An Obituary for the Subscription MMO

An Obituary for the Subscription MMO

Another Eye-Bleeding Post by Ryahl

In a recent editorial, I argued that we (the fans) were not tired of MMO’s.  That editorial itself was a response to a Gamespy MMO asking if we have simply outgrown MMO’s.  Lief’s piece argued that the nature of the Internet and the rise of social multiplayer games had largely turned the MMO into an irrelevant genre.  My counter was that MMO’s today are not what they were ten years ago and that’s why the subscription model isn’t working.

Both of us agree that the subscription MMO segment is in a bleak state, we disagree primarily on the causes.  The Gamespy article is a part of the industry discussion that new subscription games are struggling and free to play might be the answer.  This comes on the heels of a industry pioneers discussing and leaders heralding the benefits of Free to Play.  In addition, one of the more anticipated titles of 2011, Star Wars: the Old Republic is being directed towards Free to Play as have most of the SOE MMO portfolio.  At this moment, speculation mounts that Funcom’s the Secret World is the next to head to F2P.  For that matter, Turbine has largely reinvigorated itself by embracing free to play with their Lord of the Rings Online and Dungeons and Dragons Online titles.

With that established, I’d like to place this into my own personal context.  I started playing subscription MMO’s with Everquest back in the summer of 1999.  Since that time I have maintained a subscription to an MMO (and on rare occasions, two) ever since.  That’s roughly 150 months of concurrent subscriptions and I’m content with the purchases.  Over time I have seen most of the main entrants in the field, watched some wax and wane and others come and go.  Interestingly, I’m also still largely playing MMO’s with some of the same people I met online in those early years.

What’s up with Subscriptions?

While subscription based gaming predates the MMO, subscription based MMO’s have been the standard in the western markets since Ultima Online’s largely pioneered the transition from MUD to MMO.  The other first generation MMO’s, Everquest and Asheron’s Call each grew the market and helped establish the MMO segment as one of the more attractive emerging gaming segments.

There are two reasons that developers, quite naturally, are predisposed to subscription MMO’s.  First, MMO’s initially provided extremely stable income.  The second reason is that the margins on MMO operations have become quite phenomenal.

Stable Income is Good Income

At their inception, MMO’s produced revenue streams that grew for some time before leveling out.  Once they leveled out, they typically sustained their earnings level for some time.  Consider the following information on subscription growth for early MMO’s.

  • UO grew subscribers for nearly 36-consecutive months
  • EQ grew subscribers for 18-consecutive months
  • AC grew susbcribers for 12-consecutive months
  • DAOC grew subscribers for 12-consecutive months
  • WoW follows this model, growing western subs for 36-consecutive months

When you consider that the alternative, box sale model, largely dissipates within the first six weeks from launch.  The idea of having a title that brings new consumers to your product for at least a year and potentially three years is certainly attractive.

But it gets even better.  Once these titles hit their peak, they largely sustained their subscription levels for several additional years.  Continuing our focus on these first MMO’s:

  • EQ sustained 400,000 subscriptions from 2001 to 2006
  • UO sustained 200,000 subscriptions from 2001 to 2004
  • DAoC sustained 200,000 subscriptions from 2002 to 2005
  • FFXI sustained 500,000 subscriptions from 2003 to 2009
  • WoW sustained 5,000,000 western subscriptions from 2008 to 2011

So, the MMO market was lucrative because it defied normal video game market dynamics (short shelf life) and provided ongoing revenue streams.  When you consider a subscription of $12.50 a month (taking a mid-point of the $10/month early subscriptions and the $15/month modern ones) sustaining 200,000 subs meant a relatively stable $30mm annual revenue stream for 24-36 months.  For those familiar with calculating the net present value (NPV) of a project, it’s not surprising that MMO’s became a darling of investment capital.

Profit = Volume * Margin

So, the last section demonstrated that the revenue streams for early MMO’s provided an attractive monetary stream.  Maybe not enough to generate a Facebook level of excitement, but certainly big enough dollars to find interested investors.  But the story gets even better!

