Psychochild's Blog

A developer's musings on game development and writing.

7 December, 2005

Why the monthly subscription fee is doomed
Filed under: — Psychochild @ 5:24 PM

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?







24 Comments »

  1. I’m now just waiting for Matt Mihaly to go “I told you so!”

    – d.

    Comment by Dominic — 7 December, 2005 @ 10:08 PM

  2. Excellent food for thought, Brian. I totally agree with your prediction. It seems inevitable that fee-based transactions will quickly consume the now aged flat subscription model. It makes sense for both producer and consumer (at least to me). I would also caution the industry leaders to ensure the design incorporates a sense of responsibility. To allow players to purchase in-game advantage merely because they naturally have larger disposable incomes? It’d be too much like our real world!

    Generally speaking, I think its more apt to refer to this as revenue generation and not as a business model. But here are couple more ideas :

    Smedley refers to them as “character upsells”, which sounds fairly elaborate and expensive. I predict eventually an even smaller level of ‘micro-fees’ to allow players to granularly customize their characters/items in their bid for increasing uniqueness. I’m told of a popular Korean car racing game that essentially charges pennies for interesting decals to place on players’ virtual cars.

    Also mobile-phone access to game features will likely become more prevalent, especially as another potential revenue stream. For example, some WoW players spend significant portions of their time merely using the Auction House. Being easily abstracted from the full-blown game client, there are few reasons why this couldn’t be implemented using some mobile-phone frontend. Fees for such access could be low, but high enough volume to justify it. Another money maker.

    Your reference to Disneyland was telling as well, considering that viewing MMOs as theme parks is proving to be an accurate view of many MMOs. Translating Disney’s “paid areas” a step deeper into a game universe gives us “event upsells” and/or “interaction upsells”. Smedley mentioned that new SWG players “are meeting Han Solo immediately”. So as a potential content upgrade, a fee could be charged to allow players to be taken on a special “adventure” with the game’s principal characters, or interact with them in other ways. Or they get front-row seats at an in-game sporting event. Ironically, thats when it starts to unravel for me and starts looking too much like an American Express commercial. :-)

    Comment by Kafka — 8 December, 2005 @ 5:09 AM

  3. I expect there will be a mix of models going forward. One possible weakness of the incremental payment scheme is that you either have to interrupt the game to authorise a payment, or have some sort of direct credit linkage to your customers. This is either a point of sales resistance, and a potential magnet for security issues. Not that this will stop this model; merely complicate it.

    I think that there will be an evolution toward recurring fees like the all-access pass, which will charge for a general access to a stable of games, with upsells in the form of intial buy-ins and expansions for particular games, togather with advertising and micro-payment revenue sources in and between games.

    One somewhat unexplored spot in the line-up of such a stable is the inclusion of exclusive useful game specific web sites in the pass area, to allow players to explore within and between games. Community interaction might also be an element here, although the problems experienced by many community boards are a stumbling block here.

    Comment by Evangolis — 8 December, 2005 @ 5:51 AM

  4. Personally I like the subscription fee *because* it’s a barrier to entry. I’ve dealt with too many assholes on throwaway accounts to want to welcome more and more in for free =)

    I miss the old days of call back verification on BBSes =(

    So I’d be more happy to drop the sub fee maybe if you had to register a Credit Card to play, free or not, and that CC had to security check back to the valid billing address, and you could ban by billing address.

    Comment by Q — 8 December, 2005 @ 1:26 PM

  5. Well, you could still have a barrier to entry. Charge an up-front fee to establish an account or to buy a box. If someone gets banned, they’re looking at another $50 or so to set up a new account.

    Also keep in mind that if the account is free, it’s easier to police. When dealing with a troublemaker, you no longer have to worry about losing income; you can ban free account holders at the drop of a hat. On the other hand, when people have invested into the game they will be a bit more careful about their behavior because they’ve invested real money into the game, more than they were required to.

    Some more thoughts,

    Comment by Psychochild — 8 December, 2005 @ 3:27 PM

  6. Lachek: the problem is that impulse buys like that are fairly expensive when you consider how much it costs to process credit card transactions. Out of that 99 cent impulse purchase, a small internet-based company can probably expect to keep only about 75 cents due to merchant account rates. If you sell a “10 pack” of “chips” for $9.90 instead, you get to keep about $9.50 of that after merchant account rates. There are ways around this issue, as iTunes has shown, but most of those require keeping the credit card number around which requires extra security.

