Cloud Gaming: A North Star for Game Subscriptions
Gaming is one of the last forms of entertainment to not fully transition into a subscription-based model. From a consumer perspective, subscription models have become a preferred form of monetization as it puts libraries of content at the tips of their fingers. Whether it’s movies, TV, or music, users now expect to have whatever content they want, when they want. The experience is frictionless.
Microsoft Earnings Reports Missed Growth Projections: When Microsoft presents their gaming revenues, the spotlight is always on Game Pass subscriptions as investors love recurring revenue streams. Game Pass has done well when it comes to earnings, it regularly exceeds expectations. The last time specific numbers were released in January 2021, Microsoft had 18 million subscribers paying $10/mo for their “Netflix of Games.” That was up from 15 million in September 2020.
During their most recent earnings period, Microsoft had projected 12 month growth to be at 48%. However, according to its most recent filing (SEC) it only reached a 37% growth rate, which concerned investors that consumers might not be as excited about the service as previously expected. Microsoft boasts around 100m MAUs for Xbox Live (another game subscription that provides users access to multiplayer gameplay) so being able to layer the Game Pass subscription to content would be attractive to investors. The combination of these two subscriptions is what makes this an area of focus for earnings.
The Reason - Missing Blockbuster Titles?: A lot of the concerns focus on a lack of blockbuster titles. The service is not lacking in content volume, there are currently over 300 games available on Game Pass. Rather, this is an issue of quality. Microsoft has great games, but many of the top games that were promoted with the launch of the Xbox Series S|X have been delayed.
Games like Halo: Infinite and Starfield are some of the most highly anticipated games across the entire gaming ecosystem and both are suffering delays. Both titles are expected to be released to Game Pass Subscribers which would increase the value of the service considerably (on their own these games will sell for $60+ at launch). Microsoft has tried to cover the blow by announcing that 11 additional popular titles will be coming to Game Pass by the end of 2021. This will help, but we think there are other areas beyond content that Microsoft should focus on to reduce friction and make their existing content more valuable.
Consumer Expectations and Instant Indulgence: If there is one thing that all content subscription services have in common it is the work they have put into enabling their subscribers to consume content at a moment's notice. Netflix, for example, has invested billions of dollars building out its own content delivery network, Netflix Open Connect, to make sure that its users have the best experience. Spotify streams all music to its users without having to worry about any local downloads (as long as you have an internet connection). Due to the heavy load of 3D game rendering, multiplayer functionality, and low latency needed from games this is not the case for Game Pass. Other media subscriptions are one-way interactions where user inputs are not required - you consume the content as it is. With games, every experience is unique because the end user directly influences the content; this is what makes the gaming industry so much more engaging and valuable compared to music, TV, and movies combined.
When players use Game Pass, the most noticeable issue is that while all of these games are available, the games are not instantly playable. Since game files can be as large as 100GB, users find themselves staring at a download bar for hours at a time before they can actually play anything. The games industry has had a much harder time moving to subscription models due to their inability to offer a seamless experience between content.
Cloud Gaming: Cloud gaming has the potential to be the catalyst of exponential growth in game subscriptions. The promise of cloud gaming has been around for a while now, and while there are some criticisms, the potential benefits are monumental. With services like Google Stadia, users can play any game in their library instantly as long as they have a good enough internet connection, typically recommended to be above 35 Mbps (Polygon). Cloud gaming is such an important innovation from a distribution, access, and friction perspective that we think consoles could be on their way out as quality internet becomes more accessible.
In our opinion, this is where much of the slowed consumer adoption lies. Consumers do not want to pay a subscription for a product that requires them to wait for downloads and continually need to free up space on their devices. More people will try new games if you reduce the cost (time in this case) of entry; as people try more games and find ones they like, the existing library of content becomes more valuable. Time is friction, and when you already have great content friction is the key to unlocking value for users. Cloud gaming, and in Microsoft's case, xCloud, has the potential to make game subscriptions a multi-billion dollar opportunity in the gaming industry. Microsoft has already rolled out xCloud services to PC, but Microsoft at this point finds the vast majority of their users on Console which does not yet have xCloud (though they should by EoY).
2022 could be a great year for Game Pass adoption. In September, Microsoft announced that they had started testing xCloud integrations on Xbox One Consoles (The Verge). Microsoft will support 1080p 60fps streams of more than 100 Xbox Game Pass titles. Xbox users will be able to jump into multiplayer games as soon as friends send an invite.
Takeaway: While blockbuster titles are very important to game subscriptions, the friction (or lack thereof) to access that content is equally important. As more tech companies build out the infrastructure to support a viable cloud gaming experience we expect to see game subscriptions hit an inflection point of adoption.
