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

[Deleted member 11852]

This is Aaron Greenberg you're quoting (which I'm surprised you're taking his words at face value considering your level of pessimism)

There is marketing and then there is lying. He was asked a straight question about profitability and answered it. It's my understanding that answering a question like this incorrectly in the US is a breach of SEC guidelines. I'm really not quite sure what you're accusing Microsoft of doing?

Fixed assets can include buildings, computer equipment, software, furniture, land, machinery, and vehicles. For example, if a company sells produce, the delivery trucks it owns and uses are fixed assets. If a business creates a company parking lot, the parking lot is a fixed asset.

You hop from one financial term to another like they all have the same meaning. They do not. Other than sharing the same first seven letters, Capital expenditure and Capitalised assets are nothing alike. Capital expenditure is the procurement of tangible assets with clear market value like land, property or equipment. Capitalizing assets is an accountancy method of expressing the cost of an asset over its lifetime rather than the actual cost at the time of acquisition. This makes zero sense to apply it here because Microsoft bought Halo 20 years ago. And although software used to be something you could consider a fixed asset if it had clear market value and can be resold, in practice these ceased following the plague of non-transferable software licences.

Halo Infinite does not represent capital expenditure. Halo, and Halo Infinite specifically, is IP with questionable value (and by questionable I mean there is no clear market value). If that does not convince you, and it really should, you can read Microsoft Annual Reports where they detail their capital expenditure every year and nowhere does development of software appear because it's not a tangible asset. Because slavery was abolished.

If you want to see what Microsoft consider capital expenditure, read their Annual report. You will not find any wholly-software based assets among it. It's all about Azure and infrastructure - from the 2019 report linked above:

Other Planned Uses of Capital

We will continue to invest in sales, marketing, product support infrastructure, and existing and advanced areas of technology, as well as continue making acquisitions that align with our business strategy. Additions to property and equipment will continue, including new facilities, datacenters, and computer systems for research and development, sales and marketing, support, and administrative staff. We expect capital expenditures to increase in coming years to support growth in our cloud offerings. We have operating and finance leases for datacenters, corporate offices, research and development facilities, retail stores, and certain equipment. We have not engaged in any related party transactions or arrangements with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of capital resources.​

Stop talking out of your hat, learn from it and move on.

Why would they need a separate sales team for gamepass?

You've misread my post. I said: "I personally would be very surprised if the same team who are setup to sell produces and services (GamePass) to consumers are the same team setup for IP procurement because these are very different things with no overlap."
I didn't say GamePass has it's own sales team but that Microsoft/Xbox's sales team would be different to the team securing content to GamePass because these are very different things.

They don't, that same team just now has to do game pass signing as well, they only need to be trained on how to do it. I never suggested fill in the blank, I've had to train sales teams on my product before. I feel like you're entirely reaching here. You already have an existing Xbox sales team, why do you need to make another?

The same team who were procuring a handful of platform-exclusive deals a year are now managing 200+ deals per year without any upsizing? Maybe Microsoft are into slavery after all.

No, it's not all that different. Companies are forced to pay retailers at lower than customer costs so that they can get their cut. MS cannot force publishers to release on gamepass, so that's no different than someone not being forced to buy telecomm.

This is the barmiest thing you've said this thread and there have been many barmy things. And people have actually clicked like on it! Let's start at the beginning, nobody is "forcing" companies to sell anything to retailers, it's a free market. If I manufacture something I set the wholesale cost and I set an RRP about what retailers ought to set it so that the wholesale retail distribution gets their cut. I may chose to sell direct outside of retail as many businesses do but nobody can force me to charge a retailer less than what I want t sell it direct for. The free market means that most retailers will not carry a product if they have to charge more for it than the manufacturer can sell it direct and the Eason most manufacturers sell direct to to capture that whoelsale/retail margin.

You don't think Game Pass also gives companies more money? What do you do when your title is in decline and your title missed it's mark for expected profits? You have MS here more than happy to pay you for Game Pass and make up that shortfall.

You also have Steam, Epic and Sony. Microsoft don't have a monopoly on this charitable act of saving publishers from overly optimistic profit projections.

