Subscriptions in the console market – is this the future of the video game industry?
As the unveiling of new consoles from Microsoft and Sony take the spotlight in the lead up to the holiday shopping season, industry experts Lisa Jaeger, Global Head of the Software, Internet & Media practice at Simon-Kucher & Partners, and Nick Zarb, Partner at Simon-Kucher & Partners, share their insights on the impact new subscription models will have.
[San Francisco, CA], [October 21, 2020] – Gaming consoles have traditionally been launched in Q4 to benefit from holiday season spending -- this year is no different with both Microsoft and Sony set to launch not one, but two consoles each in November. While the new consoles may be at the top of every gamers‘ wish list this holiday season, our recent Global Gaming Study* confirms that game producers should also be prioritizing another lucrative monetization opportunity this holiday season and beyond: subscriptions.
What we know about the consoles – Xbox’s offer is a more complex choice for consumers
Both Microsoft and Sony created a high-end premium version and a cheaper option, indicating they understand there are different market segments to target. Microsoft is releasing the Series X for $499 and a cheaper, lower specification, disk-less Series S for $299, while Sony’s premium offer is $499, and $399 without the disk drive, but with no difference in specifications. Microsoft is betting on more price-sensitive gamers not being as concerned with technical specs nor a need for a disk drive, while Sony’s play is differentiating against digital vs. physical only. From a customer perspective where complexity in choice can be a barrier to purchase, Sony’s strategy is better – when compared to Microsoft’s options, Sony’s simple disk or digital choices are more straightforward for customers to grasp.
However, lack of a hardware subscription payment plan is Sony’s Achilles heel
Consumers are increasingly used to subscription models for purchases -- from the mainstream, such as Netflix, to the less common, like home furniture. Like for most media industries, subscription models are poised to dominate the future of the video game industry, so it only makes sense that as providers launch their new consoles, they’ll also be unveiling new and more extensive subscription offerings.
Microsoft now combines new hardware with a strong subscription by offering another highly attractive monetization model, the “all access model.” In this model, consumers pay $24.99/month for the Series S and $34.99/month for the Series X, which gives them access to the console of their choice and Xbox Game Pass Ultimate. The subscription runs for 24 months, and after this time frame, gamers will own the hardware. Is this a smart move? The answer is yes (assuming they can pull it off smoothly), thanks to multiple strategic levers:
- Differentiation – By offering more price points and ways to pay, Microsoft can access segments of the market that Sony cannot, due to the low upfront cost of their subscription. According to our study, the COVID-19 crisis has led to more gamers spending more time and money compared to pre-pandemic. Therefore, we can surmise that gamers are potentially also more willing to purchase a console to support their new hobby, but not willing to pay the upfront costs. Microsoft may even be able to more easily capture loyal PlayStation gamers by offering a way for them to purchase both consoles without requiring more than $800 to do so. Overall, Microsoft is expanding their addressable market through price and product differentiation.
- Behavior habituation - By bundling the game subscription with the hardware over a 24-month contract, Microsoft is making it more likely that customers will continue to use their console over this period, giving more opportunities for upsell and a stronger install base of dedicated and active customers that will be attractive to developers. Customer Lifetime Value (CLTV) could be a good payoff from this strategy.
- Purchase habituation - Once the hardware component is paid off, Microsoft can also more easily upsell buyers with their newly freed-up budget, through introducing a more premium subscription tier, other add-ons, or a price increase, for example.
Interestingly, Microsoft tries to lure more consumers with making the sum of monthly spending of the “all access model” lower than the combination of buying a separate console upfront and getting the Xbox Game Pass Ultimate for 24 months. Typically, we find that consumers are willing to pay more over time, as opposed to a substantial upfront payment, which indicates that either Microsoft is leaving money on the table, or has calculated that the CLTV impact of a more dedicated gamer committed to 24 months to their new console, is worth the $20 difference in price. Given many console buyers quickly abandon their new hobby, we’re betting on the latter.
Sony, for their part, recently announced that they will not offer a hardware subscription payment offer for the PlayStation 5. They will continue to rely on the high-priced single sales in order to monetize the games and cover the development cost. This may not necessarily be a losing strategy -- our study showed that PlayStation gamers lean more towards story-based, high-quality gaming experiences, whereas Xbox gamers lean more towards multiplayer and re-playability. Given this information and development costs of high quality games, a subscription model does not make as much sense for Sony as it clearly does for Microsoft. Whether this makes sense longer term, as they compete for market share, is debatable, as we have seen with increasingly ambitious programming budgets from Netflix and AppleTV.
In the battle for the best console…is cloud gaming the true winner?
Overall, there is no clear indicator who is going to win the game of the new console generation just yet. Sony’s PlayStation has an advantage of in terms of loyalty and exclusivity – it continues to have some of the most anticipated games being released over the next few years and is pushing the technical boundaries with its hardware. However, Microsoft is competing on a different dimension, offering a payment structure that is incredibly attractive to more casual or moderate gamers, and those on the fence of getting into this new generation of consoles. Given Nintendo’s success with casual gamers, Apple’s entry into this market, and our study findings around increased gaming during the pandemic, all signs indicate this market is big, growing, and attractive, and it may be a mistake for Sony to not have a pricing strategy that courts them…particularly when the future of gaming is likely in the cloud and this may be the last hardware-based console war.
One thing is certain: Sony will have to step up to the plate with a very compelling way of fighting the cloud gaming platforms to stay relevant over the next five to 10 years, and it will be exciting to see how they do that.
*About the survey: The Global Gaming Study was conducted by Simon-Kucher & Partners and Dynata in May—June, 2020. More than 13,000 people across 17 countries (Australia, Brazil, Canada, Chile, China, France, Germany, India, Indonesia, Mexico, Netherlands, Spain, Singapore, Thailand, Turkey, United Kingdom, and United States) were surveyed about their gaming preferences and behaviors. Full study reports on the Impacts of COVID-19 and the Future of Subscriptions are available upon request.
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