanical muscle or server infrastructure to make a serious go of it, and their competitors in the technology space are struggling with entering into the market.

MS will maybe have one serious competitor to Game Pass and it's hard to say who it'll be, Google, Apple, Amazon, maybe Sony, maybe Valve. And they'll mostly be making their own games to justify the platform, without needing to rely heavily on licenses. Spotify can't compete with the recording industry, so the recording industry has massive leverage. Netflix can compete with the film and TV industry, but it's a far more expensive process and there are other large players who have the ability to compete with them for that content.

As of the Zenimax purchase, I'm fairly certain MS is now has substantially more studios than any other publisher. And they're not done with acquistions. MS doesn't need third party AAA games on Game Pass anymore to make it a value, and they'll need them even less going forward. And they're still in the early growth phase. They just need enough subs that, when coupled with direct sales, they're able to support their first party development studios, and a fixed budget for indie devs. If they can work out licensing deals that make sense for other stuff, great, but they have all the leverage in that negotiation. They can walk and it won't affect the service much.

And Game Pass is unlikely to fully displace direct purchases, and isn't being positioned to do so; it will never have many day one titles from large third parties (this further reduces the leverage those parties have in negotiation). And it's unlikely to eat away at Steam's market dominance, even if it's better value. Because Steam is also a platform, and getting people to change that level of platform commitment is very hard.

Epic is dumping huge amounts of money into giving games away for free and purchasing exclusives and have Fortnite to drive adoption and they're still struggling to break Steam's lock on the PC market. EA's PC and console sub service haven't seemed to affect direct sales that much either. Or shifted people away from Steam. There will be millions of people who will buy MS games on Steam even though it's cheaper for them to go Game Pass for a very long time, because they use Steam. And that's the beginning and end of the decision making process for where to buy/access stuff.

And honestly it's not going to be that different with Playstation either. Sony is going up do really well even without a competing service. They're just not going to do much better than they did with ps4, and maybe a little worse. But probably not much.

This is all a plan for growth beyond where things have been though; Xbox isn't going to sell that many more consoles than they already are even with this. They might switch place with Sony in some regional markets at best. In order to address a larger audience they need a different business model enabled by different end points for access; cheaper consoles with XSS, a solution for phones for markets with minimal console usage but good cellular infrastructure and a lot of Android phones with xCloud. And then a way for them to get into gaming via a high value proposition designed move them into being platform users. And that'll include buying things directly.

And it really isn't that the business model is unique, though it's more a hybrid approach than in other examples, it's that gaming isn't the same as music or film/tv and that MS is not positioned like other streaming services in those mediums. Scale and leverage matter a lot. Being a major platform holder and one of the biggest content creators matters a lot. Having vastly more money from your other businesses that can be invested into content than your competitors matters a ton. And being hyper aggressive about building out that service while having those advantages fundamentally changes the dynamics.

This is like if Disney had sucked up Marvel and Lucasfilm and Fox much earlier and beat Netflix to market with streaming, while being willing to risk their dvd revenue in the process. Oh and they also owned a third of the movie theaters and the stores that you can buy DVDs from too. Like to be honest, a large part of why this is different is because MS is able to do a bunch of stuff that should probably be anti trust violations but isn't, at least currently.

But the rest of it is that console and high end PC gaming are not accessible to add wide an audience as would enjoy them. That means there's an actual space to grow the market size addressed by your platform. Being big enough gives you huge leverage on terms. Just like the 30% app fees on the various stores.

 

[Deleted member 7537]

The barriers to entry are much higher in this space. Competitors can't just flood into the space, in addition to building studios which takes many years, you need a delivery platform and online infrastructure. Unlike Netflix having to deal with Disney and Warner Media, none of MS's competitors in the gaming space have the finanical muscle or server infrastructure to make a serious go of it, and their competitors in the technology space are struggling with entering into the market.

