The MMO market

ANALYSIS: MMOGs - Risk vs Reward
By Screen Digest
Analyst Piers Harding-Rolls examines the gambles involved in publishing premium online games.

It is clear that for those companies that succeed, the MMOG subscription
model can be extremely lucrative and benefits disproportionately from scale. In other words, once past a certain level of subscribers, operating expenses’ impact on profit margins falls heavily, allowing for great returns. Operating profit for well-adopted premium subscription MMOGs can reach as high as 70 percent and are routinely around 50 percent, representing fantastic margins, which are higher than many other online entertainment opportunities.

The financial success of WoW since the end of 2005 – we estimate that this title alone has generated more than £700 ($1,400) million in western subscription revenues since launch – has prompted significant investment in the sector. Many publishers that were not active in MMOGs but have been tracking the success of Blizzard and Vivendi have been looking at ways to access this lucrative sector or to adopt MMOG-like strategies for their content to drive revenue growth. Screen Digest MMOG research also shows a market that is growing strongly, with more content than ever before and more gamers involved. It would appear, therefore, that investing heavily in MMOGs and collecting a substantial return on this investment represents a straightforward strategic decision for the game’s publisher. In fact, although the rewards are substantial for those that succeed, the likelihood of failure is higher than ever in a sector dripping with risk.

Our research shows that licensing of well-known IP is not enough to overcome other strategic failings, and as such can have minimal impact on business risk.

For one thing, competition in the subscription sector is currently at its peak. Growth in the market has prompted new market entrants from a number of different directions; some have expanded from their local markets in Korea and China to take a slice of the pie, while other traditional game publishers have increased their exposure to what is considered a high growth games market opportunity. Although more gamers than ever are playing MMOGs, the increase in subscription content is not commensurate with the growing opportunity.

The other key factor about the nature of the competition in the incumbent subscription market is that much of the revenue is concentrated at the very top of the market. The fact that only ten titles accounted for 85 percent of 2006 western subscription revenue confirms a market that is teeming with commercial risk. This competitive situation is compounded by the market domination of WoW, a title that is expected to have a lifespan of a good few years yet. In 2006, WoW alone represented 54 percent of the subscription market in North America and Europe. Unfortunately, the reality is that many subscription MMOGs in development will fail commercially, as the market is shared between only a handful of titles.

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Additionally, the service nature of MMOGs means there is an ongoing financial burden on publishers beyond the launch of the game. If take-up of a title is below expectation, the ongoing service and content development costs involved in maintaining MMOGs often results in service closure to stem losses. This means that with all the talk of the opportunity offered by the long shelf-life of MMOGs, there is still heavy pressure to deliver a certain level of success in the early weeks following launch.

Lastly, developing a winning MMOG strategy that can be packaged up and transferred to future MMOG releases is incredibly hard. Even those publishers that have a track record of success are unable to guarantee the success of future titles due to the complex nature of the market, its ever changing competitive climate and the demands of its consumers. As there are many important elements to a successful strategy, the failure of one of these elements is enough to undermine the potential of a title in a highly competitive sector.

So what are publishers doing to mitigate the risk of a highly competitive subscription market? Within the world of high-end, paid-for online games, publishers are increasingly looking to acquire content IP from other media sectors such as television, film and music. This content strategy mirrors the approach of publishers in the console sector and represents an effort to connect with the consumer through an established entertainment brand. Our research shows, however, that licensing of well-known IP is not enough to overcome other strategic failings, and as such can have minimal impact on business risk.

Other publishers wishing to access the market and looking to avoid spiraling development costs have imported cheaper MMOG content from Asia. So far many of these titles have failed to make an impact on the subscription market, highlighting the challenges of importing Asian MMOG content for the western consumer.

Other companies, a number of which originate from industries outside of games, are looking to develop new, often more casual, MMOG experiences targeted at new consumer groups. These games largely utilize alternative business models – advertising and virtual item sales – that offer a far lower consumer barrier to entry compared to subscription models and, importantly, are generally far less expensive to develop than traditional premium MMOGs. We expect revenue streams from alternative business models, particularly virtual items sales and advertising, to grow strongly over the next five years. Although these new business models and content strategies also bring new challenges – such as higher customer turnover and many new types of competitor – they offer a less risky way to access the potential upside offered by the MMOG model.