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 Games Investor estimates will generate over $2bn in the West this year.

A view to subscribe to?

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 per month at its peak, EA’s seminal online role-playing game established a commercial precedent that almost the entire Western MMO market was to 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 doing so 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 hardcore MMOs 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 MMO’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 MMO companies have often got wrong. For some (most notably serial MMO cancellers EA and Microsoft) the prospect of building and maintaining this cost momentum has resulted in MMO projects being abandoned well into their development cycle and sometimes even after they have been launched.

With a typical hardcore MMO customer lifetime value of some $105 to $145 over an eight to ten 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 MMO is within the first few months of a new player’s subscription. In contrast, many MMO companies report that after this period the rate of churn plummets. Others believe that this loyalty could be exploited to a far greater degree than the current $10 to $15 a 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. 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 1.65 million 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 MMO cousins: communications are at the heart of the service, 90 per cent of its subscribers have created and modified Club Pogo Minis (avatars) and 20 per cent have even paid additional sums to further embellish their profiles. Surprisingly, perhaps, this has been achieved with a subscriber base that is around 70 per cent female and with 40 per cent 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 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 discounts of 50 per cent or more on individual games in return for a minimum number of purchases by the player.

Conspicuous for their absence at this party are the consoles (Xbox Live Gold membership excepted). With a 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 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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