MS will maybe have one serious competitor to Game Pass and it's hard to say who it'll be, Google, Apple, Amazon, maybe Sony, maybe Valve. And they'll mostly be making their own games to justify the platform, without needing to rely heavily on licenses. Spotify can't compete with the recording industry, so the recording industry has massive leverage. Netflix can compete with the film and TV industry, but it's a far more expensive process and there are other large players who have the ability to compete with them for that content.

Sony, Apple, Google, Facebook, Amazon, Nintento, Valve, Epic, EA, Activision, those are all juggernauts. And having the biggest pockets doesn't guarantee success, if not the Windows Phone or Zune would have dominated their markets. Competitors always flood the markets when the RoIC is superior to the WACC, that's how competition works, sometimes those RoIC are way overvalued and you get bubbles, with excessive investment in some sectors.

And I don't see how the barriers of entry are so high. You just need an store and a license management system. Sony has actually bought services from MS to support their gaming infrastructure, Google has Google Cloud, Amazon has AWS. There are literally another dozen companies than can put out services like Gamepass.

Netflix doesnt compete? Have you heard about Netflix originals? Spotify doesn't compete? Do you realize the push they are making into a ton of different markets beyond music? Have you heard about the Joe Rogan deal?

How are they not going to have leverage when they have literally hundreds of millions of subscribers. If Spotify decides to remove one music publishers from their store who do you think is going to be hurt the most?

As of the Zenimax purchase, I'm fairly certain MS is now has substantially more studios than any other publisher. And they're not done with acquistions. MS doesn't need third party AAA games on Game Pass anymore to make it a value, and they'll need them even less going forward. And they're still in the early growth phase. They just need enough subs that, when coupled with direct sales, they're able to support their first party development studios, and a fixed budget for indie devs. If they can work out licensing deals that make sense for other stuff, great, but they have all the leverage in that negotiation. They can walk and it won't affect the service much.

So not having COD, FIFA and NFL wouldn't matter to them?

Bethesda makes great games but with the exception of Fallout and Elder Scrolls the rest of their games are not huge sellers. As for buying out other publishers, there is a moment when you are going to come into conflict with antitrust laws, you cannot just buyout your competitors.

It's like saying that because Sony has Horizon and God of War, they do not care about EA games.

And Game Pass is unlikely to fully displace direct purchases, and isn't being positioned to do so; it will never have many day one titles from large third parties (this further reduces the leverage those parties have in negotiation). And it's unlikely to eat away at Steam's market dominance, even if it's better value. Because Steam is also a platform, and getting people to change that level of platform commitment is very hard.

Epic is dumping huge amounts of money into giving games away for free and purchasing exclusives and have Fortnite to drive adoption and they're still struggling to break Steam's lock on the PC market. EA's PC and console sub service haven't seemed to affect direct sales that much either. Or shifted people away from Steam. There will be millions of people who will buy MS games on Steam even though it's cheaper for them to go Game Pass for a very long time, because they use Steam. And that's the beginning and end of the decision making process for where to buy/access stuff.

And honestly it's not going to be that different with Playstation either. Sony is going up do really well even without a competing service. They're just not going to do much better than they did with ps4, and maybe a little worse. But probably not much.

So there is competition. And, again I didn't say purchases are going away but that they'll matter less to the bottom line.

This is all a plan for growth beyond where things have been though; Xbox isn't going to sell that many more consoles than they already are even with this. They might switch place with Sony in some regional markets at best. In order to address a larger audience they need a different business model enabled by different end points for access; cheaper consoles with XSS, a solution for phones for markets with minimal console usage but good cellular infrastructure and a lot of Android phones with xCloud. And then a way for them to get into gaming via a high value proposition designed move them into being platform users. And that'll include buying things directly.

And it really isn't that the business model is unique, though it's more a hybrid approach than in other examples, it's that gaming isn't the same as music or film/tv and that MS is not positioned like other streaming services in those mediums. Scale and leverage matter a lot. Being a major platform holder and one of the biggest content creators matters a lot. Having vastly more money from your other businesses that can be invested into content than your competitors matters a ton. And being hyper aggressive about building out that service while having those advantages fundamentally changes the dynamics.

