Wednesday, July 06, 2011

Is free to play really the best business model? (part 3)

In part 1 I reflected on how successful free to play is as a business model. In part 2 I looked at a flaw in that business model that could leave it open to competition. Now I want to ask what business model might be better for online games in the long run?

The common flaw that I see in both the traditional subscription model and the free to play model is that customers are not paying for the costs they incur. In a subscription game casuals pay too much and committed players pay too little. In a free to play game casuals pay too little and committed players pay too much. To date "lock in" has tended to distort the market and prevent real price competition which would expose this inefficiency but if some smart competitor starts offering "equal status transfers " where you can carry all of  your accumulated standing from one game to a new one then that lock in could quickly become irrelevant.

The best protection against this form of competition is to charge customers according to the costs they incur. For most games this probably means a combination charge consisting of a fixed standing charge and an hourly usage charge.If you have a small number of players then the fixed costs probably dominate and you may find a fixed monthly sub makes the most sense. If you have a lot of players however you may be able to dilute the fixed costs sufficiently to eliminate the standing charge and an hourly charge makes most sense.

If you do this right and match your price to the costs incurred then you shouldn't have any vulnerable segments of your customer base who are exposed to predatory capture. If someone does undercut your price then they are probably losing money.

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