Tobold's Blog
Tuesday, March 16, 2010
Business model middle ground

In the open Sunday thread Void expressed his opinion that most MMORPGs either cost $15 a month, or are Free2Play, and wondered why there was no middle ground. That seems to be a common enough thought, Syp from Bio Break just posted about Cryptic games not being worth $15 per month and suggested they go Free2Play instead. Of course there are some games that have a monthly fee which is lower than $15, but it is obvious that there isn't much price differentiation in MMORPGs.

Let's have a look at some basic economic considerations. Of course game companies aren't all that willing to let everybody know the details of their cost structure, but publicly traded companies are legally obliged to give some financial information, for example to the SEC, and so we aren't totally in the dark. We know for example from Blizzard that they have revenues of about $1 billion per year from World of Warcraft, and a profit of about $500 million. Or in short: Of the $15 you pay each month to Blizzard, $7.50 is profit for them, and the other $7.50 cover various costs, from hardware cost, to bandwith cost, to paying the salaries of the developers and customer service.

Now lets have a look at a hypothetical MMORPG company X. How do their costs look like? Of course if the game is less big than WoW, they will need less servers, less staff, etc.; but if you calculate cost per user, their costs are likely to be similar or even higher than those of Blizzard. World of Warcraft reaps economies of scale that smaller companies don't have. Thus offering a game for $7.50 per month would only be profitable if the costs were significantly reduced. That usually means cutting customer service to the bare bone minimum, and people already complain about WoW how long it takes a GM to respond to a ticket. Cost per user for hardware and bandwith are normally already not so high, which is why a one-man MMORPG development like Love can exist.

So what about Free2Play as alternative? Everybody knows that Free2Play isn't free, but it is interesting to hear that average revenue per user (ARPU) per month is in the $5 to $50 range for typical Free2Play MMORPGs, while being in the $1 to $2 range for ultra casual games and social spaces like Club Penguin or Habbo Hotel. Of course on the basis of individual users the range is much wider, there are some people who really play for free, while others pay a lot of money. Again, at the lower end of the scale, that can only be profitable by cutting staff cost to a minimum, which is why those Free2Play games are often less elaborate than games with monthly fees, and you can never get any decent customer support in them. Which works for them, because due to the "free" label players also expect less customer service. At the higher end of the scale Free2Play games can be *more* profitable, bringing in more average revenue per player per month than a monthly subscription model. Dungeon & Dragons Online revenues went up 500% after going Free2Play, while only doubling player numbers, thus revenue per player tripled. So the high-end Free2Play games can afford to be as polished as monthly fee games, and offer the same degree of customer support.

Some Free2Play games having revenues of up to $50 per player shows that there would be a market for games with a subscription fee of more than $15 per month. But while a Free2Play game can make lots of money without too many people noticing, the monthly subscription rate is highly visible. You'd first need to persuade potential customers that your game is significantly better than all those other games they could play for $15 a month before you could get away with charging them $20 or more. But I'm sure that is something that will come, forced by inflation. Hey, when I started playing MMORPGs a decade ago, the standard monthly subscription was $9.99. But until the monthly subscription rate for triple A MMORPGs goes up, it is often more profitable for smaller games to go Free2Play than to offer a monthly subscription plan which is significantly cheaper.
Video games have been 50 bucks for 20 years... only recently have top end titles upped that to $60.

With 50% profit margins possible, I think 15 will be around for a long time. It certainly will be so long as WoW keeps it there--- nobody will dare go above it, it would be an instant death sentence for a launching game to be more expensive than WoW. So Blizz can use this cap to keep the competition under control and make entry in the market less attractive.
I'm starting to call BS, on the whole cost on "running the servers" stuff, why? Look at Ubisoft...somehow that initial $50 seems more than enough for them to put in a DRM that requires a SERVER and HARDWARE and a 24-7 support function just to run a -single player- game.

So why is that Ubisoft and Activision/Infinity Ward can run servers for their games [DRM/Dedicated Servers] without seemingly needing to ask a subscription fee for it? In fact you'd think pushing all this back to us the gamer [LAN support / No DRM] would be cheaper.

Anyway, i think you must not forget about the BOX PRICE.

DDO is truly "free to play", you can play it with $0 . GuildWars is also considered "F2P" , but you need to buy the box first.

Even Global Agenda is doing some sort of middle-combo thing [Initial Box Price , F2P and then sub for specific extra functionality] .
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I posted a list of MMOs in the Sunday thread that I felt demonstrated the fallacy of the premise. MMOs only appear to cost "either $15 a month, or are Free2Play" if you wilfully pick only the examples that fit that proposition.

We already have a huge range of pricing structures available. I'm sure it will continue to diversify.

Of course, if bloggers insist on discussing only that small percentage of the MMOs available that use the $50 box + £15 monthly fee model, they'll be able to go on arguing that black is white.

Of course, if bloggers insist on discussing only that small percentage of the MMOs available that use the $50 box + £15 monthly fee model, they'll be able to go on arguing that black is white.

Or, we could continue to vote with our wallets and tell developers that we dont appreciate these gray areas that they have forced gamers into with the F2P system.

It is simply preposterous for a game company to say that they are offering something for free, while at the same time implementing roadblocks in the hopes of making money off of less savvy gamers. Hopefully, this fad will pass rather quickly as gamers smarten up and realize what is being done to them.

