Microsoft Stock: Subscription Fortification Strategy (NASDAQ:MSFT)

Investment Thesis

Microsoft’s (NASDAQ:MSFT) strategy of fortifying the Xbox Game Pass and increasing its value by adding more games, benefits, and perks can increase Xbox Game Pass subscribers. There are currently 25 million subscribers to the Xbox Game Pass, and I believe the number to increase after the Activision Blizzard (ATVI) acquisition.

This means that Microsoft has pricing power over its Xbox Game Pass once subscribers are more dependent on seeing more upside to benefits & perks over its price. This is an excellent opportunity for Microsoft to increase its revenue in its More Personal Computing segment through the gaming market, as the gaming market is projected to grow by $125.65 billion from 2020 to 2025 at a CAGR of 12%. I think it’s great that Microsoft is using its strong market position as a large tech company to make good acquisitions, expand its gaming business, and potentially increase revenue in the company’s More Personal Computing segment.

About The Xbox Game Pass & The Value It Brings

The Xbox Game Pass plays a crucial role in Activision Blizzard. How I see things, Microsoft is building and expanding its game portfolios through partnerships and acquisitions. So, what exactly is the Xbox Game Pass? For the non-gamers out there, and maybe investors that don’t know what the Xbox Game Pass really is, it is a subscription where, according to Xbox, you can:

“Play new games on day one. Plus, enjoy hundreds of high-quality games with friends on console, PC, or cloud. With games added all the time, there’s always something new to play.”

– Xbox

We’ll be diving into the subscription plans, the Xbox Game Pass subscriber and revenue growth, and Activision Blizzard being a part of the Xbox Game Pass.

Xbox Game Pass Subscription Plans

Gamer or not, if you want to try out the Xbox Game Pass, they have different plans for you. NOTE: I am not advertising the Xbox Game Pass nor encouraging you to buy it. I’m not currently subscribed to it and am simply laying out their plans in these subscriptions:

Xbox Game Pass Ultimate ($14.99 a month)

• Play over 100 high-quality games for consoles, PC, phones, and tablets
• Play games from the cloud
• New games are added all the time
• Xbox Game Studio titles available the same day as the release
• Exclusive member discounts and deals
• Free Perks, including in-game content and partner, offers
• Xbox Live Gold
• EA Play membership included (console and PC)

PC Game Pass ($9.99 a month)

• Play over 100 high-quality PC games
• New games are added all the time
• Xbox Game Studio titles available the same day as the release
• Exclusive member discounts and deals
• EA Play membership included (PC only)

Xbox Game Pass For Console ($9.99 a month)

• Play over 100 high-quality console games
• New games are added all the time
• Xbox Game Studio titles available the same day as the release
• Exclusive member discounts and deals

Xbox Live Gold ($9.99 a month, $24.99 for 3 months)

• Get 2 free games to play every month
• Join the greatest community of gamers on the most advanced multiplayer network
• Experience the best in competitive and cooperative online console multiplayer
• Save up to 50% on select titles in the Microsoft Store

Xbox Game Pass Friends & Family (€21.99 a month)

• One membership, five individual accounts
• Play together or separately
• Play on your devices

Every subscriber basically has access to high-quality Microsoft games, membership discounts, and perks and benefits from Microsoft’s partnership with other gaming companies like Riot Games, a company owned by Tencent (OTCPK:TCEHY), which I talked about in my article about Activision Blizzard: Last Chance Of Redemption. Regarding the Xbox Game Pass, you can get the Ultimate version for $14.99, but you can also get the PC, Console, and Gold version for $9.99 a month. To me, it’s relatively cheap, considering that you’re going to play all games in their Xbox Game Studio. If you’re finding specific games available in the Xbox Game Pass, here’s where you can find all the Console and PC Games the subscription offers.

Additionally, even though Xbox Game Pass provides excellent value, the new “Xbox Game Pass Friends & Family” can be a more attractive subscription choice since you literally have 5 accounts in one. As shown from the list above, an individual Xbox Game Pass Ultimate costs about $14.99 a month, while the Xbox Game Pass Family & Friends costs about €21.99 a month, so as long as you have a friend that’s willing to chip in, getting the Xbox Game Pass Friends & Family is a no-brainer and adds more value to the Xbox Game Pass that can help invite non-subscribers, boost possible monetization, and game sales.

