The question of Game Pass profitability has been debated within the games industry ever since the debut of Microsoft’s subscription service in June 2017. The way many saw it, Microsoft could use its near-endless pockets to subsidize the service for a while, but not forever. At some point, Game Pass had to become profitable on its own.

Over time, Microsoft has always maintained that Game Pass was indeed profitable and sustainable. In December 2019, Phil Spencer, head of the gaming division, said:

The only concern I ever see is people saying, “Is it sustainable? Can you continue this?” I’ll say, Xbox Game Pass right now is doing very well for us and the people who are in it, and it’s something … I think it’s going to be really interesting, as Xbox launches next year, and it will be an interesting thing as people think about, “Wait a minute, I already have this library of games on this platform.” We’ve never had a console that’s launched with a library of games that people are going to have available day one.

However, between the slow growth of the subscriber base and the recent studio closures and layoffs, Game Pass is once again under fire by analysts and developers alike who believe that Microsoft may have bet on the wrong horse and that ultimately, it won’t be sustainable in the long run.

Now, Chris Dring, former GamesIndustry.biz Editor in Chief and now co-founder of The Game Business, has shared some important details on how Microsoft is allegedly calculating the profitability of the subscription service. Writing on X, he said:

So costs associated with the Game Pass business is fees paid to third-parties, marketing, service costs… and by that measure, it’s profitable. What they don’t count is the lost revenue that Xbox’s first-party studios are seeing as a result of the service. I have to imagine if first-party studios received similar compensation, that profitability might not be correct.

Dring later clarified that he explicitly asked for clarification and was told that first-party costs were not included. Needless to say, that changes a lot, especially now that Xbox first-party studios include not only the likes of The Coalition, Halo Studios (formerly 343 Industries), et cetera, but also Bethesda and Activision Blizzard, two large publishers that own some of gaming’s most prized intellectual properties. There’s inevitably going to be some lost revenue by putting the likes of Call of Duty, Diablo, and DOOM on a subscription service like Game Pass from day one. How long Microsoft can afford to keep doing that remains to be seen.