The Netflix of gaming? Why subscription video-game services face an uphill battle

Technology, Media & Telecommunications Practice

The Netix of gaming?

Why subscription

video-game services

face an uphill battle

Many tech giants are betting that the subscription model will become

dominant in video games. Yet the things that make gaming such an

entertainment dynamo are problematic for these types of services.

July 2020

by Dan Singer and Enrico D’Angelo

Recent announcements of new game-distribution

services from Apple, Google, Microsoft, NVIDIA,

and Tencent, as well as reports

of a prospective

Amazon offering, have caused widespread industry

speculation that video-game distribution could

move from the still-dominant à la carte model toward

Netflix-style subscriptions. If subscription services

were successful, power could shift from game

studios and publishers to a few digital distribution

giants with massive scale and market share—

analogous to the rise of Netflix in digital video.

However, comparisons with the TV and film business

don’t entirely hold up—digital subscriptions will not

translate to video games easily. Gaming’s unique

consumption model and economics arguably make

the challenge of altering consumer behavior to

create all-you-can-eat offerings at massive scale a

lot tougher than anything Amazon Prime, Hulu, and

Netflix have faced.

Still, the stakes are so high—video games generated

$120 billion in revenue

globally in 2019—that

the recent service launches are probably just

the opening gambits. Any of the players making

(or contemplating) bets on such a seismic shift in

distribution and consumption would be wise to

keep in mind that video games have several

characteristics that make them ill-suited to the

Netflix model.

Games are increasingly open-ended

experiences, each offering thousands of

hours of entertainment

Until the early-to-mid 2000s, video games were

primarily linear forms of entertainment: gamers

engaged with the narrative, and most games

had a clear beginning, middle, and end, very

much like movies. That design framework has

since dramatically evolved. Although some linear

experiences still exist, engagement with today’s

most popular games relies, more often than

not, on infinitely playable “loops,” which can be

competitive (for instance, play to improve, and climb

leaderboards) or loot driven (such as collecting a

never-ending set of items of increasing rarity

and value to face a never-ending set of increasingly

difficult challenges). These loops feed the digital

identities and status of players within their

online communities.

Such experiences, by design, never end, which

is reflected in the astronomical amount of time

devoted to top games. According to Steamspy.com,

players spend almost two hours a day, on average,

in the popular MOBA game DotA 2 and more than

one hour a day in the online shooter CS:GO. When

Destiny launched, Activision announced that players

were spending, on average, three hours a day in it.

More than 70 percent of Fortnite players spend in

excess of six hours a week playing, and at least 20

percent spend 16 hours or more.

Since the average

Netflix user watches it for just 18 to 27 minutes a

day,

Netflix as a whole generates less engagement

than any of these games individually, despite

spending $12 billion a year to produce 1,500 hours

of original content and to license thousands more.

Games are turning into free-to-play

services and platforms

One of the main motivations for the transition

from linear narratives to “live” products was the

desire of the game publishers to stabilize and more

actively control their revenues. The traditional

model required risky, multimillion-dollar bets, with

uncertain returns, in search of blockbusters. In

the live model, game publishers have turned their

products into services, constantly investing in

frequent releases of new content, features, events,

and competitions to keep players active—all

supported by an obsessive focus on analytics-

based decision making. Games that demonstrate

Seth Schiesel, “Amazon pushes into making video games, not just streaming their play,” New York Times, April 2, 2020, nytimes.com.

Dean Takahashi, “SuperData: Games hit $120.1 billion in 2019, with Fortnite topping $1.8 billion,” January 2, 2020, VentureBeat.com.

A Steam API-based statistics website providing insights into PC player behavior on Steam.

Rob Marvin, “Fortnite by the numbers: How many hours are you playing each week?,” PC Magazine, October 2, 2018, pcmag.com.

