Recently, a comment from famed Wedbush games analyst Michael Pachter has been making the rounds, in a wide-ranging interview on Microsoft's gaming business.
The interview focused on the Activision Blizzard acquisition, which is a megaton $68.7 billion deal that will see Microsoft vastly swell its monthly active user base, and muscle into the lucrative mobile gaming market owing to games like Candy Crush and Hearthstone. It will also grant Xbox full control over games like World of Warcraft, Call of Duty, and many others, which remain lucrative cornerstones of their respective genres. Pachter believes the deal will close, despite the share price trading below what Microsoft is expected to pay for it. He also believes that the deal will help swell Xbox Game Pass' subscriber base by a significant amount.
I thought we'd look at the commentary from Pachter and take a broader view at some of the other plays Microsoft has made more recently, and why 100 million could end up being a conservative estimate for Xbox Game Pass.
Could Xbox Game Pass hit 100 million subscribers?
Quite honestly, I think the answer to that is a firm "yes," and the reasons for that go far beyond what Mr. Pachter outlined in his interview with Yahoo. In response to a question about Microsoft's future strategy in a world where the Activision Blizzard deal goes through, Pachter offers a vision of Xbox Game Pass with an additional 75 million subscribers, leveraging Activision's properties to get there.
"Let's use the cloud, and let's deliver games to any screen that you have. And that potential market is 3 and 1/2 billion people. So I don't think they'll get that many subscribers, but will they go from 25 million to 100 million? Yes.
So much like Disney bought Fox to support Disney+, they didn't pull the Fox movies out of theaters. They're just putting the catalog eventually onto Disney+, instead of HBO. And that's a very, very smart strategy. So that's where this is headed, more free-to-play. Activision is great at free-to-play. More than half their revenues come from free-to-play. So it's a big, big opportunity for Microsoft to get good at it."
The potential contradiction here seems to be that Pachter is implying Activision's free-to-play games like Call of Duty: Warzone will help boost Xbox Game Pass subscriber numbers via mobile devices, but considering Microsoft is offering Fortnite without a subscription on Xbox Cloud Gaming right now, that seems to stand at odds with the idea of free-to-play games generating subscriptions. However, there's no reason to think Microsoft's strategy wouldn't evolve to on-ramp free players into the sub. Perhaps they could offer higher-quality streams to paying cloud subscribers or offer additional in-game loot or premium content for those who are subscribing, for example.
Either way, the point is that mobile gamers are the key to getting Xbox Game Pass to 100 million subscribers and beyond, but there are other factors coming into play as well.
An underrated angle for Xbox Game Pass is Microsoft's unprecedented deal with Tencent to get offer the entirety of Riot's in-game content unlocks for free as part of Xbox Game Pass. As of last year, Riot had 180 million monthly active users across its properties, which is double what Activision Blizzard has. Each and every one of those games is free to play on PC and mobile, skipping consoles entirely.
At the Xbox showcase at the start of the summer, Microsoft and Riot announced that Xbox Game Pass users will get access to all characters in every single one of their games, including on mobile devices. To buy all of those outright represents hundreds of dollars, making Xbox Game Pass an incredibly lucrative option for tens of millions of free-to-play players of these games. Even without onboarding Activision Blizzard's games via the cloud, this deal alone could be a huge deal for Xbox Game Pass, if Microsoft and Riot give it the visibility it needs to inform potential customers that it even exists. As of right now, the vast majority of Riot gamers likely don't know this is even on the way.
Presumably, once the Activision Blizzard deal closes, Microsoft will do similar deals for Xbox Game Pass with existing games in the ABK stable. Perhaps Candy Crush Saga players will get extra perks for subscribing. Maybe you'll get a free card pack per week in Hearthstone if you're a subscriber. Perhaps Xbox Game Pass Ultimate users will get premium battle pass tracks included, and so on. The sky really is the limit on how Microsoft can leverage these properties to on-ramp newcomers into Xbox Game Pass, and I honestly feel like Microsoft has only very barely scratched the surface when it comes to some of this stuff with its existing games.
