Are You Ready For Subscription Based Consoles?

In a preview note from Wedbush Securities, the oft quoted Michael Pachter gave an interesting bit of advice to potential investors.

XBox-Live-Blades-Design2.jpgHe said:

We think that the next-generation consoles will perform a wide range of multimedia functions. We should learn more in the coming months, but we expect the next Xbox to have an IPTV tuner that will allow an MSO to deliver services over the Internet outside of the MSO’s regulated geographic boundaries. If we are right, any of Microsoft’s MSO partners will have an incentive to subsidize the purchase of the next Xbox in exchange for a long-term service commitment (similar to the cell phone model). If the subsidies are steep, it is likely that the next Xbox will appear more affordable to many consumers than currently anticipated, and it may capture market share faster than many expect. We don’t expect Sony to sit idly by watching, and believe that the PS4 will follow Microsoft’s lead in short order, suggesting to us that next-generation consoles could have lower starting prices than any in history.

As Pachter stated in his note, this is the cellular phone model of business and we’re all familiar with it; you buy the hardware at lower price, but the catch is, you’re locked in a certain minimum amount of time where you have to keep up with a subscription. It’s a double edged sword. On the one hand, some people may welcome the idea of a lower purchase point if for some reason they have to pay in cash and don’t have that kind of money on hand for a single purchase. On the other hand, consumers are paying much more money over time as the payment on the subscription becomes a long term money-sink.

Now the rumors are circulating that the next Xbox will be more of an all-in-one, pass through device, which makes much more sense for an “always online” requirement, and this might not affect the gaming side of the console at all. But if this is the case, it presents an interesting new dilemma to gamers; how many consumers would happily get locked into yet another service contract?

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In Canada for example, the two biggest service providers for cellular phones are Bell and Rogers. For many years, they were the only alternatives for customers that wanted a cellular phone and as a result, many, many people complained about their almost draconian business practices and horrible customer service. As newer, smaller, more consumer friendly services have become available, many people have fled from these traditional providers to escape the “big bad, uncaring multinational corporation” treatment they feel they have experienced at the hands of these companies. The problem here is that when someone escapes a phone contract, there are usually options to keep — or jailbreak — the phone to continue usage with a different service provider. This won’t be an option with Microsoft or Sony if someone decides that new Xbox Live or PSN terms are unacceptable. In the event of not wanting to use Xbox Live or the Playstation Network this means the consumer simply can’t use that aspect of the console at all. There is no alternative to multiplayer on a console, whereas on a PC, there is no limiting factor like this for people that wish to play online.

It’s all still rumor, of course. There’s still zero information on the exact specifics of a next-gen Xbox Live, and Sony hasn’t divulged any details on how the Playstation Network will be evolving on the PS4, so there’s no need to start cursing big businesses just yet. But if either company decides to go this route, it’s a perfectly valid business strategy. There are many people out there who don’t mind paying more money in the long term if it means a lower up front cost, but we’ve already seen the history of such outcomes. People are quite vocal about how much they dislike some of the conditions they’re forced to endure with phone contracts. Does anyone think either Sony or Microsoft will really be an improvement?