An Endless Stream of Games Is the Perfect Business Model for a Pandemic
(Bloomberg Businessweek) -- On Aug. 11, Microsoft Corp. posted an alert on the Twitter account of its Halo franchise: The game’s next installment wouldn’t be ready this fall as originally planned, with its release delayed until 2021. A few years ago, that would have been devastating news for the team that makes the company’s Xbox game console, which had been planning to roll out a new model in tandem with Halo Infinite. But the Xbox will arrive as scheduled in November, and Microsoft is bullish about its prospects—even though Sony Corp.’s rival PlayStation 5 will also make its debut in the coming months, with what many players say is a stronger slate of games. Central to Microsoft’s optimism is a service called Game Pass, which offers a vast selection of titles for a flat monthly fee. “We’re confident,” says Sarah Bond, the vice president who oversees relations with game creators. “We will launch with thousands of games.”
Game Pass and similar offerings from Apple, Google, Sony, and other software houses are changing the dynamics of the video game business. After spending hundreds of dollars on a game machine, users would typically have to lay out an additional $60 or so for any newly released A-list title they wanted to play. Now a subscription costing $5 to $15 per month will get them scores, or even hundreds, of games—including, in Microsoft’s case, hot titles on the day they’re released. Since Game Pass was introduced three years ago, Microsoft has signed up 10 million subscribers. Sony, which started its PlayStation Now service in 2014, has some 2.2 million customers, more than triple the number a year earlier after the price was cut in half, to $10 per month. “Subscriptions will play a big role in driving engagement,” says George Jijiashvili, an analyst at researcher Omdia.
Subscriptions can keep revenue flowing even when a company has no new console or blockbuster title. Game Pass is available in 41 countries, and Microsoft is adding the ability to stream games to Android devices. This fall it’s tripling the number of countries where it sells what it calls All Access, which gives customers a new console and a Game Pass subscription for a monthly fee that’s currently $20 to $25, similar to cellphone contracts that periodically give you a new handset. The company says deals with Walmart Inc. and Target Corp. will help boost sales of All Access.
Contrary to expectations, Bond says, monthly plans get customers to spend more. A Game Pass subscription leads to about 20% more playing time. Users sample a wider variety of genres, and they generate 20% more in sales, both on titles not included in the plan and on extras such as downloadable content. Game Pass helped increase revenue for Xbox content and services by 65% in the most recent quarter. “People make this assumption that if you have a subscription, you stop buying games,” Bond says, but the opposite is true.
The risk for subscription providers is that game fans may tire of paying multiple monthly fees, much as TV fans are starting to wonder whether they really need Netflix and Hulu and Disney+ and HBO Max. But industry watchers say there’s plenty of room for growth because the games business lags video and music in converting buyers to subscribers. While subscriptions make up almost 90% of premium video revenue, Omdia says, they account for less than a fifth of the $53 billion in annual sales of console and PC games.
Although Microsoft offers game makers an upfront payment and bonuses based on how well a title does, producers aren’t entirely enthusiastic. Many, particularly makers of smash-hit games, fret that subscription services will shake up the industry in the same way platforms such as Apple, Pandora, and Spotify changed music, taking the biggest slice of revenue. A survey by the Game Developers Conference found that almost three-fourths of developers fear subscriptions might hurt the value of individual games. Still, it’s a hit-driven business with myriad titles jockeying for attention, and even successful studios often worry about covering costs. For them, Game Pass can seem like a sure thing. “You get a good influx of cash as an advance,” says Dan Da Rocha, studio chief at Jaw Drop Games. “It’s a very good helping hand.”
Simon Byron, publishing director of Curve Digital, a software house in London, says Game Pass has helped win new fans for his puzzle games, which aren’t typical console fare. Microsoft says 60% of people who played Curve’s Human: Fall Flat on Game Pass had never done puzzles before, and two-fifths of those bought a similar title after playing. While individual sales of the $15 game are comparable on Xbox and PlayStation, five times more customers have tried it on Game Pass, according to Byron. “We were genuinely nervous, but so far we’ve been really pleased,” he says. “Selfishly, the service is becoming so popular with other publishers that it’s become harder to put our titles there, but that’s a sign they’re doing something right.”
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