In an era when revenue from online games comes from in-game add-ons and other secondary sales, it’s a wonder that anyone is still making money off of subscription fees. Activision Blizzard (NASDAQ: ATVI) may still be making close to $2 billion per year on World of Warcraft subscriptions, but every other publisher of a massive multiplayer online role-playing game in the world has had to adopt the same free-to-play business model as your average Facebook game just to stay afloat and keep gamers active. It is remarkable, then, to find that Microsoft (NASDAQ: MSFT) and its subscription-based online gaming network for the Xbox 360 game console, Xbox Live Gold, is not just surviving but thriving.
Microsoft head of Interactive Entertainment Business Dennis Durkin announced at the credit Suisse Annual Technology Conference that Xbox Live Gold currently hosts approximately 12.5 million paying subscribers worldwide. Xbox Live, the online network that crosses Microsoft’s Xbox, Windows Phone 7, and Windows platforms giving members access to multiplayer gaming and a wealth of connected services like Facebook, Netflix and others, currently has 25 million members. Xbox Live Gold is the premium, paid-subscription version of the Live service. That Microsoft is maintaining a nearly 50% paid-subscriber base is an impressive feat, especially considering that secondary services that are free on other platforms, not gaming, are such a significant draw for Xbox Live Gold subscribers.
Durkin said that the average U.S. Xbox Live Gold subscriber spends over 3 hours per day using the service and that 40% of their time is spent using non-gaming features like Facebook, Twitter, and Netflix (NASDAQ: NFLX) instant streaming movies. What is surprising about these usage numbers is that all of these services don’t require access subscription fees on other platforms (with the exception of the Netflix-specific subscription.) Users on competing game consoles like the Sony (NYSE: SNE) Playstation 3 and the Nintendo (PINK: NTDOY) Wii do not have to pay extra for access to Netflix access beyond their NFLX bill, nor do PC users.
With increasing access to free online gaming content on a variety of platforms from smartphones to tablet PCs, investors might be thinking that Microsoft can’t possibly be able to maintain such a large subscriber base for Xbox Live, let alone hope to grow the service over the coming years. Microsoft’s entertainment division, however, seems confident that Xbox Live Gold will stay healthy as long as the Xbox 360 remains a viable and profitable platform. The subscription price for Xbox Live Gold was raised to $60 per year at the beginning of November, an increase of $10, and right in time to capitalize on both the flood of new users looking to play Activision Blizzard’s Call of Duty: Black Ops, not to mention the 2.5 million consumers who purchased a Kinect hands-free control device in the past three weeks. With the influx of new users and a new, popular add-on for the console, it appears that Xbox Live Gold should stay healthy for the foreseeable future.
Microsoft is also developing a number of new services that should help grow the service going forward. The first of which is the new Live Rewards program the company announced just yesterday. Not unlike rewards programs used by retailers like GameStop (NYSE: GME), Live Rewards let’s users build points to be used for Premium content like downloadable games and download content for disc-based games for the console. More significant to Microsoft’s future in home entertainment, however, is the rumor that emerged earlier this week that Microsoft will launch an Xbox Live television service in late 2011 or early 2012. The service would be a competitor to full cable services from companies like Time Warner (NYSE: TWX) and Comcast (NYSE: CMCSA). Word is that Microsoft has already had productive discussions with cable channel and network television companies to bring their channels to Xbox Live. Given that Microsoft’s current experiment in bringing a television channel to Xbox Live, the recently launched ESPN 3 (NYSE: DIS), requires an Xbox Live Gold subscription, it’s reasonable to assume that their future television service will also require a paid-subscription.
Microsoft’s shareholders continue to pressure the company to split the thriving entertainment division into a separate entity to free it from the flat core Microsoft business. The continued success of the Xbox Live network should only spur their efforts.
As of this writing, Anthony Agnello did not own a position in any of the stocks named here.