Are Subscriptions the Future of Media, Entertainment, and More?

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3Q 2019 | IN-5534

The highlight of E3 2019 was Microsoft’s formal announcement of its next-generation console (“Project Scarlett”), which, based on current information, is more similar than not to Sony’s next-generation PlayStation platform—i.e., based on AMD architecture, uses Solid State Drives (SSDs), supports ray tracing, 4K/8K, etc. Microsoft confirmed a late 2020 launch, and while Sony has not provided an official timeline, its platform will likely launch around the same time. In addition to hardware, a great deal of attention was devoted to cloud gaming, regarding both announcements that were made at the show and others that were expected to be, but were not. Google revealed additional details about its Stadia service, including two tiers—a free to access tier (Stadia Base) that supports up to 1080p/60fps gaming in stereo sound (10 Mbps connection required for 720p, around 20 Mbps for 1080p) and a premium (Stadia Pro) tier priced at US$9.99 per month, which includes select games as part of the subscription, discounts, and content up to 4K/60fps HDR and 5.1 surround sound (35 Mbps connection required for 4K).

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E3 2019: New Consoles on the Horizon, Cloud Gaming, and More Subscriptions

NEWS


The highlight of E3 2019 was Microsoft’s formal announcement of its next-generation console (“Project Scarlett”), which, based on current information, is more similar than not to Sony’s next-generation PlayStation platform—i.e., based on AMD architecture, uses Solid State Drives (SSDs), supports ray tracing, 4K/8K, etc. Microsoft confirmed a late 2020 launch, and while Sony has not provided an official timeline, its platform will likely launch around the same time. In addition to hardware, a great deal of attention was devoted to cloud gaming, regarding both announcements that were made at the show and others that were expected to be, but were not. Google revealed additional details about its Stadia service, including two tiers—a free to access tier (Stadia Base) that supports up to 1080p/60fps gaming in stereo sound (10 Mbps connection required for 720p, around 20 Mbps for 1080p) and a premium (Stadia Pro) tier priced at US$9.99 per month, which includes select games as part of the subscription, discounts, and content up to 4K/60fps HDR and 5.1 surround sound (35 Mbps connection required for 4K).

Microsoft was expected to spend quite a bit of time on its xCloud cloud gaming platform at E3 2019, but focus was placed on the next-generation console and game titles. Microsoft did announce plans to enable console streaming later in 2019—something the industry has seen with Sony’s Remote Play and streaming from PCs. In time, Microsoft will launch a true cloud gaming service, but there is no need to rush. Microsoft electing to tone down its messaging around xCloud could have stemmed from Google’s Stadia announcement and the service’s support for 4K graphics, particularly if Microsoft’s initial launch solution was planned to approximate gameplay on current generation consoles rather than offering next-generation features.

Ubisoft also announced Uplay Plus, which gives players access to a library of publisher’s titles for US$14.99 per month. This service joins others like Microsoft’s Xbox Game Pass (and Xbox Live) EA’s EA Access, Apple’s gaming subscription service, and Sony’s PlayStation Plus (along with cloud gaming service PlayStation Now).

Subscriptions, Subscriptions, and More Subscriptions

IMPACT


The title of this ABI Insight might strike some as peculiar, since consumers have always dealt with a number of subscriptions (e.g., pay TV, phone and Internet services, magazines, fitness clubs, warehouse stores, etc.), but the nature and extensiveness of these recurring transactions are changing. There is some consolidation; for example, Apple News+ and Readly, but other markets like Over-the-Top (OTT), music, and soon gaming will offer consumers a range of subscriptions to pick and choose. In the OTT market, Subscription Video on Demand (SVOD) has already become the strongest business model, but more mature markets, like the United States, are exhibiting signs of saturation and “subscription fatigue” as more services come online. The gaming market is currently shifting more resources away from standalone titles to Games-as-a-Service (GaaS) and platforms/subscriptions in order to bolster recurring revenue streams. The media and entertainment market is not alone, as other areas like automotive (outside of public transportation) and retailers (e.g., Amazon, Walmart, Target) are either experimenting/trialing or deploying subscription services.       

Subscription services certainly help keep consumers within an ecosystem or brand, and also generate a recurring revenue stream that both helps the top line and keeps revenues more consistent, but there are limitations. Food delivery services, for example, have struggled with profitability in an effort to compete with existing establishments that often operate on relatively low margins. In the video market, services are spending billions to produce and secure exclusive content to not only differentiate services but also maintain the necessary threshold of value/content to keep customers spending on a regular basis—it will be interesting to see if the end of Game of Thrones will have a negative impact on HBO Now subscriptions (betting money is on yes). The operational model has changed with the proliferation of subscriptions—consumers are now less likely to take a subscription and forget about it, continuing to pay for a service they hardly use, because there are simply too many other potential subscriptions out there to take its place.

Managing the Flow of New Content

RECOMMENDATIONS


The focus of subscription services needs to fall on finding ways to keep users engaged. Netflix, Amazon, Hulu, and other video services do this by releasing increasing amounts of original programming. For cloud gaming, quality will certainly be a factor (and potential differentiator), but exclusive content is vital as well; while exclusive platform deals are increasingly viewed in a poor light, it remains a critical means of differentiation. 4K gaming is a strong feature, but those who care the most about graphics will likely choose to purchase a high-end gaming PC over a cloud gaming service if they have the means, even if its ultimate end cost to the consumer is lower.    

Perceived longevity is also important for many subscription services and especially gaming, which still generates significant revenue from transactional purchases. For transactional purchases (where cloud services serve as a central repository or virtual locker), consumers need to feel confident the service will remain active for the long haul or, at minimum, offer consumers alternatives should it shut down, which appears to be the case with UVVU’s digital locker system. While closures of cloud services are not new, they remain a lingering concern for these types of transactions and were one (among many) of the reasons early cloud gaming services failed in the past. While cross-play (multiplayer across different platforms) is more common today, cross-buy (buy once and access content to multiple services/platforms) is far less common, and this could be a problem for cloud gaming or any subscription or cloud service that includes transactional engagements. ABI Research plans to take a deeper dive into the market potential for cloud gaming in an upcoming research report, but the announcements at E3 2019 and the launch of new consoles in 2020 suggest a longer horizon for cloud gaming, perhaps not unlike Virtual Reality (VR).

The competitive landscape puts pricing pressures on fees, which makes balancing content expenditures and revenue a challenge. In addition, competitors are looking at alternative business models like Ad-Supported Video on Demand (AVOID) service Tubi, for example, which uses advertising to offer “free” content and recently surpassed 20 million monthly active users. Cloud gaming similarly has to contend with Free-to-Play (F2P) titles and, while these games will likely be available on the cloud gaming platforms, if they require a monthly fee, many consumers may simply elect to go with a PC or mobile device (these titles typically do not have ultra-high hardware requirements). Cloud gaming services are also limited in the amount of content that can be added to all-you-can-eat plans. Since games carry high per unit costs and derive significant revenue on a transactional basis, these titles will take longer to reach a Netflix like cloud gaming service. The games can also change dramatically between launch and months down the road, making the point of entry different if a consumer has to wait for it to reach a cloud service. As with video services, investments will need to be made to produce unique/original content. Success will likely take time and companies like Google (which notoriously moves on when things do not progress quickly) might have to show more willingness to weather the slower adoption rate than they have in the past.