Microsoft Spent $80 Billion On Its Bet For Xbox Game Pass. It Did Not Work.

So what happened with Game Pass? One theory is that the Netflix model of paying one price to access a huge library of content didn’t work in the context of gaming due to documented player behavior. Data from Circana shows that the majority of US gamers buy a maximum of two games per year. The suggestion here is that consumption patterns are very different between Netflix and Game Pass. To be sure, Microsoft never billed Game Pass as the “Netflix of games.” Strauss Zelnick, the head of Take-Two, pointed out the difference between linear and interactive consumption in comments he made in 2021.

“Consumers who are involved with interactive entertainment have different consumption patterns than those involved with linear entertainment. Linear entertainment consumers consume something like 150 hours of programming a month. That’s probably well over 100 different titles. In the case of interactive entertainment, consumers are consuming something like 45 hours a month, and that may be one, two, three, four titles. But it’s certainly not 100 titles. So from a consumer point of view, it’s not clear that a subscription model really makes sense, for the bulk of consumers,” he said.

Zelnick said it makes no sense to release new games directly into a subscription service like Game Pass.

“Outside of the enthusiast core, few cared”

Circana analyst Mat Piscatella weighed in on the Game Pass situation, writing that Game Pass “failed” because Fortnite and other so-called “black hole games” taking up so much time, money, and attention. Beyond that, Piscatella observed that Game Pass was not appealing enough to the mass market audience.

“The problem with Game Pass wasn’t the service itself but rather the goal of selling subs and services, as Microsoft was aiming for across its business at the time,” he said. Call of Duty launched on Game Pass and did not significantly boost subs, and had little impact on hardware. And that was that.”

$1 billion annually on third-party game deals

Also in the Bloomberg piece, it was reported that former Xbox president Sarah Bond was the leader of Xbox’s Game Pass strategy. The report said Microsoft was spending $1 billion annually for third-party game deals to help convince people to sign up for Game Pass. Other efforts to expand Game Pass, like offering it to the massive PC player userbase and streaming markets, failed to catch on as well.

Regarding the $80 billion in spending in the past decade, this came from Microsoft’s blockbuster acquisitions of Activision Blizzard ($75.4 billion) and ZeniMax ($7.5 billion), as well as the purchases of developers like Ninja Theory, Obsidian, and Double Fine. The idea, spearheaded by former Xbox executive Phil Spencer, was to ramp up the studio base to create more games that Game Pass members could play as part of their membership fee.

But people inside and outside of Xbox questioned the economic realities of this approach. Sources speaking to Bloomberg said some Xbox staffers feared that putting popular, expensive-to-make games into Game Pass at launch “could devalue them and cannibalize individual, higher-priced copies.”

While there were some success stories of developers seeing a lift in full-game sales after coming to Game Pass, that wasn’t always true. Black Ops 6, the first new Call of Duty game to launch into Game Pass, reportedly missed out on $300 million in sales due to its inclusion on Game Pass. Piscatella pushed back against this number, saying it is “piracy math.”

“That anyone that played via Game Pass was a lost sale–which isn’t true–just as every pirated copy is not a lost sale and does not take into account sub revs. But whatever, minor quibble,” he said.

Black Ops 7 launched into Game Pass in 2025, but this year’s game, Modern Warfare 4, will be “windowed” for about a year. If people want to play it at launch, they have to buy it outright before it comes to Game Pass during the next holiday season.

Divesting studios

In terms of Microsoft saying goodbye to five development studios, Sharma said it is “neither possible nor desirable to own every great independent studio.” She added that Microsoft has come to realize that, “We are not the best home for every type of studio.” To make her point, she said that in a typical year, Microsoft lost 64 cents for every dollar it invested. Going forward, Microsoft has pledged that its spending on games will not decrease, but the company will instead re-focus and shift its spending to higher-priority areas with the highest likelihood of capturing a positive return on investment.

Double Fine and Compulsion Games are regaining their independence, while Ninja Theory and Undead Labs have been sold to unnamed buyers. Arkane Lyon, meanwhile, has entered into “consultation,” pursuant to local labor laws in France, and this process will decide the fate of the studio and its new game, Marvel’s Blade.

Microsoft laid off 1,600 Xbox employees this week, with another 1,600 people set to lose their jobs in the next year. The cuts were part of a wider pullback at Microsoft, which includes 4,800 total layoffs, amounting to about 2.1% of Microsoft’s total global workforce.