These aren't relevant discussion points, because what-if scenarios aren't worth discussing. As of right now MS doesn't have to do anything but think about their growth and develop their product because they are the only player in the space.

Of course they're relevant. You don't think Microsoft's GamePass business won't adapt to changing market conditions do you?

 

[iroboto]

You hop from one financial term to another like they all have the same meaning. They do not. Other than sharing the same first seven letters, Capital expenditure and Capitalised assets are nothing alike.

I have not. I indicated that labour used to produce software, in particular the software that is the core business asset that you will sell, that labour can be capitalized at least until the product is launched. That labour is the capital expenditure towards the capital asset in this case is Halo Infinite.

And I have indicated how this would vary from Game Pass in terms of allowance of exceeding planned budgets.

I will not say anymore on this. If accounting laws are different in UK I do not know, but capitalizing labour to create a product is, as far as I know, normal practice. Maintaining said software once launched is a different story.

The same team who were procuring a handful of platform-exclusive deals a year are now managing 200+ deals per year without any upsizing? Maybe Microsoft are into slavery after all.

I would expect normal operating procedure to be reps in a region where their clients are. The more clients, the more reps. You originally stated that you would need more people supporting the procurement of contracts as the subscriber count went up. Of which I countered that I believe it's based on the number of studios creating games instead.

Of course they're relevant. You don't think Microsoft's GamePass business won't adapt to changing market conditions do you?

I'm trying to keep the discussion grounded on whether the service is sustainable/profitable or not - or how one might model the service to work. You've been introducing all sorts of new arguments to circumvent my ability to do this, and I have continued to keep on the original mainline post where you questioned if this service is even possible to generate a profit. I have tried, I think patiently, to answer this question for you of which if you want to agree to disagree I'm perfectly fine with. But I feel I sufficiently covered this topic well and there is not much more I can say even if this discussion went further and I feel I have tried address all your concerns to the best of my ability without attacking you as a person. I am satisfied with my responses and I don't feel the need to continue further.

I'll let others chime in here.

 

[iroboto]

They don't just transfer the data though do they? For popular games they have to hold multiple copies (if I remember/understand previous discussions correctly).

I should imagine when the big games hit the stores the costs (to MS) for those is quite high.

Unless something is going wrong, there is no additional labour required.
All the labour to setup and configure everything is upfront. But once it complete, it's an automated process to complete every transaction.

 

[Deleted member 11852]

I will not say anymore on this. If accounting laws are different in UK I do not know, but capitalizing labour to create a product is, as far as I know, normal practice. Maintaining said software once launched is a different story.

Capitalising labour is something else entirely. Different to capital expenditure and capitalising assets.

I would expect normal operating procedure to be reps in a region where their clients are. The more clients, the more reps. You originally stated that you would need more people supporting the procurement of contracts as the subscriber count went up. Of which I countered that I believe it's based on the number of studios creating games instead.

Given the some of money involved it doesn't seem likely that this is some task just devolved to a bunch of existing Microsoft Business reps geographically. You need the authority to spend a lot of money and negotiate contacts and sign it. You'd need some knowledge of the gaming industry and be informed enough to know whether somebody asks for 20% more for an extra month, you understand what they means in terms of user engagement. This is not like being upskilled to sell Office 365 subscriptions to SMEs at a 5% discount.

I'm trying to keep the discussion grounded on whether the service is sustainable/profitable or not - or how one might model the service to work.

We know it's not very profitable. The question that has dominated the last 3-4 pages is how Microsoft will grow profitability. That's fine if you don't want to discuss that, fell free to ignore those posts.

You've been introducing all sorts of new arguments to circumvent my ability to do this, and I have continued to keep on the original mainline post where you questioned if this service is even possible to generate a profit.

If you don't want to discuss the business aspects of subscription game libraries then you're in the wrong thread. If you want discuss something very narrow and specific the way to do this is create a new thread to focus just on that.

But just to be clear, you post like I an undermining your ability to deliver your narrative about GamePass whereas I'm here because I have so many questions about GamePass. GamePass is fascinating to me because, as I've said a lot, I see it potentially struggling like PS3 era PS+ when that grew. And as I posted before, some devs are really getting a good deal. Too good a deal. It's also great for consumers hey only a small number of Xbox owners subscribe. There are few, if any, altruistic business models that benefits three parties simultaneously. Game rental services have so much potential but the business model has so many hurdles. The moment it becomes really popular, costs will spiral. We've seen this in low-tech equivalents like when you could rent games as easily as VHS tapes and DVDs.

