How Sony Or Microsoft Could Use Subscription To Win Video Games

Editor’s note: Tadhg Kelly is a video game design consultant and the creator of leading blog What Games Are. You can follow him on Twitter here.

Pretty much every business competes on four basic vectors: meaningful features, distribution, marketing stories and value. Your widget does what others don’t, your widget can reach customers that others cannot, your widget is important to customers in a way that others aren’t or your widget is cheaper than everyone else’s. It’s always the same from whiskey to office furniture, video services to cars. Great businesses dominate on one or more vectors whereas struggling businesses don’t.

The preferred strategy tends to be to compete on distribution. If you can lock in a source of customers then you can build a very big business, one that scales. Google and Facebook (and Twitter eventually) are examples of companies that basically did this. They created networks that became self sustaining because there was more value to the users as the networks grew, which in turn reinforced their usage. Then they figured out how to draw revenue from around the edges, which in their case meant advertising. Comcast similarly is a distribution business – though not well liked. It owns the pipes that bring the TV and in many areas is the only provider.

By contrast many businesses avoid competing on value where possible. If you add a new feature, lock in customers or tell a better story that means you can charge a premium. Competing on value, on the other hand, is all about lowering margins. Value essentially means buying into the race to the bottom and tends to only reward margin-focused scale. Walmart, Amazon and the App Store can do margin-focused scale. Most of their competitors can’t. Those businesses can make a profit on small margins where others would be dead.

The other two vectors (meaningful features and marketing stories) are hazardous. The time and money plowed into a feature usually doesn’t pay off. Most features in most products are meaningless, and while maybe 1% of users like them they’re never going to move the needle. Meanwhile marketing story strategies need to find a cause that users really care about and then play up to it. That often leads marketing stories into niches that can’t grow. They may be profitable but they have no way the ensure long-term expansion, which means sooner or later they stall. But this is not always the case: A variety of eco businesses do the marketing story thing, for example, as do future-forward tech companies like Tesla. But it tends to require the personal magnetism of a leader figure, which can also prove the undoing of such a business.

In the video game business this issue of available vectors is growing more pressing. The App Store, for example, is largely dominated by publishers trying to corner distribution (they buy a lot of advertising to blanket the airwaves and ensure user acquisition) but they’re teetering on the edge of having to become value businesses. It’s great that Supercell continues to makes millions every day but they’re also spending millions every day to stay there. At some point they or one of their competitors is going to have the genius idea of competing on price (“twice as much gold as Clash of Clans!”) which will require a response. Similarly in other platforms like Steam the issue is growing. You can’t move for indie game makers sick to death of Steam Greenlight, Valve’s voting platform that provides a publishing track for many developers but also leads to a lot of terrible (and in some cases scammy) games clogging up the platform.

The major holdout is the console sector, the land of Sony, Microsoft and Nintendo and their closed-off platforms. The console sector has long used feature, distribution and story strategies and done very well with it. Nintendo often leads on the feature front, for example, bring analog controls, rumble, gesture control and more. It also has a long history of making great in-house games that speak to a shed load of fans, who in turn form a marketing story advantage. Sony does something similar as does – to a lesser extent – Microsoft . However the latter two tend to be more active on distribution than meaningful features, for example securing exclusives and partnerships with big publishers to get the next Call of Duty or Grand Theft Auto.

The problem for the entire console sector is that all three of its traditional vectors are under threat. Nintendo attempted to make a push with features with the Wii U, for example, and failed. Microsoft screwed up Xbox One royally by trying to attach big features to it that nobody wanted. Sony seemed to figure out that maybe its customers just wanted a better console and has been rewarded for that for now. But on distribution the issue is increasingly that interested small and mid-sized developers don’t think of console as the place to be (why else would Nintendo feel it has to make mobile games). Similarly their marketing stories are pretty weak, which suggests that the early rush to purchase has probably begun to play out. Gamers do love to argue over whose machine has the best graphics but these arguments are increasingly weak.

These problems have led to something of a state of denial within the console sector itself. Both the hardcore fans and the people running the platforms just sort of believe in the continued equilibrium of the sector until the end of time (or worse, that it’s “taking over the world”, which is completely unsupportable). The truth is that console as it is is very slowly being eclipsed. Mobile especially continues to pass it by in terms of reach and revenue while the cost of winning the console crown only continues to mount. If nothing changes in the long term some degree of contraction is therefore inevitable. The question is not whether it will happen but rather how, and from that the question is which of the console platforms – or maybe someone new – will break with the traditional model and start competing on value.

Because that platform will go on to win video games.

Gamer Values

Console gamers are not the spec-heads that the ultra-core fans like to think they are. They do like to own the premium system that gives them the special experience, but the whole reason they buy consoles at all is that they want to be able to access that experience at a reasonable price. There really aren’t THAT many people who’ll dump $2000 on their perfect game system for example. Historically there have been many moments where division of support by players came down to price. Sega Saturn vs Sony Playstation was basically a price point war. So is Xbox One vs Playstation 4. Console gamers are value gamers, and always have been.