Xbox Revenue & Xbox Game Pass Subscriber Growth

Besides the additional value of the new subscription plan, it’s also worth noting that Xbox Revenue & Subscriber count has been growing in the past few years. Microsoft is taking “the more, the merrier” to a new level through its subscription plan, from around 10 million subscribers in Q4’20, to about 25 million subscribers in Q2’22, which is a 150% increase in a short amount of time.

Xbox revenue for the past few quarters has also been increasing since the Xbox Game Pass was released in 2017. I still think Xbox revenue will continue to set records if Microsoft wants to disrupt the gaming market by making huge acquisitions.

Overall, I think Microsoft is paving the way for the Activision Blizzard deal. Xbox Game Pass already has excellent value as it is. Its revenue and subscribers continue to increase, and if the Activision Blizzard deal takes place, Xbox can potentially see an increase in subscribers and revenue, especially when ATVI is confirmed to be a part of the Xbox Game Pass (if the deal falls through). According to Phil Spencer, Microsoft Gaming CEO:

“We intend to make Activision Blizzard’s much-loved library of games – including Overwatch, Diablo, and Call of Duty – available in Game Pass and to grow those gaming communities. By delivering even more value to players, we hope to continue growing Game Pass, extending its appeal to mobile phones and any connected device.”

– Phil Spencer, Microsoft Gaming CEO

If the deal falls through, we are expected to see perks & benefits with Activision Blizzard games and more updates to the Xbox Game Pass, hopefully increasing Xbox Game Pass subscribers and revenue. That’s why I think that fortifying the Xbox Game Pass prior to the deal completion is an excellent strategy for Microsoft in a growing gaming market:

The Growing Gaming Market & Platforms

Moreover, the market is segmented by type (casual gaming and professional gaming), device (mobile gaming, console gaming, and PC gaming), platform (online and offline), and geography (APAC, North America, Europe, MEA, and South America).

The gaming market is diverse and can be recognized in different segments through its type (casual gaming & professional gaming), device (mobile, console, and PC gaming), platform (online & offline), and geography (APAC, Europe, and the Americas). Microsoft’s gaming revenue faced a decline in its Q4’FY22 results due to a decrease in Xbox hardware sold (revenue declined 11% – can be affected due to lower console demands), a reduction in Xbox content and services (decreased by 6%), but was partially offset by Xbox Game Pass subscriptions.

All the games that Activision Blizzard offers are comprised of games that are for casual and professional gamers (mostly casual gamers). According to ResearchGate, hardcore gamers (regardless of gender) typically spend twice the time a casual gamer would. Why is this significant? High engagement hours would mean gamers (regardless of casual or professional) would most likely spend on a game if they spent a lot of time in it. Whether cosmetics, pay-to-win features, or game-winning subscriptions, gamers are inclined to spend on a game if they spend a lot of hours playing it.

Quickly Analyzing Activision Blizzard’s Top Games

Here are quick informational tidbits on the different games that Activision Blizzard has. This information is needed to determine what type of players (casual vs. professionals/ aspiring professionals) are and who is more likely to avail the Xbox Game Pass.

NOTE: The information below are my assumptions, so take this information with a grain of salt. These are what I perceive the gaming community to be in these game franchises.

Overwatch: Mostly played by casuals, but if Overwatch 2 has a successful debut, it could easily be a new 5v5 online competitive game from Activision Blizzard that could create new aspiring professional gamers.

Diablo: Mostly played casually, increasing number of players since its mobile release.

Call of Duty: Still one of the best franchises of Activision Blizzard. It can be casual and aspiring professional gamers and can be played on all platforms.

World of Warcraft: Played by casual gamers, player count hovering over 7-8 million.

Candy Crush: Is played by casual gamers and remains one of Activision Blizzard’s strong gaming segments.

With the speculations and assumptions on what type of gamers will play Activision Blizzard’s games, I also included if their gamer base/population is most likely to avail of the game pass. Again, these assumptions are mine, and without further guidance on the specific perks & benefits (other than Microsoft’s announcement stating that ATVI games will be included in the Xbox Game Pass), my assumptions are based on the possible rewards players would receive on the type of game they have.

