Does Xbox Gamepass Actually make a profit?
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Xbox repeats history again
As Microsoft have now officially come clean on what I had been discussing for years, their Multi-Platform publishing aims. Following the latest Xbox Developer direct they closed the final gap in that plan, console exclusivity. We learnt the brand new Fable title from Playground games will be day and date on PS5 alongside PC and Xbox Series consoles. Xbox have followed in SEGA’s path ever since they entered the console arena shortly after SEGA’s exit. And now, again, they have followed them into the mutli-platform software publisher. Following on from my Gaming bubble burst video 2 years ago now, I wanted to cover some real numbers on why this slow death of Xbox, as we knew them, happened and what I, and many others warned.
Is this... https://t.co/riye1mI5WU pic.twitter.com/5Og6Ku0jRa
— Michael T (@N_X_G) February 12, 2024
It's all part of the plan... https://t.co/mM2icWDUnU pic.twitter.com/1sfWyv7T96
— Michael T (@N_X_G) July 10, 2024
They made no money on Gamepass(GP), undoubtly the biggest shadow across the industry over the past 5 years. The ongoing battle of is GP profitable or not, seems to flip flop on both sides of the fence. The haters hate and know (without doubt in their hearts) it makes no money, and those that still hope for an Xbox days of yonder, “Know” it does as is say’s so in the tea leaves. As I often say, there are lies, damn lies and statistics (well Tom Sawyer said it first) but I often extend with accountants. Within my own industry role I call them the 100% club, Them being sales and finance. They always manage to turn a negative into a positive and with MS qtr earnings, like MANY public companies’ mind, they often change metrics to suit, change measurements or stop reporting entirely on things if they do not align to their aims or results any longer.
Take GAAP (General Accepted Accounting Practice) most companies that deal in international markets change certain reporting to reflect local and foreign currency changes. Which stop huge swings in market rates shifting qtr to qtr comparisons, these are normally reflected by reporting as is, but it is often done with a NON-GAAP measure which can be calculated many ways and these are ALWAYS done to present the best balance sheet. I.e. if last qtr the £ or $ dropped 15% against the euro or yen, then I may report a loss or gain from sales in each region in my overall rate. If that was a gain, I would likely report GAAP and look great (and actual) but if I decided my biggest external market was costing me 15% off the top of my earnings, I might wince at that on paper. So, I can take last qtr exchange rate, where is looks better, report that and add an * for those that care. OR I could average out the past year as whole if that works even better, and again NON GAAP * and I am good. Now this is minor and often done, but it presents a small sample of what Common accountancy practises are. With Gamepass, I have said before, it is a Profit centre or a cost centre, which ever best suits the accountant. And what this means is within Xbox and MS, they can split out the OPcost, from revenue, the cost of sale from the profit margin, marketing, service and infra (I do not know the specifics but they do this as they confirmed they DO not factor in 1st party games Loss of Sales OR Development into Gamepass figures. NOW HERE is where the ? from all online stems from, helped in no small part by Chris Ding being, inconsistent, at best, but muddled with what he has reported.
The reality is, an accountant will always report what looks best, will always use the tools within their vast arsenal to improve this, and where possible they will often massage all areas of a business finance to best balance revenue, cash flow, and profit. Why do you think so many companies support charities for example, or Green renewable plans, it is most often not for the good in their heart. Now the quarterly results tell us a great deal, like cash flow reducing, big losses on MS investment in OPENAI both in the 30billion sunk cost into it but also the share drop and the fact the bubble on AI may already but stretching close to bursting. Not just for MS but Google also and even Nvidia, fundamentally MS have gotten into BED with AI as the future and this is driving their core business, investment in infras from datacentres and such to expand into it, but they are chasing the market here by a field yard or more. The reason I say this, is because this is driving much of the cutbacks and layoffs from the gaming division as the billions in acquisitions can no longer be subsidised by other parts of MS, namely cloud SaaS, Azure etc. And Gamepass is part of that equation and as a 3rd party publisher, the single biggest now, the latest cuts appear as if Nadella is saying to Phil and co, you clean your own room from now on, IMHOP atleast.