Perhaps the best example of how they are so is the phenomenon of used game trading. Unlike most media the second-hand trading business is a huge part of the overall games market. Certain quarters on the publishing side agitate for DRM systems that would prevent resale, largely because they want more average revenue per player. But such propositions have always met with heavy resistance because it’s through resale that players recapture most of the value of a game in order to spend it on more games. GameStop is essentially a top-up credit service to them that allows them to convert $100 to 10 game experiences rather than 2.

That’s why journalists cheered Sony en massed in 2013 for announcing that they planned to not change their DRM. Why? Because players are sensitive to value. They know that they want to play a lot of games on their systems – just as they do on any entertainment platform – but $60 a game is high. That kind of price for games is like a movie theater that only sells 3D IMAX tickets at $30 each and acts like it’s the only place to go see the latest Marvel movie. Viewers would find a way around that, and players did in console gaming. Whatever about the wishes of platforms and publishers to see high value from every purchase, most players do not have $1000 a year gaming budgets. The choice they face is between not playing games at all or finding a way to get them cheaply.

This would seem to indicate that the best business model for console games should be a rental system, but it’s not so simple. Games are very different from movies and TV shows because their duration of consumption varies wildly. With a story you watch it and return it, but with other media like games or music there’s a high degree of reuse. A game like The Witcher 3 might contain hundreds of hours of gameplay and be played over half a year, and so renting is actually poorer value than purchase. Even monthly subscription offerings are of questionable value. In postal rentals, for example, the game you want is often metered by available copies. This means you’re playing Destiny months after everyone else did, losing the social dimension of being a gamer.

The issue is further complicated by the perceptions of individual publishers. They don’t want to see their brands devalued even though lower prices would lead to much higher volume (as they tend to when Steam runs big sales for example) and often their internal company culture enforces that. Nonetheless the desire of the player eventually wins out in that scenario. That desire is to get access to many games, play the ones they want when launched, at what they perceive to be good value and with the flexibility to keep playing as often as they like on specific favorites. They basically want a value console.

Is that solvable? I think so.

Plus-Plus

Some of the most interesting innovations in the console space in the last few years have been quietly occurring in value. I’m speaking particularly of services like PlayStation Plus and PlayStation Now. With Plus you pay an annual fee and then get discounts on many online purchases as well as guaranteed free games once a month that you can keep (as long as your subscription is maintained). With Now you can directly stream games from Sony’s cloud. Many older games charge trivial rental fees ($1-$5). Microsoft now does something similar to Plus with Xbox Games With Gold (although its offerings tend to be shallower) but as of writing has no equivalent to Now.

I think the value-future of console games lies in blending these two ideas together. Suppose, for example, that the default model with a new console were an annual subscription in the $99 range. This subscription would give you broad catalog access to the whole range of games on the system. You could access them straight away via streaming, and then download the ones you liked. From there you could play them for as long as you liked but perhaps with a limit of say 10 games, like a library. And if you wanted to keep a game over and above that, permanently? You’d pay a small fee, say $10.

The result would be that players could get access – which is most of what they crave – and those that wanted to own could so so for a lower cost. Moreover they’d be doing so on-platform for much the same cost as they were doing via GameStop. But where would the publisher incentive be? In most businesses that compete on value the pressure usually falls most heavily on the producer. Consider the farmer unable to make a good living because Walmart holds all the cards, for example. It’s often similar with a game developer. However one of the differences between the farmer and the developer is analytics. Play can be measured, and therefore potentially taxed.

What I mean is that a platform could track how often games are played and thus determine a payments system to publishers based on that activity. Hollywood does this all the time in the form of residuals payments. When a movie gets played on a TV station the producers, distributors, talent and more all get a slice of a complex economic pie – and it adds up. There’s nothing stopping a console platform from doing the same thing. They already have the analytic infrastructure in place, tracking play times and achievements and all that good stuff. In a club/cloud subscription service that data could form the bedrock of how EA gets paid.

If I as a player happened to be playing the latest Dragon Age on Xbox One, for example, then Microsoft could pay EA residuals from the subscription fee pile – as well as free to play transactions occurring within the game. Not only would this incentivize EA to make a great game, it would incentivize them to keep releasing content for that game and thus keeping players playing. Wouldn’t everyone win? Not quite.

The main casualty of competing on value would still be margin. The console platform that opted to provide a more value-oriented service would have to accept making less ARPP no matter what. However set against that is the bet that making such a generous offer would attract all the players and annihilate the competition. Sony managed to sell more than twice as many PS4s as Xbox Ones imply by saying that they wouldn’t lock out second hand purchases. That’s how much console players actually treasure value. As the next E3 looms the question therefore goes begging: Who among the major platforms will take the next step?