What’s Really Behind Microsoft’s Strategy for ‘Call of Duty’ and Game Pass

Microsoft’s “Call of Duty” gaming franchise is a revenue colossus. In 2022, for example, “Call of Duty: Modern Warfare” generated more than $1 billion in the first 10 days of its release for Activision, which Microsoft bought in 2023. Last month, Microsoft said “Call of Duty” was the primary driver of 51% revenue growth in its Gaming division during the company’s third quarter.

With such massive numbers, Microsoft’s decision to change how it distributes the game raised some eyebrows. Microsoft will offer an option to access the next edition of “Call of Duty” this fall through the Xbox Game Pass subscription streaming service – rather than exclusively selling the game on discs.

What does Microsoft’s move say about the video game and entertainment industry? The Darden Report checked in with Assistant Professor of Business Administration Anthony Palomba for some ideas. Palomba’s research includes a focus on entertainment consumption and consumer behavior, including trends in the video game industry.

Anthony Palomba has expertise in audience analysis, media innovation and firm competition, and entertainment science. (Photo by Stephanie Gross)

What’s behind Microsoft’s move with “Call of Duty”?

Microsoft’s decision is a strategic move aimed at bolstering the growth of Game Pass and establishing it as a dominant platform in the gaming industry. By making one of the most popular and lucrative gaming franchises available through Game Pass on launch day, Microsoft is leveraging the immense appeal of “Call of Duty” to attract more subscribers to its service, and to move further toward being platform agnostic (meaning that you can play the game on your laptop, PC, television or other related devices with just a Microsoft controller). This move aligns with the broader industry shift towards subscription-based models and the growing popularity of game streaming services.

Additionally, Microsoft’s acquisition of Activision Blizzard has given the company control over the franchise’s distribution and monetization strategies. By leveraging this ownership, Microsoft can experiment with alternative revenue models and potentially reshape the industry’s traditional sales approach. In-game purchases have become popular among numerous video game players, and I imagine Microsoft seeks to further capitalize on this.

There are also analytics to consider here. It is far easier to measure how consumers play a video game through a streaming service than through a physical disc. You can better predict which consumers will make an in-game purchase, or win, or need help, or, really, any other question your imagination can carry you to. Finally, there are cost-saving measures here in not needing to split fees with video game stores, distributors, and other related channel partners. Video games are now being sold at $70 a pop, and were at $60 for several decades. This will help ensure that video games stay relatively affordable for consumers.

What are the larger forces at play in the streaming and entertainment industries?

They are undergoing a significant transformation driven by changing consumer preferences and technological advancements. The rise of subscription-based models, such as Netflix for video streaming and Game Pass for gaming, has disrupted traditional distribution methods and challenged the dominance of physical media sales. Younger consumers are increasingly favoring convenience, accessibility and affordability over outright ownership. Streaming services offer a vast library of content accessible from multiple devices, catering to the on-demand consumption habits of modern audiences. This shift has led to a decline in physical media sales and a growing emphasis on recurring revenue streams through subscriptions.

Furthermore, the proliferation of high-speed internet and cloud computing technologies has enabled the growth of game streaming services, allowing gamers to access and play resource-intensive titles without the need for powerful hardware. This has opened up new avenues for content distribution and monetization, challenging the traditional model of purchasing physical copies or digital downloads. Streaming services and social media have been platform agnostic since their respective inceptions, and we can see that YouTube, Tik Tok and Netflix are dominant in user time spent. Video game parent firms need to break into this and seize user time spent from these cross-platform competitors.

How is consumer preference changing?

Gen Z, known for their digital nativity and preference for on-demand access, is driving the adoption of subscription-based and streaming services. They prioritize convenience, flexibility, and the ability to access content across multiple devices without the constraints of physical media or ownership.

Unlike previous generations, Gen Z is less influenced by established traditions in media consumption. They desire to comment on, critique and customize content based on their preferences. This generation is less concerned with shared experiences and sees individualized content engagement as a viable and attractive trade-off.

Gen Z’s affinity for subscription models aligns with their desire for variety and constant access to new content. Services like Game Pass offer a vast library of games that can be explored and played without the need for individual purchases, catering to their preference for diverse experiences and value-conscious consumption.

Where is this heading?

Towards a future where subscription-based models and on-demand access become increasingly dominant.

We can expect to see further consolidation and competition among major players in the streaming space, as they vie for market share and strive to offer the most compelling content libraries and features to attract and retain subscribers. Exclusive content and original productions will become even more crucial in differentiating streaming services and driving subscriber growth. Additionally, managing the content library quality, and its variance, will be just as important, particularly for smaller players.

In the gaming industry specifically, cloud gaming and game streaming services are poised to gain significant traction, as technological advancements in internet infrastructure and cloud computing enable seamless and high-quality gaming experiences without the need for powerful local hardware. This could potentially disrupt the traditional console and PC gaming markets, as gamers increasingly embrace the convenience and accessibility of streaming platforms.

I also think that generative AI will enable us to begin to test new characters, intellectual properties, prospective franchises in incredible manners. Building a mock-up world for fans and consumers to interact in for an unpublished work of art can allow creators and consumers to co-create together. If all gamers are available all the time across all devices, this can change how creation and research is conducted in the entertainment and cultural arts industries.

While the specifics of this evolution remain uncertain, one thing is clear: the future of entertainment consumption is increasingly streaming-centric and subscription-based.