Following Microsoft’s mass layoffs, Xbox Game Pass’ business viability is again being questioned — is Xbox’s biggest differentiator an albatross?

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Xbox Game Pass offers an exceptional value within the realm of gaming, a sentiment often expressed. Yet, there’s a growing curiosity among users whether this seemingly ideal offer might be more than what appears on the surface.

Over the last seven days, it’s been reported that Microsoft let go approximately 9,000 staff members spread across their various departments, with a significant number (though exact figures remain unknown) coming from the Xbox division.

Without prior notice, a number of seasoned professionals in roles such as production, management, marketing, development, artistry, and more were let go – many who had just received commendable performance evaluations not long ago. Projects that Microsoft had publicly expressed optimism towards were terminated, and under unique circumstances, The Initiative studio was completely shut down.

Following one of Microsoft’s most significant and self-critical actions in recent times, there’s a growing curiosity among people about whether the Xbox division might be struggling, with a keen interest in the Xbox Game Pass service in particular.

Is Xbox Game Pass an exceptionally beneficial service for gamers, or is there a catch? Does it generate profit for Microsoft, and could it potentially become a burden in their gaming division? Let’s delve into the details.

Is Xbox Game Pass profitable?

On several social media outlets, there has been debate about whether Xbox Game Pass can truly succeed in the gaming industry. Raphael Colantonio, creator of Prey and Dishonored, expressed concern that the service is unsustainable and could harm the industry for a decade. He suggests that the only reason it appears to be working is because Microsoft has an unlimited budget. (By the way, you might want to check out Prey and Weird West.)

Xbox Game Pass, led by Phil Spencer, has consistently been reported as profitable. Given Microsoft’s extensive financial expertise, it seems reasonable to trust their assessment. Misrepresenting business profitability could lead to complications with the SEC and shareholders, so Microsoft likely has a solid understanding of its financial situation. However, there are multiple ways to define “profitability” in accounting.

Sure thing! Microsoft has access to data on the monthly revenue generated by Xbox Game Pass through subscriptions and the rate at which users cancel their subscriptions, known as the churn rate. It seems reasonable to expect that they would take these factors into account when justifying Game Pass as a sustainable business model, wouldn’t you agree?

However, perhaps there’s more to this “profitability” factor than meets the eye.

The Game Pass business generates profit by paying fees to third parties, advertising, and covering other costs. However, it does not take into account the potential loss in revenue for Xbox’s internal game studios due to this service. I can only speculate about what might happen if…July 6, 2025.

In my query about whether Game Pass generates a profit, I was informed that no expenses related to first-party titles are factored into that determination. (Date: July 6, 2025)

According to Chris Dring, who serves as the Editor-in-Chief at TheGameBusiness and is a seasoned journalist, he pointed out on X that Microsoft explicitly stated that they do not include the cost of first-party games in their Xbox Game Pass subscription.

Initially, Microsoft suggested that Xbox Game Pass could boost sales by creating a buzz through word of mouth, making games on the service resemble free-to-play games in terms of virality. However, in more recent times, Microsoft has ceased to make this claim. As the usage and understanding of Xbox Game Pass have evolved, Microsoft admitted in court that the service negatively impacts retail game sales.

It seems reasonable to assume that Microsoft takes into account potential revenue losses from the sale of individual games due to the popularity of Xbox Game Pass when they calculate its overall profits and losses.

According to Dring, Microsoft acknowledged to him that the profitability claims for Xbox Game Pass don’t consider the revenue lost from first-party game sales at retail stores, which means they haven’t accounted for how much one game might be eating into the sales of another. A few months back, there was talk about DOOM: The Dark Ages, a game that didn’t sell particularly well on Steam. Interestingly, Microsoft claimed it had 3 million players in just seven times compared to DOOM Eternal, which could imply that Game Pass might have affected the sales of this particular game.

It appears that Microsoft does consider cannibalization when evaluating the performance of its internal studios, contrary to the initial statement.

