Games as services, Publishing, video games

New business models: subscription

October 2008

Last month we looked at the potential of advertising as a core or ancillary revenue stream for games companies. This month I want to turn our attention to the venerable subscription, a business model that GIC estimates will generate over $2bn in the west this year.

Subscriptions have been established as a pillar of the hard-core online games market for well over a decade although its substantial commercial potential was only really established with the 1997 release of Ultima Online. With run rate revenues of some $2.5m / month at its peak, EA’s seminal online role-playing game established a commercial precedent that almost the entire Western MMOG market was the follow. Subscriptions ultimately allow companies to more closely match their revenues with their ongoing costs and offer an upside potential far beyond any fire-and-forget boxed product sale. However, in so doing subscriptions also force companies to adopt a service provider approach for which the regular flow of new content, improvements and features as well as the provision of an accessible and efficient customer service resource are of paramount importance.

The subscription business model is highly momentum based. Many of a typical hard-core MMOG’s largest ongoing costs (such as bandwidth, hosting, marketing and customer support /community management) are theoretically variable but in practice cannot easily be switched on and off and certainly not without significant ramifications for the MMOG’s revenues. Measuring and predicting this cost momentum, combining it with the more “fixed” billing, development and admin costs, and ensuring it all comes to below the forecast revenue level takes considerable skill and practice. It is a precarious balancing act which many MMOG companies have often got wrong. For some (most notably serial MMOG cancellers EA and Microsoft) the prospect of building and maintaining this cost momentum has resulted in MMOG projects being abandoned well into their development cycle and even after they have been launched.

With a typical hard-core MMOG customer lifetime value of some $105-$145 over a 8-10 month subscription duration, the opportunity cost of losing a subscriber early can be huge. It is ironic therefore that the greatest level of churn for a typical MMOG is within the first few months of a new player’s subscription. In contrast, many MMOG companies report that after this 8-10 months period the rate of churn plummets. Others believe that this loyalty could be exploited to a far greater degree than the current $10-$15/month with special premium-priced subscriptions offering exclusive, high perceived value (but low comparative cost) content and services. Getting users over the difficult first few months is therefore a huge challenge. The use of long-term subscription discounts, free periods of play and lower subscription rates can all help but ultimately it comes down to the quality of the game, and in particular the community and service that surrounds it.

Subscriptions also represent one of the fastest growing segments of the casual online games business too. And once again it has taken EA to establish the commercial precedent from which the rest of the market is drawing inspiration. The growth of EA’s Club Pogo subscriber numbers may have slowed significantly in the last 18 months (still an impressive 1.65m at present) but the service remains the clear market leader in the casual online space generating the most revenue and providing the most sophisticated service. In fact Club Pogo has begun to display some of the traits of its MMOG cousins, with communications at the heart of the service, 90% of its subscribers having created and modified Club Pogo Minis (avatars) and 20% having even paid additional sums to further embellish their profiles. Surprisingly, perhaps, this has been achieved with a subscriber base that is around 70% female and with 40% over the age of 50.

Most of the larger casual online games publishers and portals now also offer a subscription alternative to buying titles on an individual basis, a proposition that has proven extremely popular. This usually gives players either unlimited access to a selection of premium casual download games for the duration of the subscription or gives them 50%+ discounts on individual game purchases in return for a minimum number of purchases by the player. Others have built successful subscription services around individual casual online games that have elements of player and gameplay persistence built into them such as iWin’s Family Feud Online Party.

Conspicuous for their absence at this party are the consoles (Xbox Live Gold membership excepted). With a vast ready-made audience of gamers and established billing systems, it is almost shocking that there has not been more use of subscriptions on consoles to date. The subscription model has been proven to work with even casual online games, so the argument that subscription-based console games are too high risk does not fly. Given the manifold commercial benefits of the model, we believe that it only a matter of time before the consoles start to catch up with the PC subscription market.

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