Updated: March 2, 2023

Microsoft's Game Pass Expands to New Markets as Activision Acquisition Raises Regulatory Concerns

The subscription service, which outperforms competitors Sony and Amazon, is expanding into dozens of new countries.

Since its release more than two decades ago, the Xbox console has been the key to Microsoft Corp.'s clout in the gaming industry. The company is evolving to keep up with gamers as gaming expands beyond bulky devices that people plug into their television sets. However, its transformation is raising concerns among regulators, who believe Microsoft will be even more dominant in the industry's next era if it completes its proposed $69 billion acquisition of gaming behemoth Activision Blizzard Inc.

Game Pass, a six-year-old service that charges users $10 to $15 per month to play a collection of more than 400 games on the Xbox, Microsoft's Windows PC operating system, smart TVs, smartphones, and tablets, is a key component of Microsoft's strategy. The number of users who accessed the service on three or more devices had increased by 20% in January compared to the same period the previous year. On February 28, the company will launch Game Pass on PC in dozens of new markets, including Latin America, the Middle East, and Eastern Europe, nearly doubling the number of countries where it is currently available to 86.

Gaming subscription services currently account for a small portion of the overall gaming market. However, Microsoft sees its Netflix-like gaming experience, which is available on a variety of devices, as the future of video games. "When I look at the industry today, that's not where it is, but that's where it wants to be," says Sarah Bond, Xbox's vice president of game creator experience and ecosystem.

In comparison to its major competitors, the company's success with Game Pass, which has more than 25 million subscribers, has been notable. Amazon.com Inc.'s Luna service has been steadily losing games, and Alphabet Inc.'s Google shut down its game subscription service entirely in January. Even Sony Group Corp., long the market leader in gaming, is struggling to compete. With the initial release, Sony did not offer its biggest gaming titles on its own subscription service, PlayStation Plus, depriving Sony of the buzz generated by Microsoft's splashy Game Pass releases.

Microsoft clearly outperforms its competitors in terms of both content and infrastructure. It owns approximately two dozen game studios, including those behind hit franchises such as Minecraft and Halo, and has built-in delivery systems on the Windows operating system and Xbox console. It also runs Azure, one of the world's largest cloud computing networks. When it comes to cloud gaming, where games are streamed directly from central servers rather than downloaded in advance, this is a critical distinction between Microsoft and Sony. Cloud gaming is available on one tier of Game Pass, and Microsoft's cloud network enables it to provide the service with low latency, or the time between when something happens on a server and when it is reflected on a user's device. "Azure and Xbox cloud streaming are separate and run on different infrastructure," said David Cuddy, general manager for public affairs at Microsoft, in an email.

"It's a big, industrial-sized investment," says Joost van Dreunen, a lecturer at New York University's Stern School of Business on the business of games. "By removing the games from the box—away from the PlayStations and Xboxes—and turning them into a digital service, or eventually a cloud-based service, Microsoft has finally found a way to outmanoeuvre the PlayStation."

Microsoft's geographic expansion this year is an attempt to reach audiences for whom console gaming has traditionally been out of reach. "A lot of people will be getting their first taste of Xbox," says Xbox Chief Marketing Officer Jerret West. Streaming can "play more of a primary role in a gamer's experience" in regions such as Latin America and Southeast Asia, where gamers are more likely to use cheaper PCs or mobile phones, he says.

Microsoft declined to disclose the total number of subscribers in any market, but says Game Pass membership in Vietnam, which is only available on PC, more than doubled in January. Over the last two years, Game Pass membership has more than doubled in Asia, where mobile games are played by 80% of the online population.

Microsoft's desire to acquire Activision Blizzard is focused on acquiring content in order to attract new players. Activision Blizzard creates some of the most well-known games for both core console gamers and casual smartphone users. Its first-person shooter Call of Duty has tens of millions of monthly active users, and King, its subsidiary that publishes the mobile gaming phenomenon Candy Crush, had 233 million monthly active users in the quarter ended December 2022.

Regulators in the United States, Europe, and the United Kingdom, who are all reviewing the transaction, are already concerned about Microsoft cementing its dominant position in a nascent market. "Microsoft has a combination of assets that we provisionally consider difficult for other cloud gaming service providers to match," the UK's Competition and Markets Authority, the country's primary antitrust regulator, wrote in preliminary findings released in February, citing the Windows operating system, Xbox Cloud Gaming and Azure, and Microsoft's existing ecosystem of consoles and games. According to the CMA, the merger may result in a "significant lessening of competition" in the console and cloud gaming services markets.

Microsoft does not make the terms of its Game Pass licences public, but developers say they frequently receive upfront payments as well as bonuses for games that perform well on the service. One of its main selling points is that Game Pass provides a level of sustained engagement.

Some sceptical analysts and developers argue that streaming engagement comes at the expense of more lucrative one-time sales, echoing musicians' complaints about streaming services. According to the CMA's preliminary findings, Microsoft's internal documents "recognise that adding titles to Game Pass would lead to cannibalization" of traditional game sales. It's difficult to tell how this dynamic is playing out today, owing to the fact that many of Microsoft's partners are reluctant to discuss the specifics of their agreements. Most publishers contacted for this story declined to comment, citing a fear of jeopardising their relationship with Microsoft.

Mike Rose, the founder of No More Robots, recognised the value of Game Pass when he added the mountain biking game Descenders to the service in 2019. The game had been available for over a year, but sales more than quadrupled after he added it to Game Pass. Rose's current goal is to have all of No More Robots' games available on the service. According to Jason Kingsley, CEO of Rebellion Developments, the British developer of zombie and Alien vs. Predator games, when he adds titles to Game Pass, many of his company's other games benefit from a noticeable increase in sales despite not being on the service itself. According to Kingsley, between 20% and 30% of Game Pass subscribers buy additional downloadable content.

Nonetheless, unless they come from Microsoft-owned studios, the biggest games today are rarely released on Game Pass. Many indie game developers are still sceptical of Microsoft's ability to use Game Pass to determine which smaller games will succeed. That is what antitrust regulators should be asking about, rather than the impact on Sony, according to Omdia analyst George Jijiashvili: "Does this give one entity too much power in terms of subscriptions?"

Microsoft claims that it gives a wide range of indie game companies a shot in Game Pass. The Xbox version of Game Pass includes over 125 titles from Microsoft's [email protected] indie game programme, and the PC version includes over 140. If indie developers become dissatisfied with Game Pass, the game service landscape is currently fragmented enough to provide developers with a variety of distribution options, according to Jijiashvili. That may not always be the case if Microsoft continues to outrun the competition.





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