Microsoft Corporation (MSFT) took less than 15 hours on Jan. 22, 2021, between announcing a large price hike for its Xbox Live Gold subscription plan and offering an apologetic retraction in the face of fierce and widespread criticism. Microsoft had planned to double the annual cost of Xbox Live Gold in select markets, including the United States. In its original announcement, Microsoft said: "In many markets, the price of Xbox Live Gold has not changed for years and in some markets, it hasn't changed for over 10 years."

  • Microsoft had planned to double the annual cost of Xbox Live Gold membership plans in select markets, including the United States.
  • In the face of heavy criticism, Microsoft rescinded the price hikes on the same day that they were announced.
  • Microsoft has retained incentives for Xbox Live Gold members to migrate to the costlier Xbox Game Pass Ultimate plan.

What Is Xbox Live Gold?

Xbox Live Gold is one of four monthly Game Pass plans offered by Microsoft. Its key features are, per Microsoft:

  • Get 2 free games to play every month.
  • Join the greatest community of gamers on the most advanced multiplayer network.
  • Experience the best in competitive and cooperative online console multiplayer.
  • Save up to 50% on select titles in the Microsoft Store.

Xbox Live Gold is not the most comprehensive and expensive gaming plan offered by Microsoft. Rather, that is Xbox Game Pass Ultimate, which includes all features of Xbox Live Gold and more.

How Microsoft Planned to Hike Prices

The bullet points below list the planned changes originally announced by Microsoft on the morning of Jan. 22, 2021, along with the changes made in the evening of the same day:

  • Existing members with 12-month and six-month plans will see no price increase and can renew at their current prices. This offer stands.
  • For both existing and new members, the price of a one-month plan was to increase from $9.99 to $10.99. This price hike was canceled.
  • For both existing and new members, the price of a three-month plan was to increase from $24.99 to $29.99. This price hike was canceled
  • For new members, the price of a six-month plan was to increase from $39.99 to $59.99. This price hike was canceled.
  • Existing Xbox Live Gold members can upgrade to Xbox Game Pass Ultimate at no extra cost, for the remaining term of their current Gold membership, with a cap of 36 months. This offer stands.

In 2020, Microsoft stopped offering new 12-month Xbox Live Gold memberships, which had been priced at $59.99 per year. The upshot of all the above was that, for new members, Microsoft had planned to double the cost of a 12-month membership to just under $120. However, in its updated announcement, Microsoft indicates that $59.99 12-month memberships are available. Meanwhile, Sony Corporation (SNE) is holding the price of a 12-month subscription for PlayStation Plus at $59.99.

The standard price of Xbox Game Pass Ultimate is $14.99 per month, but Microsoft is trying to lure new members with a promotional price of just $1 for the first three months. An obvious conclusion is that Microsoft is looking to move existing and prospective Xbox Live Gold members to the more expensive (at just under $180 per year, at the standard price) Xbox Game Pass Ultimate. This still appears to be the case, given that Microsoft still is offering incentives to upgrade.

Microsoft’s Apology and Retraction

Microsoft added this statement, in bold type, at the top of its amended Xbox Live Gold pricing announcement:

We messed up today and you were right to let us know. Connecting and playing with friends is a vital part of gaming and we failed to meet the expectations of players who count on it every day. As a result, we have decided not to change Xbox Live Gold pricing.
We’re turning this moment into an opportunity to bring Xbox Live more in line with how we see the player at the center of their experience. For free-to-play games, you will no longer need an Xbox Live Gold membership to play those games on Xbox. We are working hard to deliver this change as soon as possible in the coming months.
If you are an Xbox Live Gold member already, you stay at your current price for renewal. New and existing members can continue to enjoy Xbox Live Gold for the same prices they pay today. In the US, $9.99 for 1-month, $24.99 for 3-months, $39.99 for 6-months and $59.99 for retail 12-months.
Thank you.

The original price increase announcement appears verbatim below this statement, but with lines drawn through the passages that detail the planned price increases that were rescinded.

Significance for Investors

Microsoft apparently believed that it has significant pricing power with Xbox systems and subscription packages. Moreover, it seemed emboldened by its ability to quickly build up the ranks of Xbox Game Pass members to 15 million by September 2020, partly through $1 introductory offers.

However, a critique in tech-related website The Verge called the planned price hike "[a] poorly timed and clumsy move" that "risks a year of goodwill." Moreover, the author pointed out some extreme anomalies that the price hike would have created: "That means many Fortnite players will now have to pay $120 a year just to play on an Xbox console. Fortnite on PlayStation and Nintendo Switch is free, and even on Microsoft's own Windows platform, it's free to play. In fact, PC gamers playing Xbox Live-enabled games don't even have to pay for Xbox Live Gold to access multiplayer. It's a bizarre situation for Microsoft to knowingly place itself into."

At the time of the price hike announcement, it was unclear whether this was a masterful exercise of pricing power or a colossal blunder that would create significant ill-will toward the company. The latter now seems to be the case.

In particular, as a tech giant that is very much under the political microscope, Microsoft generally needs to tread lightly. The commentary in The Verge noted: "That’s a huge jump and a badly timed one: it's happening in the middle of a pandemic, just as Microsoft has reported big boosts to its gaming revenue throughout 2020."

Looking Ahead

The only open questions now remaining are how severe and long lasting the damage to the company’s image will be, and what effect it will have on the future of the Xbox product line. Also worth watching are what repercussions, if any, will be in store for the Xbox executives who created this disaster. Indeed, Microsoft has an earnings release and earnings call scheduled for Jan. 26, 2020, and it is possible that this escapade will spur some questions for management.