Microsoft CEO of Gaming Hints Closing Game Pass if Subscriber Numbers Don’t Meet Expectations by 2027

By Todd Russell Sep23,2023

Is Microsoft’s Game Pass in some kind of financial trouble? Is Game Pass unprofitable with the number of paying subscribers? Would not have thought that to be the case, but this MSN article (ironic!) somewhat suggests otherwise: Microsoft may “exit” gaming if Game Pass fails to meet expectations by 2027

In recent developments regarding the ongoing Federal Trade Commission case against Microsoft, Phil Spencer, the head of Xbox, made a startling statement.

According to Spencer, Xbox might exit the gaming industry if there’s no significant increase in the Game Pass’ number of users on PC and cloud platforms by 2027.

Referring to a presented projection showing the estimated growth of Game Pass on different platforms, Spencer said, “I can safely say that if we do not make more progress than this off console, we would exit the gaming business.”

In some ways, this might suggest more comped and discounted Game Pass subscribers exist. It’s one thing to have multiple millions of subscribers, but if too many of these are subscribers not paying any real $$, perhaps “free” via redemption from the Microsoft Rewards program and/or other programs, that could substantially alter the income to the program.

Let’s be clear about Microsoft, the company, finances. They are far and away not in any sort of financial trouble. How wealthy is the company? In October 2021, during the pandemic, Forbes reported Microsoft Is Now The World’s Most Valuable Company After Apple Falls On Earnings:

Shares of Apple fell nearly 4% Friday morning to $147.10 per share, lowering the company’s market capitalization to $2.43 trillion. Shares of Microsoft, meanwhile, rose 0.9% to $327.30 per share, giving it a market capitalization of $2.45 trillion.

In the image to the right, as of September 2023, two years later, Microsoft has continued to gain value. Sure, stock prices flucuate based on investor activity, but people don’t continue to invest in a company by and large that haven’t proven to make money over time. Microsoft makes money for investors because they make good financial decisions.

It’s no secret that the Xbox console itself has always been a loss leader for Microsoft. They lose money on the sale of every Xbox Series X console sold, per Phil Spencer via Microsoft Loses Up to $200 on Every Xbox Console Sold :

New consoles, with the exception of some Nintendo hardware, are typically sold at a loss and the money made back through games and accessories purchases. Microsoft hopes to do the same with Xbox during this generation, but you can argue that’s a harder task because rather than purchasing multiple games at full price, Xbox owners are encouraged to subscribe to Game Pass instead.

Game Pass, itself, is currently profitable, via Microsoft says Xbox Game Pass is profitable as it sees subscription growth slow and another quote from Phil Spencer in October 2022:

“Game Pass as an overall part of our content and services revenue is probably 15 percent,” says Spencer. “I don’t think it gets bigger than that. I think the overall revenue grows so 15 percent of a bigger number, but we don’t have this future where I think 50–70 percent of our revenue comes from subscriptions.”

So, what can we draw from all this information? Microsoft is giving all of this another few years. It’s only 2023. In four years a lot can happen. They seem to be hoping this Activision acquisition will lead to further Game Pass subscribers along with more focus on mobile and PC owners, since they don’t seem to think they’ll sell a bunch more consoles. They don’t want to be limited to Game Pass subscribers mainly from the consoles, because there is a ceiling to revenue there.

Also, and to this author anyway very significant, there is the cost of making another Xbox, the R&D, which we have to think something else is under development in the pipeline. They could always kill this off, but if they do release a successor to the Xbox Series S/X, there’s no way they shut down Game Pass in/around 2027. They simply have too much invested in delivering games through a subscription model to backtrack to physical media. Physical media in the games industry, is not as prominent as digital downloads and cloud streaming. This is what and where to watch signaling the true future of Game Pass: an announcement from Microsoft about a new Xbox. If there is no new Xbox then the future of Game Pass is definitely in trouble. In the meantime, it’s all just smoke, mirrors and crosstalk to telegraph investors that Microsoft, don’t worry, remains committed to the bottom line.

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