MMO’s are high margin products.  Consider, for a moment, the original projections for Funcom’s The Secret World.  In the lesser of two scenarios, had TSW sold 1mm copies and only retained 280,000 subscribers, Funcom projected $100mm first year revenue with a 43% profit margin.  Bear in mind that developers may only see 20-25% of net sales from their boxes.  A good chunk of that projected $100mm derives form the subscriptions (about 25%), direct sales (digital sales from Funcom direct) and in-game items (projected at about 35% of subscriptions).

While MMO’s are increasingly costly to make, they aren’t as costly to operate.  This was a key point in the recent Funcom investor disclosure, the costs to operate TSW in 2012 are notably cheaper than the costs to operate Age of Conan which launched in 2008.  Realize that TSW intends to kick out content in monthly updates and it uses external voice talent for a number of its game elements and you have to wonder what’s driving that “costs less to operate” statement.

It turns out that the answer lies in the technology.  Computers and bandwidth, once a significant operating cost for MMO’s have become tremendously more efficient in the last decade.  Substantially, it turns out, is probably an understatement.  Ciena references Dan Rayburn who quite succinctly notes:

 To put the rate of pricing decline in terms everyone can understand, today Netflix pays about five cents to stream a movie over the Internet. If Netflix tried to do this in 1998, at the same quality they are doing it today, it would of cost them $270 per movie. Of course, in 1998 no one was capable of getting a 3Mbps stream, but even if Netflix only encoded their videos for 37Kbps in 1998, it still would have cost them $4.80 to stream one movie.

The backbone of the MMO has become dramatically cheaper over time.  Additionally, there are more options available today making near-constant uptime, secure, low cost persistent online communities relatively easy to realize.  Consider the case of Runescape.

 RuneScape is run on commodity hardware.  All our own proprietary web serving technologies, file systems, databases etc. have allowed us incredible scale and tremendously high margins because they are so efficient.  I think we’re probably the most efficient game in terms of infrastructure and servers costs in the entire industry.  Which is great when it comes to scale, because that’s what MMOs are all about.

So, over the course of a decade, margins for operating MMO’s improved, shelf-life cycles extended and revenue streams remained stable for a matters of years.  A high margin, relatively safe revenue stream is the kind of thing that gives CFO’s pretty explicit dreams. The subscription MMO clearly was a thing of beauty from a financial perspective.

A Funeral without an Obituary?

The subscription MMO market entered hospice care in 2008.  While some are calling Free to Play the future of MMO’s, the future is probably already here… and perhaps should have been here a few years ago.

If you look at MMOData.net and check out “Total Active Subscriptions” it appears that the MMO market saturated somewhere around 2009.  Subscriptions apparently peak and begin tapering off a bit as we moved through 2011.  That, however, is a misleading picture.

MMO Market Segment Growth and Share by Title

Growth in the MMO Segment and Market share per title. Source: MMOData.net

You just made those numbers up, didn’t you?

Spoiler:

I am using data from Ibe Van Geel’s work at MMOData.net.  I prepared this data using his subscription information.  Titles included had to meet the following criteria:

  1. They had to use and be reported using western subscription models.  Lineage, Aion and others can’t be included.  Arguably, though, they represent the future business model for MMO’s so they will be touched on in the next editorial.
  2. They needed to peak over 100,000 and hold those subscribers for at least a six month window.
  3. I tracked data in six-month blocks
  4. If a data point was not provided at a specific six month interval, an estimate was created along the linear trend between the two existing data points
  5. Titles which do not report, but are still in operation, near the end of the series are listed as 75k users.
While exact details of subscription information is virtually impossible to access, Ibe Van Geel (and SirBruce before him) does a reasonably good job of providing transparency in his methodology.  The data points are all best estimates and thus, certainly wrong to some degree, but for the purposes of this examination the trends matter more than the details.  It seems unlikely that his data is missing the broader trend.
Industry life cycle

Industry life cycle

The MMO market grew at a pretty amazing rate between 2004 and 2008.  It does appear to have tapered out from 2008 to 2012, but it’s sustaining (or nearly sustaining) its peak.  Students of business should note the oddly similar shape between the MMO segment and the classic industry life cycle pictured on the right.

