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.