Microsoft's Xbox boss explains the master plan for the $10/month subscription service that Wall Street thinks could make it a $1 trillion company (MSFT)

Microsoft Phil Spencer

Microsoft is hyping up Game Pass, a service that's very similar to Netflix, but for video games.
Game Pass offers access to a large library of major video games for $10/month.
"The thing I honestly want Game Pass to be is a creative outlet for game creators," Microsoft executive president of gaming Phil Spencer told Business Insider in an interview this weekend.

The man at Microsoft in charge of all things gaming doesn't love how Game Pass, the company's $10/month video game subscription service, keeps getting compared to Netflix — even if Wall Street does think that the service puts Microsoft on a path to becoming a $1 trillion company.

For starters, the business model that Microsoft is pushing is more complex: Even if a player gets an Xbox game via Game Pass, they can still spend additional real money on virtual items, changing the value equation.

"Games actually have business models inside of themselves, so getting distribution inside Game Pass is not the end of its ability to make money for a developer," Microsoft executive president of gaming Phil Spencer said in an interview with Business Insider this weekend.

To put a fine point on it, if you make a movie, and you sell it to Netflix, that's it. But if you make a game, and you put it on Game Pass, you can still sell stuff to players within your game.

That's part of the argument Spencer is making to game makers small and large with Game Pass, as the company builds out the service's library beyond the 100-plus Xbox One and Xbox 360 titles already on there.

"If you put a game in there and you have a business model in your game, that could work," he said. "But also, if it's a single-player game with a beginning, middle, and end, I need to build a business relationship with you so that you feel great about getting new customers for your franchise and also putting some money in your pocket for doing a deal with us. And we're committed to all of that."

phil spencer xbox e3 2018

Like Netflix, Microsoft funds development of its own content. Where Netflix has banner franchises like "House of Cards" and "Stranger Things," Microsoft has "Halo" and "Gears of War," both published by the tech behemoth itself.

That original content is core to the message Microsoft is using to sell Game Pass. The next big "Halo," and the next "Gears of War" game, and the next "Forza" racing game will all come to Game Pass at launch.

"We're finding people in Game Pass actually play more games," Spencer said. "And they're trying some franchises where, if they had to buy the franchise — even if they're $30, $60, whatever the amount might be — it's way easier for them to be invested at $10/month."

You could buy those blockbuster titles for each, for $60 apiece at launch, or you could pay $10 or Game Pass and play all three. It's a pretty strong argument if you own an Xbox One. Indeed, Microsoft has already started down this path: The recent "Sea of Thieves" and "State of Decay 2," both Xbox exclusives, were on Game Pass the day they launched.

Though Microsoft doesn't have the data to back this up, Spencer asserts that it's possible for games on Game Pass to actually sell more copies overall despite the fact that they're available with a Game Pass subscription. "With 'Sea of Thieves' and 'State of Decay 2' — I will look you in the eye and I have no way to A/B test this — we sold more copies of those games than we would have if the game wasn't in Game Pass," he said.

Sea of Thieves

It may sound illogical, but he makes a reasonable argument: Because people who had Game Pass were able to easily access those games without buying them, they helped spread word of mouth by playing it and surfacing the game to people who don't have Game Pass. People saw the game being played on Twitch, and they saw people playing it in their Xbox Live friends lists, and they saw talk on Twitter.

Indeed, like Netflix, it's easy to scroll through the Game Pass library and try things out that you might not otherwise.

It is, of course, notable that both "Sea of Thieves" and "State of Decay 2" are inherently shareable games. Both feature unpredictable, player-driven gameplay that results in hilarious videos more often than most games. It certainly didn't hurt that they were both available in Game Pass for $10/month in addition to being full priced retail games.

"I fundamentally believe we had better retail success with both of those games than if they weren't in Game Pass," he said.

That success is unlikely to work the same way with every game on Game Pass, of course, and that's fine. Spencer intends to build a platform that offers a foundation for experimentation, with enough financial stability for game makers to try new things.

"I want it to be a place where creators feel like they can take risks in things that they wanna do," Spencer said. "And know that [creators] have an audience of people who are already invested in the service, such that the marginal cost for them to click on the next icon and give it a try is very, very low."

Sound familiar?

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