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Is Xbox Game Pass really a threat to physical retail?

GAME and GameStop investors have been frightened by Microsoft's new digital initiative

When Microsoft announced it was launching a subscription service for Xbox One and Windows 10, retail investors do what they do best - they panicked.

Both GAME and GameStop (although particularly GameStop) saw their share prices take a bit of a tumble in the wake of the new initiative being revealed.

Investors are right to be concerned, of course, although not just because of Microsoft's new experiment. The physical games market is still lucrative and not about to vanish overnight (or at all), but it is shrinking and continuing to do so. There are fewer games being released in boxes and consumers are becoming more comfortable with digital platforms. Currently AAA games are primarily sold physically - upwards of 80% in most cases - but that number is being encroached by digital every year.

The likes of GAME and GameStop are not oblivious to this and are aggressively pursuing new ventures to offset the declines in their core business. GameStop is investing in publishing and merchandise, while GAME has spent millions building its eSports and events projects.

What's interesting about Xbox Game Pass, however, is that it targets the heart of one of GAME and GameStop's most significant revenue generators - pre-owned.

Xbox Game Pass is not the 'Netflix for games' that it has been dubbed. The business model may be the same, but that TV service entices viewers with exclusive content such as Daredevil and Stranger Things. Xbox Game Pass is just a means to play games that you missed from two years ago - but that is still significant.

"Back catalogue is dead at retail. The shelf-life of new games is getting shorter and shorter."

Back catalogue is dead at retail. The shelf-life of new games is getting shorter and shorter. As soon as GAME and GameStop start receiving a decent number of trade-ins of, say, Resident Evil 7, then they no-longer need to order anymore stock from Capcom. Unless you're GTA or FIFA, the idea of getting recurring revenue from a game you released months ago is unlikely - DLC and microtransaction revenue aside.

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Pre-owned has killed the back catalogue business for most publishers

Xbox Game Pass gives publishers a chance to extend the life of its products and try and claim a slice of that second-hand market.

However, as of this moment, it's hard to see Xbox Game Pass having an immediate impact upon the business.

Take EA Access or PlayStation Now (or historically OnLive). These services have certain issues - whether that's a lack of content or the challenges around streaming - but their subscription offerings simply haven't generated significant interest amongst consumers (yet).

The initial announcement of Xbox Game Pass was also notable by its absences. There was no EA or Activision or Ubisoft (perhaps those last two are also planning their own). The games initially touted for the service appear to be either forgotten releases from a few years ago, first party content, ageing sports games or Xbox 360 titles.

Now that's not to be disparaging towards the initiative. Netflix, Amazon, Apple and Spotify show that subscription services do work in other entertainment mediums if the proposition is strong enough - and 7.99 for access to 100 games seems more than reasonable. Xbox will also certainly push the proposition hard - we should expect to see 'one month free' game passes bundled with every Project Scorpio machine.

And let's not forget, in 2011 over 50% of Netflix usage came from games consoles - so this is an audience that does subscribe to entertainment services.

"In 2011, over 50% of Netflix usage came from games consoles"

Yet it's going to take time to get there. Perhaps in a few years, EA Access will become part of the Game Pass. Maybe Xbox could debut a few of its more quirky indie games on the service. And there's the prospect for other offers, too, such as the chance to buy games early or obtain exclusive DLC. I would imagine the idea of an Xbox Live Platinum service, which includes the Game Pass, is very much in the thinking.

It is the platform holders that will make this work. Nintendo, PlayStation, Xbox and Steam are the companies that have the largest base of loyal fans, not to mention an ecosystem that they're already committed to. But there's a lot of convincing to be done, both to publishers and consumers.

So should GAME and GameStop's investors be fearful of the subscription model? Well, yes, but only in the way that they should be concerned about the digital market in its entirety. The physical sector remains a multi-billion dollar business, and the success of expensive accessories, the rise of gaming merchandise, and the fact you can't download a console, means that it's not about to die anytime soon.

