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

[AzBat]

Nope. Just means that all surprises are good.

Doesn't look like you would even enjoy them if you were surprised. You would just find something else to be pessimistic about. LOL

Tommy McClain

 

[Deleted member 11852]

You miss 100% of the shots you don't take.

Quote so. And companies need to try new things otherwise a market will stagnate.

Does it suck being such a cynic all the time?

Personally I like to feel myself as a realist. Blind optimism is no better a position to adopt to cynicism. Both assuming a position of bias. This thread is supposed to discuss the business aspect and nobody has yet explained how Microsoft will grow the subscriber base and/or grow profitability. So I'll ask again and keep asking until somebody can come up with a sound way how GamePass's costs will decrease disproportionately (as as to increase profitiabiity) as their subscriber base grows - which seems the the general consensus of Microsoft's goals. So again:

If Microsoft have 20 million subscribers by this time next year, why will their profitability increase? Don't just look at more subscriber revenue, look at infrastructure costs and third party publishers wanting more.

Go!

 

[goonergaz]

Time will tell. MS believes GP can work and they have more data than anyone on these forums. I've decided that's good enough for me to think it can work, though certainly not a guarantee that it will.

Kinect and TV, TV, TV say hello! They had loads of data ‘proving’ the success of Kinect.

Also they need to sell ideas to investors, so (as I’ve said before) will pick data points to suit their argument.

One thing everyone isn’t even bringing to the table is the forever growing subscription models, at some point something has to give.

 

[iroboto]

If Microsoft have 20 million subscribers by this time next year, why will their profitability increase? Don't just look at more subscriber revenue, look at infrastructure costs and third party publishers wanting more.

Yea absolutely. This is why budget matters.
The budget assigned to Game Pass for 2020 should only be slightly more than it was for 2019. You forecast your spend up to a certain amount say 80%, leaving 20% for overage. If you suddenly gain 10M customers in 1 year, whereas you took 2 years to get 10M customers, your net revenue far exceeds the budget you allotted for the year. You should be profitable for at least one year. To keep people around you may and will likely increase spend for 2021, but that’s a separate story from obtaining profits.

For each subscriber gained increases debt you’re doing it wrong. There’s no indication that is happening. The indication is that it’s very a massive money maker; not a bottomless hole they throw Jedi into.

I made a spreadsheet that models how their business would lead to profitability over time. But You choose to ignore it, so it’s hard to have a discussion around it If we remove all methods of illustrating how it could work

 

[Silent_Buddha]

I completely agree with this. Sony felt that bankrolling PSN (free multiplayer) in the PS3 era was worth the overhead. They changed tack the following generation. Low profitability, or howvever we wish to term it, is better than loss-making but equally with any business you are constantly assessing not just the monetary side but the wider value to the operation. If Microsoft have data that demonstrate that GamePass is attracting people to their platform, or stopping people leaving, it may be worth it to them.

But there is also a danger of indulging business units that aren't profitable and are being propped up the the successful parts. Sony learned this the hard way in 2007-2010. The question most large organisations will ask themselves, when they have a reason to think about it, is if you stopped doing X and put those people and resources on Y, would you be better off?

Think of it another way. Game Pass is doing many things for Microsoft that Microsoft desperately needs and it's other division are unable to provide in a significantly meaningful way.

Considering how there is still so much lingering negativity and distrust many people have for Microsoft (exacerbated by the ill conceived launch marketing for XBO), Microsoft can use anything that generates not just good publicity but good will.

We could point to something like Microsoft's various initiatives WRT bringing computing and gaming to people who can't traditionally use computers or consoles, but that's a very small market and it's not driven so much by a desire for good public relations marketing as much as a genuine desire to improve accessibility to people with disabilities (Satya Nadella's child is disabled). And while that does generate some positive publicity the reach is small and very much limited.

That's also a division that operates at a loss, but MS won't be stopping investment in those initiatives anytime soon. They will never operate that division at a profit.

Back to Game Pass, it has done more to reverse some of the negativity around Microsoft and regain consumer (mostly gamer) trust in the company than the billions they've spent on marketing, PR, and products over the past decade.

