7 December, 2005
At the recent AGC, lots of people were talking about business models. Specifically, the were talking about a "new" business model out of Korea where you can buy perks in the games. These perks include in-game items, special avatar appearance, special in-game events, etc.
Of course, those of us that have been watching the industry know that this business model is nothing new. But, I predict one thing: now that more people are aware of it, the monthly fee is doomed.
Of course, this assertion seems silly on the surface. The monthly subscription fee is wildly profitable! Look how much money the large companies are making! WoW has to be making about a million-billion dollars per year!
Unfortunately, there are a few problems here from a business point of view. The main problem I've run into as a small game operator is that this business model doesn't scale down very well. Let me illustrate: if I have 1,000 subscribers and charge them $10/month, I have a yearly income of $120,000. If another game has 1,000,000 subscribers and charges the same $10/month, then they make $120 million. Obviously, the bigger game has more funding to do more development work. Yet, to the individual players, it appears that they are paying the exact same price for a different amount of development. For the company, the only way to increase income is to increase the number of players, which requires appealing to a wider and wider audience (which often requires appealing to the least common denominator).
In addition, the income per subscriber is capped. Realistically, there's little a player can meaningfully do after they own about half a dozen accounts, and these people are the exceptions. There are certainly some people playing your game that are willing and able to spend more, but that don't really get much use out of buying more accounts. In particular, consider busy professionals that made good wages but spend a lot of time at work. (Ignoring the fact that these games don't cater to them anyway due to the huge time commitments required.) In most business, income follows the 80/20 rule: 80% of your income comes from 20% of your customers, yet the subscription model limits how much each customer can pay us.
So, what about the "pay for perks" model? In essence, it allows the customers to spend more money if they want in order to enjoy the game. Players can spend money to buy certain perks in the game such as in-game items, new avatar looks, special events, access to certain areas, etc. For the most part, these perks are optional to the player. In contrast to the subscription-based model, a game can make more money by encouraging existing customers to spend more instead of being required to expand their subscriberbase.
People currently enjoying the subscription system usually dislike this newer business model, and who can blame them? Currently they get all-you-can-eat service for a rather low monthly fee. Even at $15/month, this is cheaper than just about any other sort of entertainment. Having to pay more in order to enjoy all aspects of the game is just not as appealing. For many people, they think this type of system will allow people to "buy success" in the game, and bypass people who invest time into the game with ease. Many people feel that online games are more "fair" with the subscription model, since even the poorest college student can be the leader of a massive guild and lauded with admiration. (Of course, this ignores the fact that people with more time than money often have an incredible advantage.)
But, there are some benefits to the "pay for perks" model. First, most games that charge for perks don't charge a subscription fee. This means the game is easier to get into, and easier to take a break from since you don't have to worry about a recurring charge. In addition, this allows for a wider variety of games. Perhaps there's some genre that you're interested in that can't possibly support a million (or even hundreds of thousands of) players, such as Cyberpunk. Given the expectations set by WoW, it is unlikely that a large company would make a Cyberpunk-themed game that was true to the genre; I don't think the market for this type of game is over 1 million users given the nature of the genre. However, using a pay-for-perks model, the game could make significantly more money per individual than a subscription-based game does and thus require a smaller userbase to make a sufficient return on investment. The business model allows for the possibility of other games besides the ones that can attract the largest number of players in order to maximize profit.
This business model isn't all that unusual, either. Besides having wide acceptance in Korean online games, you can find this business model in many other hobbies. For example, golf is a great example. Everyone pays greens fees in order to play the game, but many of the other parts of the game have variable prices. For example, more expensive clubs and golf balls allow you to do better, in theory. :) You can play the game with a cheap set of clubs pulled out of the trash or expensive, custom-made clubs that look flashy. Obviously, there's still an element of player skill involved: giving me Tiger Woods' golf clubs won't let me play like he does.
We even see this in other forms of entertainment as well. I recently went to Disneyland with my better half. While looking up information about one of the restaurants in the park, I came across something very interesting. There's a place called Club 33 in Disneyland that isn't open to the general public. It was originally designed as a place for Walt Disney to host dignitaries who visited him in the park. It's a rather posh place, according to most descriptions, and it requires a special membership that costs several thousand dollars per year. Even though people pay for regular tickets to the park, only special members get access to this place. Of course, they are still able to enjoy most of Disneyland without paying this extra money, even eat at a nice restaurant right next to the club. :) But the parallels are obvious.
Even cable TV uses this model. You can pay for basic cable TV, which pretty much sucks with some notable exceptions, and then you can pay for "premium" channels that show the movies and shows you really want to watch. More recently, we've seen smaller perks available in the form of pay-per-view shows you can order. You can buy it all or just stick with basic cable if that entertains you, but people are able to pay for more in order to get more.
Finally, even current online games have toyed with this model. Even large online games have offered services such as name changes, server transfers, and other perks for payment. Although most of these perks have been small and do not affect gameplay much, they do allow people with more money to do more with the game.
So, given this new business model I feel confident in predicting the impending doom of the subscription-based model. Okay, perhaps "doom" is a bit strong of wording because the large games will always make lots of money from subscriptions; I'm sure WoW's monthly income, even just from North America, is keeping them rather happy. The real benefit will come from smaller games which are able to appeal better to niche interests. These smaller games will be able to offer game that can't attract money because they can't prove the market is at least 1 million subscribers. On the other hand, if this business model is profitable at as the games scale up, you can be sure it won't be long before the larger publishers want in on that action. Or, perhaps sooner than you think...
Looking forward, I think the worst aspect of this will be the transition between subscription-based models to "pay for perks" models here in the Western market. One of the best things about the subscription-based market is the regular income. You can budget based on projections, even if the number of players changes slightly from month to month. So, many companies are going to want to hold on to that monthly fee while trying to exploit the "pay for perks" business model to make more money. Unfortunately, this is going to give them the worst of both worlds: the barrier to entry of a subscription model with the resentment caused by the perception of people "buying success" in the game.
Most importantly, this type of business model must be designed into the game to be most effective; you cannot simply slap it on an existing game designed for a subscription-based model and expect great results. You have to be very careful that players cannot simply "buy success" in the game. In general, you want to allow people with limited time to be able to buy perks that allow them to keep up with their in-game friends that have significantly more time. Striking a balance requires a good designer with a firm grasp on the repercussions of this business model.
Obviously I've been doing some thinking about this business model. If any game developers out there are interested in learning more, you can contact me.
What are your thoughts on business models?