Looking to Netflix
Netflix has been in financial news a fair bit recently since losing a massive chunk of its share value owing to its first dip in subscribers. It was probably inevitable as the global economy began shifting back into gear with offices and schools re-opening. If you're someone with a two-hour commute to and from work, that's an extra couple of hours per day you could be spending on Netflix (or indeed, Xbox Game Pass).
Above, we can see the company's quarterly growth trajectory. While we don't have the same kind of granular data for Xbox Game Pass, it at least gives us a frame of reference. Xbox Game Pass is sitting at around 25-30 million subscribers after 5 years in operation, and also competes in a very different landscape.
Indeed, Xbox Game Pass is a very different beast to Netflix, and difficult to compare in a lot of ways. Xbox Game Pass has a very tightly curated library that is designed to resist cannibalizing retail sales of other games, for example. Still, at a very surface level, their formula for exclusive content is tried-and-tested, and clearly something Microsoft is pursuing for its own entertainment subscription service.
Pachter mentioned in the interview that Microsoft went on a content buying spree, taking on studios like Obsidian, Bethesda, and Playground Games to ensure a steady stream of high-quality games. 2022 has been incredibly anemic on this front for sure, and if a service like Netflix with limited revenue streams had this kind of content drought, it would probably be extremely devastating for its business. Gaming is a little different, though, owing to the diversified paths to monetization. From accessories licensing, merchandising, in-game purchases, add-ons, battle passes, and so on. It's this kind of stuff that Netflix struggles with as a business, with recent reports noting that less than 1% of subscribers ever bothered to access the small library of Android games available as part of the sub.
Microsoft noted in its recent report to investors that some areas of its gaming business had shrunk, inferring blame on a decrease of in-app purchases in games like Fortnite and Call of Duty. However, Microsoft also mentioned that its subscriptions were growing, which is impressive given how few truly "must-have" experiences have been put into the service this year.
This, of course, is set to dramatically change in 2023 and beyond. The list of upcoming Xbox games is absolutely gargantuan when you take into account various leaks and announced games in tandem. Couple this with upcoming Activision Blizzard games like Diablo IV and the survival game IP (which we understand to be codenamed Odyssey), and you'll eventually be in a position where Xbox Game Pass has at least one major game launch per quarter, driving subscriptions in a similar fashion to Netflix' major exclusive shows. Netflix managed to beat investor expectations this quarter, thanks almost entirely to Stranger Things, Season 4, which was incredibly well received. I suspect we'll get similar reports of games like Starfield, Fable, The Elder Scrolls 6, and even future Call of Duty games also boosting Xbox Game Pass subscriptions in the same way.
There's another upcoming feature that will also boost Xbox Game Pass: the family plan. We exclusively revealed a few weeks ago that Microsoft was working to bring a family plan to Xbox Game Pass Ultimate, and it's now confirmed to be in testing in Ireland and Colombia, expected to cost around $25 for up to five accounts within the same country. That might seem exceedingly cheap, considering one account costs $15. But this is another Netflix-like play.
The firm was notoriously hands-off with password sharing up until this year, when it will actually begin charging users who share their subscriptions beyond their households. The reason they took so long to crack down on it was the virality password sharing brought to the service. If you share Netflix, you're essentially marketing the product for free, and getting more users used to the idea of simply having access to it. Microsoft's not going to allow users to share it for free, but at $25 for five users, they are essentially offering it at cost. This is all about improving access to the service I believe, where one paying user will essentially evangelize the product to four other users within their friend circle or family, and then beyond.
This could increase Xbox Game Pass' userbase by tens of millions by itself, even without taking into account the additional upcoming games, the Riot deal, access on mobile via the cloud, and whatever else Microsoft may or may not have up its sleeve.
Michael Pachter is right
Pachter's analysis focused on Activision-Blizzard's potential for Xbox Game Pass, but there are various other avenues to growth that could take the userbase even further beyond 100 million.
There are 3 billion gamers in the world right now, and while global infrastructure isn't quite good enough to reliably stream Halo Infinite multiplayer from the cloud for everyone, there are hundreds of games that play extremely well even on modest connections right now. Global internet speeds are constantly creeping up, with Microsoft and its massive Azure cloud well positioned to be at the fore of this brave new gaming world.
Pachter is 100% right about Xbox Game Pass hitting 100 million users in the future, though, considering it's already at around 25-30 million without some of the major pieces in play.
