Microsoft misses Xbox Game Pass subscriber growth target again

Microsoft misses Xbox Game Pass subscriber growth target again

Screenshot from a video game showing people in armor during a laser shootout

Infinite Halo. Screenshot: Xbox/343 Industries

Subscriber growth for Microsoft’s all-you-can-eat Game Pass subscription service fell far short of the company’s annual goal tied to CEO Satya Nadella’s salary, according to a new financial filing.

Why is this important: The strength of Game Pass has long been used to measure Microsoft’s success in disrupting the gaming industry.

  • It has also become pivotal in discussions over whether regulators should approve the company’s $69 billion bid for Call of Duty maker Activision Blizzard.

Details: Microsoft has targeted a 73% growth rate for Game Pass for its fiscal year ending June 30, 2022, as part of performance incentives for Nadella and other senior executives. But the service only achieved 28% growth.

  • It’s two failures in a row. The company also fell short of the Game Pass executive compensation target last year, after surpassing it in 2020.
  • Microsoft doesn’t release the actual number of Game Pass subscribers, but it said in the filing that its Xbox division provided “more than 25 million Game Pass subscriptions.”

Catch up fast: For a monthly fee, Game Pass gives Xbox console and PC subscribers access to hundreds of games, including new releases from Microsoft.

  • It’s an alternative to the historical model of players paying in full for every new game they want.

Between the lines: In an interview yesterday at a Wall Street Journal tech conference, Microsoft head of games Phil Spencer called Game Pass profitable but limited.

  • It represents 10% to 15% of the company’s content and services revenue (which includes games) and is “profitable for us”, he said.
  • In remarks transcribed by The Verge, Spencer said Game Pass’s growth has been “incredible” on PC but has slowed on console, “mostly because at some point you’ve reached everyone on console who wants to s ‘subscribe’.
  • Game Pass’s growth could also be stalled due to a lack of major releases available. Microsoft has released few major exclusive games over the past two years, especially compared to rivals Sony and Nintendo – neither of which bundle new releases into their subscription offerings.

The plot: The UK Competition and Markets Authority has cited Game Pass as a concern over the approval of Microsoft’s Activision deal.

  • In a 76-page initial report, it said the deal gave rise to “a realistic prospect of a substantial lessening of competition” in “multi-game subscription services” if Microsoft put Call of Duty on Gamepass.

  • The idea is that offering the popular series – which often represents the best or second best-selling game of a given year – could make Game Pass irresistible and Microsoft problematically unstoppable.

The other side: Microsoft denied that such a move would reach an anti-competitive threshold requiring the deal to be blocked, saying PlayStation could always counter by putting better exclusives on its service – or even offering Game Pass on PlayStation.

  • The CMA’s rejection could kill the offer, although its final decision is not expected until next year.

A key metric for Microsoft: Game Pass growth is the only game-related performance target in the executive compensation package.

  • Other goals relate to Microsoft Cloud revenue, Teams usage, and LinkedIn sessions.
  • The Game Pass metric was more heavily weighted this year than in previous years and was tied to a potential payout to Nadella of over $37 million in stock.
  • The miss on that stat probably wasn’t too painful. For the 12 months ending June 30, 2022, Nadella received $55 million in cash and stock.

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