Even if it were a loss generating section of Microsoft, if you think of it in terms of marketing spending, it's thus far been a stellar return on investment. Dollar for dollar they are likely seeing more positive returns from Game Pass than their various marketing initiatives which target the general public.

If MS can also eventually turn this into a highly profitable part of the company, that's a big huge cherry on top of an already incredibly successful division (in terms of Marketing and PR).

Regards,
SB

 

[Johnny Awesome]

Also, it's pretty funny for people to be worried about MS stockholders. I'm pretty sure they're happy with the 10 fold growth in their stock over the past 10 years. Someone at MS seems to know what they're doing. LOL

What's being said right now about GP is the same thing everyone said about Xbox in 2002 a year after launch "OMG! MS is losing their shirts! They'll close down Xbox any day now!"

Here we are almost 20 years later.

I don't think a lot of people here understand what MS is building with GP. One thing that's super smart is that it's Xbox AND PC.

Question: Who do you think wants to pay $15 per month for a service that has 10+ AAA games every year and 10+ AA games and 10+ year-old 3rd party AAA games and another 300 decent filler games?

Answer: Almost everyone. (ie. 100+ million subscribers - ie. $18 billion in revenue)

MS is betting they can provide all this content with their (eventual) 40 studios ($10 billion per year for 1st party stuff) and some key 3rd party titles (another $2 billion), netting them $6 billion.

This is the end game 5-10 years down the road. Obviously they need to be more reliant on 3rd parties in the short run until the studio acquisitions start churning out content.

The question for me isn't whether the business model can work, it's whether or not they can actually get each of these hypothetical 40 studios to put out consistently high quality AAA games every 4 years that target a variety of gaming tastes. I'll admit it's a big question mark.

They have some great AAA potential with Halo, Forza, Forza Horizon, Ori, Gears, Gears Tactics, Flight Sim, Sea of Thieves, Fable and things like Avowed. They have cool AA stuff like State of Decay, Battletoads, Grounded etc.... but they need to keep expanding in a big way, especially into Sony's territory with games to compete against The Last of Us and Uncharted and things like that.

IMO that's what they're shooting for. It might not even take as much content as I'm saying and they'll have the numbers to see how much content they really need. If I were them I'd overshoot a little at the beginning to generate excitement and then scale as necessary to maintain subscriber growth.

 

[zed]

Spotify has over 100 million paying customers (me included)
yet they have still have not turned a profit
But It will certainly happen sometime in the future, gotta give them more time as theyve only been around for 14 years

 

[Johnny Awesome]

So does Netflix and they make money. The key might be 1st party content. That would explain Spotify's woes and GamePass' potential.

 

[BRiT]

Or it could be music streaming is an overly crowded market, especially when there are cornucopias of free music services where their only income is from ads.

 

[goonergaz]

Back to Game Pass, it has done more to reverse some of the negativity around Microsoft and regain consumer (mostly gamer) trust in the company than the billions they've spent on marketing, PR, and products over the past decade.

Even if it were a loss generating section of Microsoft, if you think of it in terms of marketing spending, it's thus far been a stellar return on investment. Dollar for dollar they are likely seeing more positive returns from Game Pass than their various marketing initiatives which target the general public.

Based on what? How are you measuring this ‘stellar return’?

 

[goonergaz]

Question: Who do you think wants to pay $15 per month for a service that has 10+ AAA games every year and 10+ AA games and 10+ year-old 3rd party AAA games and another 300 decent filler games?

Answer: Almost everyone. (ie. 100+ million subscribers - ie. $18 billion in revenue)

Wrong! Try again. It’s a significantly smaller number than you think.

 

[Deleted member 11852]

For each subscriber gained increases debt you’re doing it wrong. There’s no indication that is happening. The indication is that it’s very a massive money maker; not a bottomless hole they throw Jedi into.

I made a spreadsheet that models how their business would lead to profitability over time. But You choose to ignore it, so it’s hard to have a discussion around it If we remove all methods of illustrating how it could work

Your first statement contradicts what Microsoft have said publicly - which AzBat helpfully quoted above. I didn't ignore your spreadsheet, I gave you feedback telling you that it lacks hundreds of critical datapoints that you wouldn't have access too.