My verdict on who’s most likely to avail the Xbox Game Pass: Although it’s difficult to benchmark the value of the Xbox Game Pass with the price/performance for ATVI games since they haven’t released detailed perks & benefits for ATVI games (obviously, they’d release that information once the deal takes place), I think that it would all come down to the number of casual gamers in the game.

Even if aspiring pro/pro gamers spend more time on the game, that doesn’t necessarily equate to the number of the revenue made from the Xbox Game Pass. Since there are more casual players than aspiring pro/pro players, I’d say that revenue would be made from the game with a high number of casual players, such as Candy Crush, Diablo, and maybe even Call of Duty. I’ll have to wait on management’s announcement of the anticipated perks & benefits for the ATVI games once the deal is complete.

According to Yahoo Finance, the casual gaming segment is forecasted to be significant in the following years. They also mentioned that there would be an increased adaptation to mobile games because of mobility (everybody has phones). Casual gamers will also play on online platforms since playing games are way more fun and enjoyable when played with other people. Lastly, they stated that casual gamer growth would come from APAC. In a market that’s projected to grow at a CAGR of 12%, it’s fair to say that Microsoft wants to be a part of that market. However, is Activision Blizzard really an excellent choice for Microsoft?

Is Activision Blizzard Acquisition A Good Addition?

The deal is set to take place in the first half of 2023 or once Microsoft’s FY23 has ended. Personally, I think that the ATVI acquisition is good because ATVI is already well-established in the different gaming communities, and its game portfolios are already available on various platforms and devices.

For example, its Call of Duty franchise is available on consoles, PCs, and mobile, making it more accessible to casual and pro gamers. Since ATVI already has established game titles, and most of them are available on all platforms and devices, I think they can ride with the trend of the growing gaming market. Plus, I believe that ATVI games are readily compatible with the Xbox Game Pass. For example, they can release new skins in Call of Duty, maybe rewards in Diablo, an exclusive hero in Overwatch. These are just examples; we’ll surely know what the perks and benefits would be once the deal is completed.

ATVI will also release new games and sequels to its game portfolios in the second half of 2022. The effects (increased MAUs, potential Xbox Game Pass subscribers, and game purchases) would last until 2023 if the games meet or beat the gaming community’s expectations. I also have assumptions about how many people would like to invest in Xbox Game Pass, and it’s only hypothetical. ATVI reported 361 active users versus 362 million in the prior quarter, so let’s say that 50% can afford the Xbox Game Pass subscription, so that’s 180 million, right?

Of the 180 million players, only 10% are willing to subscribe to the service; that’s 18 million. These are my assumptions regarding the Xbox Game Pass subscription; with ATVI’s monthly active user count and assuming 18 million players would avail the cheapest Xbox Game Pass subscription ($9.99). This would mean that Xbox Game Subscription revenues alone would be:

25 million (current Xbox Game Pass sub count) + 18 million (potential players that would avail the Xbox Game Pass from ATVI’s gaming community) * $9.99 (assuming they choose the cheapest option) = $205 million in revenue from Xbox Game Pass alone.

These assumptions of mine are based on the current subscribers and a hypothetical figure of how many people would subscribe from ATVI’s community. The assumptions are imaginative. It’s just to give a perspective of how much revenue it will bring for Microsoft’s More Personal Computing segment, specifically in gaming revenue. I think the figure I calculated above could grow (it depends on the games that ATVI will release if they meet the standards or not).

I also think that once there’s so much value in the Xbox Game Pass, this gives Microsoft pricing power over its subscription. Amazon (AMZN), for example, increased its Amazon Prime subscription due to macro factors. I think that once subscribers depend on the perks and benefits of Xbox Game Pass, Microsoft can change the prices at will. It all comes down to whether the current subscribers can afford to continue the Xbox Game Pass subscription.

Conclusion

I think that Microsoft is taking a significant step toward fortifying and making Xbox Game Pass much better. The deal is set to take place at the end of Microsoft’s FY23. With ATVI’s gaming community and Microsoft’s gaming community merging into one, more players might subscribe to Xbox Game Pass, which can also mean that Microsoft will gain pricing power over its game subscriptions. It’s also an excellent opportunity for Microsoft to increase its gaming market coverage and grow revenue in its More Personal computing segment. The deal is not complete yet, so I’d rate the stock as a Hold for now and will continue to follow the company for its future endeavors.

Thank you for reading, have a great day.