From this, it’s pretty apparent why you are hearing discussion of the future.  We appear to have hit the market peak and it’s time to look for the next business model.  I submit, though, that the peak already happened and we have been well into the decline of this segment for some time.

The problem with the data is the elephant in the room: World of Warcraft (WoW).

WoW entered the market as an established gaming IP with a rabid pre-existing fan base due to the success of their Warcraft, Diablo and Starcraft IP’s.  WoW is ultimately responsible for the bulk of the growth in the subscription MMO segment.  WoW managed to co-opt most existing MMO customers and WoW converted a number of the customers of its existing IP’s into WoW subscribers.  While WoW is beginning to show some signs of weakness, it is still far and away the market leader.  Indeed, the remaining large MMO titles do not combine to match WoW’s western market share!

MMO Segment Growth Without WoW

MMO Segment Growth Without WoW. Source: MMODAta.net

If you remove WoW from the industry, the picture looks starkly different.  Apparently, the MMO industry peaked in 2004 at around 2 million subscribers.  WoW grew the market an additional 5 million western subscribers.

However, no title since that time has brought and converted new consumers to the subscription model.  For the most part, new competitors entering the market simply diminish the existing market share of the other competitors.  It’s quite likely that these new entrants briefly grab subscribers from WoW, but given the overall market shape and WoW’s sustained western subscriber base, any such defections are eventually offset by that player (or other players) returning to WoW.

If we consider 200,000 to be the magic number for MMO subscribers, there appears to be room in this industry for about ten subscription titles and, of course, WoW.  That we are running with approximately fifteen such titles suggests we are seeing segment cannibalization, which would explain the number of titles changing to free to play this  year.

Perhaps more importantly, though, the life pattern for the MMO has changed.  Recall that the initial generation MMO’s enjoyed 12+ months of subscription growth followed by 18+ months of sustained volume.  That has not been the pattern for MMO’s launching from 2008 and on.

 

MMO Launches from 2008 tp 2011

Six months from launch: MMO’s from 2008 to 2011. Source, MMOData.net

The grow and sustain pattern, once the hallmark of this market segment, has disappeared.  It has been replaced with a spike and dive model.  Looking only at the four most successful (as it were) launches in the last four years, the results are markedly abnormal for the old industry (several other titles, such as FFXIV simply failed outright).  Three of the four titles showed an initial spike with a rapid decay.  Only TOR evidenced some initial growth.  However, TOR has been unable to sustain that growth for more than a quarter.  Further, within six months TOR has dropped to under it’s launch sales level.  This isn’t a statement about TOR, it’s a statement about the sector.  When a prized IP can’t pull off the build and sustain model, the problem may not be the game it may be the model.  The twelve months to grow and eighteen to sustain is a thing of the past.  It has been replaced by the spike and dive model that actually describes the normal PC game sales trajectory.

The King is Dead, Long Live the King!

I’m a fan of subscription MMO’s, hopefully I made that clear at the opening.  However, my experiences in the market are actually remarkably in line with the general trends.  I used to subscribe to a game for a solid year, sometimes longer.  The last three MMO’s I have subscribed to (with intent to remain) held me for less than a year (three months for the one prior to TSW).

It would seem that the market for subscription MMO’s is truly dead.  Over the past years, only three titles in the MMOData set evidence first generation grow-sustain patterns.  WoW is certainly the most succesful, which may be finally entering its decline phase (Mists of Panderia may change that).  Dofus, which I admit to having never heard of until preparing this post.  However, Dofus appears to be a hybrid subscribe or F2P model and thus may best represent the shape of the new industry and less the vestiges of the old.

The stand-out is EVE Online.  EVE is noteworthy in that it has grown its subscriber base longer than any first generation MMO and sustained a healthy subscription level even in the face of market saturation.  EVE, though, also represents the one remaining large scale sand box MMO, it may in fact simply be the WoW of a smaller market segment (with UO, Tales of the Desert and some of the other sandbox titles).

I Wish I Knew How to Quit You

Moving away from subscription based MMO’s is proving difficult, though.  First, no single publisher has been willing to bet the farm on the transition.  Allegedly, the failed Project Copernicus would have been the first such title, but its fail to launch is an entirely different story.

