I've written about it before here, but I think GamePass is a more potentially lucrative venture than people give it credit for - and would bring in enough revenue to support a substantial investment into AAA development should they see the need to.
$10/month is the equivalent of 2 full priced games a year. $15/month is the equivalent of 3 full priced games a year. And $20/month is the equivalent of 4 full priced games a year. With any consumer group, there are power users and those that aren't. With that logic in mind, there are people who spent well over the price of 2-4 full priced games a year, and there are those who spend less. Depending on the price point, while you're losing potential revenue from your more engaged gamers, you're making more than you otherwise would have from those who are less engaged - so it balances out in a way in the end.
I'm pulling these numbers out of my ass, but lets be conservative (I have no idea if I'm being conservative) and say that at its peak - Microsoft has 20,000,000 active subscribers to Gamepass. That would be $2.4 billion to $4.8 billion in revenue annually, depending on the $10-20/month subscription cost. Every additional 5 million subscribers would be $600 million to $1.2 billion in additional revenue annually. Now that's revenue exclusively from the subscription. That doesn't include consumers who are still purchasing games, and the purchase of downloadable content - given that Gamepass only gives you the base game and not season passes / expansion packs. That seems like a fairly significant amount of money to me?
I think this model is beneficial to Microsoft in a way the AMC's A-List subscription is beneficial to AMC. I'm a subscriber to AMC A-List for $20/month, and while I easily make out like a bandit in terms of how many movies I'm watching a month - I ultimately find myself watching movies I otherwise wouldn't have. Yes, had I had to pay for the 8 movies I saw this month in theaters - AMC would stand to make more money. But I probably would not have watched 6 of those movies. Furthermore, since I find myself in the theater more often, I'm probably not saving as much as I feel like I am given concession purchases. The same is true for Microsoft. Simply because consumers are playing all of these games on Gamepass, does not mean that Microsoft is losing money - because someone consuming something on a subscription model does not mean they would purchase that item through traditional means had they not been able to play it through the subscription service. And since they're going to have consumers trying games they otherwise would not have, Microsoft stands to have situations where consumers enjoy games they otherwise would not have - and then purchase DLC / season passes for games they otherwise would not have.
I think Microsoft's short term and mid term goals for GamePass and First Party development is to create a value proposition that is irresistible to gamers, and bolster the existence of a subscription game platform to a generation of gamers - establishing it within the zeitgeist of gaming, similar to what Netflix did from 2012 until recently with streaming television. It's not a matter of what's practical, economical, or sustainable in the short term - it's a matter of creating a culture of dependency. And to do so, I believe they'll be willing to pump a ridiculous amount of money into creating that foundation. That's why they've purchased seven studios, created two (three if you include Playground Games second full team), significantly bolstered the workforce of existing and newly acquired studios -and on top of the fact that they're seemingly not done acquiring studios.