    Anyway, your attitude is a bit unusual. Perhaps I’m wrong and people will accept it easier than I predict; I’m willing to be wrong on that account. :)

    More thoughts,

    Comment by Psychochild — 9 December, 2005 @ 5:18 PM

  7. What I like about the pay for perks model is the incentive it gives to the game maker.

    Churn is really dominated by novelty. Basically, introducing new stuff keeps people in the game. If new stuff = new perks that people can buy there is a direct motivation for tbhe games company to make new stuff and therefore reduce churn.

    This model scales to the small operator and the big operator, and provided functionality isn’t thrown out of whack by some game breaking madness it is actually a smart thing to do.

    Interestingly, a mix of models also works in practice (OK, going back to my PBM roots here). If you offer a very low subscription, plus optional extras you tend to find an INCREASE in regular, predictable turnover as the players are empowered to spend more to enjoy more. We added about 20% overnight when we switched to this approach and we had happier players. The key was balance and a realistic upper limit where more cash = flash not advantage. It was nice.

    Comment by Andrew McLennan — 10 December, 2005 @ 4:59 PM

  8. Brian,

    What’s working well in terms of payment model is the prepaid credit system. So instead of selling a 3-month subscription at say $30, you sell a $30 worth of credits valid for 3 months.

    Thus, you continue to have less volatile revenue stream, yet give the players the freedom to pay as they go.

    So just like Vegas, many go there with a set “spend” per trip. If they lose it all, it’s the cost of entertainment + cheap buffets + comps + etc. If they go home with extra winnings, they go home happy.

    Also, something one have to be careful in this model is whether you are still putting up toll booths in another form or upselling by providing something optional rather than core. Missteps in this area has gotten a lot companies in trouble.

    Frank

    Comment by magicback (Frank) — 11 December, 2005 @ 10:18 AM

  9. Puzzle Pirates has a hybrid system — some servers are for subscribers on a traditional $10 a month fee and some use a microcurrency (doubloons, which are basically Vegas chips in that you purchase a pack of them from Three Rings at a certain defined rate with bonuses for buying in bulk). You can avoid sales resistance and encourage impulse-buying with one simple mechanic with profound ramifications for your game: allow players to exchange your “chips” for your “gold” and make this process instantaneous and painless, using some sort of virtual currency exchange. You’ve all presumably seen an AH or bazaar model or several in games before, this is essentially a specialized one that should be available wherever your game allows you to redeem “chips”. (Heck, I would put a web link to your shopping cart right there, too: “Sword of Awesomeness (+15 to-hit versus Foozles; rare polka-dot particle effect). [150 gold and 3 Dragon Eggs]. The current price of [3 Dragon Eggs] on the spot market is [400 gold]. CLICK HERE to buy more Dragon Eggs”. Bonus points if you code your shopping cart directly into the game client)

    There are, of course, some ramifications for that. First of all, although I haven’t heard Three Rings address it specifically I’ve heard mention from players that you can essentially buy your way into the political “endgame” on the doubloon servers (doubloons finance ship purchases and captain’s badgets, meaning he with the doubloons has more ships than he who doesn’t). Puzzle Pirates probably profits (try to say that five times fast) from this dynamic, though, because it enables them to say “You can play as much as you want on these servers, FOR FREE” and its literally true — you just have to do a little more plundering (think farming, but with more pirates) to buy doubloons from someone who eventually paid USD for them, assuming you want the doubloon content (the core game can honestly be enjoyed for free).

    I apologize if I sound like a shill for Puzzle Pirates. I’m a terrible fanboy — I love the idea of the game even more than I love playing the game, and I keep a subscription around to play once or twice a month when I have the time.

    Comment by Patrick McKenzie — 11 December, 2005 @ 10:43 PM

  10. I’m a admirer of Three Rings, their offerings and their business model.

    They have so far decided to be developer-operator and grow organically. However, if they find the right distribution/operating partners they can tap multiple markets at once without losing control of the direction.

    Frank

    Comment by magicback (Frank) — 12 December, 2005 @ 8:41 AM

  11. If I recall correctly they have a distribution agreement with Ubisoft to produce a boxed version of the game.

    Comment by Patrick McKenzie — 12 December, 2005 @ 7:30 PM

  12. Since the original person didn’t do a trackback….

    http://terranova.blogs.com/terra_nova/2005/12/the_transparent.html

    Mentions this blog entry.

