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

[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.

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).

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: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: 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.