Travis Clark, “Netflix says its subscribers watch an average of 2 hours a day—here’s how that compares with TV viewing,” Business Insider,

March 13, 2019, businessinsider.com; “Playback time: Which consumer attitudes will shape the streaming wars?,” February 11, 2020,

nielsen.com; “US: Netflix grabs the most attention, but its reign will be challenged,” December 3, 2019, emarketer.com; Media Nations: UK

2019, August 7, 2019, ofcom.org.

The Netflix of gaming? Why subscription video-game services face an uphill battle

Matthew Handrahan, “Fortnite tops SuperData’s 2018 chart with $2.4 billion digital revenue,” January 16, 2019, gamesindustry.biz.

Todd Spangler, “‘Fortnite’ revenue dropped 25% in 2019 but was still the year’s top-earning game with $1.8 billion haul,” Variety,

January 2, 2020, variety.com.

As of June 7, 2020.

“Worldwide digital games market: April 2020,” May 22, 2020, SuperDataresearch.com.

A coauthor of this article is a Roblox employee.

Erik Kain, “Warzone had a huge first month with a staggering player count ,” April 10, 2020, forbes.com.

Dean Takahashi, “SuperData: Digital games grew 13% to $119.6 billion in 2018; Fortnite earned $2.4 billion (updated),” January 16, 2019,

VentureBeat.com.

NPD, GfK, and GSD for XBoxOne, PS4, and Switch, worldwide, 201517.

“Domestic box office for 2018,” boxofficemojo.com.

mass appeal become platforms and spur the

creation of new communities: all-encompassing

experiences with social, competitive, and personal-

status elements.

To minimize initial barriers for new players, many

games have embraced the free-to-play business

model. Publishers are deeply committed to

expanding their audiences and focused on the

long-term sustainability of these businesses. They

therefore willingly sacrifice upfront revenues (a one-

time $60 payment or a monthly $15 subscription)

for the longer-term opportunity to make money

from usage, through microtransactions for in-game

goods and services.

The world’s most popular games in terms of

hours spent and the number of active players and

revenues are mostly free to play.

According to

SuperData, for example, Fortnite generated $2.4

billion in 2018 and $1.8 billion in 2019,

despite being

completely free to play. According to AppAnnie,

99 of the top 100–grossing mobile games in the

United States are free. So, on PCs, were six out of

the world’s top ten titles (and four out of the top five)

in April 2020.

Console gaming has become the last

bastion of the traditional paid model, but free-to-

play experiences such as Fortnite, Apex Legends,

and Roblox

have launched on console and found

significant success. Even Call of Duty, historically

premium only on console and PC, was recently

released as a stand-alone, free-to-play Battle

Royale experience (Warzone). It is enjoying strong

early momentum, with 50 million players in the first

month from launch.

Premium games in a subscription

format might not be a winning formula

These trends make gaming subscriptions a hard sell.

The Netflix proposition is a practically inexhaustible

library of compelling content, with a core that is

exclusive to the service. Free-to-play games, by

definition, don’t make sense behind a subscription

paywall, especially on PCs and mobile (console

providers charge a monthly fee to access online

features). What’s more, the game-as-a-service

model does not lend itself to a large portfolio of

games, implicit in the value proposition of all-you-

can-eat subscriptions, since that gaming model is all

about limitless engagement with one destination.

To succeed, a gaming subscription would therefore

need to offer access to otherwise-premium (paid)

games, an $18.5 billion global market, which is

smaller than the approximately $90 billion free-to-

play market and growing much less quickly.

The

premium game market is heavily concentrated; the

top ten franchises (such as Grand Theft Auto, Call of

Duty, Uncharted, Red Dead Redemption, and FIFA)

account for roughly half of the market’s revenues.

(By comparison, the top ten blockbuster movies

accounted for only 33 percent of the US box office

in 2018.

) These games would be prohibitively

expensive for a subscription service to carry:

Video games have several characteristics

that make them ill-suited to the

Netix model.

