Netflix for Games: Both Console and Mobile Game Publishers Look To Subscription-Based Revenue

The video game market is huge and mature — and current revenue models are showing their age.

Source: Bigstock and Subscription Insider

Someday soon, smartphone users may pay to play game apps the same way they pay for Netflix, Hulu and other subscription video services.

The U.S. video gaming industry is huge, and it has grown beyond its console and PC roots with the explosion of smartphone adoption. 

Four out of 10 smartphone users say they use their phones to play games.

(Source: TNS Infratest; Google via Statista)

However, although the user base is huge, there is not a lot of movement in the market. U.S. revenues have been flat:

(Source: Statista)

And worldwide market segmentation is also not really going anywhere:

(Source: Newzoo via Statista)

Video games are a big market with poor growth prospects overall. Game publishers are therefore willing to try new things. Let’s consider the two basic video game forms: console games and mobile games.

CONSOLE CATCH-UP

According to Business Insider, “the video game business is behind that of other mediums: subscription services.” According to Ben Gilbert, console makers are trying to change that now. “In 2017, the game console makers are finally realizing how important subscription services are.” Let’s take a look at how the gaming giants fell behind the subscription trend.

This segment is dominated by Microsoft, Nintendo, and Sony. Online play is hugely important to all three:

(Source: Nielsen via Statista)

For a very long time, console makers saw growth. The video gamer kids of the 1980s continued to play as they got older, and the console business long ago escaped the kiddie toy stigma. But now that even seniors are avid gamers, the console game user base is flattening out:

(Source:eMarketer via Statista)

And so is the time each user spends playing:

(Source: Nielsen via Statista)

These data paint the picture of a mature industry, with limited growth prospects. That is pushing console makers to look for ways to protect (or grow) market share and to lock in customers by tying them to a platform. The subscription model, especially one that offers access to a library of games, is attractive because it provokes interest even after gamers finish the games that brought them to the platform initially. The psychology of the Netflix model — access to a library of offerings so great no customer could use them all — might work well for a game maker with a deep backlist of older titles — titles with nostalgia value.

According to Eric Johnsa at The Street, moving to a subscription model was “inevitable.”

  • I’m talking about the many, many content providers relying on subscription services to deliver forms of entertainment that in the past were generally consumed piecemeal. And to some degree, the many other subscription services popping up that aim to replace one-off consumer purchases.

Christina Warren at Gizmodo agrees. She writes that “this move to game subscriptions is something we should all prepare for.” She agrees with the Netflix analogy, saying, “game subscriptions could eventually become the de facto way gamers get games.”

Microsoft Xbox chief Phil Spencer is a vocal advocate for this strategy. He told Business Insider:

  • I’ve looked at things like Netflix and HBO, where great content has been created because there’s this subscription model. … Could we put story-based games into the Xbox Game Pass business model because you have a subscription going? … The storytelling ability in TV today is really high, and I think it’s because of the business model. I hope as an industry we can think about the same. [Subscription services] might spur new story-based games coming to market because there’s a new business model to help support their monetization.

PC Gamer asked Spencer about spreading the Xbox Game Pass, a $10 monthly subscription service, to PCs. “It’s a business model that I think could be good for creators, and when business models work for creators, it usually means good content will come for gamers,” he said. “I like that.”

That’s a direct challenge to Sony’s much more expensive Playstation Now service, priced at $20 per month, or $45 per three months. Without an affordable annual option, the service currently seems to be missing out on an opportunity.

Nintendo is on board too. The game maker’s new Switch subscription service will offer access to newer and older games for $20 per year, starting in 2018.

The analogy between subscribing to a library of movies and TV shows and that of subscribing to a library of games is not perfect, though. Console games have to be tailored for each console, or ported to a desktop operating system. Imagine if you could only watch Paramount movies on a Paramount TV, or if AMC shows did not play on CBS boxes. That makes it harder to populate a hypothetical game library service with all the popular games.

Business Insider’s Ben Gilbert makes this point.

  • Services like HBO, Netflix, Hulu, and Amazon are easily accessed through pretty much everything. Every phone, tablet, computer, set-top box, and game console can run these services. There’s an expectation of ubiquity when it comes to Netflix. It’s much easier to make an argument for a monthly subscription fee when that service is available on every device you own. That same concept simply doesn’t apply to a console-specific subscription service. It’s impossible to create the “Netflix of gaming” as a console-maker like Microsoft unless Microsoft is willing to put that service on competing platforms (like the PlayStation 4, which is the market leader over Xbox One by tens of millions of units).