To date, western MMO’s launch as subscription only and then convert to F2P once the subscriber model fails.  Thus, western consumers understandably consider a non-subscription model to be a failure, developers are working hard to teach that lesson (and it’s the wrong lesson).

Second, for the most part, the transition to F2P has treated F2P as a second class citizen.  If you look at the SOE F2P platform, it’s clear that F2P is simply a lesser customer.  SOE uses F2P as a subscription tease, if you hang around long enough you need to subscribe.  While there are some things you can a la carte purchase, making the most of your account requires the subscription.  Thus, the customer continues to learn that F2P means substandard.  Who really wants to be the red-headed step-customer?

There are noteworthy exceptions.  Turbine’s approach to F2P really offers a two purchase model choice.  Subscribers get everything for a monthly fee, F2P players can a la carte their way to pretty much every feature in the game.  Arena Net has successfully built an MMO-like product and is planning on launching a full blown MMO using the traditional PC game “buy the box, get it all” approach.

In my next post, I want to spend more time on what F2P is and what it could be.  I think there is a place for the subscription MMO, even alongside the F2P model.  However, I think doing it right reqiures treating all of your purchase models equitably.  This entails design decisions that probably need to be in place before development begins and it requires finding equitable trade-offs in the various pricing plans.  That, though, is fodder for a different discussion.

(Edit:  If you made it though all that, you are now rewarded, with the followup article!  A look at the Box+ subscription model!)

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24 Responses to An Obituary for the Subscription MMO

  1. Wow, these are some hefty financial analysis for a website dedicated to TSW playguides. Hope you get more exposure as more people really need to read and understand what you are trying to tell them.

  2. This was thought-provoking stuff.

    I also did not know about your sources, and I like what I’m seeing. DATA!!! :D

  3. Awateru says:

    I have played a large number of MMOs over the years, usually keeping to one pay, one free at any given time. I haven’t enjoyed many of the F2P models, since they do treat you like a red-headed step-gamer (I’m so stealing that phrase).

    I feel however that Turbine has done this one very well, and my purchases have basically worked out to the same price as having subscribed. (shocked when I found that out!)

    I decided to purchase the Grand Master pack for TSW, and hopefully if it goes F2P they have the joint model so I don’t feel that I got totally ripped off.

  4. amanda says:

    Thank you for the informative read I truly enjoyed it. Having played nearly all of the games you mentioned a lot of it rings true to my experience as well.

    I do find it odd though that you label Copernicus as the “would have been” pioneer of subscription free MMO’s when Guild Wars has been Sub free all along and Guild Wars 2 which launches in 2 days will also be subscription free as well.

    • RyahlRyahl says:

      Thanks for the thoughts Amanda. I don’t really view Guild Wars as an MMO any more than Diablo 3 is an MMO. They were built largely around cooperative and competitive group play and GW didn’t really have a persistent world (other than a few city hubs).

      However, you are correct, GW2 appears to deserve the pioneer mantle. From all looks, it’s pretty much a MMO by design and it’s definitely not going sub. On the other hand, they aren’t really F2P, they are “buy the box.” Their pricing model is more akin to single player games than to the F2P model.

  5. Furiant says:

    I actually prefer a subscription model. I find it encourages development efforts along lines that I’m interested in, versus lines that are more solely and baldly ‘quick buck’ driven.

    What I’m tired of is companies rushing products out the door in a barely finished state in hopes of making enough money in a quick grab – and then later in paid upgrades – to bring the game to a more polished state. This has become the standard model now. I end up leaving (as do many, I presume) because the game is barely playable, it takes months if not years to actually implement that polish, and by the time they it happens I’ve burned out on the crappy UI, buggy quests, and half-baked features. So they lose my money, which furthers their delusion that subscription is the problem and they just need to roll it out faster and buggier. They interpret this as me having a short attention span and respond by continuing the very behavior that drove me away.

    Figure out whatever model makes a buck for you, I don’t care. But take a step back and remember that people don’t play games for the sole purpose of finding novel ways to give you money. Giving you money isn’t the point of gaming. The point is entertainment, and if your game isn’t entertaining in the long term, no fee structure is going to fix that.