Yet it is declining. Investors don't like that. The onus is on the specialist retailers to diversify their businesses quickly, and that's what they are trying to do.

The imminent arrival of Xbox Game Pass doesn't really change that.

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Latest comments (3)

Jordan Lund Columnist 7 months ago
There's a really weird dichotomy in the gaming industry:

"Back catalogue is dead at retail." - true. Retailers pretty much stock the 100 most recent titles and not much else.

"The shelf-life of new games is getting shorter and shorter." - Also true, particularly in Sept. to Dec. which is new release heavy. After New Years those titles are pretty much old news.

But at the same time, there's a claim for a continual demand for "backwards compatibility".

So people are abandoning new titles faster than ever, but we're expected they have a huge demand for really old games? Doubtful.
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Nathan Richardsson Executive Producer 7 months ago
I agree Xbox Game Pass is not the new Netflix.

Let's not forget, though, when Blockbuster died, Netflix was predominantly a mail service for DVDs and cable Video on Demand had an automatic 3-6 month delay after DVD release or at best, the equivalent as DVD. I would say they were equivalently broken to Xbox Game Pass today.

So you're right, while Xbox Game Pass specifically isn't the end, time is running out for the Blockbusters of games and to date, and their diversification efforts has been to start selling DLCs and POS cards in the stores (!) and protect their resale.

That means they are selling credit for their competitors' direct distribution platforms, or content which can be acquired digitally - on top of pissing them off royally by their efforts to protect resale.

In other words, Gamestop acted just like Blockbuster did. Used their position of power at the time to force through their business model, which nobody has forgotten. I'm fairly confident that the platforms and content owners will be happy to accelerate their demise.

In fact, the competition between big publishers today is showing how fast they can increase the % of revenue coming from digital vs physical.

And perhaps the last thought on the matter. Yes, Xbox Game Pass itself isn't creating original content like "Netflix Originals" but they are on a platform which does feature "originals" or exclusives to a certain degree. With Netflix there as well ;)
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Paul Jace Merchandiser 7 months ago
"The business model may be the same, but that TV service entices viewers with exclusive content such as Daredevil and Stranger Things."

Yes but Netflix did not start producing exclusive content until more than a decade after it had been on the market. And yet their business was continuing to grow even without original content.

"Take EA Access or PlayStation Now (or historically OnLive). These services have certain issues - whether that's a lack of content or the challenges around streaming - but their subscription offerings simply haven't generated significant interest amongst consumers (yet)."

It isn't always the first to start a movement that always gets it right. Nintendo and Sega tried internet integration with the SNES and Genesis respectively and the Sega Dreamcast also took a good stab at it. But it wasn't until Xbox Live launched for the original Xbox that console internet integration and online multiplayer was finally done right. XBL wasn't the first but still to this day it's the best example. Which means there's hope for Xbox Game Pass even if it's not perfect from day one.

"The initial announcement of Xbox Game Pass was also notable by its absences. There was no EA or Activision or Ubisoft"

Give it time. If Microsoft is going to pay out royalties to each publisher for the use of their games they might find it difficult to say no to free money. I suspect EA will even come around, although they will probably keep certain titles for EA Access only. Right now I'm sure that deals are still being made in the background, not just for those three companies but for other ones as well.

"we should expect to see 'one month free' game passes bundled with every Project Scorpio machine."

I made a similar comment in the initial story GIBiz published on this. This tactic has worked for over a decade with Xbox Live Gold so it's safe to say we will see free trials of Xbox Game Pass bundled with most(if not all) Xbox One systems sold during the holidays.

Ultimately this is a real game changer if executed correctly. It's another great option for
consumers who want an instant game collection back catalog of titles to play without spending a ton of money. And at a very affordable price. The one caveat for me is that I will probably already own a good chunk of those initial 100 games but there's bound to be something in there I haven't come across yet.

Edited 2 times. Last edit by Paul Jace on 3rd March 2017 1:30am

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