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Monday, April 6, 2009

What Everyone Should Know About Subscription Gaming

World of Warcraft and EA's Club Pogo are two of the well known game sites that use subscription as a means of generating revenue from online game play. Over the past several weeks I have received a number of inquires concerning online subscription gaming. My discussions with the interested parties reveal some preconceptions and misconceptions about subscription gaming. Subscription gaming is not for everyone and has some unique characteristics that should be taken into consideration before committing to using subscriptions to monetize game play.

I spent 5 years operating online subscription gaming sites on two continents with very different regulatory regimes targeting different gaming audiences. That experience taught me that subscription gaming has fundamental characteristics that transcend geography and game type.

Legal Status - Many of the questions I receive on subscription gaming involve its legal status. This is the one area that business owners are the most confused about. First and foremost the subscription model in and of itself does not make a gaming site legal or illegal!! Taking a fee of any kind for game play is consideration. In most regulatory regimes the combination of consideration, chance and prize are all taken into account to determine the classification of the business, game and transaction.

Laws addressing online gaming are complex, confusing, ever changing and in some cases poorly defined. My suggestion to anyone contemplating monetizing game play through subscription or any other monetary consideration should consult an attorney that specializes in this field. My recommended attorney's for US operators are Tony Cabot and I. Nelson Rose. For the UK and for Eurozone operators I recommend Harris and Hagan in London. They will have good advice on UK operations and will refer you to qualified attorneys for the rest of Europe. Asia is a different challenge with legal advice hard to come by. My suggestion for operators considering Asia as a target is to isolate the country(s) of interest and then research businesses that are engaged in monetizing gamers. Reach out to them to determine how they decided to move forward with their transaction model.

Life Time Value of a Player (LTVP) - The LTVP is a number used by many gaming sites to develop business models, measure progress and to project future revenues. In a subscription model this is not as easy to do as you might think.

In my last company I took random samples of subscribers to determine their subscription durations, drop off and resubscribe rates. My sampling consistently indicated that subscribers were subscribing and resubscribing on a regular basis. I can not reveal the actual rate for this company but it was a surprise to me to see so many players treating the subscription model as a "micro transaction" model.

This behavior makes it hard to determine what the lifetime value of a player. It requires some sophisticated math involving statics and probability to sort out what is happening at any moment in time. A better and more simpler way to determine the health of the business is to calculate the total subscription revenue for each month and determine the percentage increase or decrease from the previous month. Going forward you should see a trend that will help you predict future revenue.

Subscription or Micro Transaction? -In analyzing gamer behavior watch out for high percentages of churn and then re-subscriptions. If players are coming and going at relatively high rates this means your property may be a better candidate for a micro transactions and or a lower subscription fee. This phenomena is what I call a a micro transaction in disguise. The content or characteristics of your property are not attracting a long term commitment by players. This does not mean that you do not have a business but it does mean that you should reconsider your content to attract longer term players or change the model to take advantage of the short visitation of your clientele.

Churn - Churn is the fall off of subscribers on a month to month basis. In both of my subscription gaming experiences churn stayed constant. This may not be the case in your proposed operation but for this example let's presume yours is constant. The challenge for subscription sites is the back filling of the lost subscribers as the overall pool of players increases. For instance, when you first start out with your business you may have 1000 players subscribing. If you have a 20% churn rate you will need to replace 200 players to keep you revenue numbers the same as the prior month. When you have 10000 subscribers you will have to replace 2000 player before you can grow your revenue.

This phenomena creates interesting marketing and operational challenges. In the early days of a subscription business you may see excellent growth because your churn pool is relatively small. When your overall pool increases it becomes more difficult to maintain the status quo and to grow. This may require a constant addition of new content to keep pace with churn or ever increasing marketing expenditure to keep the business growing.

Source of Payment - Subscription monetization requires a relatively reliable single transaction source to bill on a regular basis. Credit cards are the most popular source of obtaining funds for recurring transaction. If you are in an environment such as China where credit cards are not commonly used you may have to reconsider using a subscription model.

Churn And Credit Card Transactions - Involuntary subscription cancellations related to credit card expiration and insufficient funds are significant contributors to churn. Special programs, reporting and notifications are required to address these issues. Build these programs into your operation early.

Recapture Programs - There are a number of clever methods to recapture subscribers that have involuntarily and voluntarily stopped subscribing. These programs impact your decision on CRM and payment processing selections. Be sensitive to these issues early and modify your procedures and systems to quickly recapture lost subscribers.

Recurring Payment Providers - Some of the credit card payment services offer a recurring billing option. In most cases these will not be sufficient to run your business. Players will have to be rebilled when they fall out of their normal subscription run. Special for free subscription periods may be required to keep a player as part of your service. Special promotional discounts that have initial periods and revert to another payment amount will be required. Do not think of subscription gaming as an effortless way to generate revenue. Flexibility in payment processing is essential for success. You may have to build your own recurring billing system.

Community/Social Networking Features - I mentioned in a previous blog (The Power Of Your Existing Players) about the importance of existing players in an online gaming business. Do not start your subscription gaming business without community or social networking features. The best way for you to decrease your churn rate and to cost effectively increase your subscribers is through voluntary player invitations and the camaraderie of the community itself.

Free Play Is Essential - I also addressed this in a previous blog (The Importance Of Free Play). Never under any circumstance force a new player to transact without having experienced game play for free. The fall off for this mistake could be terminal for your business. Those first players are so important for building community and volume. Transition (Optimizing Pay For Play Transitions) them into the subscription transaction model and let them fall back into free play if they can not transact. They may return and become subscribers at a later date.

Players That Pay But Do Not Play - There is a cadre of players that will play for a bit but stop playing and still pay for the service. This is great but your ability to maintain this revenue source is heavily dependent on how you deal with credit card expiration. Do not take these people for granted. If they do fall off reach out to them again.

Gaming Platform Requirements - If your subscription model is working you are going to experience high volumes of players playing at the same time over long periods of time. This translates into technical game platform challenges. In my previous position we flattened two game platforms that had been designed for a game transaction model. Your average off the shelf systems are not going to make it. Build a business plans that includes the development and maintenance of your own gaming platform. This is expensive but you will need the expertise and flexibility to react to volume spikes and the addition of more games and content.

In conclusion, the subscription model is a creative way to offer a comfortable initial price range for players and still get a higher overall transaction amount if you can successfully retain players. However, operating a subscription gaming business is not a trivial undertaken and requires special operational planning and procedures to make it work effectively.

For more details on operating a subscription based gaming model please contact me at kflood6@gmail.com.


Stephen said...

Very detalied and usefull informatiom and as you said it is not for everyone. I also am a business owner and host gaming servers from home saving a bundle of cash to reinvest back into my business.
I have been in the POINT OF SALE business for over 15 years and is important to realize it is not easy to get approved to accept major worldwide credit cards.first you must have a good credit and credit score, you may have to pay non-refundable application fees. IF accepted, you are also REQUIRED to pay monthy statment fees as well as proccesing fees and transation fees to your bank processor.
If you get accepted and can afford to pay the credit card fees then you in luck, if not then consider other ways of accepting payments or donations such as PayPal or GooogleCheckout etc.
If you need more info on how to host your own gaming servers for free, contact me and i'll be more than happy to asist you any way i can.

Ruben said...

If you are a US business, first ach/chargeanywhere has payment solutions for gaming. Let me know if we can help with merchant accounts.