Roger’s $0.02 - Xbox Game Pass Makes Consoles Irrelevant (Patreon)

Xbox Game Pass is Microsoft’s ultimate Trojan Horse. On its face, it’s a relatively benign game-as-a-service subscription. Pay the monthly fee and get access to a broad library of games. You can play on Xbox or play on PC. And if you’re fine with playing cloud streaming games, you can also play on your smart TV, tablet, phone, web browser, or VR headset. However, the service’s deliberate growth to multiple platforms positions the service as the dominant player in console video game distribution. It signals a change in the way console video games are distributed and more importantly consumed. It’s not just a competitor to Sony’s PS5 and Nintendo’s Switch, but will make the business model that Sony and Nintendo use irrelevant in the coming decade.

I’ve written in a previous column about how the traditional video game console business model relies on a very siloed ecosystem. The games you buy for a video game console are tightly controlled by the console maker. Everything from the game development kits to ensuring the content meets the console maker’s approval, and finally, competing with not just other publishers' games but also first-party games as well. The degree of vertical integration that video game console makers have is something that a company like Apple could only dream of.

Technical limitations were the natural walled garden for home video game consoles when the market started. Unlike a VHS tape or audio CD, the content of video games had to be programmed for specific console hardware. If a publisher wanted to produce their game for a competitor's video game console the game would need to be re-written for that hardware. While the game might be similar to the game for the first console it wouldn’t be exactly the same. The consumer side of the business follows the disposable razor model. You bring in consumers on the technical merits and marketing of the hardware, often selling the consoles at a minimum profit. Once they buy the hardware they’re locked-in customers for at least several AAA games titles from the catalog.

Even though digital distribution and platform agnosticism has swept video streaming, music streaming and Steam gaming the walled garden model for video game consoles still remains. But Xbox Game Pass could change all that. Microsoft is betting that gaming hardware will no longer be a deciding factor in the games consumers purchase and play. In their view, subsiding console hardware to bring in customers is old-fashioned. Instead, taking a page from streaming services, you offer your game library wherever the audience is. Technical considerations like CPU and GPU power can be mitigated by offering cloud gaming as an option. For a company like Sony or Nintendo, which still rely on the decades-old video console, they could be in for a rude awakening. While exclusives will still draw in customers for the PS5 and Switch, the play the games anywhere model Microsoft is pitching would effectively make them niche players in video games. Game development studios produce games to make money. You spend time, effort, and money on developing for the largest audience possible. That means getting your games in as many places as possible. Xbox Game Pass does that. Sure, larger studios could afford to port a game to natively run on a PS5 or Switch, but would it make financial sense for smaller or majority of indie developers? Again, the PS5 and Switch will still have games, but a much smaller library compared to Xbox if Microsoft’s strategy works out. And for those points to Japanese developers' affinity for producing titles for homegrown video gaming hardware, I would argue that’s beginning to fade. Valve’s Steam has recently seen a surge of interest from Japanese developers hoping to cash in on the PC gaming digital marketplace. Develop a game only for PS5 and you limit your reach to only PS5 owners. Develop a game for the PC and sell it on Steam and you reach the entire world. It also helps PS5 and Xbox Series X/S hardware is PC based reducing the complexity of developing and porting titles.

When NES came to the North American market, Nintendo saw what happened during the video game crash of 1983. To ensure that wouldn’t happen to their console Nintendo placed strict limits on third-party publishers. They limited the number of cartridges they could have limiting the number of copies they could produce, instituted a hefty 30% per game license fee, and didn’t allow the return of blank cartridges forcing the publishers to carry all the financial risk. Although the restrictions today aren’t as onerous, they still follow a similar set of guard rails by the console makers to manage content on their devices. But like cable and satellite TV with their bundled channels and linear viewing experience, digital delivery has changed all that. The question is not whether or not the console video game model is on its way out. It is. The question is when will Sony and Nintendo follow suit?