If everybody stops claiming GamePass profitability will spike later, with or without more people, and concedes that maybe profitability isn't the goal here - as suggested by Aaron Greenberg, we can all move on. My questions has always been, I can't see with such a resource-intensive business model (people to administer it, infrastructure to deliver it etc), it looks tricky to improve profitability.

 

[Eolirin]

Capitalising labour is something else entirely. Different to capital expenditure and capitalising assets.


Given the some of money involved it doesn't seem likely that this is some task just devolved to a bunch of existing Microsoft Business reps geographically. You need the authority to spend a lot of money and negotiate contacts and sign it. You'd need some knowledge of the gaming industry and be informed enough to know whether somebody asks for 20% more for an extra month, you understand what they means in terms of user engagement. This is not like being upskilled to sell Office 365 subscriptions to SMEs at a 5% discount.


We know it's not very profitable. The question that has dominated the last 3-4 pages is how Microsoft will grow profitability. That's fine if you don't want to discuss that, fell free to ignore those posts.



If you don't want to discuss the business aspects of subscription game libraries then you're in the wrong thread. If you want discuss something very narrow and specific the way to do this is create a new thread to focus just on that.

But just to be clear, you post like I an undermining your ability to deliver your narrative about GamePass whereas I'm here because I have so many questions about GamePass. GamePass is fascinating to me because, as I've said a lot, I see it potentially struggling like PS3 era PS+ when that grew. And as I posted before, some devs are really getting a good deal. Too good a deal. It's also great for consumers hey only a small number of Xbox owners subscribe. There are few, if any, altruistic business models that benefits three parties simultaneously. Game rental services have so much potential but the business model has so many hurdles. The moment it becomes really popular, costs will spiral. We've seen this in low-tech equivalents like when you could rent games as easily as VHS tapes and DVDs.

If everybody stops claiming GamePass profitability will spike later, with or without more people, and concedes that maybe profitability isn't the goal here - as suggested by Aaron Greenberg, we can all move on. My questions has always been, I can't see with such a resource-intensive business model (people to administer it, infrastructure to deliver it etc), it looks tricky to improve profitability.

The marginal cost of scaling Game Pass is pretty low though? MS already has Azure investment. They're leveraging Xbox investments that they needed to make anyway for delivery. Even game streaming is being used for multiple purposes, as their Series X server blades can be retasked for different compute work loads. Yeah they'll need more people doing contract negotiation, but the marginal cost per game is less than an individual and the total number of games they need to hit sustainable numbers of subscribers is actually fixed. The licensing outlays are the only things that potentially scale with the size of the subscriber base.

If they get enough subs before they hit a point where new subscriber acquisition costs become prohibitive it's very difficult to not be profitable. Individual developers may or may not be able to get as good of a deal depending on where that number ends up though. But it's structured so that it's mostly value add on top of actual sales for the big players who are most likely to try to push those costs up. If MS is the only party doing this, normal sales don't go away. It's only if the entire market goes to this model and no one has a store anymore that things dramatically change. But since large third parties aren't going day one, that's really unlikely.

And, to note, according to MS, Game Pass subscribers on average spend more on direct purchases as well. Which MS also gets a cut of. So you do need to factor indirect increases in spending as part of Game Pass's value. It's got an effect on usage. The low barrier to entry is encouraging people to try out new genres and franchises and then they're buying games in them. Subscribers are playing more games and using video streaming services less. This has effects on the social networking and multiplayer aspects of Xbox as well.

Though of course, if the number they get to before new subscribers become cost prohibitive to acquire is too low it'll never be directly profitable. Might still be worth doing if those indirect benefits are enough and the losses are small though.