This is like if Disney had sucked up Marvel and Lucasfilm and Fox much earlier and beat Netflix to market with streaming, while being willing to risk their dvd revenue in the process. Oh and they also owned a third of the movie theaters and the stores that you can buy DVDs from too. Like to be honest, a large part of why this is different is because MS is able to do a bunch of stuff that should probably be anti trust violations but isn't, at least currently.

But the rest of it is that console and high end PC gaming are not accessible to add wide an audience as would enjoy them. That means there's an actual space to grow the market size addressed by your platform. Being big enough gives you huge leverage on terms. Just like the 30% app fees on the various stores.

Being a major publishers is not unique to MS, having a cloud gaming app is not unique to MS (Stadia, PSNow, GeForceNow, etc.), being different on multiple devices is not unique to MS, etc... Again people sell this as something unique, and it's not.

And if Disney had come up with Disney+ way long ago they would still have to deal with NBC Univeral, Paramount, Sony Pictures, Warner Bros, HBO, Apple.... because... there is always competition.

 

[iroboto]

https://twitter.com/i/web/status/1308390144949583873

pretty good exposure here.

 

[iroboto]

This just one episode, these four (journalist, game actor, game director, composer) do these shows almost every week and often talk about the economics and inner working of the game industry. I have genuinely learned more abut the games industry since watching these podcasts than in the decades prior. So much good stuff and the only lines they don't cross are hard NDAs.

I didn't see anything there that sort of made game pass seem like costs would get out of control. It does sound like there are a variety of methods to get paid on gamepass, and some developers are opting ot be on game pass for free (but to be promoted hard through marketing).

on an interesting side note, Austin (Flow) brought up Jonathan Mak (Every day shooter) - good high school buddy of mine. Jonathan was making games with my buddies and we got the chance to play some of his earlier work in gr10. He's fallen off the scene since, but that was a crazy time when he was signed by Sony.

 

[Deleted member 11852]

I didn't see anything there that sort of made game pass seem like costs would get out of control. It does sound like there are a variety of methods to get paid on gamepass, and some developers are opting ot be on game pass for free (but to be promoted hard through marketing).

Did you completely skip over the segment on how Mike Bithell's studio was compensated for including games in Game Pass? This is not going to be some special deal for him. It's Mike Bithell, not Rockstar!

 

[iroboto]

Did you completely skip over the segment on how Mike Bithell's studio was compensated for including games in Game Pass? This is not going to be some special deal for him. It's Mike Bithell, not Rockstar!

I watched that segment as well, I'm not entirely sure what I missed, he does mention that there is serious money involved with Game Pass, its not a charity and it does appear to be a win for everyone. But aside from that, it goes into MS sort of trying to guess what they project your title will bring in. What they project they can get in profits/budget. And they strike a deal that they believe based on their analysis, what your game can achieve. So it sounds like, at least to me, that as long as you aren't breaking their projections, MS is okay with things, and the developer is expecting to achieve their sort of projected amount. But aside from that, I'm not necessary sure like, how this means 3P licensing will become unsustainable to fund in the long term.

I think the thing to note here is that Mike Blithell isn't one to be super hungry when it comes to profits. He mentions that in this video. So to him, when he says they've been successful, and that game pass has paid them, and the money has been sufficient enough to cover some budgets or many, or that enough was given to them to start another game. I see that as anywhere between 200-400K just for gamepass which is a lot of money. But somehow between the remaining 149 titles, we need to make a shortfall of 14B a year.