James Fowler at Lexology points out another way the analogy breaks down. When you watch a movie, you’re done in two hours. When you play a game, the game may hold you for a month. A game is more like an entire run of a TV series. Fowler wonders if “binge-gaming” will be a thing.

That helps explain why console games have come late to the subscription business. But mobile games play on every device. Why are they only turning now to subscription models?

CELLULAR SATURATION

From Pokemon Go and Candy Crush Saga on down, the social game market is a $2 billion business.

(Source: PricewaterhouseCoopers, PwC, VentureBeat via Statista)

But as cell phone saturation sets in, the outlook dims for growing the customer base, as above with console gamers.

Cellular and social game publishers have not used a subscription model, in the main, because there was a model that worked just fine: Freemium gaming. The assumption is that most, maybe a marge majority, will download a game for free. A small percentage of them will pony up for advanced features, extra gameplay, and other in-game extras. Those users pay for the entire model. Here’s how Tim Hampson at SalesSeek puts it:

Source: Bigstock and Subscription Insider

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The idea is that the paying customers in essence subsidize the “freeloaders.” However, the industry has been moving toward ways to make the freeloaders pay too, either through in-game ads, or through lead-generation mining. The problem is that users start to get sick of the business model. According to Hampson,

  • Users tend to take the “free” part for granted, and whine at the “fee”. … Often these models rely upon a lack of transparency … Games that can be downloaded for free, but incur in-app purchases are essentially relying upon this … principle and can end up with unwitting parents getting clobbered with high bills.

In an article headlined “Is Freemium Ruining Gaming Industry?” at theappsolutions.com, a blogger named Kate puts it this way: “As the popularity of free-to-play games grows, the army of their haters becomes even bigger. At times it seems that anti-freemium rant is going to push the popularity of the gaming model down.”

Will Fulton at Digital Trends points out not only that the user experience fosters distrust between the game publisher and the user, but it is also a more subtle betrayal of the relationship due to data mining abuses. One game industry insider revealed to Fulton that “every new project became less and less about how we can do cool things, and more about how we can track and target users.” According to Fulton, “Like sharks to the smell of blood, upper management developed an insatiable hunger for data about when, where, and how users were playing their games. They realized the potential this information held for getting players to buy more things, or convince their friends to play as well.”

With its bad press, flattening user base, and tendency to alienate users, some say that the freemium model is wearing out its welcome. James Batchelor at gamesindustry.biz, for example, says that the “subscriptions model will bleed into mobile gaming.” He interviewed a research exec and came to the conclusion that

  • Netflix-style subscriptions could become the future of monetisation in the realm of mobile games, with business intelligence firm App Annie predicting that the model could become popular with those who play on their smart devices regularly.

That executive, Al Campa, is bullish on the transition:

  • I think you’ll start to see subscriptions making their way into gaming. Rather than buying a new version, paying $5 to download it, if you had a subscription for $15 per month, you’d have access to a collection of games. It would be similar to the Netflix model, and I think we’ll start to see that model break into the gaming category as well.

And honestly, when the famous Internet webcomic “Dinosaur Comics” has turned against you, as in this July 3 strip, your days are surely numbered:

Source: Bigstock and Subscription Insider

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It is not just that people hate the freemium model — in fact, the rise of mobile gaming by subscription is not just prognostication. In one real-world example, kid-game publisher Curious World has been offering a subscription service since 2015. More recently, start-up mobile game publisher GameMine is partnering with cell companies to offer access to a large library of games.

That said, the mobile game industry remains highly invested it the freemium model, and it will be interesting to see how subscription services will compete with it.

Insider Take

Console gamers have been reared on a pay-per-game basis; they expect to pay for each game they own. For those users, the move to a subscription service makes sense, just as it did for the music lovers who stopped paying $0.99 per song and migrated to Spotify and Pandora instead. Casual gamers on social media and mobile platforms, on the other hand, have been conditioned to expect their games to be free. For those consumers, a more sophisticated sell is required, but user exhaustion with in-game ads and hard-sell upgrade appeals is pushing the segment in that direction as well. Still there are market forces that make subscribing to game services more and more appealing, and the video game industry is, in part quickly, in part slowly, getting there.

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