Name: Why Microsoft's $80 Billion Xbox Bet Backfired
Uploaded: 2026-07-16T18:00:00Z
Duration: 6 min 19 s
Description: Struggling to keep up in the console market, Microsoft’s Xbox made a big bet on its Game Pass subscription service. Now Xbox is calling for a “reset” of its business. Here’s what went wrong.

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Struggling to keep up in the console market, Microsoft’s Xbox made a big bet on its Game Pass subscription service. Now Xbox is calling for a “reset” of its business. Here’s what went wrong. Photo: George Downs

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Struggling to keep up in the console market, Microsoft’s Xbox made a big bet on its Game Pass subscription service. Now Xbox is calling for a “reset” of its business. Here’s what went wrong.

Why Microsoft's $80 Billion Xbox Bet Backfired

For years, Microsoft's Xbox struggled to keep pace with Sony's PlayStation and Nintendo. So it bet its future on a different model, a subscription service called Game Pass.

We're looking at the massive success of Netflix in television and they though subscription was the future and they could do it for video games.

Microsoft spent more than $80 billion to acquire game studios and bring major franchises like "Call of Duty" and "Fallout" onto Game Pass. It was one of the biggest bets in gaming history, but now Microsoft is cutting more than 3,000 jobs across Xbox, about a fifth of the division, and selling or spinning off five game studios. So what went wrong?

Microsoft got into the video game business in the early 2000's with the Xbox console. They were competing with the already established players, Sony and Nintendo.

The Xbox is everything the Rock is, cutting edge, powerful, exhilarating.

Consoles typically lost money and Xbox often lagged its competitors in sales. So in 2017, Microsoft launched Game Pass. For $9.99 a month, subscribers could play a library of games on their console. With Game Pass, Xbox though it could generate recurring revenue without having to win the console wars.

They were ahead of the curve. There wasn't any other company that was offering anything comparable.

The following year, Xbox announced that its first party games would be available on Game Pass the same day they were released.

All the idea at Xbox games you just saw will premiere on Xbox Game Pass day one.

Instead of paying up to $70 for a new game, fans could play it on launch day with their $10 Game Pass subscription.

The only concern I ever see is people saying, "Is it sustainable?"

Right.

Like can you continue this? And I'll say, Game Pass right now is doing very well for us.

They were entirely focused on gaining subscribers and they thought just like Netflix had done in video and Spotify had done in audio, that when they eventually gained enough subscribers, they'd be able to raise the prices on them, they'd be the dominant player in the industry, and then they'd become really profitable.

How is Xbox not just going to lose money handover fists on this?

Yeah, a lot of people say that. We always kind of laugh. We just listen, please don't worry about us, like Microsoft.

And at that time, Xbox was showing promising signs. With the pandemic supercharging the video game industry, Game Pass surpassed 15 million subscribers. Xbox's revenue from content and services increased 11% from the year before.

They thought this was the moment that they could get everybody hooked onto Game Pass.

Microsoft went on an acquisition spree to add more games to its portfolio, buying ZeniMax Media for more than $8 billion, and Activision Blizzard for 75 billion. Now Xbox owned franchises like "Fallout," "Doom," "Candy Crush," "World of Warcraft," and "Call of Duty."

People were surprised that Microsoft was spending so much on games. It's a pretty small part of Microsoft's overall business.

But Microsoft wanted to be a major player in gaming and it was willing to spend to get there. By 2022, Game Pass was available on a range of devices and cost up to $14.99 a month.

I think it will stay in that 10 to 15% of our overall revenue and it's profitable for us.

Yet that same year, Game Pass missed its subscriber growth target by a wide margin. After the Activision deal closed, Microsoft wanted to make a big splash with the next "Call of Duty" release. The company chose to release it on Game Pass on day one.

This was a huge deal because "Call of Duty" sequels sell tens of millions of copies typically for as much as $70 per unit. So to put it on Game Pass and forgo all that revenue just to gain subscribers was a pretty risky move.

"Black Ops 6" set a record for Game Pass signups on launch day, but industry analysts questioned the business model.

The economics of spending several hundred million dollars to make like a "Call of Duty" sequel and then put it on a subscription service that costs somewhere between 20 and 30 bucks a month were just not panning out for them at all.

According to regulatory filings, Microsoft acknowledged that adding titles to Game Pass would cannibalize retail sales, but the company still released new games on day one.

So then in 2025, with the next Call of Duty game, they decided they would have to raise the price of Game Pass in order to make these economics work.

Xbox raised the price of Game Pass' ultimate tier from $19.99 to $29.99, a 50% increase.

We shed millions of subscribers over the span of a few months. We corrected that offering, pulling a title out, bringing the price down. At the same time, the rising cost of memory chips is squeezing Xbox's hardware margins. For three straight quarters, Microsoft's gaming revenue has declined year over year. And while Xbox had projected that Game Pass would reach 77 million subscribers this year, it currently has less than half of that. In February, Xbox appointed a new CEO, Asha Sharma, who had worked as an executive at Instacart and in Microsoft's core AI division, but had no background in video games.

When you bring in somebody like that, what you're saying is we need somebody from the outside who's going to think about it in a whole different way.

To some industry analysts, Xbox restructuring was a long time coming.

Its profit margin is only about 3%, which is pretty awful for a big company like Microsoft. They could be making more of a profit margin by just investing that money into like a bank account.

Other gaming companies are also dealing with a post-pandemic slowdown.

But the other issue Microsoft has from having made this huge bet on Game Pass is unique. No other game company kind of staked its future on a subscription service the way that Microsoft did.

Now, Microsoft is changing course. In recent months, Xbox cut the price of Game Pass Ultimate to $22.99 and it won't be releasing the next "Call of Duty" game on Game Pass on day one. The company says that after more than eight months of decline, Game Pass is starting to grow again.

They've set this very ambitious goal of having a billion daily players. Right now they have something like 500 million monthly players, so they haven't had a long way to go to get there. But I think Microsoft wants to get to that level by investing in its big franchises and by also becoming a better partner for independent game developers.