NOV. 10, 2007 • A key challenge in the interactive entertainment industry is getting a clear understanding of all the new business models that have exploded on the scene in recent years. Advertising, virtual item sales, real-money trading, digital distribution and other revenue streams promise to expand the way consumers consume and purchase video games. However, so far these business models have come nowhere near replacing the traditional retail packaged sales model. The one exception is for the high-end subscription model for online games.
DFC Intelligence is publishing a series of reports that look at emerging business models in interactive entertainment. The recently published report MMOG Subscription Business Models takes a detailed look at the high-end subscription model for massively multiplayer online games (MMOGs) that are sold at retail and then charge consumers from $10 to $20 a month to play. Of course, the biggest success in this area is World of Warcraft. However, it is clearly unreasonable to write a business plan assuming a product will equal the success of World of Warcraft. Therefore, a key focus of our report was looking at the business model for more modest MMOGs.
Our report contains detailed revenue and profit breakdowns in multiple scenarios, assuming different levels of success and different assumptions for development and marketing costs. One very reasonable scenario is for a hit MMOG that has a subscriber base in the 100,000 to 200,000 range. DFC forecasts that the current market is able to support as many as five such games at a time.
Like most MMOGs this type of product would obtain almost all its revenue from three key sources:
1. Retail revenue from initial sales
2. Additional revenue from expansion packs sold at retail and digital distribution of virtual items and even full products sold and distributed online.
3. Subscription revenue
Under this scenario for a hit MMOG subscription game profits are solid, but will be limited if marketing, distribution, development and support costs are not closely controlled. There is simply not a great deal of cash flow to support large marketing pushes after the product launches.
We present assumptions for a 10-year lifespan for this type of game. Under these assumptions the game generates between $30 million to $50 million in annual revenue during its first five years. Revenue then starts to decline significantly in later years thereafter and by year eight the publisher is no longer operating at a profit.
One key point to note about this business model is that publisher profits peak in year three and start to decline steadily from that point forward. By year eight, the game is operating at a loss to the publisher. Of course, most MMO games will not last that long. Nevertheless a key challenge with an ongoing product like an MMOG is having a clear strategy for managing the tail end of the cycle.
Key Scenario Assumptions
• This is an MMOG product that is launched in both North America and Europe.
•The monthly subscription fee for the first five years is $15.
• A full boxed version is sold at retail for $50.
• Major retail expansion packs are released in years two, three and five. The initial retail price of these expansions ranges from a low of $20 to a high of $30. The game also offers the ability to purchase items and products via digital distribution.
• Digital distribution revenue is only representative of virtual items, characters and game levels sold and distributed online. It does not include online sales of the full MMOG game or expansion packages that are sold as a standalone product.