    Comment by Psychochild — 12 December, 2005 @ 11:06 PM

  13. Reasons I wouldn’t want to play a game with a business model like that:

    1. Fear of the unknown. With a subscription model, I know exactly how much it will cost me every month to play. With a micropayment model like this, I have no way of knowing, before I get into the game, how much it’s going to cost me. During the course of the month, I can control my purchasing, but until I’ve actually spent (perhaps wasted) some time playing, I can’t tell what kind of purchases I will need to make in order to have fun playing.

    2. Nickel and dimed. I don’t like to be nickel and dimed. How much content will I be cut off from if I don’t pay? How much nuisance stuff will I need to endure if I don’t pay? Getting hit by tiny little fees every time I try to do anything more advanced than walking around would be really annoying.

    3. Hidden fees. With every cell phone plan I have used so far, it is very difficult to keep track of how much I am spending until after I get the monthly bill. They don’t make it easy to see how long I’m talking or how much the call will cost, and there are lots of hidden fees that I technically agreed to in some fine print I never actually read.

    Comment by Jimbot — 2 February, 2006 @ 7:23 PM

  14. Business models…

    In between editing 90-page chapters (!!!), I’ve been reading a few blogs. Matt Mihaly has a post about business models for virtual worlds (http://forge.ironrealms.com/2006/08/15/virtual-world-business-models-part-2/). A pretty good list based on fee…

    Trackback by Psychochild's Blog — 16 August, 2006 @ 6:14 PM

  15. WTS [Club of LtM-bashing +3] $10…

    Over at Broken Toys, Scott rants about the evils of EA (http://www.brokentoys.org/2006/11/14/bashing-ea-is-fun-and-easy/) and manages to work in a clever denunciation of RMT while he’s at it. You are a sly one, Mr. Jennings. At the center of his arg…

    Trackback by Psychochild's Blog — 14 November, 2006 @ 6:40 PM

  16. Macro-thinking on Micro-payments

    [...] Why The Monthly Subscription Fee Is Doomed – Brian Green [...]

    Pingback by Loading… — 1 August, 2007 @ 7:36 AM

  17. Austin Conference Talk: Emerging Business Models

    [...] And, these business models aren’t new, even in the North American and European territories. As I’ve said before, subscriptions aren’t the wave of the future, and can actively hold a small-scale game back. If you [...]

    Pingback by Psychochild’s Blog — 11 September, 2007 @ 2:23 PM

  18. An interesting post that references this post: http://www.gamersinfo.net/staff_blogs/ophelea/2007/10/09/p80

    Comment by Psychochild — 8 October, 2007 @ 11:01 PM

  19. Money in online games

    [...] the other hand, I firmly believe the subscription fee is doomed and that item sales are the wave of the future, particularly for smaller games. A game with a few [...]

    Pingback by Psychochild’s Blog — 4 January, 2008 @ 10:58 PM

  20. Just One Dollar

    [...] little over two years ago, Brian Green laid out why he believes that subscription models for MMOs are doomed. More recently, he touched on money in online games again, and this time hit the reason why I [...]

    Pingback by weblog.probablynot.com — 14 January, 2008 @ 2:02 AM

  21. Weekend Design Challenge: Predicting trends

    [...] take advantage of it? It’s interesting to see your own predictions come to pass. I wrote about how the subscription fee is doomed almost 3 years ago, and now we’re starting to see most of the industry start to use new business [...]

    Pingback by Psychochild’s Blog — 5 October, 2008 @ 7:36 PM

  22. It’s the same future we’ve always had…

    [...] also been supportive of microtransactions, but understand that this business model isn’t the only solution, and that it’s easy to abuse this [...]

    Pingback by Psychochild’s Blog — 25 March, 2010 @ 6:00 PM

  23. A tale of two free to play games

    [...] I'm a long time fan of the "free to play" business model. But, like any other aspect, it can be done well or done poorly. As I said in a comment to Green [...]

    Pingback by Psychochild's Blog — 25 May, 2011 @ 12:57 PM

  24. Evaluating business models

    [...] go into a bit more discussion about different business models. Long time readers of this blog know I'm a fan of the "free-to-play" business model. Yes, I accept that it can be implemented poorly. But, I don't think there's necessarily anything [...]

    Pingback by Psychochild's Blog — 27 May, 2011 @ 7:12 PM

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