Why Microsoft’s Free Games for Xbox Live Gold Could Hurt Xbox One Sales

Microsoft (NASDAQ: MSFT  ) has just announced four new free "Games With Gold" for Xbox Live Gold members on the Xbox 360 and Xbox One.

Starting on Aug. 1, Gold members can download Crimson Dragon and Strike Suit Zero for the Xbox One, which each previously cost $20. Gold members on Xbox 360 can download Motocross Madness, which previously cost $10, between Aug. 1 to 15. Starting on Aug. 16, members can download Dishonored, which previously cost $20.

Crimson Dragon. Source: Microsoft.

A great deal for gamers, not a great deal for Microsoft
That's a pretty good deal for Gold members, who pay a subscription fee of $60 per year. But the math tells an odd story -- any member who owns both an Xbox One and Xbox 360 can get $70 worth of free games in August. And that's just a single month -- Microsoft has been offering new free games every month, along with big 50% to 75% member discounts on digital games.

Microsoft isn't doing this to be generous -- it's a direct response to Sony's (NYSE: SNE  ) free games for PS3, PS4, and PS Vita owners on PlayStation Plus, which costs $50 per year. Last month, Sony offered six games, including Dead Space 3 and Strider. In August, Sony will offer Saints Row IV and Far Cry 3, among other titles. Sony's titles are arguably better known than Microsoft's August offerings, which puts Microsoft in a tough position considering that Xbox Live Gold costs more.

Dead Space 3. Source: EA.

But the gaps in quality, quantity, and cost are only three problems. The biggest problem is that Microsoft's current Games with Gold strategy actually encourages Gold members to stick with the Xbox 360 instead of upgrading to an Xbox One.

Microsoft's love for the 360 could doom the One
Out of the four free Gold games for August, Zenimax/Bethesda's Dishonored is the most well-known. It's a triple-A title that sold 3.25 million copies on the Xbox 360, PS3, and PC. Both Dishonored and Motocross Madness were fairly well received -- the former received a 88% score at review aggregator site Metacritic, while the latter received a 73% score.

By comparison, the Xbox One's offerings were less loved. Crimson Dragon, which was intended to be the spiritual successor to Sega's Panzer Dragoon series, flopped with gamers due to its excessive use of microtransactions. The game currently has a Metascore of 56%. Strike Suit Zero was criticized for its lack of polish and stiff controls, but fared slightly better with a score of 67%.

Strike Suit Zero. Source: Born Ready Games

Xbox 360 members who let their Gold memberships expire can keep the games. However, Xbox One members lose the free games unless the Gold membership is renewed.

Weaker titles and expiring games aren't a great strategy to boost sales of the Xbox One, which remains in last place behind Nintendo's (NASDAQOTH: NTDOY  ) Wii U and Sony's PS4 in the eighth generation console race.

Another reason to put off buying the Xbox One
This favoritism of the Xbox 360 bleeds over to upcoming third-party games as well. The vast majority of new triple-A games, like Activision Blizzard's Destiny, will straddle both seventh and eighth generation consoles. Take-Two's Borderlands: The Pre-Sequel will only be released on seventh generation consoles.

The math is simple -- there are 5 million Xbox Ones on the market compared to 83 million Xbox 360s. It doesn't make economic sense to launch a $500 million title like Destiny solely for the tiny next-gen market. Meanwhile, better free games for Gold members on Xbox 360 could convince gamers to put off purchasing an Xbox One. If Microsoft wants to wean gamers off the 360 and onto the One, it needs to offer better games for the Xbox One, while allowing Gold members to retain their games if their memberships expire.

Microsoft has launched good free Games with Gold in the past -- such as Fable III, Assassin's Creed II, Halo 3, Gears of War, and Dead Island -- but those games were all for the 360. Microsoft obviously can't afford to give away new triple-A titles like Titanfall and Watch Dogs for free, but it could launch limited-time free offers exclusively for new Xbox Live Gold members on the Xbox One. That wouldn't be much different from the loss-leading bundling strategy that it used for Titanfall, and it would translate to higher sales of the Xbox One.

The new age of subscription-based content
Looking ahead, Microsoft could turn Xbox Live into a subscription-based channel for cloud-based games, similar to Sony's PlayStation Now, which streams PS, PS2, and PS3 games to the PlayStation TV or PS4. However, Sony's prices are still too high -- a 90-day rental of Final Fantasy XIII-2, for example, costs $30 when the physical disc only costs $17.

Final Fantasy XIII-2. Source: Square Enix.

These problems reveal a glaring weakness that Microsoft can easily exploit. Since Microsoft isn't shy about taking short-term losses in the Xbox division, it can adopt a similar model as Amazon (NASDAQ: AMZN  ) Prime, which lets members borrow one e-book per month from its Lending Library.

Instead of offering up an entire library of free games to stream, Microsoft can allow Gold members to borrow a single game from a handful of new titles every month. As the Xbox One receives better exclusive games, this could allow Microsoft to justify raising the cost of the Gold membership.

The Foolish takeaway
Microsoft's current Gold with Games strategy simply isn't aggressive enough to remain competitive against PlayStation Plus. Moreover, Microsoft is throttling the adoption of the Xbox One with its preferential treatment of Gold members on the 360. However, I believe that an eventual conversion to a subscription-based, limited rental platform could give Microsoft an edge over Sony, especially as the latter struggles with pricing issues with PlayStation Now.  

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