The viability of subscription services in VR

When Meta announced its new subscription service, I wondered for a while why VR companies have not adopted it more. On paper, it is one of the most profitable and stable business models ever. Amazon subscription revenue was over $35bn in 2022, while Netflix generated $31.6bn. Spotify earned €10.25 from its Premium subscription, while its ad-supported version generated (just) €1.47bn. It feels like turning on a money tap.

So why have we not seen more subscription-based services in the industry? The long and short of it is that it’s a retention strategy for hardware manufacturers, and a (potentially) difficult market for software developers. Let’s dip into how.

Don’t compare VR subscriptions to streaming

First, let’s dip into how VR businesses are different from streaming. The comparisons are helpful, but both operate under different development environments and profitability. It’s like comparing apples to ten thousand oranges.

The most important differences come down to scale and costs. Few companies have the finances and scale to support subscription models and get the penetration they need for success. Yes, Amazon Prime reached $35bn in revenue – but the company is also spending $16.6bn in content spending this year, outstripping competitors. Similarly, Netflix is set to maintain $17bn in 2024, matching the same levels.

These levels are required because the profit margins are much smaller. Doug Shapiro notes that 20% margins are the basis for a good business – but most streaming companies are expected to be well below that as they race for user acquisition. The same race spooked Disney investors, and Bob Iger promised a slow-down in spending from 2023 onwards.

VR companies are nowhere near this scale – nor can they reach the same access. Streaming companies are reliant on a business model that require hundreds of millions of subscriptions to make a profit. Streaming can succeed by reaching users through mobile phones, TVs, laptops, tablets, or even kitchen fridges (for some reason). VR will never reach the same audiences because it is locked into prerequisite hardware. It’s an inherently smaller market, and the economics of scale do not match.

So why would VR companies investigate subscription models, to begin with? I believe it comes down to two reasons:

• For hardware manufacturers I believe it comes down to user retention, to ensure people use the headset for longer;

• For software providers, it provides a smaller but consistent income flow – though it needs more users for longer-term viability.

Let’s touch on each one.

VR hardware: Retaining your fans

The companies that best compare here are Meta and HTC. Meta recently announced Quest+, a service where users receive two games a month for $7.99, or $60 for the full year. Similarly, VIVEPORT Infinity offers access to a selection of VR titles for $5.99 or $8.99 a month, or $108 a year (for more games).

Both platforms offer incredible value. If you buy an annual subscription to Quest+, you effectively receive 24 VR games for $2.50 a pop (on an annual rate). These are great-quality games, too. Pistol Whip consistently rates highly on the App Store. Similarly, VIVEPORT Infinity offers a plethora of games where users can milk as much of $8.99 as they can (reasonably) wish.

In the end, subscription services are good value. “Subscription services create a low-risk opportunity for users to try out different content, while giving developers a chance to reach an audience who otherwise might not have tried their experience,” said Joseph Lin, GM of VIVEPORT. This is also why VIVEPORT is so open. “VIVEPORT is unique in that it's designed to be open-walled and therefore device-agnostic,” Lin said. “We see it as a way to showcase the range and depth of incredible XR experiences.

The selected games are likely ones where the revenue has dropped from its launch-day highs, following down the demand curve to maximise the revenue from a product. The price will then go down and down to pick up users who were on the fence, and then jump. About 40 Quest titles report over $10m in revenue, though a bulk of that comes from its launch day and week (save for sales periods). For example, After the Fall earned $1.4m within 24 hours. (The exceptions are games that act like platforms rather than single-player experiences – which we will get to very soon).

If we draw it out on a demand curve, it would look like this:

Why would a company do this? It’s unlikely that profit margins are the answer. VR games are expensive to make, and the margins cannot be high for a service that (effectively) charges $2.50 per game. The economics are even lower for VIVEPORT Infinity, which offers many more games for the player. Similar services like PlayStation Plus cannot compare, because the service has more users to balance the books. PlayStation Plus has 45m subscribers with earnings of $794m, not including PlayStation Store fees or transactions. The same goes for Xbox Games Pass, which has 120m users across consoles and other devices.

I suspect the reason is that it ensures the person keeps using the VR headset after their initial purchase. Take the Meta Quest as an example. The headset normally sells well during the winter holidays, and the Quest app reaches the number one spot as players use it to register their devices. VR sees a surge in interest, and prospective buyers swamp sites like UploadVR for game recommendations (or my own for free game suggestions, in years past). We know it is selling well – in March 2023, Meta sold nearly 20m headsets.

But we also know that Metas wants to improve its retention figures, and the newer people who buy it at Christmas are “not as into it” as people who bought it earlier. Mark Rabkin, the VP of VR at the company, said in an internal presentation that “we need to be better at growth and retention and resurrection. We need to be better at social and make those things more reliable, more intuitive so people can count on it.”

I believe the subscription service is how Meta is tantalising these casual fans who have come into the Quest ecosystem. The steady trickle of great games is helpful to ensure less engaged fans revisit the headset, and perhaps buy more software as part of their gaming habits. It’s a platform play for retention and maximising the customer lifetime value of users, not generating revenue from the service itself.

The perspective also ties into software development, too.

VR software: Needing the numbers

VR software acts a little differently. Companies are not aiming to get lots of users on a platform; while developers want to maximise the value of users already on it. For single-player games, that means asking users to pay one bulk fee to play a fun experience. For subscription-based games, it also includes people staying on the platform for as long as possible.

There’s strength in subscription-based games – particularly with fitness titles. “The subscription model allows us to continuously invest in content and new features,” said Ady Rugina, Director of Product at FitXR. “We’re really proud to have almost 1,000 classes, with more released every week, and the widest experience in the market in terms of the verticals that we serve.” It looks like consistency ensures people keep coming back.

But for Rugina, it takes time for users to trust a company enough to give money as well. “The biggest challenge is that VR is a relatively new medium and customers still need to build trust in giving their credit card details, unlike the mobile platforms which are turning into the default payment method.” Time is a factor I did not consider here, and it makes sense that consistency is vital. Once that hill is crested, making more money within an ecosystem becomes a little easier.

Other companies did not go into much detail on why they do not pursue subscription-based titles. A representative from Vertigo Games said that the company “is not doing these kinds of subscription services at the moment, and aren't planning to use them in any of their future titles.” When pressed, the company declined to expand on the reasoning. Meanwhile, Supernatural and Fast Travel Games did not respond for comment. I was surprised by the (lack of) responses to the topic, and it’s difficult to say why for sure.

Anyway, perhaps it does go back to total addressable market (TAM). The more active users on a platform, the more likely there will be enough people to subscribe. But the market gets smaller and smaller as you cut it down – from 20m Quest 2 units to 6m active users, then again to people interested in your particular type (like fitness).

It’s a difficult market. Cheaper headsets will increase the market quickly. Consumer VR is price-elastic, as consumers tend to buy headsets regardless of quality. Once bought, software providers need to hook people in and keep them consistently engaged – and by the sounds of FitXR, that takes a little longer. Then after purchase, the company need to do what it can to keep users engaged and avoid churn.

That challenge becomes easier the more people buy and use headsets. Subscription services from Meta and HTC are a good start.