Microsoft’s new app store policies could crack open the game console

Microsoft’s approach to the console gaming market has undergone substantial change over the past five years, shifting away from hardware and game sales and toward a device-agnostic, subscription-driven future. But the company’s new set of app store policies, which it unveiled Wednesday, foreshadows an even more radical business model shift for the Xbox platform on the horizon.

The question now is what it might take, regulatory or otherwise, for Microsoft to fully transform its console gaming business, and what that means for the hardware and game distribution business it’s been building for the last 20 years.

The Xbox model won’t last forever, but it’s staying put for now. Microsoft detailed 11 new principles it says will apply to apps and games on the Microsoft Store on PC and to “next-generation marketplaces” it’s hoping to build for mobile and cloud games. Only the first seven of those principles, however, will apply to the Xbox platform today.

• Microsoft said the principles focused on app safety and quality, accountability, and fairness and transparency will apply to Xbox. The crucial final four, which center on giving developers more freedom over distribution and letting them earn money on their own terms, won’t apply to the Xbox ecosystem, which right now remains closed, like iOS.
• That makes sense. Opening up Xbox to third-party payment systems and options for purchasing Xbox game content outside Microsoft’s store would completely upend Microsoft’s current console business model, which depends on collecting 30% of all game sales and in-game transactions, like Fortnite emotes and Call of Duty currency. It would also involve a complete rethinking of distribution and development costs, publishing deals and marketing.
• President Brad Smith said as much in the announcement: “Emerging legislation is not being written for specialized computing devices, like gaming consoles, for good reasons. Gaming consoles, specifically, are sold to gamers at a loss to establish a robust and viable ecosystem for game developers. The costs are recovered later through revenue earned in the dedicated console store.”
• Sony and Nintendo, however, do earn profit on hardware sales, making Microsoft an outlier. Without its cut on Xbox, Microsoft would earn substantially less on its gaming business as it stands today. Yet in a Game Pass-led future, those scales may tip.

Microsoft is pledging to move away from this model, in time. Perhaps most surprising in the announcement was the company’s commitment to open up the Xbox platform down the line. “We’re committed to closing the gap on the remaining principles over time,” Smith wrote.

• Microsoft isn’t going so far as to say it will allow other company’s app stores, operating systems or subscription services onto its platform. But it is saying it will one day give developers the freedom to transact directly with consumers on Xbox devices without having to give Microsoft a cut, or a flexible system that takes into account different services the company might offer, like cloud gaming. This is already the case today for apps sold through the Microsoft Store on PC (though PC game-makers must still give Microsoft a reduced 12% commission).
• This can be read in multiple ways. First and foremost, Microsoft is trying to appease regulators who will decide the fate of its Activision Blizzard acquisition, a monumental deal that stands to reshape the game industry. Pledging to treat developers and competitors fairly and not disadvantage them, while also giving them freedom over payments, is a savvy first step in getting the deal approved.
• Microsoft is also positioning itself as a more open market for games and software. In the event U.S. regulators do force companies like Apple and Google to open their app stores to more competition, an Xbox app store and native cloud gaming service on iOS would be a no-brainer. But the current closed nature of Xbox makes Microsoft look hypocritical, as Google’s legal chief Kent Walker was happy to point out, which is why it’s laying the groundwork now to shift away from that model in the future.

If Microsoft’s strategy pans out, it won’t need the Xbox business model. With Game Pass, Microsoft has put a priority on expanding the consumer audience of its games while downplaying unit sales and the industry economics that have made its primary competitor, Sony, so successful over the last decade.

• Recent first-party releases like Forza Horizon 5 and Halo Infinite shattered player-count records because they’re available Day One on Game Pass. “The longest goal for us is: ‘Do creators on our platform feel like they have the best opportunity to reach the maximum number of players with the maximum creative diversity that they need?'” Microsoft Gaming CEO Phil Spencer told Axios last week.
• In a future where gaming is no longer mediated by hardware and exists via the cloud on mobile devices, AR and VR headsets and whatever manner of new device or screen, it won’t matter that Xbox isn’t a profitable hardware business or that the Xbox console store remains a big revenue-driver. What will matter is the number of Game Pass subscriptions and having that service exist on as many devices and platforms as possible.
• Given the trend of free-to-play live service titles taking over the game industry, Microsoft stands to benefit by becoming the technological backbone of how these titles are played in the future, not just the store owner that collects its toll. If the next Fortnite or Minecraft or Call of Duty becomes a free-to-play game existing in the company’s cloud, Microsoft wins no matter where it’s played or whose store stands in the way.

Microsoft is playing an extremely long game, even if its short-term priorities mean making a lot of bold promises to smooth out the regulatory path of its Activision Blizzard deal. Xbox executive Sarah Bond, when speaking about her boss Spencer, told The Wall Street Journal last month, “He is an extraordinarily patient man,” adding that he “thinks of things in arcs of time far longer than me. He often encourages me to be patient.”

Spencer’s vision for Xbox, which so far has included a relentless belief in the promise of Game Pass, has clearly panned out so far. But the road ahead for the Xbox business involves a tricky tightrope act as Microsoft juggles the financial health of its console ecosystem with a preemptive approach to regulation. Apple and Google are clearly not going down without a fight, and Microsoft may need to make more than just vague promises about the direction of Xbox if it wants a truly open gaming market with a more even playing field.

— Nick Statt (email | twitter)

A MESSAGE FROM SAMBA TV

Samba TV operates the world’s largest independent source of first party connected TV data helping brands, agencies and content owners to plan, buy and measure all in one place. The State of Viewership report offers the industry’s most accurate insights into television viewing and advertising engagement. Download the report at www.samba.tv

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A MESSAGE FROM SAMBA TV

Samba TV operates the world’s largest independent source of first party connected TV data helping brands, agencies and content owners to plan, buy and measure all in one place. The State of Viewership report offers the industry’s most accurate insights into television viewing and advertising engagement. Download the report at www.samba.tv

Learn more