3The Netflix of gaming? Why subscription video-game services face an uphill battle

— Most users interested in blockbuster premium

games buy them right away: on average, 50 to

60 percent of the lifetime units are sold in the

first month after launch: for example, Red Dead

Redemption 2 sold 17 million units in its first 12

days. To be attractive, a subscription service

would have to feature blockbusters at or near

their launch dates.

— Currently, a game publisher nets at least $42 per

unit on a $60 game sold digitally or physically.

That’s probably what publishers will expect from

any distribution outlet, including subscription

services, that offer their products. The leverage

for blockbuster games lies squarely with the

publisher—more so than for video entertainment.

— Licensing just two blockbusters a year could

cost a platform $8 per user every month. That

would be 80 to 100 percent of subscription

revenues if game services were priced in the

same way over-the-top (OTT) videos are.

Past game-subscription services (such as GameTap

and OnLive) have faced this very problem and ended

up with either older games that publishers were

willing to license cheaply or with unsuccessful titles

that quickly moved to the bargain bin. As a result,

these remained niche services.

Game development for

subscription services would be

prohibitively expensive

The concept of a Netflix for gaming is even more

ambitious than it seems. Services like Netflix attract

subscribers with their own exclusive offerings.

Repeating that playbook would probably require

game-subscription services to develop first-party

blockbuster titles and spend hundreds of millions of

dollars on product development and marketing.

This is the strategy Microsoft seems to be pursuing

with its Xbox Game Pass service: it offers most of

its first-party titles as part of a subscription service

when those games become available at retail.

Microsoft has also been acquiring multiple studios,

ostensibly to expand its subscription catalog. Xbox

Game Pass has recently announced that it has

ten million subscribers,

but the economics of the

service are unclear.

With Apple Arcade, Apple too has made a big wager

on content, reportedly investing $500 million

in small indie games. It is betting that the sheer

quantity of titles will eventually outweigh “must

play” content in helping to acquire players. Other

companies are trying a lower-investment, long-

tail strategy—for instance, Sony PlayStation Now,

which had 2.2 million subscribers as of April 2020,

focuses on the back catalog.

For pure-play subscription services, developing

exclusive games would be a tall order. A triple-A

game can cost $50 million to more than $100 million

to develop, not including marketing costs, which

can easily double that budget. Such games have

no certainty of success. Competition is intense,

particularly since gamers, unlike consumers of

video content, are less likely to sample lots of

different titles, focusing instead on just one or two

titles for weeks or months at a time. Subscription

platforms would need to become (or acquire) full-

fledged game publishers with multibillion-dollar

commitments in order to compete for subscribers

against industry powerhouses: the à la carte

AAA blockbusters and free-to-play games that

already have vibrant communities of players and

unpaid streamers.

Dean Takahashi, “Microsoft moves from acquiring game studios to showing off their games,” November 14, 2019, VentureBeat.com.

Nick Summers, “Xbox Game Pass clears 10 million subscribers,” April 30, 2020, engadget.com.

Tim Bradshaw, “Apple spends hundreds of millions on Arcade video game service,” Financial Times, April 13, 2019, ft.com.

Matthew Handrahan, “PlayStation Now reaches 2.2 million subscribers,” May 19, 2020, GamesIndustry.biz.

The Netflix of gaming? Why subscription video-game services face an uphill battle

A YouTube of gaming?

If the Netflix playbook can’t be easily rerun in

gaming—where exclusive content, the free-to-play

model, and a service mindset drive engagement—

does this mean that no digital-content platform can

serve as a model for reinvention? Not necessarily.

YouTube might be the better model. Much as

its platform for user-generated content (UGC)

disrupted traditional video, so might a UGC gaming

platform create a profitable, scalable alternative to

traditional games. UGC gaming offers open-ended

experiences, created by gamers, that can generate

revenues in a variety of ways (for instance, limited

paid access, microtransactions, and advertising),

even if none of them are subscription based.

Minecraft (owned by Microsoft) and Roblox are the

largest UGC experiences so far. But games such as

Fortnite are adding UGC features, and new entrants,

like Sony’s Dreams, are rolling out intuitive tools and

templates to help users create and share content.

