ANALYSIS: Are console contracts the future?

James Batchelor
ANALYSIS: Are console contracts the future?

Price promotions are an industry staple, but few have got the trade talking like Microsoft’s latest offer. 

The platform holder’s US stores are selling a 4GB Xbox 360 and Kinect for just $99. The catch? It comes with a two-year subscription to Xbox Live, priced at $15 per month, and an early termination fee.

This model is commonplace in other sectors: smartphone handsets are discounted or free with contracts, and media packages like Sky+ come with a free set-top box. 

But it’s rarely been tried in gaming before.

As sales fall, format holders need new ways to make consoles more appealing. And the benefits of subscription packages make it difficult to fathom why this hasn’t been tried earlier. 

“Lower upfront costs could make the console appear more affordable, despite the fact that it’s actually more expensive when you add the two-year subscription,” said Jia Wu, connected home devices director at research firm Strategy Analytics. 

“In essence, it is a financing deal just like a car loan.”

Tesco entertainment director Rob Salter added: “A fixed term contract guarantees an ongoing direct relationship with the customer, which will hopefully secure greater retention and the ability to market directly to the customer. This alone has significant value to the platform owner.”

THE SMALL PRINT

However, the games industry can’t just assume that the subscription model can be lifted wholesale from the mobile and media markets. 

One mobile operator exec told MCV that such offers would introduce credit risk: “You only want to let someone walk out with an Xbox if you are confident they will pay their bills. I’d add that given the failure rate of some consoles there might need to be a service element, like a premium repair service in the life of the contract.”

It’s also important to remember that a network contract is mandatory when using a mobile phone but Xbox Live is not entirely essential for 360 owners. Time will tell if the significant two-year commitment to an optional service proves to be a selling point or a deterrent.

The subscription itself may put off consumers already snowed under by monthly fees: rent, bills, insurance, phone contracts.

And let’s not forget phones and TV are viewed as must-have utilities. Video games are still very much a luxury.

A NEW ERA?

But if Microsoft – or whoever else tries this practice – irons out the kinks, it could have huge implications for the way consoles are sold.

The next generation is on its way. And while we won’t know anything about the new consoles until E3 at the earliest, you can guarantee they won’t be cheap. 

360 launched at £280, PS3 at £425. Both 3DS and Vita have suffered slow sales after launch – thanks in part to £200+ price tags branded “expensive”. So imagine how a £500 NextBox or PS4 would struggle in today’s market. Subscriptions could be the answer.

Even the current consoles could benefit. Streaming services are becoming more prominent in today’s market, and enable this generation to run more powerful content. 

Analyst Nick Parker says: “Streamed content does not require high-end hardware – just a connected device so that cheaper dumber local clients can be deployed and sold through subscriptions.

“If streaming and browser games take off, as I expect them to, then any connected device will be competition to consoles: smart TVs, set-top boxes, mobiles and tablets.

“Microsoft is testing the water, both in terms of consumer acceptance of the financials and prioritisation of a service-led platform. It may also indicate a future direction for the next gen – with less emphasis on the box’s specifications and more on services.”

That was OnLive’s vision – selling a console through retail and games packages via subscription. Now that a big brand like Xbox is trying its hand, perhaps consumers and the trade will take notice of what could become more commonplace in future.

“It will be interesting to see what level of interest exists for this model,” said Salter. “In the end, it is about the value it represents and the trade-off between a lower entry point and a two-year commitment. Customers will decide whether it is a good deal overall to them.

“We will be watching this with interest.”

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Tags: xbox 360 , analysis , console , future , subscriptions , contracts

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