Why video games are shooting down the Hollywood model
Not that long ago, big video games used to get sold like big movies: a flashy trailer, lots of message board hype, some fan conference sneak previews, and then a big make-or-break release date. Those early sales numbers determined whether something was a big hit like Grand Theft Auto V, or a big flop like Transformers: Rise of the Dark Spark.
But then a funny thing happened. Big games just started showing up without much hype or promotion, like a new Beyonce album. For example, EA’s Apex Legends came completely unannounced last February and had more than a million unique players just eight hours after its launch. In its first month, the game had attracted 50 million players and earned $92 million in revenue.
Games as a service, services for games
Traditional game manufacturers and distributors are beginning to catch on. They’re no longer solely focused on the number of game consoles or individual games sold, but increasingly how they can acquire and retain customers through ongoing services: Games-as-a-service (GaaS). And even GaaS is changing beyond single games providing services within themselves, toward services providing games.
Just look at the recent announcements from the big players – Project xCloud, Microsoft’s new cloud gaming service; Stadia, Google’s forthcoming cloud-based gaming platform that allows you to play games instantly across devices; and GeForce Now, Nvidia’s new game streaming service.
It’s not just that video games are changing – their entire business model is changing as well. Instead of flashy Hollywood-style premieres and boom-or-bust opening weekend sales, the business model of today’s games is built around generating a stable base of recurring revenue through subscription services, creating the same lock-in effect as an Amazon Prime membership. For example, the occasional expansion pack has become the “season pass” includes a ton of free post-launch content to keep gamers continually engaged, while sports games have become almost entirely about constantly collecting new players via Ultimate Team and the like.
A patch every half-fortnight
Another interesting fact – many current games don’t get updated every year. They can get updated every week. Video games aren’t being developed and sold like discrete products anymore, based on single sales and annual sequels. Games are turning into services, with constant upgrades and virtuous feedback loops.
Fortnite, for example, is constantly iterating with fun stunts like giant pink robots and Marshmello concerts. It’s much more of a subscription-enabled SaaS approach to game development than a big Hollywood blockbuster approach. As anyone who has played it knows, Fortnite doesn’t have annual releases – it has seasons, which last roughly ten weeks each. That helps it generate more narratives, more player input, and more engagement.
Taking a cue from Eric Ries’ lean startup method, Epic Games is shortening their product development cycle through experimentation, validated learning, and iteration. And they’re creating a virtuous feedback loop whereby customer feedback helps inform product development. It’s “Fortnite-as-a-Service.” However, the company has seen some backlash for putting increased pressure on its developers to meet new timeline demands – figuring out how to do push updates sustainably is going to be important to the industry moving forward.
Unity Technologies is another example of this shift. One of the world’s most popular developer platforms, Unity is currently used to create over half of the world’s video games, as well as dozens of feature films every year. A few years ago, Unity decided to pursue a recurring revenue model as a hedge against boom-or-bust industry cycles.
The company’s shift from perpetual licenses to subscriptions wasn’t just a financial imperative – it was a creative one as well. “In today’s world, we can’t leave customers behind for a year because we are in the process of releasing a major version,” said Unity Co-Founder Joachim Ante in a blog post. “We think it would be very bad for Unity developers if we held features for a full number release, rather than launch these features along the way when they are ready … With our switch to subscription, we can make Unity incrementally better, every week. When a feature is complete, we will ship it. If it is not ready we will wait for the next point release. Our switch to subscription is absolutely necessary in order for us to provide a robust and stable platform.”
The subscription advantage
Again, we see the SaaS philosophy at work. Most SaaS companies roll out incremental new product upgrades on a monthly basis, rather than ship giant new releases every year like many of the video game sports franchises. Sure, the pace can feel demanding at times, but the subscription model actually creates more space for ideas and creativity, because developers aren’t shackled to a giant annual release, which forces lots of hard decisions about what to cut and what to keep.
“With a subscription, we’re able to see the kinds of games customers like to play most regularly, and the kinds of experiences within games they might want to play more frequently,” said EA Senior Vice President Mike Blank at the most recent E3 Conference. “By virtue of that, we can try to tailor an offering where we can provide types of games experiences that might be more relevant.”
But the subscription model doesn’t just benefit development teams – game bundle subscriptions encourage more creativity and discovery on the player side as well. IDC Research Director Lewis Ward recently said, “Our surveys show that users of bundled game subscriptions … tend to experiment more with titles they otherwise wouldn’t play. So the upside for publishers is that subscribers are more likely to try their product because it’s ‘free’ with the subscription. The downside is that if you don’t grab those users out of the gate, they’re more likely to quit.”
That sums up both the appeal – and the challenge – of subscription models. Relatively low acquisition costs means that you can generate a sizable base of subscribers to any given service. But to hang on to them, you’ve got to keep happily surprising them on a consistent basis.
The game studios are trying to replicate the Netflix effect – just look at Microsoft’s Xbox Game Pass, which is aimed at becoming the “Netflix of video games.” While everyone loves a hit, the new imperative is to translate the popularity from that hit into growing your base of subscription revenue. Where game studios – and Netflix – can improve, is continuing to feed the flywheel, developing a virtuous circle where more engagement creates a better service which creates more engagement. Netflix could probably do a better job of hanging onto popular bread-and-butter shows like Friends and The Office, which are vital to their retention strategy.
In short, the game studios – and particularly traditional game console manufacturers and distributors – are trying to stay sticky as new competition emerges. Sony now has 36.4 million PlayStation subscribers, Microsoft Live has 64 million monthly users, and Nintendo now has over 10 million Nintendo Switch Online subscribers. They’re not thinking in terms of “games sold” anymore – they’re thinking in terms of acquisition and retention of subscribers.
Upcoming cloud gaming systems like Google’s Stadia and Microsoft’s Project xCloud will only accelerate the trend towards “video games as a service,” enabling users to stream games just like they’d stream Netflix or YouTube videos. Think about it: Stadia and xCloud are flipping traditional gameplay on its side, allowing people to play high-end games directly on their phones or PCs. In other words, console-quality games, without the outdated console.
For gaming studios, this opens up new and untapped revenue streams. For consumers, it’s another key benefit of subscription services (car services, home security services, etc) – we get the actual outcomes we want, without having to deal with all the annoying hassles of planned obsolescence. We get to extract the service that sits within the product. And if that service stays smart and creative, we stick around.
Now, I don’t think big video game launches are going away any time soon – marketing departments love them too much. But if a game studio wants to stick around for the long term, then it’s going to have to develop some kind of subscription strategy. It’s going to have to make every month a launch month.
Read more on the latest tech trends in the gaming industry.
Tien Tzuo is CEO and co-founder of Zuora and the author of Subscribed: Why the Subscription Model Will be Your Company’s Future – and What to Do About It.
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