Microsoft misses Xbox Game Pass subscriber growth target again

Halo Infinite. Screenshot: Xbox/343 Industries

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

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

• It’s also at the center of the debate over whether regulators should approve the company’s $69 billion bid for Call of Duty producer Activision Blizzard.

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

• This is two losses in a row. The company also failed to meet its manager-paid Game Pass target last year after exceeding it in 2020.
• Microsoft doesn’t publish actual Game Pass subscriber target numbers, but in the filing it said the Xbox division has delivered “over 25 million Game Pass subscriptions.”

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

• An alternative to the historical model of players paying in full for every new game they want.

Between the lines: In an interview at a Wall Street Journal tech conference yesterday, Phil Spencer, Microsoft’s head of gaming, described Game Pass as profitable but limited.

• It accounts for 10-15% of the company’s content and services revenue (including gaming) and is “profitable for us,” he said.
• In remarks written by The Verge, Spencer said that Game Pass growth has been “incredible” on PC, but has been slowing on console, “mainly because you’re reaching out to everyone who wants to subscribe on console at some point.”
• The growth of Game Pass may also have stalled due to the lack of major releases available. Over the last two years, Microsoft has released a few major exclusive games, none of which include new releases in their subscription offerings, especially when compared to rivals Sony and Nintendo.

Intrigue: The UK Competition and Markets Authority has cited Game Pass as a point of concern over whether Microsoft will approve the Activision deal.

• A 76-page initial report said that if Microsoft were to put Call of Duty on Game Pass, the deal led to “a realistic expectation of significantly reduced competition in multi-game subscription services”.

• The idea is that delivering the popular series that often makes up the best or second-best selling game of any year could make Game Pass irresistible and Microsoft problematically unstoppable.

Other side: Microsoft denied that such a move would reach an anti-competitive threshold requiring the deal to be blocked, and said it could always counteract by placing better privileges on PlayStation’s service and even offer Game Pass on PlayStation.

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

A very important metric for Microsoft: Game Pass growth is the only game-related performance target in the admin pay package.

• Other goals include Microsoft Cloud Revenue, Team usage, and LinkedIn Sessions.
• The Game Pass metric was heavier this year than previous years, with more than $37 million in stock potentially being paid to Nadella.
• The loss in this stat was probably not too painful. For the 12 months ending June 30, 2022, Nadella was awarded $55 million in cash and stock compensation.

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