About a week ago I overheard quite a few co-workers talking about how Farmville was fun initially, but outside of a timesink - there is really nothing to "win". Once the "crack" effect wears off, it's amazing what truth exists out there.
What about a pay per day or week model? Not everyone has the schedule to dependably play for a full month, and their options are FTP or eat the cost.
It is clear a subscription plan would be compared with other subscription plans. However you could get a favorable comparison if you change the rules.

If your NextBigThingMMO has a monthly plan of $20/month everyone will ask if it is worth $5 more then WoW.

If your NextBigThingMMO has a $1/day price and targets it's marketing message at "why pay $15 a month if you only play 2 nights a week?" you will have better traction.

If you can actually get by on $15/month could get even better traction on having the price be $1/day and cap out at $15/month.

Of corse then you will NOT be able to have some amount of "coast" off of players that get tired and drop play down to a few or no nights a month. However maybe your game model compensates for that (simpler for you to add more quests, so rather then 1, 2, or 3 unique sets of quests while leveling there are 8 or 9 so alt-fategue sets in later...or maybe it is simpler for you to add end-game content...or maybe you really have found a way to control MUDflation).

$15/month and Free2Play aren't the only business models. They do happen to be the _successful_ MMO bisness models though.

"why is that Ubisoft and Activision/Infinity Ward can run servers for their games [DRM/Dedicated Servers] without seemingly needing to ask a subscription fee for it?"

I donno, maybe they don't spend as much on evolving the content. Maybe they have fewer features so they need less work to keep them working. Maybe they just don't fix as much broken stuff. Or maybe they support a lot fewer players per server and that makes a huge difference. Or maybe one company uses some real server sort of OS and the other uses MS crap. Whatever the reasons it is pretty clear that Blizz does spend half the WoW money on keeping WoW moving. Maybe they spend it inefficiently, maybe they don't, we can't tell that. We can tell they spend it though. It isn't a PRnumber it is a "lie to the SEC and face jail time" number, so it is reasonable to assume it is ballpark correct and not a lie.
Remember the WAR devs talked about potentially charging more than fifteen bucks, and then they backed away?

I think the reason for the 15 dollar subscription is WoW. I think other companies would like to charge more -- perhaps they need to charge more -- but WoW is keeping the max pegged at 15 bucks.
Thanks for analyzing the numbers Tobold. It makes a lot more sense when looking at the business side of the MMOs that we play.

I do hope we continue to see the business model diversified in the coming years. More options for the consumer are better.

Nintendo NES games cost anywhere from $60 - $80 in the 80's.

Games didn't see a big drop in price until they went to CD format.

I'm with Void here, there are other ways. You could have a $5-10 month fee and still offer a CS.
Tobold, your numbers on Blizzard's cost structure are dubious at best, if not intentionally deceitful.

It would really help if you had actually sourced where your $1 billion comes from. 11 million players paying $15 a month would yield just under $2 billion, not including any box sales all year from any Blizzard game.

You are also attributing way, way too many costs to WoW. That $500 million (assuming you pulled that from a credible source) includes development costs for Starcraft 2, Diablo 3, Cataclysm and most importantly the unnamed new Blizzard MMORPG.

Saying it costs them $7.50 per player is flat out laughable. If they added 10 million new players, would it cost them another $500 million per year? Not even close, I would be surprised if their added costs were over $100 million. Servers, bandwidth costs, and near-minimum wage customer service employees are not nearly as expensive as you seem to think they are.

You also forgot the point of the your own discussion. Many MMORPGs AREN'T as good as WoW, largely because they spend a tiny fraction for their budget. So why are those games charging $15 a month?
@Samus A little over half of those 11 miilion players pay per hour on Asia servers, and are far less profitable than the other players. The more you know, because knowledge is power! Fwooooooosh!
I did source those numbers, they are from Blizzard's SEC filings of revenues and profits, with costs being revenues minus profits. As it is illegal to lie on SEC filings, you can be damn certain that they didn't forget a billion somewhere.
Well, you said you got your numbers from the SEC filings, but you did not link them. Activision Blizzard's Form 10-K Annual Report can be found here:

It indicates revenues of $1.196 billion for Blizzard and $555 million in total costs, specifically citing $212 million as MMORPG costs.

At 11 million subscribers, those are costs of $1.60 per month per player. This certainly makes a $5-10 a month subscription a lot more viable than your original number of $7.50 per month.
"If your NextBigThingMMO has a $1/day price and targets it's marketing message at "why pay $15 a month if you only play 2 nights a week?" you will have better traction."

If your nextbigthingMMO does this, they will DEFINITELY have daily quests and content designed specifically to reward people who log on every day.

You can say 'that's fine, I choose not to do that', and that's all well and good. But the game design is intimately tied up with its payment system.

I think there's still some experimenting left to do with charging models, to see what works and what doesn't. And that subs probably will go up at some point.
It might even be nice if MMOs would offer multiple subscription types for the same game. It would be nice if you could choose to play unlimited for $15 per month or choose to pay money as you play.

I would play MMOs using the pay as you play model that I don't currently want to pay $15 per month for.

Overall, the more methods of subscription available the more MMOs that I would play.
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