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

[Travis Mansbridge]

Microtransaction based games have a fundamental problem and that is that rather than being primarily designed to be fun, they are instead primarily designed to be addictive and to drive the user toward making microtransactions in order to maintain the play that they've become addicted to. However, games that offer mostly cosmetic microtransactions that don't offer a substantial in-game advantage usually manage to avoid this problem.

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

[Anonymous Coward]

It was possible to beat coin-op arcade games on a single quarter. You can't do that with the new pay-to-win model.

Re:B2B only

[Half-pint HAL]

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.

There is a fundamental difference between traditional games and pure microtransaction harvesters. And the problem is...

The problem is that the microtransaction model encourages developers to negatively impact these core game mechanics.

If by "negatively impact", you mean "completely eliminates", then you're right, because there are two types of pschological "reward" in gaming. Microtransactions fulfill our desire for recognition and completeness, and they are, as the guys at Extra Credits say, pur Skinner-boxing (I would link, but the stupid iPad would wipe this message if I tried to find another webpage).

Traditional gaming rewards in a more subtle level -- mastery of mechanics gets you into an almost meditative "flow" state during play, and improved mastery means longer unbroken sessions of flow, which is exhilarating (even more so when the play is physical and high-speed -- eg skiing). Early computer games didn't do a lot of recognition, with the waves in Space Invaders, for example, being identical apart from their speed. The next step was to include some visual confirmation of progression, and Centipede did that by changing colour between stages, whereas PacMan relied on stage numbers and occassional interstitial animations, and Donkey Kong had multiple different screens. Then we had progression through a combination of these (Pengo had the baddies change colour on each level, accompanied with interstitial screens on the same every-third-level schedule as PacMan, Ms PacMan added multiple maps).

As I say, these supported the mastery of mechanics by making explicit how much you had improved. I'm a language hobbyist, and my early experience of language at school was frustration at a perceived lack of progress, which was demotivating. As it turned out, I was progressing relatively fast, but I just couldn't see it at the time.

But microtransactions often completely replace the core mechanics, and there is nothing to learn, nothing to master. There is no lasting flow state, just momentary shots of neurochemicals when you get a stupid fanfare noise on the screen and hit the next arbitrary milestone

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.

Re:B2B only

[darkain]

Secondly, they're only talking about B2B Apps (as in phone apps or little web tools). The freemium model has been working out well for VMWare with their "Player" product encouraging people to get "Workstation" and their "Hypervisor" product encourage people to get the full "vSphere" suite. Oracle is doing this with the acquisition of Sun and MySQL server, trying to convince users to switch over to their Enterprise Server products. There are plenty of other examples in this space, too.

Re:B2B only

[Dutch Gun]

Still, saying games are fundamentally about challenge is a value judgment that I do not think holds water.

I definitely agree. Many people don't understand or accept that different people enjoy different aspects of different types of games. For instance, I've heard from people who hate cutscenes say "I don't want to watch a movie, I want to play a game!" For me, watching an involved story through lengthy cutscenes is not painful (unless horribly done), but one of those *rewards* for getting through parts of the gameplay. Moreover, some people dislike the Elder Scrolls games because of the weak combat, but I love them because I take great pleasure in exploring new worlds.

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.

Re:Greed is the problem.

[Nyder]

The successful freemium games I have played have been successful because greed isn't the motive. Generally because those don't require you buying anything, don't make it so you have to buy stuff to be successful and keep adding new content. Marvel Heroes 2015 is one of the best examples of this. And I have happily spent over $100 on it over the last 2 years. I don't play the game very much anymore, but I'm not above buying a new hero I like when it comes out just to support the company for making a fun "freemium" game.

Too many games force you to actually have to purchase stuff to compete, or have really annoying buy this ads. Don't update with new content. Give you hardly any play time, wanting you to buy more. I have enough games in my collection that I don't have to play yours if you make it to much of a pain.

Look, I didn't read the article and apparently I didn't even read the freaking summary properly. I am stoned and I'm a big gamer. I didn't know there was "freemium" business apps. Seems like a stupid model for business apps. My bad!

It was always a scam

[msobkow]

The freemium model was always based on a scam: we "give away" the product, but for it to actually be useful, you have to pay. So anyone who tried the free version came away disillusioned about what the tool or product could actually do, and those who realized they needed to pay for the useful features came away feeling ripped off because "it's supposed to be free."

Worse still are those products where you can do everything with the free version, but it's a pain in the arse to do so compared to using the add-ons.

Let us face it: very few products can be built on a framework-and-plugin model successfully. In order for it to work in the market, those plugins have to provide some pretty impressive functionality to justify paying for them. But due to greed, a lot of the people and companies who tried this model instead shipped a crippled "free" version to force you to pay for the plugins and expansions.