So, using that little example, which we know is true, lets take a look at the books from MS themselves and see what we can work out as an example of what that impact may be. I stress I know accounting to a level within my job, mostly bids, BAFOs, ROMs, etc to full multi-year fixed price, T&M, Best Endeavours, SI, Sub-contract, services for support and other such commercial delivery mechanisms that cover a great deal of these areas. But I am NOT an accountant and do not profess to be, but I know enough to talk about it with some level of certainty. For this example, and based on what I think has happened within MS and Xbox, we will assume that EVERYTHING is funded by themselves from staff, marketing, development. The last Official figure from MS themselves on GP subs was from Sarah Bond back in 2024 with 34 mill (Clip) BUT, this was also when MS merged Xbox Live into Game Pass light, so we can surmise that at least 5-8 million (maybe more) of those came from Xbox Live becoming Game Pass core, so £6.99pm which DOES NOT include 1st party games or even the full catalogue, instead curated 25 games of High quality. Ditto standard DOES NOT include day1 games but at least the full catalogue of games can be played. Only the £14.99 ultimate covers day one 1st party and discounts. Now, this figure only rose in over 2 years by 9million, so the assumption is on my behalf that 8 of those were xbox live gold now core and 1 were new. But we can surmise a figure that breaks that down into:-
So, GP is bringing in £477m per month revenue for Xbox. Which equates to just under $5.8billion p/Year. Now this is estimate and it may swing up or down by a billion a year and likely does due to month-to-month changes of userbase, i.e. when a big new game lands, but enough for estimates.
But these users all need to connect and play from somewhere, and contrary to the marketing myth, the Cloud is not a place, it is a metaphor for DCs. As of the date of this video, July 25, MS has approx 400 DC across the globe in over 40 regions. Of which let’s assume a mixed total of 14 support Game pass and Xcloud ( a part of Gamepass Ultimate) and recall gamepass is only available in 27 countries, more countries cannot get the full cloud option than can. Infrastructure is the reason, and why from MS to Sony and even Amazon they stagger and roll-out in phases due to that cost. MS alone spent 20 billion this year on this which is needed for that Ai drive alone, but back to gaming. Being generous we will assume that Xbox only has to pay for 2 of these from scratch in past year, but assume at least that figure + 50% year on year if they plan to achieve the 110 million GP users by 2030, likely more. From my Experience in working with and on DC for years, 2 things are always true, Estimated costs are always wrong, about 50-85% higher than at start, Op costs are also always higher, and rarely go anyway but up.
That said, we need a number, so let’s use my figures based on recent projects I have delivered as a guide (stress not exact) and we will ignore land purchase, local planning, legal etc for this which is millions on its own. We are hovering well into estimates here and this would need to be factored up and down depending on region, but if we take these UK costs and convert to Dollars we are over $1.1 bill of that revenue gone just to keep the lights on in the DCs.
But this is nothing, lets again assume incorrectly, that all MS/XBOX current infra is factored within the entire Xbox Studios operating income from 1st party and 3rd party sales for support, websites, helpdesk, returns and R&D etc. But that does NOT and SHOULD not include the cost of 3rd party deals into Gamepass OR the lost revenue and at least a percentage of op and dev cost from any 1st party that is sold into game pass, no, that should all be funded by Gamepass.
Last year or so we have had a bumper 1st party year from Xbox, and in that time we have seen some big hitter’s land. Taking figures made public in Indy, Doom and Oblivion Remastered we know that Oblivion was the only one in the black from a dev to profit perspective and remasters are very, very cheap compared to new games. But this only takes into account the sales from NON Gamepass markets of which Xbox themselves are so small as to not be relevant, effectively if they were 1st party only on Xbox it is not sustainable due to the cannibalising it has on the market and the death of xbox brand, largely by xbox’s own hands via poor strategy and management.
Taking the latest mix of 1st party games, even with all external sales taken into account, estimates remember. Then they loose money on all games bar Oblivion, but if we took Xbox game pass on its sold, self supporting, origins to the market and stakeholders. It does not come close to washing its feet, let alone its face. This mix of 1st party then 3rd party game that did ok on gamepass but MUCH better on other platforms for both the publisher AND the platform holder, xbox are almost 400 million in the red, and this is just 6 games. Across an average of 4.5 year dev time. Now you see why they cut so many projects and teams, as the sunk cost was not worth chasing back, as most of them are loss leaders for Xbox Studios from the get go. Lets assume that they have 30 games in active development at any given year across all their studios and a further 10 big titles from 3rd party deals each year. We extrapolate these 6 games into 40 and average the dev and sales cost as a figure across 4 qtrs we hit 6billion on that cost alone, which does not cover the entire Dev cost of each studio, legal, location, equipment etc or even the vast cost of the every 3rd party game cost from the those same subs. But for now, close enough to give you a view, add in that Infra run rate for GP itself and that potential 4.2bill revenue stream being profitable is gone.
Now likelihood these are not the real figures, likelihood is they are better and worse for each, but the net result is likely the same. GP and Xbox as a platform losses money month on month, year on year and even with current sales factored in, that remains true.
