Why the Freemium Business Model Isn't What It Used To Be

mattydread23 writes: A few years ago, every enterprise software company was trying freemium — the idea of giving a product away to build users, then charging for additional features. Now, that model seems to be losing favor, except with open source software. Business Insider talks to enterprise founders and VCs to figure out why 'freemium' wasn't all it was cracked up to be.

Comments

B2B only

[phantomfive]

Note that the article is only talking about business software......we will still be harangued with free-to-play games for a while, I think.

Re:B2B only

[RogueyWon]

To some extent, yes. But I think the worst of the big "rush to freemium" might have passed now. Certainly, traditional gaming companies like EA and Crytek who invested heavily in the model have found the results from it disappointing. Meanwhile, the mobile gaming companies like King who made it big on the back of mobile mega-hits have found it difficult to replicate the success of their big-name games and are generally downsizing.

There are parts of the industry where freemium is working; League of Legends, which has a particularly benign version of the model, is a huge success and will remain so for the foreseeable future. A few failing MMOs, such as Lord of the Rings Online and Star Wars: The Old Republic have managed to extend their lives by moving partially or fully to a freemium model. But in general, the pendulum in most of the gaming world seems to be swinging away from freemium right now (though sadly, buy-to-own games with pay-to-win elements like Forza 5 don't seem to be going away). The mobile gaming ecosystems are not in a happy place due to over-saturation of the markets and low standards, which console and PC gamers have gotten a bit savvier over the last couple of years and have generally realised that there is no such thing as a free lunch.

The exceptions to all of this are in Asia. Much of Japan's gaming industry is rapidly decoupling from the wider global industry (Sony, Nintendo and, to a lesser extent, Square-Enix being the exceptions). But the only forms of gaming in good health at the moment are childrens' games (primarily buy-to-own and on handheld platforms), otaku games (some freemium, some buy-to-own-but-pay-to-win on home console and handheld platforms) and salaryman/woman-focussed pay-to-win mobile games, designed to be played in short bursts on a commute. The commute is, unfortunately, more or less the only time that a Japanese adult with a full time job has for gaming, given their ridiculous working hours culture, so the freemium model sits more naturally there.

China's the other exception. There's simply less stigma there about buying your way to success and the majority of their online games in particular are explicitly built around the fact that whoever spends the most on in-game items will have a huge advantage in the game. Everybody there seems to be ok with that (likely for a massively complicated web of social and cultural factors), but it makes my blood run cold.

Re:B2B only

[Dutch Gun]

If you think about it, ALL games are designed to be addictive. The sort of pleasure/reward sensations are really no different between paid, free, free-to-play, buy-to-play, or any other variation. Instead, what's different is that the microtransaction based free-to-play games purposefully slow down the effort/reward ratio over time, and force the player to either slog through longer hours of gameplay with fewer rewards per hour spent, with the temptation of being able to increase that ratio with real money.

Every game has to carefully balance that effort/reward ratio. Too much effort required, and the game feels like a grind. Too much reward too quickly, and there's no sense of accomplishment, or the game simply runs out of content for the player. The problem is that the microtransaction model encourages developers to negatively impact these core game mechanics. Many players also dislike the immersion-breaking aspect of a game asking for more money during gameplay. Unfortunately, it's also proven to be a rather popular model, because it's a great way to get players hooked without the initial barrier of a financial commitment.

Personally, I feel the nastiest side of microtransaction games is that these types of games also benefit greatly from addictive/obsessive personalities, with some players spending obscene amounts of money on in-game perks (this was according to the CEO of a company I used to work for). This is great for a company's bottom line, but I don't care much for that aspect of microtransaction based games at all.

Re:B2B only

[Half-pint HAL]

Gaming arcades had to make a game, and playing the game had to be fun, and you had to be able to get bette with practise or you wouldn't come back. Microtransaction games often have no "game" at all -- no mechanics to master, no real choices to make. With an arcade machine, you have to decide to start every time you come back to the machine, but with microtransaction games, you only choose to start once and all your progress is saved in perpetuity -- but you do have to decide to stop.

First-to-market, niche markets and dependencies

[Anonymous Coward]

Honestly it seems like the freemium model is only sustainable in cases where you're first to market with a product (no competition), niche markets (where people don't or can't compete [e.g.: specific expertise requirements, software patents, little to no profit margins, etc]) or in places where the software (or service) is reliant upon something you control (e.g.: specialty hardware).

You see it with scientific devices for example which are coming with more and more free and extendable software but still require you to purchase expensive vendor locked hardware and maintenance contracts.

Enterprise softare market

[l0n3s0m3phr34k]

I could have told him that too...enterprise users don't care about cost really. We need something that works 99.999%, has reliable troubleshooting / tracking when it doesn't work, and 24/7 support specialists. It's all done under a financial penalty SLA (service level agreement). We can't skip on this as our clients already have us locked into contracts so the risk isn't worth the "free reward". When my client's stuff breaks, I have 15-30 minutes to ge5t the needed support on the line, no matter the time, across the planet and multiple time zone / languages. I would hate for the root cause to be tracked back to some "freemium" software that I installed; the ITIL change control should have caught this software before it was ever installed. No one is allowed to install software without a clearly defined ITIL compliant review system, all software must meet SLA requirements.

This reminds me of Uber using "alternative delivery" and sneaking past licensed taxi services; they are getting away with it in some places but in others are being found to violate local laws. Enterprise software has similar checks and balances, but is far faster to discover software without SLA requirements...either via hacks of non-compliant software (see Sony GOP hack exploiting SAP/Oracle/Java/whatever) or system failures and SLA fines (EDS's million dollar FAA SABRE outage fines).