Tobold's Blog
Tuesday, September 02, 2008
 
How low can you go?

How low can you make a monthly subscription fee? I recently wrote that I find the regular monthly fee for Football Manager Live too expensive at $11.33 per month (12 months subscription), and only signed up because I got a half-price beta tester offer. Now the forums of Wizard101 are full of people saying that $9.95 per month (1 month subscription, not sure about rebates for longer periods) is too expensive for Wizard101. Well, with Wizard101 actually having 3D graphics and being a lot more like a regular MMORPG, I think the $9.95 for Wizard101 are a better deal than the $11.33 for FML. But I can see how the monthly fee will scare away some players, who won't continue past the content you can play for free. But then I'm not sure if $5 per month would have been much better, and I'm even less sure how much monthly fee you need to be profitable.

Let's take World of Warcraft for comparison. Whatever the development cost for that game was, I think it's safe to say that this has been paid back already. With expansions not coming out all that often, the profitability of WoW depends mostly on the income from monthly subscription fees compared with operating cost. Blizzard has a profit margin of nearly 50%, according to their 2007 numbers. So it follows that their operating cost per customer per month must be about half of his monthly fee, or about $7.

Now Blizzard has millions of customers, and correspondingly a good economy of scale. Of course smaller companies have much smaller server farms, which cost a much smaller total amount of money. But on a per customer basis the smaller server farm is probably more expensive than the huge Blizzard server farm. The fact that the smaller game has probably less content doesn't really help with operating cost. Maybe the smaller company can save some money by having less customer support, but it isn't as if WoW had a huge amount of that. So probably the smaller game companies also have operating costs of $7 or more per customer per month. They have to charge you around $10 per month to have a decent profit margin, at $5 per month they couldn't survive.

The economics favor the bigger games in the monthly fee subscription model. WoW or WAR have ten times the content of FML or Wizard101, but they aren't ten times more expensive. That is why the smaller games often have different business models, like premium services, or microtransactions. Having less content, and therefore by definition less longevity, it is better for the smaller games to nickel and dime their customers for the maximum amount of money for a shorter time. But for the big games it is better to keep them playing for a long time at a steady monthly fee.
Comments:
I'm sure a big chunk of WoW's ongoing expenses are things other than paying for servers. I'm sure there's a lot of employees working there that need to be paid, advertising (TV ads here in Korea), etc. etc.
 
One thing you're not accounting for is that smaller MMO companies aren't developing several AAA titles on the side. If Blizzard wasn't developing anything not WoW-related, I can only assume their profit margin would be much higher.
 
Another thing to consider Tobold, is that anybody who has gone to business school knows all to well how to run the numbers and figure out how to price a product or service to achieve the highest return.

Price to low, you may sell a lot, but may also increase support costs, increase distribution needs/cost, and make it more difficult to raise prices later or do promotions to drive sales as needed. Plus you have to worry about giving the impression of having an inferior or cheap product if you're not priced inline or more than your competition.

I'm sure you get where I'm going. I do agree it'd be preferred to have the smaller games that offer less 'content' and upfront investment in the $5-6.95 range, as they would open up their market to younger or multi-mmo playing gamers.

However I'm just not sure the economics on that would work. There have been some indy small team MMO projects that couldn't make the numbers work at even $10/mo and only say 5 commodity servers running with volunteer staff. If you have a very small customer base it makes it very hard to scale on a monthly fee, and the cheaper it is the harder it gets.
 
Interesting points made here, but you're not accounting for the massive explosion of free to play, microtransaction based titles in the Asian market. A number of them have a higher user base than WoW, and yet still don't charge a monthly subscription fee, but rely on microtransactions.
 
The larger MMOs do suffer from one additional factor that most of the smaller ones do not and which is not helped by economies of scale: localization. WoW for instance just launched in Russia and Latin America. The cost associated with localizing all of the content and opening/maintaining servers in those areas are costs that a smaller MMO with only Korea or the United States as a market would not have to deal with.
 
Well what that breakdown doesn't show tobold is that if it cost 7 dollars per month per subscriber then the Western subs are the only profitable ones.

If that's true then they must be losing money or be barely profitable. Which will be a problem if they keep losing a few hundred thousand or more western subs for every new game that comes.
 
err in meant barely profitable in Asia. obviously they are making a lot overall.
 
For any number of reasons, assuming a $7 fixed cost per subscriber doesn't necessarily hold. For example, I remember being shocked when I discovered PotBS was running on MS SQL (a DB I wouldn't have guessed was ready to run a major MMO). Given what we have seen with other games, I see no reason to assume they are being run as efficiently as possible (or efficiently at all).
 
Or it could be like my weekend, and WoW could be free...
At least according to my account, which had been renewed...not by me...with a credit card...not owned by me.

How odd is that?

Guess they really want me back so bad, they will pay for it...

WoW sense of security
 
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