Previous Game Pass Strategy Sent Xbox Into ‘Freefall’

It’s no secret that Xbox has had a rough time in 2026. With nearly 2,000 staff cut as part of sweeping layoffs and studio closures, Microsoft’s gaming business is in the middle of one of the most significant restructures in video game history. But what led Xbox to this point? According to CEO Asha Sharma, Game Pass played a key role.

Today, in an internal memo obtained by Windows Central, Sharma reiterated that Microsoft’s Game Pass strategy sent Xbox’s balance sheet into “freefall.” Jez Corden, who initially reported on this memo, suggested that this was because of “the damage at both ends to Call of Duty and Xbox Game Pass.”

It’s easy to see why that may be the case. After Xbox bought Activision Blizzard for an eye-watering $69 billion and added Call of Duty to Game Pass, subscription costs skyrocketed, which likely scared away a lot of existing subscribers, and at the same time cut Call of Duty’s sales. After all, why spend $70 on the new Call of Duty when you can just buy a month’s subscription?

Every Video Game Franchise Xbox Owns After Acquiring Activision Blizzard

But for all the doom and gloom of Game Pass’s consequences, Sharma suggested that Xbox is on the way up. In the memo, Sharma said: “We’re making the right decisions to reinvest in the business, after an all time low, we’ve started to return to growth, more than 2 to 3 times what we were, and we expect that to continue.”

In the past Sharma has made statements suggesting that Xbox needs to reach more than 1 billion people each day. And while Xbox probably isn’t hitting those numbers any time soon, the reported return to growth shows the company is, financially at least, heading in the right direction. It probably doesn’t hurt that Blizzard’s World of Warcraft: Forever looks like a hit.

It seems like Xbox is going to work to make Game Pass more accessible in the future too, though with a few catches. Last month, there were rumors that Microsoft would be introducing new tiers of Game Pass without the day one launches, both with and without ads. Around the same time, Microsoft also filed a patent that would suspend your game in order to show you an ad for additional game time.

If Microsoft was able to introduce these changes at a low enough price point, it could expand Game Pass by simply being a more affordable way to play games. Those rumors last month suggested the ad-supported tier would be $12.99, which seems high for such a subscription, especially when the base price is $9.99 right now. But if Microsoft was able to lower its asking price, a more limited ad-supported Game Pass could absolutely bring in new players, which does seem to be Sharma’s goal.

When Sharma announced the Xbox layoffs in the summer, she admitted that Game Pass had failed to grow as Microsoft had expected.

“Our business today is not healthy,” Sharma said at the time. “We are operating at margins that are 3-10x lower than comparable platform and publishing businesses. We entered Gen 9 with a smaller install base and a higher cost structure. To grow, we bet on Game Pass, multi-platform, and a broader portfolio of content. While those businesses have created meaningful value, they did not grow at the pace we expected. As that happened, our core business weakened, and we added more teams, more investment, and more time, hoping for a better outcome. And now the industry is facing the most severe hardware crisis in its history. We must reset Xbox.”

The Wall Street Journal said that Microsoft had expected Game Pass subscriptions to hit around 77 million this year, but it currently has only about 30 million. As revealed during the FTC vs Microsoft trial of 2023, Microsoft had hoped for 100 million subscribers by 2030, which seems very unlikely at this stage.

One of the first decisions Sharma made after replacing former Xbox boss Phil Spencer was to cut the price of Game Pass and pull Call of Duty out as a day one title. Sharma recently told Bloomberg that Xbox had “been able to reset Game Pass after an eight-month decline.” “It’s now returned to growth and expanding retention,” she added, “and most importantly, we’re starting to get back to being closer to our players and our community.”

Still, the future of Game Pass is unclear. Will Microsoft eventually pull all its games out of the subscription as day one launches? Will Bethesda’s The Elder Scrolls 6 launch day one on Game Pass? Will the next mainline Halo game? Could we see Game Pass become more like Sony’s PlayStation Plus, which does not launch first-party games day one?

Jackie Thomas is the Senior Tech Editor at IGN and the PC components queen. She’s been covering gaming hardware for more than a decade for IGN, TechRadar, Gizmodo, PC Gamer and more. You can follow her @Jackiecobra