MS's comments about profitability really shouldn't be suggestive of the idea that they aren't thinking about being profitable, just that they're not trying to maximize profitability as their primary going concern with Game Pass. Maximizing value to the consumer is still a profit motivated play, it's just a long term one. Game Pass being focused overperforming on value is about building a larger more invested audience for Xbox. This increases Xbox revenue at every level. It helps with hardware sales, where they're lagging their competition. It helps broaden the size of their addressable market. It seems to be helping get titles onto their platform given the ports coming out of Square Enix and Sega. And if course it's helping with direct sales of games and dlc and increasing multiplayer populations. So they don't need to care about it making money directly right now. Doesn't mean it isn't set up to be able to do so though. They'd be pretty crazy to set up something that has no path to profitability. But that doesn't need to be an immediate focus. It'll get there naturally if Xbox gets big enough.

 

[Deleted member 11852]

The marginal cost of scaling Game Pass is pretty low though? MS already has Azure investment. They're leveraging Xbox investments that they needed to make anyway for delivery.

I think the traditional digital delivery of GamePass games isn't a problem at all. As we say in the UK, "it's small beer" because even 10m subscribers can only download so many games per month and in the grand scheme of things that type of bandwidth is a rounding error in terms of what Azure does now.

Even game streaming is being used for multiple purposes, as their Series X server blades can be retasked for different compute work loads. Yeah they'll need more people doing contract negotiation, but the marginal cost per game is less than an individual and the total number of games they need to hit sustainable numbers of subscribers is actually fixed. The licensing outlays are the only things that potentially scale with the size of the subscriber base.

This aspect is more complicated. Microsoft can leverage the existing investment and upgrades in Azure for sure, but the biggest low-latency server issue is servers being close to your customers. Not an issue for one-way streaming but definitely for anything interactive. If Microsoft see a bunch of new streamers pop-up somewhere they may need to deploy Series X servers blades there previously there was no demand. But I don't think Microsoft want Series X servers blades taking up rack slots everywhere because they're certainly less powerful, and the customer demand much lower, than whatever generic hardware configurations they're filling their farms with.

Individual developers may or may not be able to get as good of a deal depending on where that number ends up though. But it's structured so that it's mostly value add on top of actual sales for the big players who are most likely to try to push those costs up. If MS is the only party doing this, normal sales don't go away. It's only if the entire market goes to this model and no one has a store anymore that things dramatically change. But since large third parties aren't going day one, that's really unlikely.

Indeed, this is just business. Sales don't go away on other platforms either because games end up in Epic's programme or Sony's PS+ programme or Steam sales so ridiculous it's almost free anyway.

And, to note, according to MS, Game Pass subscribers on average spend more on direct purchases as well. Which MS also gets a cut of. So you do need to factor indirect increases in spending as part of Game Pass's value. It's got an effect on usage. The low barrier to entry is encouraging people to try out new genres and franchises and then they're buying games in them. Subscribers are playing more games and using video streaming services less. This has effects on the social networking and multiplayer aspects of Xbox as well.

Though of course, if the number they get to before new subscribers become cost prohibitive to acquire is too low it'll never be directly profitable. Might still be worth doing if those indirect benefits are enough and the losses are small though.

MS's comments about profitability really shouldn't be suggestive of the idea that they aren't thinking about being profitable, just that they're not trying to maximize profitability as their primary going concern with Game Pass.

Agreed, and I've never suggested otherwise. My only challenge has been to the folks who believe it will be "easy if" or "if Microsoft just do [that]" they can increase profitability - or with a larger base. GamePass, and fundamentally this business model, being new means nobody knows where the economics will go. We had physical game rentals before and it was all low cost until publishers wanted a larger and larger cut to compensate lost sales.

The economics of game development aren't always clear but Alanah Pearce has a great mostly weekly podcast called Play Watch Listen and she has the same three guests every week; Troy Baker (voice actor), Mike Bithell (game director) and Austin Wintory (composer) and they talk a lot about the mechanics of the industry, including Game Pass, the breakdown of how $60 breaks down, how game cost is calculated from development cost combined with appeal and so on. I'd recommend it a source of this type of information from the people who know.

 

[dobwal]

The biggest question is if these subscription services can induce gamers to spend more than they normally would. Do subscriptions lead to subscribers investing more into their console hobby? If that answer is "Yes" and if that additional investment is significant. Profit will be a moot point.

