Microsoft (NASDAQ:MSFT) recently jumped on the subscription service bandwagon with the announcement of Xbox Game Pass. For $10 per month, Xbox One owners can have access to over 100 Xbox One and backward compatible Xbox 360 games.
One of the attractive features of the service is the ability to download the full game directly to the Xbox One console, so players can enjoy each title without worrying about internet connectivity issues. The service also allows gamers to buy games at a discount.
On the flip side, titles included with the service will be cycled in and out on a monthly basis, which will limit the selection and potentially the service's overall popularity.
Game Pass will not appeal to everyone
Xbox Game Pass does not offer new releases -- no service will likely ever offer that to gamers at just $10 per month. And while there is no information available regarding the terms Microsoft negotiated with publishers, they are obviously not going to sell a new release for $10 or less when a full game download typically ranges from from $30 to $60.
In some cases, I have seen people compare Xbox Game Pass to other entertainment streaming services like Spotify or Netflix. Although Xbox Game Pass offers the same convenience, it falls short of other popular entertainment services on the breadth of selection. Netflix, Apple Music, Spotify, and Amazon Prime cost about the same price per month, but these services usually offer subscribers access to massive libraries, including new and original content.
Microsoft targets used game buyers
The new Xbox service appears to be taking direct aim at GameStop's used game business. GameStop believes it is the largest retailer of pre-owned games in the world. In each of the last three years, GameStop has generated approximately $1 billion in gross profit from pre-owned game sales -- accounting for nearly half of its gross profit each year. As physical game sales fade, some of that $1 billion will begin flowing back to publishers and console makers, but it may not happen overnight.
While Xbox Game Pass will likely lure some customers away from Gamestop, I don't expect Microsoft to deal a death blow -- at least not yet. The transition will ultimately be driven by the quality of games includes with the service.
But all of the games shown in the image on Microsoft's announcement are at least one year old. A few high profile games listed in the announcement are Halo 5 and NBA 2K16. Consumers can buy those titles pre-owned from Gamestop for $15 to $30. Once they play it for a month or two and trade it back to the store, gamers would net about the same cost with Xbox Game Pass as going the used game route. GameStop also has a slight edge over the Microsoft service considering the month-to-month cycling of the Game Pass catalogue.
Leading game developers shun the service
Part of the problem with Game Pass' limited selection is the lack of support from Electronic Arts, Ubisoft Entertainment, and Activision Blizzard -- three giant publishers. Electronic Arts has its own subscription service -- EA Access -- exclusive on Xbox, so it's likely we will never see EA join Xbox Game Pass unless its own offering falters.
In an interview with Gamespot, head of the Xbox business Phil Spencer said it took two or three years to launch Xbox Game Pass due to challenges, including signing deals with third-party publishers:
It's taken so long because Microsoft had to get the under-the-hood, technical specifics worked out, while the company also had to sign business deals with third-party publishers.
If Microsoft wasn't able to recruit Activision or Ubisoft over several years, it's unlikely those companies are going to sign up any time soon. Activision Blizzard is focused on making new, major releases that allow the company to deliver a steady flow of downloadable content to millions of players. Releasing older games to Game Pass could potentially steer players to those titles where Activision is generating less revenue.
As a result of these shortcomings, Xbox Game Pass will only appeal to subscribers interested in having access to older games. But at just $10 per month and with new titles regularly being added to the library (and the potential for future partnerships with other developers), both casual and hardcore gamers can probably find something to like in this service.
Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. John Ballard owns shares of Activision Blizzard. The Motley Fool owns shares of and recommends Activision Blizzard, Amazon, Apple, and Netflix. The Motley Fool has the following options: long January 2018 $90 calls on Apple, short January 2018 $95 calls on Apple, and short April 2017 $28 puts on GameStop. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.