It seems that every entertainment business model slowly creeps toward similar evolutions, each in a slightly different path but eventually ending up the same.
The three major steps:
- Sell each product individually through end-user distributors
- Economies of scale end-user distributor with added services
- Subscription with limitless access to all products
A subscription service is superior for many reasons, from avoiding the emotional phase of every purchase to easy access to try things you wouldn't otherwise.
This is nothing new. Tech only made the model easier to scale. Blockbuster already cracked the business model of video subscriptions, but Netflix's use of streaming cracked it all up to 11.
The gaming industry is getting ready for this business model to disrupt it, and with Microsoft's acquisition of Activision-Blizzard for $69B, the heat is up.
Not every video game fits the subscription service, though. Free-to-play games, depending on large network effects, and monetizing on micro-transactions don't fit. Games like Fortnite, PUBG, League of Legends, big mobile games, and more.
There are ways in which a subscription service can attend to these games, but it'll complicate things so much that I'd be surprised if anyone will attempt it. So my model for it is this: free-to-play is the Youtube videos to the Netflix gates video, which are paid games.
Why it's so hard
Creating a bundled service for video games will be very capital intensive. It is so capital intensive because the jig is up on the business model, not because of the art form of video games specifically.
Netflix story can make sense of it - Netflix was able to rise because they boiled the pot under the IP holders slowly. It wasn't considered such a luxurious business at the time, so Netflix could sign deals with the biggest studios out there to stream their content.
Bootstrapping on popular content, Netflix business grew enough that it started producing its own high-quality content, lowering the dependence on other IP holders.
By the time Disney, HBO, Fox, Warner Media, whatever, realized that the money was to be made in owning the platform - Netflix was stable enough with its own content.
But the gaming awakening is too late - everyone knows the platform owner is the king. So you can't bootstrap on other IPs slowly as Netflix did - you have to get so big that no one will say no to you all at once.
The tech giants battle
Because of the capital intensity of such endeavor, requiring one to capture most of the market from the get-go, mostly deep-pocketed tech giant jumped on the game (with honorable mentions at the end):
Google launched Stadia back in 2019 with no apparent solution to the issues above. They took a subscription fee for a tiny library and paired it with individual game purchases to cover up for all the studios that didn't want to play into Googles' play.
It seems that Google's approach to this was to start creating high-quality games within their own studio. But they soon discovered that game development is hard, and like many other Google projects, it was closed after less than two years.
And so Google finds itself in limbo: Stadia is a bad product because it has a tiny library, and to get studios to buy in, they need to have a large customer base. To get the customer base, they need games in the library, and they failed to create those within the company.
Add to the fire the fact that the tech for games streaming isn't there yet, and you have the perfect storm.
Amazon has prime gaming, a subscription leveraging their ownership of Twitch for a premium account there and merging with the other Amazon Prime benefits such as Prime TV.
It seems that Amazon acknowledges their inability to get a big enough library now, so instead, they offer several free games forever every month. A strategy similar to that of Epic games, but less aggressive.
Giving it all for a very low price, attached to other benefits like Twitch and the general Prime bundle, it seems that Amazon plays the long game - first trying to get the massive audience, then leverage the distribution to get studios in.
The problem is, everybody else already does that. I mentioned Epic, but Valve is already at a position so powerful that rarely a studio can afford not to sell its game through Steam.
Meanwhile, Amazon is working on wholly-owned IPs through its studio Amazon games. But like Google, they discovered this field is harsh. With almost every big title in recent years being canceled, and the big one they released, "New World", lost 95% of active players within a few months.
- Apple chose to focus on its advantage in the mobile space with the launch of Apple Arcade. The service is reasonable, but didn't take the mobile games industry by a storm. Mobile games are mostly free-to-play anyway, and within it they pay the 30% Apple tax anyway.
- Valve controls the PC market, and they enjoy this position by being the intermediator taking a large percentage of every sale on Steam. They make interesting moves like going into the handheld devices market with Steam Deck, but there is nothing in the direction of a subscription service.
- Epic spends a lot of money to gain some momentum over Steam, as revealed in their legal battle with Apple. But they are far behind and lack the capital even to take on Steam, let alone trying their luck with a big subscription service.
- Nintendo lives in their own (very profitable) bubble, where they have unique IPs and hardware to match it. They won't go anywhere near wide-market subscription anytime soon.
- Sony is in a similar position to Nintendo. They can't give up Playstation exclusives to cater to a wide-market subscription service - they'll cannibalize themselves in a way they can't risk. For these reasons and more, their existing subscription service Playstation Now is struggling.
Microsoft superior model
Microsoft's approach to this upcoming disruption seems superior in every way. They were also in the right place at the right time - the only big tech to be in gaming for decades now. Amazon & Google are merely opportunistic players compared to Microsoft that already develop games, own a big console, and controls the PC gaming market for decades.
Existing subscription service that just works™
Cross platform - Many games are available for multiple platforms, and Game Pass supports all of them: Xbox, PC, iOS, and Android. This is the only service that does that.
Downloading games - PS Now supports PC and mobile, so does Stadia. But they do it through game streaming, which doesn't just works™. For most people, it won't work. Game Pass lets you download the game for each platform it supports, running it natively.
Streaming - If you do want streaming for any reason, you are covered here too with Xbox Cloud Gaming.
Best games library
Microsoft created through the years many gaming IPs and gaming studios fully owned by them. From Halo, Gears of War, and Forza, to Age of Empires and Flight simulator.
On top of this strong lineup that creates internal organization knowledge, they were also shopping. If I'd had to define what kind of studios or IPs they buy, I think the only good answer is: Yes. An inexhaustive list of some acquisitions:
- Bethesda - Doom, Fallout, Elder scrolls
- Activision-Blizzard - Call of Duty, World of Warcraft, Diablo, Candy Crash
- Mojang - Minecraft
- Coalition - Gears of War
- Undead Labs, Playground Games, Ninja Theory, and Compulsion Games - Multiple games
- Double Fine - Psychonauts, Rad, any many others
- inXile - Wasteland
- Undead labs - State of Decay
To all of that, add a strategic partnership with EA:
And you have the best, biggest library out there by a very wide margin.
Many articles recently focused on Microsoft being the 3rd by revenue - behind Tencent and Sony. This is irrelevant for our case.
Tencent assets are mostly free-to-play games that I already mentioned aren't relevant for this business model, and Sony is bigger by revenue due to their stronghold with Playstation - but they aren't bigger by total players and engagement.
If a business model disruption is indeed coming to the gaming industry, then Microsoft is currently best positioned to win it.
They have the capital, expertise, and momentum needed to pull it off.
That is not to say anything about the value of it all. it might turn out to be a poor investment on Microsoft side. Them winning this battle doesn't necessarily means this is a battle worth fighting, especially for how expensive this battle is. Even though many big companies believe it is worth it.