How low can you go?

How low can you make a monthly subscription fee? I recently wrote that I find the regular monthly fee for Football Manager Live too expensive at $11.33 per month (12 months subscription), and only signed up because I got a half-price beta tester offer. Now the forums of Wizard101 are full of people saying that $9.95 per month (1 month subscription, not sure about rebates for longer periods) is too expensive for Wizard101. Well, with Wizard101 actually having 3D graphics and being a lot more like a regular MMORPG, I think the $9.95 for Wizard101 are a better deal than the $11.33 for FML. But I can see how the monthly fee will scare away some players, who won't continue past the content you can play for free. But then I'm not sure if $5 per month would have been much better, and I'm even less sure how much monthly fee you need to be profitable.

Let's take World of Warcraft for comparison. Whatever the development cost for that game was, I think it's safe to say that this has been paid back already. With expansions not coming out all that often, the profitability of WoW depends mostly on the income from monthly subscription fees compared with operating cost. Blizzard has a profit margin of nearly 50%, according to their 2007 numbers. So it follows that their operating cost per customer per month must be about half of his monthly fee, or about $7.

Now Blizzard has millions of customers, and correspondingly a good economy of scale. Of course smaller companies have much smaller server farms, which cost a much smaller total amount of money. But on a per customer basis the smaller server farm is probably more expensive than the huge Blizzard server farm. The fact that the smaller game has probably less content doesn't really help with operating cost. Maybe the smaller company can save some money by having less customer support, but it isn't as if WoW had a huge amount of that. So probably the smaller game companies also have operating costs of $7 or more per customer per month. They have to charge you around $10 per month to have a decent profit margin, at $5 per month they couldn't survive.

The economics favor the bigger games in the monthly fee subscription model. WoW or WAR have ten times the content of FML or Wizard101, but they aren't ten times more expensive. That is why the smaller games often have different business models, like premium services, or microtransactions. Having less content, and therefore by definition less longevity, it is better for the smaller games to nickel and dime their customers for the maximum amount of money for a shorter time. But for the big games it is better to keep them playing for a long time at a steady monthly fee.