In short, they treated their market as gullible idiots. And their market rebelled against being taken for fools.

Re:It was always a scam

[l0n3s0m3phr34k]

No one runs iOS on enterprise level hardware. Nor do you play any games on it. This guy tried to compete in an IBM level world, "enterprise class" like Oracle, SAP, RHEL, Microsoft (haha) and is running into requirements coming in from SLA's signed between other contractors. The enterprise world is a maze of cross-competing contracts that are all industry-standard set by external (ITIL, NIST, HIPAA, etc) policies. "It's free!" doesn't help with an SLA fine that can be in the millions.

Re:It was always a scam

[meta-monkey]

It's also nothing new. Back in the day we called it "crippleware." Freemium is just a little less crippled, but it's the same thing.

But I suppose going to the VCs and saying "we've adopted a freemium business model" sounds better than "we sell crippleware."

Business freemium? You be damned!

[sanf780]

I cannot see how easy a freemium environment works inside the business space. Is it something like the difference between Visual Studio Express ( (1) freemium) and Visual Studio (premium)? Or between Windows Starter and Windows Pro? If you need a specific feature - and most of the time you need that specific thing in the higher tier license - you just go for the premium version. If you do not realize you need the premium version at the beginning, then both vendor and you are in a bad position. If you are going to change software, you might also consider at this stage alternatives. Then you will get remorse due to the time you spent with this half-arsed version of the tool.
At the end of the day, we are talking about the business world, and not a consumer one. If freemium is so prevalent in the consumer mobile space is because applications can get revenue from advertising. You better not show unrelated adverts to a business client.
Note 1: Large business should not use Visual Studio Community due to licensing.

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).

Re:Enterprise softare market

[CanadianMacFan]

Not every application that gets installed in an enterprise is mission critical. If you sell stuff on the web then your site is mission critical. An app that analyzes your logs to send reports to the managers, while high profile, isn't mission critical. I was in a government department that had an application that was used to vote for favourite images. (They built it internally and did a crap job but that's beside the point.) Hardly something that needs to work 99.999%.

It doesn't matter the source of the software, if you have your process then you are going to test it to make sure that it isn't going to upset your environment. If any provider can't support you with the required coverage then you aren't going to go with them. It doesn't matter if it's a big multinational charging millions or a freemium package or open source.

Re:Greed is the problem.

[l0n3s0m3phr34k]

TFA is about a level of software that can cost hundreds of thousands, if not millions. The VC's are stupid to expect any company who would cut costs on enterprise software to succeed...all real enterprise software are governed by SLA's and no corp in their right mind would allow this on their network.

It works in games because your willing to put up with the inconveniences of the ads. An analogy to this is if the ads are analogies to the enterprise software's system-disrupting bugs that pop up in a corp environment. Then imagine that if you didn't "click through" on that ad within a few seconds, the "free app" got to charge you real $$$ each time, even a few cents. Would you play that game? That's basically the risks this "freemium" is trying, and failed. It's trying to shift the VERY real risks of failure into "hey it's free". If it spectacularly fails, companies are fined tens of thousands of dollars per hour/minute for breaking their contracts with each other. That is the "enterprise class" software world.

Re: American idiot

[easyTree]

I think your being unreasonable. There government actively encourages low standards in education. Jeez, just look at the Burger State where they mandate the teaching of something that is blatant nonsense.
In such a climate, how would you're spelling rate?

Whatever happened to free?

[Hagaric]

Time & time again I experience this: I have a task, I look for a free opensource solution, I find one, only to discover that it's essentially bait for a commercial version, and it is nigh-on impossible to get it to work without coughing up for the pay version, which is almost always ridiculously overpriced, and to add insult to injury, the broken version is covered in ads for the commercial one.

I've wasted my time, the company will never get my money because they pissed me off with a broken "free" version which appears only to exist to satisfy the license of the source they based their product on, and is published in the most obfuscated and undocumented way they can get away with.

I'd be happy with something that worked with a given feature set, and offered more functionality for pay, I'd pay for that. This is not the same as figuring out how to cripple the most core feature in order to force people to buy...

This is not the opensource we were looking for.

Re: American idiot

[N!k0N]

I think your being unreasonable. There government actively encourages low standards in education. Jeez, just look at the Burger State where they mandate the teaching of something that is blatant nonsense. In such a climate, how would you're spelling rate?

I really hope you got those wrong on purpose ...

Re:Just shareware renamed

[gnupun]

But many freemium games allow you access to almost all the content (say 70-90% of the game) for free whereas shareware gives you only about 5-10% of the full game for free.

Another difference is freemium content is 10-100 times more expensive (but buyers won't notice because they pay small amounts in micro-transactions) than full commercial or shareware games. The high price is because the premium content in freemium games allows the buyer to win easily against free players, which is not how shareware works.