Microsoft is working on an All-Digital Edition of the Xbox One S, according to new rumors from Microsoft-insider news site Thurrott. This unconfirmed device does not have a disc drive and is launching soon. But this is something that we’ve heard multiple times in the past, and it has yet to materialize.

But an Xbox One S All-Digital Edition does makes sense. Microsoft has done a lot of work to ensure that something like this can work. And at the same time, it has found itself in a gaming market that is ideal for a less-expensive gaming box.

What stands out here is how different console gaming is compared to the end of the last generation. At six-to-seven years into the Xbox 360’s life, Sony and Microsoft weren’t looking to sell hyper-cheap versions of their systems to new customers. That’s largely because it seemed like those customers just didn’t exist.

In 2011 and 2012, people without consoles were choosing to spend their money on iPads and iPhones. Mobile gaming was booming. Even if consoles were less expensive, each game was still $60. And if you weren’t into Call of Duty, the zeitgeist was with Clash of Clans, Subway Surfers, and Candy Crush Saga. So putting $400 toward a tablet and its free games was more enticing than consoles for many people.

In 2019, however, the gaming zeitgeist has shifted back toward consoles thanks in large part to free-to-play battle royale shooters. And that should help sell a lot of Xbox One S All-Digital Editions.

Fortnite and Apex Legends are driving sales

Mobile gaming is still huge, but it has matured. So has smartphone hardware. Each new iPhone isn’t quite as exciting as they once were. And many of the top games on the App Store and Google Play market are still the ones that came out in 2012.

And traditional developers have started to emulate and adapt the mobile model to consoles. That has led to massive free-to-play hits like the battle royale shooters Fortnite and Apex Legends.

These two games are among the biggest in the world. Apex Legends has more than 50 million players across PC and consoles. Fortnite has 200 million players on PC, consoles, and mobile. These are the “it” attractions of the gaming world. And while you can play Fortnite on mobile, using a controller and a TV gives you a distinct advantage in its competitive environment.

And what’s crucial to understand here is that people want to be competitive. Or, at least, people are spending a lot of money to have a better experience with these games.

Accessory and currency game cards both saw huge growth in 2018. That was due to people rushing out and buying headsets and new controllers.

“Everybody’s calling it the Fortnite effect,” Turtle Beach brand boss Mac Marshall told GamesBeat in June. “And that’s what we’ve seen — although I wouldn’t limit it to just Fortnite. PUBG was right up there at the beginning as well. That battle royale scene is what’s moving the needle.”

Console sales are right in line with that. The Switch, Xbox One, and PlayStation 4 all saw year-over-year growth throughout last year.

“For 2018, hardware spending increased 8 percent to $5.1 billion,” said Piscatella. “Console hardware sales drove the growth, as PlayStation 4, plug-n-play devices, Switch, and Xbox One all experienced year-on-year gains.”

An all-digital Xbox One S can laser-target the right audience

Now think about who would want to play Fortnite or Apex Legends on a console but hasn’t purchased one yet. What’s the main reason they haven’t? Price.

An Xbox One S bundle with Minecraft sells for $205 to $300, depending on the retailer. A PS4 Slim without a game is selling for $235 to $300. That prices out a lot of people who want a console for just one or two games.

But by going digital only, Microsoft can cut the price of the Xbox One S significantly. Sure, it can remove the disc drive and reduce the overall size of the box, and that’s bound to save some dollars-per-unit. But it also eliminates the possibility of buying and selling second-hand games.

Most importantly, however, if gives Microsoft a chance to funnel a huge number of players into its ecosystem as we approach a new generation of consoles.

All about Xbox Game Pass

The Xbox One S All-Digital Edition makes a lot more sense if you pair it with Microsoft’s Netflix-like platform Game Pass. That service enables people to download and play a library of games — including almost all of Microsoft’s first-party releases — for $10 per month.

While many consumers may pick up the console to play Fortnite and Apex Legends, Microsoft could take that opportunity to introduce them to Game Pass. People who don’t like the idea of paying even $20 for a second-hand game may feel differently about paying $10 a month for more than 100 games.

Microsoft has made it clear it wants to operate as a digital gaming platform in the future. It’s still going to make high-end console gaming hardware, but its goal is to get more people on Game Pass. And it’s OK if those customers are accessing Game Pass on other devices. But that vision requires the cloud-streaming version of Game Pass, which is on the way. But in the meantime, why wouldn’t Microsoft provide an inexpensive way to do that right now with an official Xbox One?

Game Pass is definitely a play by my Microsoft to grow its addressable market. And it’s going to need to reach the kinds of people who haven’t purchased a console yet if that strategy is going to work.

The right price

But a lot of this hinges on the price of the Xbox One S All-Digital Edition. For example, Microsoft is not going to win over a lot of new converts at $200. If it gets down to $150, puts Fortnite or Apex Legends on the box, and includes 3-to-12 months of Game Pass, then that could draw a lot of attention.

The major hurdle here for Microsoft is Xbox Live Gold. You need Xbox Live Gold to play games online — even if they are free-to-play. It would likely include a trial of that with a digital-only console, but paying to play online is a tough sale for people coming from mobile.

But Microsoft could get a lot of potential customers to overlook the cost of Gold if it’s willing to sell at a shockingly low price. At $99, most people probably wouldn’t even think about Xbox Live Gold until they already had the system at home.

And while it would probably lose money at a $99 price point, this seems like the right time for Microsoft to get aggressive. Fortnite and Apex Legends are turning a lot of people into console gamers, and Microsoft has an opportunity to turn them into Xbox owners and Game Pass subscribers. And if it’s real long-term fight is about getting people into that subscription ecosystem, then losing money on Xbox One S hardware right now seems like a decent way to spend a marketing budget.