After all, game developers, and platform owners are partners. If an additional revenue stream is created and is able to tap deeper into gamers' pockets, those partners will work out a way to generate revenue and profit for both groups. I not aware of widespread antagonism between developers/publishers and MS/Sony that would create an inability for both parties to work out a win-win situation for each other.

However, if subscription services are more of a disruptive innovation that's meant to replace traditional sales with one or the other party forcibly trying to redistribute profit and revenue in their favor, these services will never take off. Can't have a service if pubs aren't willing to provide games and you can't have a subscription model if the platform owners won't allow the service.

 

[Johnny Awesome]

Well they say the usual attach rate is 10. That's $600. GamePass @$10 per month is $600 over 5 years. Costs are lower than with physical delivery and people will likely supplement their purchases with some must have day one 3rd party games. It all seems pretty viable to me.

I think one of the keys is tons of good 1st party content. MS seems to agree with this, hence all the studio acquisitions.

 

[Eolirin]

The biggest question is if these subscription services can induce gamers to spend more than they normally would. Do subscriptions lead to subscribers investing more into their console hobby? If that answer is "Yes" and if that additional investment is significant. Profit will be a moot point.

After all, game developers, and platform owners are partners. If an additional revenue stream is created and is able to tap deeper into gamers' pockets, those partners will work out a way to generate revenue and profit for both groups. I not aware of widespread antagonism between developers/publishers and MS/Sony that would create an inability for both parties to work out a win-win situation for each other.

However, if subscription services are more of a disruptive innovation that's meant to replace traditional sales with one or the other party forcibly trying to redistribute profit and revenue in their favor, these services will never take off. Can't have a service if pubs aren't willing to provide games and you can't have a subscription model if the platform owners won't allow the service.

Well, according to MS, at least so far, the answer is yes. Significant? Hard to say. We're not going to get that kind of detail.

 

[Deleted member 11852]

The biggest question is if these subscription services can induce gamers to spend more than they normally would. Do subscriptions lead to subscribers investing more into their console hobby? If that answer is "Yes" and if that additional investment is significant. Profit will be a moot point.

Assuming that money is going to, or through, Microsoft. I assume this is the case, Microsoft said more money is being spent I don't see how they could know if somebody played a game on Xbox, then bought a game by the same dev in a Steam sale - but that could be happening as well. Discovery, or lack of, is one of the biggest barriers to smaller devs/publishers.

However, if subscription services are more of a disruptive innovation that's meant to replace traditional sales with one or the other party forcibly trying to redistribute profit and revenue in their favor, these services will never take off. Can't have a service if pubs aren't willing to provide games and you can't have a subscription model if the platform owners won't allow the service.

Most change is disruptive. Equally it would be interesting to see if GamePass has changed gamer's behaviour. I know it's impossible to tell for sure because we don't have a convenient GamePass-less mirror universe to reference, but it's probable that people are playing more games they wouldn't have, and potentially not playing games that they may have.

I think publishers are the biggest 'risk' to GamePass. GamePass works for them now as they're either being amply compensated or inclusion in GamePass is as beneficial as promotional sales, but we know what greedy bastards most publishers are. The moment anything becomes popular, it becomes a target for the bean counters.

 

[dobwal]

Assuming that money is going to, or through, Microsoft. I assume this is the case, Microsoft said more money is being spent I don't see how they could know if somebody played a game on Xbox, then bought a game by the same dev in a Steam sale - but that could be happening as well. Discovery, or lack of, is one of the biggest barriers to smaller devs/publishers.


Most change is disruptive. Equally it would be interesting to see if GamePass has changed gamer's behaviour. I know it's impossible to tell for sure because we don't have a convenient GamePass-less mirror universe to reference, but it's probable that people are playing more games they wouldn't have, and potentially not playing games that they may have.

I think publishers are the biggest 'risk' to GamePass. GamePass works for them now as they're either being amply compensated or inclusion in GamePass is as beneficial as promotional sales, but we know what greedy bastards most publishers are. The moment anything becomes popular, it becomes a target for the bean counters.

Yeah, I imagine is only related to data specific to the Xbox unless Valve sells its users data.