Think of it another way. Game Pass is doing many things for Microsoft that Microsoft desperately needs and it's other division are unable to provide in a significantly meaningful way.

Considering how there is still so much lingering negativity and distrust many people have for Microsoft (exacerbated by the ill conceived launch marketing for XBO), Microsoft can use anything that generates not just good publicity but good will.

I agree with your post. I also see GamePass as being something of a concession of profits for goodwill - and Microsoft pretty much said as much (AzBat's post above). You won't find any posts from me saying GamePass is bad for consumers, the only point I've ever debated was related to profitability, or that profitability would be greater with more subscribers.

 

[iroboto]

Your first statement contradicts what Microsoft have said publicly - which AzBat helpfully quoted above. I didn't ignore your spreadsheet, I gave you feedback telling you that it lacks hundreds of critical datapoints that you wouldn't have access too.


I agree with your post. I also see GamePass as being something of a concession of profits for goodwill - and Microsoft pretty much said as much (AzBat's post above). You won't find any posts from me saying GamePass is bad for consumers, the only point I've ever debated was related to profitability, or that profitability would be greater with more subscribers.

You mean Aaron G saying this ?

Ultimately, we think long term that’s the right thing for the business, and will have long-term benefits for us. But, in the short term, yeah, it’s not a big profit play.”

Do you mean to take this as the business will continually cost more with more subscribers?

What would be the driving cost in which that is possible? That’s like saying that GamePass is like a operating a fitness gym that is less profitable as they acquire more members.

 

[Deleted member 11852]

You mean Aaron G saying this ?

Do you mean to take this as the business will continually cost more with more subscribers?

No, this: “Ultimately, we think long term that’s the right thing for the business, and will have long-term benefits for us. But, in the short term, yeah, it’s not a big profit play.”

What would be the driving cost in which that is possible? That’s like saying that GamePass is like a operating a fitness gym that is less profitable as they acquire more members.

I'm interested in the profitability, the general consensus seems to be profitability will increase with subscribers but I'm not seeing how costs will not increase proportionately with scale. I don't think a gym isn't a good analogy because there is no gym business equivalent to Microsoft paying third party publishers to include their games in GamePass.

Note that he's not even saying it'll be profitable as it grows, he says "benefits". As I posted above, this could be a reference to GamePass stopping user erosion/disengagement over a generation.

 

[goonergaz]

Indeed benefits could mean anything, in fact keeping users thinking MS are great so I will stay in their ecosystem is a benefit.

 

[iroboto]

No, this: “Ultimately, we think long term that’s the right thing for the business, and will have long-term benefits for us. But, in the short term, yeah, it’s not a big profit play.”



I'm interested in the profitability, the general consensus seems to be profitability will increase with subscribers but I'm not seeing how costs will not increase proportionately with scale. I don't think a gym isn't a good analogy because there is no gym business equivalent to Microsoft paying third party publishers to include their games in GamePass.

Note that he's not even saying it'll be profitable as it grows, he says "benefits". As I posted above, this could be a reference to GamePass stopping user erosion/disengagement over a generation.

Focusing on that as being a single statement and assuming there is no path towards long term profitability is probably too selective to base an argument around game pass being unprofitable especially if you're looking at these decisions being made purely in isolation. Xbox is a very small portion of MS overall revenues when compared to the greater picture; all this excessive reinforcement (buying up studios (billions), xcloud (billions), and game pass(billions)) are massive expenditures for the purposes of growth. Using all this money to sustain such a small part of the business could be used elsewhere and likely return a much larger profit. The end goal for MS is to grow Xbox into a large service provider (subscriptions) to ensure consistent long term profitability. It's hard to view this in any other perspective and the moves by MS trend towards sustaining a large subscriber base over a variety of devices and profiting from this subscriber base.

As we saw with Mixer, MS is not interested in paying large amounts of money to simply 'sustain' or to stop customer base erosion. They would much rather just cut the business off.

On that same point, there are a variety of ways to reduce subscriber erosion and disengagement; building a net new service that has never been proven in the space before with significantly large investments would never have been green lighted for this purpose. MS is willing to pay for innovation and to go after large opportunities where they see they can succeed.

