- [Narrator] This is the Xbox Series X, Microsoft's most powerful flagship console. For a long time, you needed an Xbox to play games like Halo or Gears of War. Then Microsoft decided you don't. So it launched a monthly subscription service that lets users play the latest games on a bunch of other devices, but it's increasingly competitive and will take a lot of investment to make it work. So, will this shift pay off? And what does it mean for the future of the console? This is The Economics of Xbox. Today, with more than 30 game studios, Xbox is an industry mainstay, - But it had to really earn that position in the market. - [Narrator] The console war began in the 1970s when video game companies started competing to create a more powerful console and win more customers. By the '90s, the biggest players

were Sony, Nintendo, and Sega. And in 1997, consumer spending on consoles surpassed arcades for the first time. A few years later, Microsoft entered the scene with its first-generation Xbox. To entice customers into their ecosystems, most of these companies tried to keep the prices on their consoles as low as possible, selling them at a loss. Xbox loses up to $200 per console, but the brands made up the difference by selling games and other accessories. - The more consoles you sell, the more software you're going to sell with it. - [Narrator] The PlayStation outsold the Xbox every single time. Microsoft only came close to beating Sony with the Xbox 360. Analysts say this was because the PlayStation 3, which ran customers up to $600, was priced too high, but the Xbox lost ground with the next generation, and ultimately, it lost the console war. In 2017, Xbox launched Game Pass,

positioning itself as a services brand. It's more interested in making content available to people, whatever device they choose to play on. - [Narrator] Game Pass is a tiered service. The least expensive plans offer gaming on either console or PC, and the most expensive plan has multi-device gaming and other features like streaming games from the cloud and access to certain games the day they're released. In essence, Microsoft is betting that it can get more customers if they don't have to buy a console. This model also gives the company a recurring revenue stream, so it doesn't have to rely as much on blockbuster successes. - So Game Pass solves the problem on the consumer side by making lots of content available for cheap, and on the business or the supply side in terms of offsetting the financial volatility associated with entertainment. - [Narrator] Microsoft's head of gaming, Phil Spencer, has said Game Pass is profitable.

- And I think it will stay in that 10 to 15% of our overall revenue. - [Narrator] But Microsoft isn't the only one stepping into the subscription world. In 2022, Sony merged its subscription services, PlayStation Plus and PlayStation Now, and relaunched it to compete with Game Pass. There are two key things that give Microsoft an edge. First, it's a much larger company with lots and lots of money. And for the past decade, Microsoft has been using that money to acquire game studios, beefing up its library. In 2014, it bought Mojang, the maker of Minecraft, for $2.5 billion. In 2021, it bought ZeniMax Media, owner of Fallout and Doom, for $8.1 billion, and in 2023, it finalized the purchase of Activision Blizzard, the maker of Call of Duty.

and Candy Crush for $75.4 billion. To put it in perspective, that is a little bit less than what Sony makes annually. [Narrator] Second, as a giant tech company, Microsoft owns lots and lots of data centers, over 300 worldwide. Some of which help support Game Pass and cloud gaming. The incumbents like Nintendo and Sony, they live and die on great content, and this magnificent retail distribution infrastructure that they've built. So it's in Microsoft's interest to push into its data centers and its infrastructure in the cloud, because it can't beat Sony and Nintendo at retail. [Narrator] This puts it in an arena that mainly other massive tech companies like Amazon, Nvidia, and Google can really compete in, but there are lots of obstacles. To start, adoption has been slow. In 2020, it targeted 71% subscriber growth and reached 86%, but the following year, it fell short.

And in 2022, it missed its target by a long shot. Some people are just not comfortable with the idea of not actually owning a game. They may wanna play a game, put it down for six months, and pick it up later, or a year later, or more, and it may not be in the subscription service anymore after that time. [Narrator] So as of 2024, Game Pass has amassed 34 million subscribers. Some of the biggest challenges are specific to cloud gaming, a feature included in Game Pass's top tier. Traditionally, game data was stored locally on cartridges, disks, or downloaded straight to the console. With online multiplayer games, data like each player's actions were streamed. But with cloud gaming, the entire game is streamed to your device, which can be laggy. If it's a competitive game, a millisecond can mean the difference between winning and losing.

- [Narrator] Cloud gaming is also expensive to operate. - The economics have changed, but they haven't immediately changed to, you know, only run a profit. Both of those offerings, whether those are product-based and conventional, or whether they are streaming and more digital, both of those run at a loss in principle, but to recuperate and that to earn money in those contexts is a very different proposition. - [Narrator] One report found that just 6% of gamers around the world were subscribed to a cloud gaming service in 2023. Still, experts believe it will grow substantially. - Cloud gaming is one of those few components where they could possibly thrive and lead, even if that's a much more modestly sized industry. - [Narrator] Microsoft isn't getting rid of the Xbox anytime soon. Later this year, it will release new versions of its current generation, the series X and S, but it's clear that Xbox views its content as the future.

of the company, not its hardware. - It is incredibly difficult for these large companies, in spite of their resources, to be agile and innovative. And so, you know, they're always watching someone else just run the show. And so in many ways, you could make the argument that the current effort and investment towards Game Pass, and X Cloud, and all of the things that they're building and acquiring goes towards perhaps finally being in the driver's seat for the first time, - [Narrator] Giving it the chance to win whatever the new gaming war will be. (screen buzzes) (relaxing music)

Xbox Lost the Console War. Now It’s Redefining Gaming. | WSJ The Economics Of

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