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Microsoft’s plan to raise the price of an Xbox Live Gold membership by $10 to $60 a year as of this November has once again reignited the long debate of its value. Many have dismissed it as a token increase to keep pace with inflations, or pointed at the many features that have been added for Live members over the years. And there is little question that the online gameplay experience provided by Live is superior to Sony’s. To the lay person this may seem a good value, even at the new, higher price.

But there is a problem if you actually know how Live works. When you understand what is happening behind the scenes it is hard to ignore how little of the cost for all those features Microsoft is actually paying for. Here is a quick rundown of Xbox Live Gold’s features and who actually pays the bills to run them.

  • Multiplayer Games: To Microsoft’s credit, they are actually matchmaking for games you play online through Xbox Live. But that is a fairly quick process that can be quickly executed. And frequently Publishers who want to, handle this themselves; something they do for free on PS3 and PC. MS does not host any of the actual games themselves. You do, or at least one of the Xbox owners you are playing with or against does. All games on Xbox Live are peer-hosted. The game decides which player has the fastest and most stable internet connection and that person’s Xbox becomes the server. So in essence, Gold member are paying for the right to use the hardware they bought to host games over the internet connection they also pay for. Peer hosting also limits the design of multiplayer games because it has to work on a consumer-grade broadband connection and the amount of memory and processing required must be small enough not to impact the experience of person playing on the host machine. Hard limits are placed on the number of players in a single match and the size of maps that can be practically accomplished.
  • Twitter, Facebook, LastFM: These are all free, web-based services for which Microsoft has built custom dashboard applications and then placed behind a paid gate. Sony didn’t make a big deal about them at an E3 press conference because the PS3 and PSP have web browsers built in. Microsoft could just create a web browser for the 360, too, but that would interfere with their ability to charge for access to any future web services that catch fire.
  • Netflix, ESPN3: In this case you are paying to use services you are already paying for. You must have a Netflix membership that includes Instant Streaming and for ESPN3, you can’t access that content unless it is included in your ISP’s package that you also pay for. Microsoft might argue they paid to develop custom dashboard applications to justify restricting them to Gold members, but Netflix seemed more than happy to develop applications themselves for the PS3 and Wii. And make no mistake; MS is not involved in streaming any of the content. Netflix and ESPN handle that themselves.
  • Xbox Live Marketplace: It is not widely known, but last year it was reported by the MTV Multiplayer Blog that Sony was charging publishers for hosting demos, DLC and full games on PSN. Microsoft does not. In a lot a quarters this was spun as some kind of black eye for Sony, but that interpretation ignores the fact that instead of passing those costs on to the publishers, Microsoft subsidizes those expenses with their revenue from Xbox Live Gold members. In essence, Xbox Live Gold members are also paying to host files that are marketing materials or that they’ve bought. Over the last fifteen years lot of publishers may have gotten used to being able to foist hosting costs for demos and betas onto third parties thanks to arrangements with sites like FilePlanet and FileShack, but it does not seem unreasonable to make them responsible for the expenses associated with promoting and distributing their own games. And that is aside from the fact that many demos can only be downloaded by Gold members for the first week.

What should be clear by now is that the Xbox Live Gold service is, for Microsoft, a license to print money. Their costs are extremely low and the entire system is designed to place as little burden on them as possible. Their “value added” services like Netflix streaming access are actually “value subtracted” from their free Silver membership. In fact, the more you look at it the more it seems like they must spend a lot of money thinking up creative ways to place something simple, like Twitter, behind a pay wall. And it makes very little sense to deny a Silver member who already pays for Neflix every month the ability to stream through their 360, something that literally costs MS nothing.

Further, as MS has so many revenue streams available to them thanks to Xbox Live—dashboard ads, XBLA, DLC and avatar items—it is simply inconceivable that the service doesn’t pay for itself. Now, this doesn’t change the fact that for any 360 owner with any interest in gaming online a Gold membership is indispensable. What it does illustrate is the fact that a Gold membership cannot be described as a good value.

I will leave you with this observation: The fact that you are paying isn't what makes Xbox Live better than PSN. It is better because it was better planned and better implemented by Microsoft. In practical terms, it should not cost any more to operate than PSN and all its advantages derive from smart decisions made as far back as Live’s launch for the original Xbox.