As a life-long gamer, I spend an inordinate amount of my time thinking about the vast sums of wealth the gaming industry has squeezed out of me over the last 25+ years. There are two main ways that game companies squeeze some extra profit from their customers in addition to selling games at retail. The first model, the “freemium” model, is well understood by anyone who likes cell phone games. Candy Crush has made millions, $2 at a time.
The other method for continued profits after game sales is to require the game to be used in conjunction with a subscription service. We first saw this kind of business model hit the mainstream with World of Warcraft, a brilliant business model which to this day sees continued profit from people who have been paying monthly fees since day 1. The console manufacturers have also gotten into the recurring subscription business – both major console lines require a separate subscription in order for the machines to get on the Internet at all. These entertainment behemoths have even built hooks into their services to make the exit barriers prohibitive. Subscribing to the Sony service that allows your PlayStation access to the Internet also grants you access to dozens of free games, all of which disappear the moment you stop paying your subscription fees.
This expansion into additional product add-ons and pseudo-mandatory subscription fees isn’t limited to just the gaming industry, however. With the advent of the Internet of Things, I predict we’ll see this trend grow in new ways. For example, I recently rented a Ford and attempted to use the in-dash GPS to navigate to my destination. Instead of a standard GPS screen, I was presented with a Microsoft-branded login screen and a disclaimer saying I needed a $60 subscription to Sync to use a basic GPS feature like directions. Of course, I wasn’t required to pay that amount to start the car, but some of the advertised features of the vehicle simply didn’t work without it. As the number of products getting hooked up to the Internet continues to increase, so will the amount of subscriptions services required for the products to work. The real money in the IoT, I believe, will be in these subscription lock-ins.
Today, the subscription economy seems relatively focused on recurring services unlinked to physical devices, such as Netflix and Pandora. However, this pattern of requiring a separate subscription to ensure full functionality of a physical item represents a newer trend in vertical integration. The real key, as always, is customer retention. Consider my opening gaming example – if I cancel my PlayStation Network subscription, not only do I lose the games that are part of it, but I also lose all my gaming history on their servers, including my friends lists, historical records, and ability to use my phone or computer to control certain aspects of my PlayStation. By linking physical devices to online subscription services, a company can erect multiple exit barriers. The prohibitive switching cost of new, big ticket items like cars, appliances, and home entertainment devices has always kept customers relatively loyal in the short term, but combining that with recurring subscriptions to value-added services will keep customers engaged and locked in to your product offerings in the long term as well.