Microsoft Morphs Xbox Into a Subscription Service

Businesses keep finding new ways to adapt the "something"-as-a-service model, and Microsoft (NASDAQ: MSFT) may just be out ahead of the curve with this one: It's going to offer an all-inclusive package of games and Xbox hardware as a subscription.

This will mean far lower up-front cost to get into its gaming universe, and -- as Market Foolery host Mac Greer and senior analysts Matt Argersinger and Aaron Bush note in this segment from the podcast -- a sticky product that gamers will be less likely to opt out of. Does this foretell the future of gaming?

A full transcript follows the video.

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This video was recorded on Aug. 29, 2018.

Mac Greer: Guys, I want to close with a story that played out earlier in the week, but we haven't talked about it yet on Market Foolery: Microsoft turning the Xbox into a subscription service. They're selling it much like Apple (NASDAQ: AAPL) sells its iPhones. Now, that means you can buy an Xbox like you'd buy an iPhone, paying off the cost over two years. Aaron, good move for Microsoft?

Aaron Bush: I think this is a very underrated move from Microsoft. If you unpack this news a little bit, this is their all-access pass that they announced. That means that instead of paying up front for a console, you can pay monthly, which makes it easier for some gamers to enter that market. But it also bundles their Live service, which lets people play online, and it includes Game Pass, which is their Netflix-like bundle of games that all of these people will then have access to.

A month or two back, when E3 came out, I mentioned on Motley Fool Money, I think, that Microsoft is a dark horse. A lot of the moves that they are making point to the future of gaming better than most any other video game company I've seen. A couple of points that I think are interesting. One, I think the future of gaming is almost definitely going to be streaming-based. That means that consoles could eventually disappear. Instead, the gaming companies will have to host these games on their own servers, and then could stream it to literally any device that a gamer might want to use. Obviously, that has huge ramifications for Xbox. But if you think about all of the gaming companies, who is better positioned than Microsoft to host using their Azure platform, the streaming capabilities?

And if you assume that streaming is going to be the future of gaming, and if gaming becomes 100% digital, then that naturally lends itself to subscriptions. Xbox is getting ahead of the curve by being one of the first out there. But it's also the case where, it doesn't make sense for all of these different publishers to have their own subscriptions. People likely won't pay up for that. EA is trying. I'm a little skeptical. But I do think what makes sense is that there will be a few players that can aggregate a lot of the different content from other publishers and put it together. To me, it makes sense to be someone like Xbox, who has the platform, who has the streaming, computing capabilities and can bundle it all together. I think we're seeing the future of gaming, where aggregation is going to move the industry, and a lot of money could be made for the winner.

Matt Argersinger: Yeah, so well put, Aaron. You covered it all. People, right in the near term, are going to focus on the cost savings. "Oh, if I do this, I save a little bit money, I'm able to pay over time." But this is really, as Aaron put it, a mindset shift for Microsoft. The world is definitely going console-less. It's definitely going streaming. By getting people in that subscription mindset today, so that they're used to paying a fee every month to keep playing these games, get on the platform, get used to it, and always want to be a part of it, it gets out of this whole, like, "Every two years, the new console's out, I want to go buy it." No, you're already on the platform. You just have to decide to keep paying every month. It's much stickier.

Greer: We mentioned Apple earlier in the conversation. I'm curious, if this plays out, Aaron, like you think it might, with Microsoft being really underrated in this space, what do you think the chances are in the next five years or so that Microsoft overtakes Apple in market cap? Apple won the race to a trillion. What do you think?

Bush: Oh, man, that's tough. I don't know how much I'd bet on that. Apple tipped the trillion-dollar market thing. I think Microsoft right now is an $800 billion business. So, I wouldn't put it past them. I don't know. I don't know if I would take that bet. I think I would maybe more take it than not, because I think cloud, and if Microsoft can invest well in creating the next generation of Microsoft Office, whether it's acquiring Slack, or making really interesting moves there, they could have a longer stretch than people think. But Apple's a monster.

Greer: Matt, if memory serves, I know in the race to a trillion, weren't you Team Amazon?

Argersinger: I was Team Amazon.

Greer: OK. So, the race to two trillion, or maybe not two trillion, but, do you think Microsoft at some point in the next five years or so overtakes Apple?

Argersinger: I don't think so. I might have said that a little while ago, but the shift that Apple's making to services, I think, is going to keep them in the game. Microsoft's already been in that world. All respect to the shift Microsoft has made since the new CEO, getting more into cloud-based and services. But it could be a little more competition. I like the question, Mac, because I do think a few years from now, we'll look back and say, "Gosh, Microsoft was right there, right on their tail."

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Aaron Bush owns shares of Amazon, Apple, Electronic Arts, and Netflix. Mac Greer owns shares of Amazon, Apple, and Netflix. Matthew Argersinger owns shares of Amazon and Netflix. The Motley Fool owns shares of and recommends Amazon, Apple, and Netflix. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.