Subscriptions’ Place in Gaming
Business models in gaming have drastically changed over the past few decades, and this evolution has shifted the way publishers and developers build games. Here is a brief history of how this has played out and what it means for developers today:
Coin-Operated Pay-To-Play: The earliest business model came from arcades where gamers would travel to physical locations to play games. Namco’s Pac-Man, one of the biggest success stories of the 1980’s, sold 400,000 gaming cabinets to arcades and made $3.5b in lifetime sales by 1990 (Statista).
Box Sales: As consoles and personal computers became more popular in the 1980’s and 1990’s, publishers could sell games to their customers for use at home. Before direct-to-consumer became possible, publishers would sell physical copies through retail stores. Unlike today, publishers would release complete games as there was no easy way to deliver updates and new content for games (what is today known as live operations or live-ops).
Digital Sales: In the late 2000’s direct-to-consumer became possible for publishers and developers through digital sales. As innovation increased, publishers could sell directly to their customers, or through online intermediary stores, on PCs, consoles, and mobile phones. This transition expedited the fall of companies like GameStop who were now cut out of the game sales channel. It also all but destroyed the resale market as game purchases became licenses to play instead of gamers actually owning a copy of the game. At the start of this business model change, games were still being purchased for full price and consumers expected a complete experience.
Free-To-Play (FTP): FTP completely changed the way games are played. On the developer side, a full game is not required at launch because players expect constant updates (free or paid) that expand the content. On the user side, there is really no hurdle to play a game besides hardware requirements and waiting for it to download. FTP ushered in models like live-ops, microtransactions, and ad-supported business models.
Subscriptions: This is the new business model many are adopting today. Every major marketplace platform with distribution (besides Steam) has started to move to a subscription model, including Xbox Game Pass (Microsoft), PS Plus (Sony), and Nintendo Switch Online (Nintendo).
Why Subscriptions and why now?
Subscription models have grown across almost every form of media. C+R Research recently surveyed 1000 people and found that on average consumers paid for 12 subscriptions and spent $219 per month (CNBC).
Services like Netflix, Hulu, Dollar Shave Club, Blue Apron, and Amazon Prime are all representative of the numerous popular subscription offerings on the market today. This has driven consumers to expect significant value for each incremental dollar spent for subscriptions, and is a clear tailwind for why gaming has moved in this direction as well.
Where is the value?
Subscriptions are an interesting discussion point in gaming as there are major pros and cons based on what type of game developer or publisher you are. Major developers can benefit from a lower cost barrier to entry and can get their games in the hands of more players. On the other hand, if you are a smaller developer with a limited budget, discovery will be easier on subscription platforms than generic app stores, where you would be vying with numerous applications beyond games.
The major issue from a developer's point of view is that the economics on a per unit sale is significantly lower and there is a unit sale threshold that must be reached to justify the trade-off in publishing through a subscription platform. For example, Microsoft typically pays developers a fixed sum to feature them on Xbox Game Pass; therefore, if that developer would have sold more through other means of distribution then they sold short. This is a different model than subscription services like Spotify, which pays songwriters based on a “usage” model (the more your song is streamed, the more you get paid).
The trade-off of distribution via subscription platforms is harder to justify for AAA games that have larger marketing budgets. For smaller developers, it is an opportunity to recoup costs quickly and not need to rely heavily on expensive marketing and user acquisition strategies.
GTA V, for example, had a resurgence after going to Xbox Game Pass eight years after its initial release. The game was initially launched in 2013 and has consistently been on the top sales charts every year due to Grand Theft Auto Online. After only six months on Xbox Game Pass, Take-Two removed GTA V from the subscription service, and sales increased 44% (Gamerant). Being on the subscription service brought GTA V a new untapped audience, many of whom ultimately decided to pay for the game outright.
For the consumer, the main benefit is a library of high-quality games for a low monthly cost. It also significantly lowers the barrier to trying new games and genres. With subscription models, there is no buyer's remorse and with major publishers like Microsoft, Sony, and Nintendo controlling these subscriptions, there is always high-quality content available.
Does the market have room for new content subscription platforms?
Although subscription services are growing meaningfully in adoption, consumers have high expectations. The tech giants within gaming can meet their demands because they have the required content, often exclusively; remember, content is king. Though there may be room for niche genre specific subscription platforms, the cost of acquiring and maintaining the quality content necessary for consumer adoption is prohibitively expensive for most early stage startups.