An Obituary for the Subscription MMO
Another Eye-Bleeding Post by Ryahl
- This is a followup to Ryahl’s Previous Editoral: Unrealized Expectations.
- The next post in the series, Towards a better billing model, is now available
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.
You just made those numbers up, didn’t you?
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!
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.
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!)