23:56 and the kinds of money that's available
23:57 is actually like
23:59 covering budgets or covering a couple of
24:01 budgets you know and putting money in
24:02 the developers pocket to
24:04 go and make more games um and that
24:06 varies it's like any
24:07 marketplace it depends on like how
24:09 valuable your thing is seen as how much
24:11 they think it's going to bring people to
24:12 the platform
24:13 um how popular your games have been
24:16 historically and all of these data
24:18 points and various things but
24:19 yeah there is effectively there's two
24:21 ways a platform will pay you they'll pay
24:22 you with literal cash
24:24or um there's the the more vague side of
24:27 it which is marketing support so
24:29 i don't think again people realize that
24:31 like when you see a game on like your
24:33 favorite
24:34 um store on like a console's uh online
24:37 store on
24:38 through the through the console itself
24:39 or via shop fronts the
24:41 slots are not like that's not based on
24:43 necessarily meritocracy it's based on
24:45 like who's gotten a good marketing deal
24:47 or a marketing support deal with one of
24:49 these platform holders
24:50 so you cut those kind of deals so
24:51 there's lots of benefits i can
24:53i can be in a situation you could you
24:55 end up with weird things and again this is super vague and this is using
24:58 theoretical conversations but like
25:01 there are like you could theoretically
25:03 go well i want my game to launch
25:05 i know it's not i you know i know i'm
25:08 not going to make much
25:09 money on platform x but they're willing
25:11 to support me with marketing say
25:13 so my game can be perceived on that
25:15 platform as a big deal and then that
25:17 will knock on to more money being made
25:18 on other platforms
25:19 you've got this kind of you could
25:20 actually you can almost have a platform
25:22 i've never done this but
25:23 it's almost like the producers you could
25:25 actually intentionally go
25:26 we're going to develop a port for this
25:29 platform
25:30 we know it won't sell on that platform
25:32 but we know we can get marketing support
25:34 which will then
25:34 impact all these other platforms there's
25:36 loads of ways as a developer that you
25:38 can kind of
25:39 do this and to be clear kind of getting
25:41 paid in exposure
25:43 i mean basically but at this scale
25:46 you know and with these actually the
25:48 exposure does have value and that's an
25:50 interesting kind of
25:51 bouncing but no it's not i think people
25:53 look at this a lot and they go well this
25:54 is like spotify this is like
25:56 if i download thomas was alone in ps
25:58 plus or game pass
26:00 i'm giving mike gets five cents or
26:02 whatever that's not how
26:04 usually um with these kind of platforms
26:06 it will be like a buyout it'll be like
26:08 they came to me
26:09 and said here's a big bag of money can
26:11 we have your game on our platform for x
26:13 months

 

[Deleted member 11852]

I watched that segment as well, I'm not entirely sure what I missed, he does mention that there is serious money involved with Game Pass, its not a charity and it does appear to be a win for everyone. But aside from that, it goes into MS sort of trying to guess what they project your title will bring in.

And the guessing heavily favours publishers. GamePass and the economics of the games industry is a very common topic and this podcast and they discuss it a lot but you'd need to sift through all the episodes to collate it all. The sustainability has been discussed but I can't remember which show hat particular tangent occurred. I kind of binged the whole series over a couple of weeks. I felt like Neo learning kung fu in the Matrix!

 

[BoardBonobo]

I wonder at what point will the number of subscribers make it fiscally viable for devs to use it as the sole point of income? If MS are paying per game then there must be a finite amount of cash to spread between the games in the subscription. How do they work out who gets what? Or are MS taking a huge hit on financing the whole thing so that devs are comfortable with the exposure?

 

[goonergaz]

So, it seems I just found out possibly why people play more games when the have GP compared to previously (or rather another reason outside those I already said).

I get forever pestered to play x game - on my phone, on the console - suggested games which I would never even look at. This combined with a little thing called reward quests. So, I generally almost never play any games, now I spend some time just playing a game to get points which all add up to getting free game pass...I've subjected myself to 10 minutes playing this awful game just to get 25 points!

Now, if that's not skewing the figures I don't know what is!

 

[cheapchips]

So, it seems I just found out possibly why people play more games when the have GP compared to previously (or rather another reason outside those I already said).

I get forever pestered to play x game - on my phone, on the console - suggested games which I would never even look at. This combined with a little thing called reward quests. So, I generally almost never play any games, now I spend some time just playing a game to get points which all add up to getting free game pass...I've subjected myself to 10 minutes playing this awful game just to get 25 points!

Now, if that's not skewing the figures I don't know what is!

It's all about engagement. It doesn't matter if you're actually enjoying it.