I foresee most big pubs having their own service eventually. I doubt MS can allow EA play on the Xbox yet convincingly argue to pubs like Activision and Ubisoft that their own similar services are unnecessary.

I see MS service limited to their own wares and pubs/devs who don’t have a large enough library to warrant their own service.

I can see a cable company like system with a basic tier and higher tiers consisting of other services. We are already starting to see this as Ultimate now gives you access to EA Play.

This would allow MS to compartmentalize the greed of each publisher. LOL

 

[cheapchips]

This would allow MS to compartmentalize the greed of each publisher.

Good lord! Imagine the price on the Activision and Take Two tiers.

 

[Deleted member 7537]

I do not want to repeat myself over this, but Netflix is a good comparison with what MS is trying to do. Getting to profitability is not that simple if you offer your 1st party games for "free" (Halo:Infinite is rumoured to be over 500M in budget), meaning that not only gamepass subscriptions have to pay for that but for all the licenses that need to be paid to 3rd party publishers (not going to ever bother to refute that EA is giving EA Access for free to MS).

Maybe MS is here to provide value to the customer and lose money but I do not think that's the strategy. IMO the long term plan is what others have done in the past: dump prices, increase user-base, increase prices.

 

[BRiT]

Question for those that know more, when there are attach rate figures given for a console, is that for the lifetime of the console or is that per year?

Also, what are the attach rates for Xbox One console generations?

 

[Deleted member 11852]

Halo:Infinite is over 500M in budget

Is this accurate? Is there a source? This is insane.

This is twice what GTA V cost to make and five times what Red Dead Redemption 2 cost.

 

[Deleted member 7537]

Is this accurate? Is there a source? This is insane.

This is twice what GTA V cost to make and five times what Red Dead Redemption 2 cost.

It was a rumor I read on ERA. Reading a bit more, may not be true. But having been in development several years (since 2015 I believe) I would bet is probably over 200M in dev cost alone, not counting marketing and other cost.

https://sea.ign.com/halo-infinite/1...finite-costs-more-than-500-million-to-develop

 

[Johnny Awesome]

I doubt these rumors. 200M I believe though.

 

[Deleted member 11852]

I doubt these rumors. 200M I believe though.

If we're playing by Price is Right rules, 190!

 

[mrcorbo]

Question for those that know more, when there are attach rate figures given for a console, is that for the lifetime of the console or is that per year?

Also, what are the attach rates for Xbox One console generations?

Lifetime. When we were getting reliable hardware and software sales numbers out of the US (during the 360/PS3/Wii gen), I had compiled some spreadsheets to calculate an average time of ownership for each console population and then combined that with the revealed attach rates we would get here and there to derive a per year purchase rate. I found this to be a much more useful metric. Once NPD decided (were forced) to kill the data stream, it became impossible for a non-industry person to obtain this information.

I think subscription services kill this as a useful metric anyway, though.

 

[BRiT]

Okay, so if we compare yearly subscription of Game Pass to Attach Rates over the entire lifetime then Microsoft Game Pass is a win for the business from the following quick takes.

Not everyone buys Microsoft first party titles so they can't count on a full $60 sale to people who own the console. They usually need to rely on third party games to sell to take their cut. The typical attach rate on consoles is rather low.

Givens:
MS's cut on console games sold: 30%
MS's cut on PC games on Steam/Origin/Epic/GOG: 0%
MS's cut on PC games via Win10: 30%
Typical game price: $60
Game Pass Console: $120
Game Pass PC: $120 (out of beta)
Game Pass Ultimate: $180

Thus:
A yearly subscription of Game Pass Console is the same as 6.67 console game sales.
A yearly subscription of Game Pass Ultimate is the same as 10 console game sales.
Two years subscription of Game Pass Console is the same as 13.3 console game sales.
Two years subscription of Game Pass Ultimate is same as 20 console game sales.
Three years subscription of Game Pass Console is the same as 20 console game sales.
Three years subscription of Game Pass Ultimate is same as 30 console game sales.

A yearly subscription of Game Pass PC is the same as an infinite number of PC game sales...
Two years subscription of Game Pass PC is the same as two infinite number of PC game sales...
Three years subscription of Game Pass PC is the same as three infinite number of PC game sales...