The free to play (F2P) phenomenon has, in its shadow, hid another big shift that’s facing the game industry: more and more, games are becoming services.
According to PwC’s Global Outlook on video games industry, the traditional console and PC games are stagnant and they don’t even predict things to change once Xbox One and Playstation 4 hit the streets. However, on PC, the so-called Online games are growing and many big names from PC Online have announced that they will be on the next-gen consoles.
Previously, these games were called Online games and today, it’s very likely that someone will try to attach the cloud keyword somewhere or other, although I do not see Angry Birds Cloud coming anytime soon. This is also what “always online” should mean, not a function of copy protection but the ability to offer a service 24/7.
It’s good to clear what Games as a Service (GaaS) mean, because this is where games really differentiate themselves against other forms of entertainment (books, music, movies etc.). Sure, there are services that offer various forms of entertainment, like Steam for games, Netflix for movies, Spotify for music and, to some extent, Kindle for books. However, it would be very innovative to be able to convert the core product into a service. This is exactly what has happened to software post-Internet and post-Windows desktop.
A much better comparison than traditional media is that to a theme park. This also explains why so many games as a service are open world games.
Here, I need to address one point that is often mentioned in blog posts that are critical of the whole F2P phenomenon - that Disneyland moved from having tickets for rides to just entrance fee and how revenues have increased from there. A quick counterpoint to that is that rarely these articles go to prove the causality and that there are many successful theme parks that charge per ride - although most globally major parks only charge for entrance. However, it would be interesting to know how much of Disneyland’s revenues come from just the entrance fees, considering that the first thing you see after entering a Disneyland theme park is the Main Street that is filled with… merchandise stores. Add to that the hotels and food stalls and you might start to realize another great point of services: you can sell additional services and products (ie. upsell). I’m pretty confident that the majority of Disney’s Parks and Resorts revenue comes from the hotel room guests. So, how well did this apply to F2P games again?
There are many other benefits when moving from a product to a service. First of all, it’s considerably harder to pirate a service because you need to pirate to some extent the infrastructure and content creation as well. However, the other key point from business side of things is that services offer you a much more variance on how your pricing works. Next time your flying and feel bored, ask around how much each passenger paid for their flight - it’s very likely that everyone paid a different price for what essentially is the same service. And yet no-one on that flight feels ripped off (more than usual). This is what economists call capturing the consumer surplus (or, in this specific case, yield management).
It just so happens that many of these games as a service use a free to play monetization scheme. However, the juggernaut in the room, World of Warcraft, does not and still relies on a subscription model. However, WoW has recently started to experiment with some in-game purchases.
This shift from physical or digital goods on shelves to services will have a huge impact on how publishers and studios operate. Publishers so far have been good at marketing and supply chain management, and this in big part explains why the previous CEO of EA, John Riccitiello, had a long history in consumer goods and, probably even why Activision’s Kotick now serves as director at Coca-Cola. In more service-driven industry, the focus will move into customer support, into which Electronic Arts has strongly invested.