Interesting news today: Zenimax, the publisher of the game Elder Scrolls Online, will be dropping that game's subscription fee in March. Users will be able to pay $14.99 per month for some premium benefits: faster leveling, lower resource requirements for crafting, an allotment of premium currency, and "free" access to future DLC. All users must still buy the original game. Full details are here.

This continues a pattern of MMO publishers initially offering access to their games on a subscription basis, and later switching to a free-to-play or 'tiered' membership plans. Analysts, including myself, have attributed this behavior to repeated, apparently naïve attempts to release pure, subscription-based games, in hopes of enjoying some of the success of the paid MMO king, World of Warcraft. Those publishers soon get a cold splash of reality, the story goes: Recognzing they were doomed from the start, they switch to F2P in search of profits, or at least enough money to break even.

But now I’m starting to think differently. I’m beginning to think that repeated initial use of subscription with later conversion to an F2P option is not a failure of publishers to come to grips with reality. I’m beginning to think it’s a conscious decision, from the start, to engage in a practice known as intertemporal price discrimination.

The basic idea of price discrimination is that you charge different people different amounts for the same – or nearly the same – product [1]. In the games industry, the most obvious example is the sale of standard and premium editions of the same game. Usually the latter includes an extra inducement – a book of game art, a statue of the game’s main hero or villain, etc – that costs far less to produce than the extra amount players pay for it. The publisher thus extracts some of the additional value that premium version buyers place on the game and its associated IP.

Intertemporal price discrimination (IPD) is when you sell the same – or nearly the same – product to different people in different time periods. The goal here is to take advantage of the importance people place on consuming a product now rather than later. People who want to consume it right now are willing to pay more than those who are willing to wait a few weeks or months, or even years. A well-known example comes from the movie industry, which has become expert at releasing its products in different formats at different times: first theater, then second-run theater, then pay-per-view, then HBO/Showtime, then BluRay, then Netflix, then cable, and so on. On a per-consumer basis, each of these viewing options is slightly more valuable to movie studios than the one following it. Video games publishers engage in IPD, too, by gradually lowering the price of their games over time.

Along these lines, I’m beginning to suspect that switching from pure subscription to a system with a free-to-play option is more – possibly much more – than a “Whoops!” moment for MMO publishers. I’m beginning to think it’s an example of IPD. In the case of the MMO, the publisher gets both money from the sale of the software, as well as recurring payments from players who want to maintain access to the game. Anyone who strongly values the game, and who simply can’t wait for the inevitable switch to F2P, will pay for the subscription. The game publisher gets what it can from these high value players. Eventually, the supply of such customers is exhausted. Their value starts to fall into equilibrium with the potential value of consumers who are still waiting to get in for free. When that happens, the company begins to offer a free-to-play option.

Why not offer F2P from the start? The typical charge of $15/mo/user far exceeds the ARPU of any free-to-play game. That’s a lot of money to forego from consumers who would be willing to pay it, but who would switch to an F2P option, given the choice. MMOs with high production value based on venerable IP have long lifetimes; there’s no need to rush into the market for the least valuable consumers when there are so many high-value consumers who are willing to pay more.

The trick, of course, is the timing. If you don’t spend enough time with the subscription model, you won’t extract the full value from users who just can’t wait for free-to-play. If you spend too long, those other users will lose interest, move on to competitors’ games, and will generally become less valuable.

Given the above, Zenimax Online’s announcement of the F2P option for Elder Scrolls Online strikes me less and less as an admission of defeat, and more and more as a good business decision made well in advance. The game no longer requires the subscription, but you will need to buy the software (still a cool $60). If you’re time constrained, or you really care about advancement, you can pay for the Plus membership to get additional benefits. Eventually, the price of the software will start to fall as well, and more and more consumers will be able to justify the expense. Each additional consumer will be worth less to Zenimax on average, but they will still be worth a positive amount of money.

I offer up this highly stylized analysis in anticipation of the inevitable “I told you so” stories (and comments) that are already starting to appear regarding Zenimax Online’s move. For example, Forbes offer this tidbit: “Sure enough, the subscription model doesn’t seem to have delivered quite the results that Bethesda was hoping for, and they’re transitioning it to a one-time purchase model…”

But if what I’ve said above about IPD and subscriptions is true, this diagnosis is off-base. In fact, it may be that the subscription has delivered to Zenimax precisely what it wanted, and the move away is a logical step planned well in advance.

The fact is that game publishers have become incredibly savvy at finding, retaining, and extracting value from customers. We should expect future, “failed” forays into subscription-based models. Not because publishers are stupid, or ignoring history, but because they are trying to make the most money they can over the lifetime of the product that they sell.

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[1] More generally, price discrimination is said to occur whenever the same item is either sold at two different prices, or costs the producer two different amounts to make. Thus price discrimination is a concept related to profit, not just revenues.