Microsoft calculates revenue projections, considering factors like Xbox, PC, and now PlayStation game sales, along with other elements. This data is then merged with Xbox Game Pass user engagement. The resulting figure is added to the profit and loss (P&L) statements for that specific title, effectively charging Game Pass for projected “lost sales” on Game Pass platforms. Additionally, factors like increased engagement and reduced churn are taken as signs of success. Furthermore, costs related to content acquisition and marketing Game Pass are incorporated into its P&Ls.

Microsoft chooses not to consider potential cannibalization of Game Pass when funding a game upfront, considering that games are developed for multiple endpoints and business models. Experts contend it’s illogical to shoulder the entire development cost of games like Call of Duty or DOOM: The Dark Ages on top of Game Pass, unless the game would be exclusively sold and accessible through Xbox Game Pass as its sole distribution method.

Essentially, according to Microsoft’s reports, they do bill and record the impact of first-party games on Game Pass as a form of competition. However, it might be beneficial to consider other broader factors that could also require attention.

The debate around Xbox Game Pass will continue, of course

It seems unlikely for Microsoft to persist in promoting Game Pass if it consistently underperformed. This is because Microsoft CEO Satya Nadella has demonstrated a tendency that suggests he’s not inclined to be patient or subsidize projects indefinitely. The history of Microsoft products that have met their end serves as evidence, and Nadella’s missteps in understanding consumer behavior have been evident, particularly with incidents like the Windows Recall controversy and the flop of Microsoft Copilot+ PCs.

One area where Microsoft seems to have a firm understanding is the quarterly use of Excel spreadsheets, and it would be reasonable to assume that they also possess a solid comprehension of whether or not Game Pass functions effectively as a supplementary offering within their Xbox business.

However, it’s possible that Xbox Game Pass may have unintended effects in the broader context. For instance, while several developers such as Sandfall Interactive (Expedition 33) have voiced support for Xbox Game Pass, others like Alex Hutchinson from Revenge of the Savage Planet have criticized it and even advised against launching there. Multiple studios continue to release games on this platform with subsequent projects, and even large publishers such as Capcom utilize Game Pass to mitigate risk associated with some of their experimental titles, like Exoprimal and Kunitsu-Gami.

There are some conflicting aspects to Xbox Game Pass that deserve discussion. If Game Pass expands so much that it starts eating into all retail sales, we might find ourselves in a situation similar to Spotify, where people view games more as a passive experience rather than something they’re passionate about. On the other hand, if Game Pass doesn’t grow, Microsoft may need to continually increase its subscription price (in line with inflation) to maintain profitability. This could eventually make it seem like poor value for customers, potentially leading to a decline in subscribers. To address this issue, Microsoft has already removed some day one games from certain service tiers and is planning to raise the prices of its AAA retail games to around $80 later this year, starting with The Outer Worlds 2 and likely including Call of Duty: Black Ops 7.

It’s challenging to quantify the impact of human behavior, especially when considering services like Game Pass and their counterparts. Mightn’t these services eventually condition users to forgo game purchases altogether, regardless of platform? Wouldn’t it then be more feasible for Microsoft to diminish the market share of “owned” Xbox games in theory, making it simpler for customers to abandon Xbox and opt for other platforms instead? Over time, they could find themselves trapped when purchasing digital games directly, as these often cannot be resold.

As a gaming enthusiast hailing from one of England’s economically disadvantaged regions, I can attest to the joy that Xbox Game Pass brings. Growing up, my family often found it hard to stretch our budgets far enough for games. Many of you reading this likely share similar experiences. The savings offered by Game Pass can make a significant difference, especially in today’s world where free titles like Roblox and Fortnite are shaping young gamers’ expectations. I still remember the puzzled look on my younger relative’s face when I told them Minecraft wasn’t free.

However, it’s not desirable for me to inhabit a universe where Game Pass is the sole choice. As Microsoft strives to make Xbox more open like a PC, finding the right mix between Xbox and PC Game Pass, subscription and traditional sales models, won’t be straightforward. Frankly, I feel the Xbox PC app could do more to highlight games available as retail options in the store.

Xbox CEO Phil Spencer expressed that the Game Pass service may not appeal to everyone, and ideally, it would never have to cater to all.

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2025-07-08 04:40