    • RyahlRyahl says:

      Thanks for the comment Furiant. I agree, one of my concerns with the move to F2P is what happens to between-expansion development. If it turns into “hey look, a pink sweater (with the same graphic as the blue sweater) now for only $3, blech!

  6. Ira says:

    Personally I would say you should ideally look how DCUO operates. They are F2P with consistent quarterly DLC’s which on average have had a rather large amount of content (much more so than Funcom I think will add in the time frame).

    In between the DLC’s there are still holiday events, new clothing options and general bug fixes.

    • AelaAela says:

      While I generally dislike the SOE F2P model, DCUO is making a solid go at their offering. They also have, bar none, one of he best costume systems in the industry.

  7. MilkInBags says:

    For an MMO that is F2P, you need to look at Firefall

  8. Rutaq says:

    My concern with F2P is one of the major points you hit upon. Since most F2P games are being built with the monetization model of “It’s free to play, until you want to truly advance your character. Then you must buy chunks or do a monthly sub,” I fail to see how we are done with the monthly subscription model. Are you suggesting that it will just no longer be the default money mechanism for large-scale gaming, because it doesn’t seem to be going anywhere. I LOVE THE DATA. Facts make me happy, and I think you have clearly charted the trends in sales. And though you note that WoW is the elephant in the room because of its success, I think we give a little too much credit to the fact that it brought a fan base with it. It did, that’s clear – but you have to maintain a quality product for it to continue to hold subscribers. Look at the decline in Diablo III. Lots of people flocked to the title, but it has lackluster reviews and many hardcore Diablo fans are already bored with the release. And while we are talking WoW’s subs, you mention that they maintained 5 million when most other titles were at 200k sub. Yet the numbers of subscriptions were as high as 10.2 million this year. That doesn’t seem to be signaling the death knell of the market.

    F2P may be the way future titles are released in the same way that many authors are now allowing Amazon to sell their books for free in hopes of getting consumers attracted to the rest of the writing catalogue, but it works in only a few cases. I cannot imagine F2P will act differently, especially when you point out that “no one wants to the be the red-headed step-consumer.” I will admit that Turbine’s model has caused me to spend way more than I have ever spent on an online game, largely because most games don’t offer as many in-game enhancements for out of game cash. But Turbine still relies on the hardcore players subscribing to ferret out the best content.

    • RyahlRyahl says:

      Thanks for the comments Rutaq.

      WoW deserves its successes, not just because it brought in a fan base. It brought in a fan base because Blizzard has a record of developing high production value, glitch free (mostly) fun titles. WoW followed suit and dominated the market. The 10mm figure, though,is eastern and western accounts. Blizzard does not use the same revenue model on eastern subs as they do with western, so I only included the apples-to-apples western sub comparisons.

  9. Dylan says:

    I think you touch on something that I’ve been meaning to write an editorial about. There’s been often a very shallow look at why people are moving to F2P (“it’s cheaper, of course they are”) but one has to ask why they were paying subscription in the first place. And, as you note, it was principally because the infrastructure was very expensive. But for years consumers of subscription MMOs have more or less been getting ripped off; money that is supposed to go to infrastructure and ongoing development costs is overwhelming pure profit. The player is paying for a service that either doesn’t exist or is tremendously overvalued.

    What’s really disappointing is that, while Funcom certainly wanted to milk the cow, TSW was at least getting back to the idea of “value for your subscription” via monthly updates. In a sense, TSW is dying for the sins of its fathers.

  10. odirex says:

    Awesome article! That gave me a raging business management boner.

    Other than business model, the other thing I think is critical for future MMOs is the way they engage their fan base. TSW is doing quite a good job via facebook and their forums. The future might hold more of a democratization of content. Its somewhat easy to let users vote for what they want most in game updates/expansions. If subs, it can be done like Flattr where they choose what percentage of their monthly sub goes towards which new feature dev. If f2p they could easily build a game around Kickstarter-like models for content updates, provided a solid product to start with and dev team that shows they can make good on promises.

