Details
Xbox Game Pass has 25 million subscribers, and generated $2.9 billion in revenue in 2021, accounting for nearly 20 percent of total Xbox revenue ($16.3 billion). After growing during the pandemic, revenue and subscriber growth has been falling short of expectations. The Xbox team does not believe that optimizing the existing business model will drive the growth that is needed. They are considering three options:
• Option 1 – Moving from a subscription model to a usage-based model
• Option 2 – Moving from a subscription model to a usage-based model with member deals and discounts
• Option 3 – Retaining existing customers through a loyalty program
What to do
1. Research the video gaming industry and describe the trends in the market and the competitive environment for Xbox over the last 10 years. Limit your answer to 1 page, and cite at least 3 primary resources to support your summary.
2. The Xbox team have requested that your support. Read the case study: https://hbsp.harvard.edu/import/1125134 B>, and answer the following questions:
Option 1
A. Excluding the non-monitizers, what are the three customer segments, and how many users are in each segment?
B. How much monthly revenue does Microsoft generate from subscriptions in each segment, and in total?
C. Based on Microsoft’s experience, what is the biggest risk of moving from subscription to usage-based pricing?
D. If Microsoft adopts the usage-based pricing model, how much monthly revenue would be generated from usage in each segment, and in total?
E. What is the total revenue difference between the subscription-based and usage-based pricing models?
A. What is the strategic goal of including member deals and discounts in the usage-based pricing model?
B. What is the trade-off that Microsoft makes in terms of revenue generated in the Game Pass store by offering deals and discounts?
C. What is the monthly revenue generated in each segment and in total from usage if member deals and discounts are implemented?
D. How much monthly revenue would Microsoft generate in each segment and in total from purchases by offering deals and discounts in the Game Pass store?
E. What is the total usage and Game Pass store revenue in each segment and in total?
F. What is the difference in total revenue between the subscription and usage options for each segment and in total?
Option 3
A. How did Microsoft structure the Xbox loyalty program?
B. The average customer lifetime for minnows, dolphins and whales based on churn rates is 20 months, 25 months and 33 months, respectively. What is the forecasted customer lifetime for each segment if the loyalty program is implemented?
C. What is the increased revenue in each segment and in total based on reduced churn?
D. What is the cost (lost revenue) of loyalty point redemption in each segment and in total?
E. What is the incremental revenue of the loyalty program in each segment and in total?
3. Summarize the financial impact of the three strategic options. What option do you recommend to the Xbox team to drive the growth that they need? Base your answer on your quantitative assessment in question 2 in the context of the strategic assessment of the market trends that you described in question 1. Limit your answer to Vi page.
4. In October 2023, Microsoft’s $68.7 billion acquisition of Activision Blizzard was approved by regulators. Microsoft plans to launch Activision Blizzard games into Game Pass.
• Describe the strategic rationale for the Activision acquisition.
• Describe how your strategic recommendation (Question 3) aligns with, and contributes to the success of the acquisition.
Limit your answer to 1 page and cite at least 3 primary resources to support your arguments.