Xbox Game Pass: Business Model Optimization and Transformation

Microsoft launched the Xbox gaming console on November 15, 2001. For years, Microsoft used the “razor-razorblade” business model for Xbox by subsidizing the console's price while making money from game titles. In 2017, Microsoft introduced Xbox Game Pass, a subscription-based model for video games. Xbox Game Pass was intended to allow subscribers to discover and play new games without having to buy the games. Those subscribers could always choose something new to play from the catalog of games on Xbox Game Pass, all for a single fee of about $15 per month for the Ultimate version. Xbox Game Pass had achieved significant success, with a subscriber base of some 25 million gamers by January 2022, accounting for about 20% of Xbox's 2021 revenues of $16.3 billion. But growth had not kept pace with expectations, partly due to the post-pandemic slowdown in gaming activity. The Xbox team began examining three options for increasing the growth and profitability of its business. One option was to optimize the current subscription-based model by adapting the Xbox game catalog, benefits, pricing, and features. The second option was innovating the business model by changing it to a usage-based one was reducing subscriber churn by creating a loyalty program (called Xbox Rewards). The Xbox team needed to decide which of these strategies would produce the best revenue and profit outcomes while minimizing the risk of alienating the most valuable subscribers of Xbox Game Pass.