  11. Kevin says:

    This was a good article, but I think it might over-analyze a bit. People seem to miss what is, for me, a very simple explanation for why games have the new quick arch model (fast sale, fast drop). It isn’t because of an inherent problem with the subscription MMO model, it is because the games just aren’t of the same caliber or they are released in horrible states. The consumer is now better informed, and has more options… and they are more demanding. Game developers and production companies have failed to deliver to that demand. Games like UO, AC, and EQ kept retention for so long because they were massive, gigantic games that you couldn’t/didn’t complete in a week, month, or even a year. EvE online is also a great example of this, minus the excessive advertising of the former titles. When you can see all the content in a game in a couple of weeks, of COURSE the subscription rates are going to fall off… especially if there is nothing left to do.

    My main point is this: the reason the subscription model is failing is because the games are smaller, the communities aren’t as good, and there is no real retention. F2P only works because people settle for bad quality because, well, it’s free. There is nothing wrong with the subscription model, there is something wrong with the quality of the games being put out.

    Just as an example… if I could play a sandbox title in the vein of Shadowbane, Asheron’s Call, or Ultima Online… but with modern graphics, voice acting, and a good storyline, but also with all of the quality-of-life enhancements that things like player housing, social areas, ease of grouping, etc of a modern MMO… I would gladly pay $50 a month for it. Instead, I’ll settle for whatever is free, because none of what we currently have is WORTH $15 a month anymore.

    • RyahlRyahl says:

      Kevin,

      I won’t discount changes to the game design as part (and maybe all) of the problem. I have two posts coming up both related to the design/segmentation of the industry, both to some extent concur with your arguments.

      That said, the linear, theme-park is pretty much dead for subs. Even if there is still a sandbox, open-ended subscription market!

      • Kevin says:

        Ryahl,

        I think you are absolutely correct, however I would say that it isn’t the sub that must die — it is the linear, theme-park game itself. Unfortunately I think the majority of the gaming community is getting this one entirely wrong, at least for now. Everyone seems to be going on and on about F2P being the future of the market, but they are missing that the future of the market isn’t this linear, theme-park style gameplay. At least, I don’t think it will be.

        If I can be allowed the latitude to make a generalized prediction: I believe that we will see evidence of what I’m talking about within the next fiscal year. We currently have two of the biggest AAA conversion MMO’s (started p2p, going f2p) in Aion and SW:ToR. Now, what these two games also have in common is that they are big budget, heavily instanced, very linear, and completely theme-park style. Aion is already on a downward trend for revenues, according to NCSoft’s last quarterly report. The Korean revenues are still keeping it afloat, but even there it is struggling. The real evidence will come, I think, after SW:ToR makes the switch to F2P. I think you will see the usual surge in active players during the onset, but I think you will then see a gradual but steady decline of players until the entire project becomes defunct. I won’t say it will shut down, but it will cease to be relevant to the market. I might eat my words here, but I think this will happen within a year of the game going F2P.

        Again, I think the core reason for this isn’t the payment model, it is the inherent game design. The linear, theme-park isn’t just dead for subs… it is dying period. People want bigger games with more longevity. They want worlds they feel like they are actually a part of. They want good social tools to connect with people and foster a sense of community. Forcing people down corridor after corridor filled with monsters to complete the same mundane task over and over doesn’t achieve this. I know you are covering this in a post, and that a lot might seem redundant to my previous comment, but I just don’t get how most of the gaming media outlets just don’t seem to get this yet.

        At some point MMO developers stopped making worlds, and started making zones. The problem is — we can see the walls, and we aren’t buying it.

        • RyahlRyahl says:

          Kevin,

          I don’t disagree with the theme park vs. sand box (and linear vs. open-ended) design decision issues. That’s an alternative explanation, MMO’s turned into pretty basic single player games and in doing so stopped receiving subscriptions from committed players.

          That’s a theme I’m picking up in a couple of posts. I have some data to examine that thought process. Not to dive into it too deeply just yet, but my conclusion is “yeah, but…” There is something to the claim (players seem to susbcribe to worlds, not parks), but not enough to suggest that the MMO market itself doesn’t need a different business model.

          In fact, I would argue that my Box+ idea would work perfectly well in an open world, sandbox MMO.

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