Minecraft, for example, is primarily a traditional paid

product, boasting 112 million monthly active users as

of September 2019.

But it also has a thriving, fast-

growing private-server

scene, where community

members create custom settings and rules that offer

varied experiences, environments, and game-play

types (from open-world adventures to shooters and

anything in between). Some of these servers make

money through donations and ads, and a select

few have massive audiences. Hypixel, spun off into

a stand-alone company (Hypixel Studios) that was

recently acquired by Riot Games,

reportedly has

more than ten million accounts.

Fortnite’s massive success has been driven by

studio-made content, but in December 2018 the

game introduced UGC through its creative mode,

providing players with spaces and tools to build

structures and game modes and to invite friends to

join. In mid-February 2020, Sony released Dreams,

an intuitive environment with tools to create a broad

range of experiences, from art showcases to actual

games, that are published within the Dreams client

on PlayStation 4.

All of these companies are sidestepping the cost of

exclusive content by offering tools that tie creators

to the platform in exchange for visibility and a

captive audience. Traditional gamers might criticize

UGC experiences because they look cruder and play

less smoothly than professionally produced titles

do. However, UGC gaming’s mass-market appeal

cannot be denied, suggesting that low-budget,

grassroots game designers can thrive, even in

competition with deep-pocketed game publishers.

The gaming community’s creativity has been

responsible for a meaningful amount of past

gaming innovation. In fact, the entire MOBA genre

(League of Legends and DotA 2, for example) was

established by Defense of the Ancients (DotA), a

mod for Warcraft III. The original class-based

shooter Team Fortress (which inspired titles such

as Overwatch) was originally a Quake mod. The

Ben Gilbert, “‘Minecraft’ has been quietly dominating for over 10 years, and now has 112 million players every month,” Business Insider,

September 14, 2019, businessinsider.com.

“The best Mindcraft servers,” pcgamsn.com.

Coco Huang, “Riot Games Acquires Hypixel Studios,” Los Angeles Business Journal, May 18, 2020, labusinessjournal.com.

Robert Guthrie, “The uncertain future of Minecraft’s independent servers,” December 21, 2016, kotaku.com.

UGC gaming’s mass-market appeal

cannot be denied, suggesting that

low- budget, grassroots game design

ers can thrive, even in competition with

deep-pocketed game publishers.

5The Netflix of gaming? Why subscription video-game services face an uphill battle

hyperpopular shooter Counter-Strike was born as a

Half-Life mod, and the cult zombie PVP game Left

4 Dead started as a Counterstrike mod. The entire

Battle Royale genre, popularized by games such as

PUBG and Fortnite, was first developed as a mod

called PlayerUnknown Battle Royale for military

shooter Arma 2. Even Minecraft is taking cues from

its private servers to update the official game.

UGC gaming platforms are much closer to YouTube

(or streaming services like Twitch) than to Netflix.

They give gamers free access to potentially

endless experiences while still offering financial

incentives to nonprofessional developers. The

ideas and genres they are establishing have found

success with millions of engaged players and

could provide the creative foundation of the next

megahits (or become next megahits themselves).

Part of the future of gaming might not be Netflix-

like subscriptions but rather open platforms with

unique experiences, built by trusted community

participants, that grow organically into small to

midsize development studios.

With the explosive growth of streaming platforms

such as Netflix and Disney+, video games seem

to be an obvious adjacent category for digital

subscriptions. This is, after all, a booming

entertainment sector in its own right, with a massive,

fiercely devoted audience of users who return to the

same free-to-play titles again and again, and even

take a hand in creating games. Yet some of those

very qualities, which help make video games such

a unique dynamo, may also make them a dubious

proposition for a Netflix-like subscription model.

Dan Singer is a partner in McKinsey’s New York office. Enrico D’Angelo, a McKinsey alumnus, is vice president of product

at Roblox.

6 The Netflix of gaming? Why subscription video-game services face an uphill battle