Game Pass is subsidizing parts of Xbox's business, subscriber loss caused major damage

Microsoft is apparently subsidizing multiple parts of its Xbox games division right now, including hardware and other initiatives.

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New reports from Windows Central illustrate how badly Microsoft was affected by the recent Game Pass subscriber drop. The unpopular 50% price hike led to a mass exodus and Game Pass lost millions of paid users. This caused a cascade of negative effects that rippled throughout the entire organization.

Xbox's business model is layered, with divisions subsidizing various initiatives and programs. Hardware is subsidized, meaning Microsoft sells Xbox consoles cheaper than it costs to produce them. Xbox then makes its money back (and hopefully more) from games and content. Game Pass is one of the key money makers for Microsoft (nearly $5 billion in FY25), and new reports say that Game Pass in particular has also been subsidizing parts of Xbox that aren't profitable, putting extra stress and weight on the service.

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The FTC v Microsoft trial from 2023 revealed that Xbox Cloud Gaming wasn't profitable then, and the venture had not yet been a success. It's likely that Game Pass is subsidizing cloud gaming and helping fund its development and progress over time. Game streaming is bundled as a major perk of Game Pass Ultimate, after all.

Since parts of Xbox depend on Game Pass, a drop in subscribers is more than just a reduction in services revenue. Essentially, a downward pull on something that has so much weight will pull the entire business with it, and that is what's happening, at least for now.

These problems are at a head now, and Microsoft is preparing to "reset" the Xbox business. This will lead to layoffs, maybe even studio closures, as well as potential adjustments to the Game Pass business.

Xbox CEO Asha Sharma has attempted to stop the subscriber bleed by dropping Game Pass Ultimate's price from $30 a month to $23, while also removing Call of Duty from day one releases.

There's also reports that Microsoft will offer a free, ad-supported tier of Xbox Cloud Gaming for mobile phones sometime this year.