Microsoft Excludes Its Own Game Development Costs from Game Pass Profitability Calculation

Is Microsoft’s Game Pass Profitability Calculation Transparent Amid Controversy Over First-Party Development Costs?

The recent mass layoffs and game cancellations announced by Microsoft have reignited the debate over the viability of Xbox’s primary product: Game Pass. For years, discussions centered on whether the service was profitable for Microsoft. The company consistently asserted that the system functioned without incurring losses but never fully clarified the economics behind a subscription model that grants access to an extensive game catalog, including all first-party launches. A core point of contention has been Microsoft’s accounting practices for Game Pass profitability. Critics have questioned the business model, particularly whether it might be losing money when considering first-party development costs. Microsoft reportedly does not include the expenses associated with creating its own games when calculating Game Pass profits, which some argue could lead to an underestimation of potential income loss for its internal studios due to the service.

Game Pass Profitability Transparency in Question over Microsoft’s First-Party Game Cost Exclusion

Journalist Christopher Dring, co-founder of The Game Business and former editor of GamesIndustry.biz, highlighted this accounting arrangement. Dring initially reported that Game Pass’s supposed profitability hid a questionable practice: the exclusion of development costs for Microsoft’s own games, which are a major selling point of the service. He explained that Game Pass’s reported profits primarily reflect costs associated with third-party deals, marketing, and service operations. Dring reported that Microsoft confirmed costs linked to first-party games were not included in these profit calculations, leading to concerns about the true financial picture. Dring, well-connected within the video game market, did not comment on the origin or timing of this initial information.

However, Dring later provided crucial clarification after 18 months of inquiries to Microsoft about Game Pass financial reports. While reiterating, “I Requested Clarification on Game Pass Profitability and Was Told First-party Costs Are Not Included,” he clarified that Game Pass is, in fact, profitable even when accounting for lost earnings from Microsoft’s in-house teams. According to sources that contacted Dring, this includes lost revenue from game sales and microtransactions for first-party titles. In other words, while the actual development costs of games are not counted against Game Pass, the opportunity cost of lost sales on Xbox and PC is factored into the profitability assessment. The situation is further complicated by the fact that Xbox Game Studios’ first-party games have been distributed on PC and other consoles since last year. For example, while Call of Duty is available via Game Pass on PC and and Xbox, it is sold as a premium game on PlayStation and other PC distribution channels. Attributing its production costs entirely to Game Pass management could distort the overall financial picture.

Game Pass Model Criticized for Industry Impact and Potential Job Losses amid Subscription Rate Speculation

Beyond accounting specifics, the Game Pass model has faced broader industry criticism. Raphael Colantonio, founder of Arkane Studios (now a Microsoft property), has argued that the subscription service is an unsustainable model that has increasingly harmed the industry over the past decade, subsidized by Microsoft’s significant financial resources. He suggested that decisions related to Game Pass might have led to job losses at Xbox Game Studios, potentially reducing choices for gamers. Amidst these discussions, some fans anticipate an increase in Game Pass subscription rates based on recent developments. Ultimately, Dring notes that despite the clarifications, the debate about whether Game Pass is beneficial or detrimental for the gaming industry remains unsettled.

In Case You Missed It

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