Friday, July 30, 2010

The $20 subscription

When I started playing MMORPGs a decade ago, the monthly subscription did cost $9.95. With the years the typical monthly subscription rate rose to $15. So, adding a few years more of inflation, will we see the typical monthly subscription cost rise to $20? Maybe, but it could also be that we'll see a very different, and less obvious price increase.

How do game companies set the price for a MMORPG? If you think the monthly subscription rate has anything to do with what it cost to make and run the game, you are wrong. The price point is set to maximize revenue, using what an economist calls a demand curve. That curve shows for every possible price how many people would buy the product. For example, imagine there is one guy willing to pay $100 for a new game, plus 10 people willing to pay $10, and an additional 50 people willing to play only if it just costs $1. So how do we set the price? If we set the price to $1, all these 61 people will play, but we only get $61. If we set the price to $100, we only get 1 customer, but the revenue rises to $100. The optimum for a single price in this example is $10, because then we get 11 customers, for a total revenue of $110.

But is that the maximum we can get for our new game? No, the maximum would be if we could get everybody to play, each paying the maximum of what he is willing to pay. If we could get the 50 people paying $1 each, plus the 10 people paying $10 each, plus the 1 guy paying $100, we would make $250 instead of just $110. And this is where the Free2Play business model of MMORPGs comes in: If set up perfectly, everybody with any interest in the game will play it, paying as much money in the item shop as is his personal maximum expenditure for the game.

That isn't just economic theory. Turbine was quite open in reporting the results of switching Dungeons & Dragons Online from monthly subscription to Free2Play, stating they increased their revenue by 500%. So now they are trying the same trick with Lord of the Rings Online, and other companies are jumping on the bandwagon. And that is with games that had initially be designed for a monthly subscription business model; we could expect games designed from the bottom up directly for a Free2Play business model to capture the money customers are willing to spend even better.

Now of course the devil is in the detail of how to design the item shop of a Free2Play game, and there are certainly good and bad designs. But economic theory tells us that in spite of all the suspicion some people have against the Free2Play model, a perfectly designed Free2Play game not only makes more money than a perfectly designed monthly subscription game, it is also better for the players: Lots of players who wouldn't be able to afford the monthly subscription game at all could play the Free2Play game. Some people claim that Free2Play games would automatically designed to be more grindy and less fun, to get players to spend more, but it is obvious that if the game isn't inherently fun, players would just leave and play something else. It isn't as if we were forced to play a specific game, developers must always design a game for maximum fun regardless of business model, or lose customers.

So whether we will see the $20 monthly subscription MMORPG in the future isn't certain. The monthly subscription business model might be a dying breed, and in a decade there will be only Free2Play games left. Albeit unlikely, the Free2Play model also could disappear again for some reason, for example due to the tricky legal problem of virtual property. Or we could some sort of balance to establish themselves, with some games having a monthly subscription (going up with time), and others being Free2Play. There are even other pricing models possible. With the MMORPG overall market still growing, there is room not only for different games, but also for different business models.

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