This is the area that MS is interested in expanding their market as they see an upper limit of 200M (100% market share) units sold in the console space, which also means upper limits on revenue.

The goal of game pass is to curate a set of titles that appeals to the widest audiences possible. To provide value to as many customers as possible which is why we see a variety of different titles in game pass. The studio acquisitions and the games designed by MS first party also follow a similar path as we continue to see a variety of titles being explored and green lighted by MS that would traditionally not get funding. All of this again, to provide games of a large variety to target a larger base.

All of this to ensure that game pass appeals to as many customers as possible, with a delivery method : PC, Xboxes, and XCloud to be able to delivery their content to.

since game pass is the only form of revenue in this chain of spending, game pass must be designed to be profitable. It may not be profitable during times in which MS is prioritizing growth, but I doubt the model is poorly built to take on more debt as the subscriber count increases. It most certainly increases revenues much more than expenses. What they do with that revenue (turn it back to generate more growth, or to profit) is up to MS.

 

[mrcorbo]

I think one of the advantages to the platform holders is more consistency in revenue. Instead of peaks around major releases followed by troughs in between, you get more gradual upward and downward trends. And there's much less chance that one tentpole title not hitting would tank an entire quarter.

 

[mrcorbo]

I think one of the advantages to the platform holders is more consistency in revenue. Instead of peaks around major releases followed by troughs in between, you get more gradual upward and downward trends. And there's much less chance that one tentpole title not hitting would tank an entire quarter.

Related to this, I think this model could actually lower the ceiling for per-user profitability over a given period of time, but could also significantly raise the floor of same and in combination with a larger potential reach could result in a better financial result over the long term.

 

[Deleted member 11852]

Focusing on that as being a single statement and assuming there is no path towards long term profitability is probably too selective to base an argument around game pass being unprofitable especially if you're looking at these decisions being made purely in isolation.

I'm not making any assumptions and nor am I arguing there is no path to increased profitability, what I have said is that I cannot personally see one and I've asked others how Microsoft would increase profitability. When I've asked folks here how, the general consensus is they need to buy more studios for more games and/or profits will increase with subscribers. Whilst revenue will increase with more subscribers so will costs - proportionately as far as I can see.

The end goal for MS is to grow Xbox into a large service provider (subscriptions) to ensure consistent long term profitability. It's hard to view this in any other perspective and the moves by MS trend towards sustaining a large subscriber base over a variety of devices and profiting from this subscriber base.

Microsoft have been in the business almost twenty years.

It most certainly increases revenues much more than expenses. What they do with that revenue (turn it back to generate more growth, or to profit) is up to MS.

Why? This is the question I keep asking.

 

[iroboto]

Why? This is the question I keep asking.

Because spend is capped annually. We've been through this.
Players can only spend so much time playing per month, there is only so much time to play. Whether you choose to play 1 title on game pass or 50 of them. The amount of time a player can play is capped you are unlikely able to extract 24/7 a whole month of playing. That means variable expenses are generally capped. You'd have to worry about a small fraction of bandwidth expenses but once again these are minor when compared to the number of players that are likely idle with their game pass accounts. And this is how you budget how much you need to set aside in variable expenses when ti comes to players downloading and playing. You know these metrics and you can work off the average play time and the number of titles a player is likely to try each month.

Forecasting the spend allows you to budget how much you are allowed to spend for the year. That caps your expenses. If you continue to gain more subscribers you are going to generate more revenue than you will accumulate expenses. A simple formula is to take the average number of games that players will download per month - multiply that by 12 and add 20%. You now have a good idea of bandwidth usage per subscriber.
You can do the same thing with play time. You take the average per month * 12 and add 20% and now you budgeted for how much possible game time they can play.

Now you know the costs for downloading titles and playing titles per subscriber.
Then you account for the cost of acquisition for how much it takes you to acquire a subscriber.
You subtract out the fixed expenses that is divided among all subscribers.
And then you set a price that ensures you're going to end up generating profit.

Just because you have game pass, doesn't necessarily mean you have the means to exploit it's offering. This is how both the gym and buffet models work.