Plotting the Rise of Xbox Game Pass (Premium)

This week, Microsoft released their latest earnings report which highlighted the fact that the company is extremely profitable, growing, and shows no signs of slowing down even during a pandemic. One item of interest that is still in its infancy is Microsoft’s Game Pass subscription service.

While it is technically not a ‘new’ SKU, I think it can be argued that this is still a new offering from the company and we are in the early days of its growth. And because I find this information interesting, I plotted down some of the known data points to dig into the rate at which the service is growing.

First the data, I am starting with the 0 day at 10 million. I know this seems absurd but Game Pass didn’t really take off until Microsoft pushed all its games to the service on day one, let people roll over their Xbox Live Gold into Game Pass at an equal transaction rate, and the lockdown starting across the globe.

The first significant data point we have is Microsoft announcing 10 million Game Pass subscribers on April 29^th (using May 1^st for round numbers) with 90 million Xbox Live monthly active users (MAUs), September 2020 announcing 15 million Game Pass subscribers with an estimated 95 million MAUs of Xbox Live and the final number of 18 million Game Pass subscribes with 100 million (actual) Xbox Live MAUs based on the recent earnings report.

Also note that Xbox Live MAUs do experience seasonality, meaning the number of gamers using the service typically increases in the winter and decreases during the warmer months.

With these numbers plotted, we can infer some interesting statistics. For example, Game Pass, as a percentage of all Xbox Live MAUs is growing, from 11% in May, to 18% in January of 2021. This means that Microsoft is having success in converting Xbox Live customers to Game Pass users. This also means that Microsoft has been adding about 1 million Game Pass subscribers per month since May and added 1.25 million Xbox Live MAUs during the same period – that is substantial growth.

Keep in mind that not all Xbox Live MAUs are paying customers but everyone in the Game Pass bucket has paid for, at minimum, Xbox Live Gold. Meaning, Game Pass customers are tied directly to revenue whereas Xbox Live MAUs are not always tied to revenue – this likely helps explain Microsoft’s recent aggressive push last week to move more people from Xbox Live to Game Pass

What this data also shows, and coupled with Microsoft earning nearly a billion dollars last quarter for Xbox content and services, is that there is still significant potential upside for the brand in the gaming segment. And this is why we see Microsoft investing heavily into the subscription service. Even if they never added another person to Xbox Live, they would still have the potential to try and convert ~80 million more customers to Game Pass.

If you look at their latest earnings report, the company netted over 15 billion dollars – in one quarter they covered their Bethesda acquisition costs. The analogy is tired but Microsoft wants Game Pass to be like Netflix, which recently surpassed 200 million customers – Game Pass should be able to top that, eventually.

But the real growth may not come from the traditional console users, Microsoft has its eyes set on PC users and mobile customers as well with Cloud Streaming. Game Pass will only work with a constant flow of high-quality titles entering the service, either through acquisition or deals like the one made with EA. Microsoft knows this and I fully expect them to continue to make significant investments into the service as it has one of the highest deltas for margin in the Xbox business – easily eclipsing game sales and hardware sales.

Going forward, I plan to plot the delta between the Xbox Live users and the Game Pass subscribers – this should help us better understand if the subscription service is sticking with customers or if this is only a success because of the pandemic.