Widely disliked to the point of being considered predatory, difficult to measure in terms of real cost, and one of the most common points of attack against consoles from PC gamers, paid online multiplayer services in consoles are what I will try to analyze and defend in this article.
Analyzing Nintendo Switch Online Subscription
First, to simplify our analysis, let's focus on the most basic of these subscriptions: The Nintendo Switch Online individual membership, costing $19.99 per year. It doesn't offer much in "extra" content, except for some old Game Boy games that you could easily play on an emulator and which likely cost Nintendo very little to provide. From those $19.99, we need to subtract the actual cost Nintendo incurs to maintain online game servers for you (one extra player). For a very rough estimate, you can rent a Counter-Strike 2 game server (at retail prices) for about $1 per player slot. Of course, you won't be playing just one game, but over time and across 38 million subscribers, the cost is averaged out, and the actual cost per player should be fairly close to that. That still leaves $18.99 from your subscription going directly to their pockets. "Outrageous!" you might say, "To pay $18.99 just for the privilege of playing online." Well, it's not that simple. Let's continue with the analysis.
The Present Value of Subscription Payments
There's a formula in finance that allows us to convert any future payment to a present payment, or even a series of future payments to a single present payment and vice versa.
If C is your future payment (say a single subscription payment), i is the yearly interest rate that Nintendo gets for their savings, and n is the number of years until you make that future payment, then that future payment has a present value (PV), (i.e., it is currently worth to Nintendo):
So, for example, if the yearly interest is 2%, when you start a subscription, the first payment (happening the same day) is worth, obviously, $19.99 to Nintendo at that moment in time. But your next-year payment is worth $19.60. In other words, Nintendo would not care if you want to pay another $19.99 next year, or just pay $39.59 the very first day and be done for two years. Similarly, your third year payment of $20 is worth an equivalent payment of $19.21 if you made it the first day of the first year. So you could pay $58.80 up-front and be done for three years; Nintendo would be unaffected either way.
The Real Cost of an Online-Capable Switch
Assuming a lifetime of 7 years for a Switch console, that would be 7 payments of $20, spaced out over that period. That's equivalent to an up-front payment of $131.96. With an introductory price of $299.99, that means that in effect, Nintendo is selling an offline-only Switch for $299.99 and an online-capable Switch for $431.95. They are just "forcing" those wanting the online version of the Switch to get a loan with 7 installments of $19.99 at 2% interest from Nintendo to pay those extra $131.96 for that version. This is probably done because it's easier to convince your parents to pay another $19.99 per year instead of getting you a $431.95 Switch, even though it's effectively the same cost, just structured differently.
Why Charge More for Online Play?
Where does that leave us? Why does Nintendo charge those who want to play online multiplayer $131.96 more? There are three answers that I can think of:
- They are simply copying Sony and Microsoft. I will not consider this as a real answer because it simply changes the question to "Why is Sony charging those who want the online version of PlayStation more?" which cannot be answered by pointing the finger at Nintendo again. We only picked Nintendo for the analysis because it was simpler, but my conclusions should more or less apply to all three consoles.
- They charge online players more because they are more "hardcore gamers" and are willing to spend more on their console than those who only play single-player games. That means Nintendo is earning pure profit from these players. We'll analyze this case further down.
- Online players are more focused on their favorite online games. A player without a subscription will play one single-player game after another, spending all their time exclusively on finishing games. A player interested enough to buy a subscription for online play is more likely to focus on one of the fewer online games, say Splatoon, and spend most of their time on it, leaving less room for finishing single-player games. I find this answer very likely to be true. Anecdotally, I've been mostly an online player for many years, and I definitely bought fewer games back then, while now I play mostly offline and buy more games, finishing (or dropping) one after another. If this is true in general and not just in my case, then Nintendo is likely charging more up-front to make up for that loss of future income. Often, console hardware itself is sold at a loss, so the way to make up for that loss is by selling games. But if your intention is to buy two games over 7 years (say Splatoon 2 and Splatoon 3), then obviously Nintendo can't have that.
- A combination of #2 and #3 could also be the real answer. Analyzing that is the same as analyzing #2, which we'll now do.
Potential Consequences of Banning Subscriptions
Let's assume then that Nintendo is overcharging online players. Is that outrageous? What happens with these profits? What would happen if they were somehow forced to reduce those profits? Imagine that a law gets passed that bans subscriptions for consoles. What now? How does Nintendo react to that? Any of the following, or a combination of them could happen:
- The price of the console itself could be increased. 38 million subscribers out of 143 million units sold very naively means that about 26.57% of the sold units were those hypothetical "online" units that effectively cost $431.95, and 73.43% are those offline-only units that cost $299.99. Now these two models are equalized, so the end result would be an online-capable unit for an introductory price of $335.06. The bad thing here is that we may have gone from a situation where the "hardcore online players" were subsidizing cheap consoles for the offline-only players, to a situation where the offline-only players are now subsidizing the costs of the online players.
- The price of all games could go up by whatever amount is needed to keep the profits the same as before. Again, the offline-only players would end up paying more in the long run, and the online players would end up paying less. If your subscription effectively costs $131.96 like we showed, paid by 38 out of every 143 users, and the average player purchases 6 games per year over 7 years, then that would be a $0.83 game price increase.
- The price of just the online games would go up by whatever amount is needed to keep the profits the same as before. If you are an average online player, then you'd see no difference in your wallet in the long run. If, as I suspect, the online players buy fewer games, say 3 games per year over 7 years, then that would be a $6.28 game price increase, only on the online games.
- Nintendo could invest less in research or game development in order to keep their profit the same as before. What this means for the next console or the next game is impossible to predict. It is safe to say that without the current level of R&D, the next console will be less capable and/or more expensive to manufacture.
- Nintendo could accept the loss of profit and make smaller dividend payments to their stockholders and/or have their stock decrease in value. The end result of that would be some amount of investment leaving the company and going elsewhere. Needless to say, this will not make their next console better or cheaper; quite the opposite.
Market Dynamics and Subscription Models
Of course, all of the above assume no player movement to or from other platforms. It is possible that the PC gaming market is starving for a new gaming machine with the payment structure that PC gamers are used to, i.e., a big up-front payment for the real cost of the hardware and the OS software, no subscriptions, and low game prices with little to no platform markups. In which case, the moment Nintendo decides to stop their subscription model, they get flooded with new players and don't need to do anything at all to make up for the loss of income.
But it's also possible that it's exactly the other way around: that the up-front cost is already too much for console players, that PC players will never buy a console just because the subscription model was abolished, and the market is actually starving for an even more subscription-based service. For example, remember that hypothetical $431.95 subscription-free online-capable Switch? Well, it's exactly equivalent to $65.43 yearly payments for 7 years with no up-front cost. Or even $5.51 monthly payments for 7 years, no up-front cost. And you can kind of do these things by buying the device with a credit card, though those have much higher interest rates than what we assumed so far.
Hell, you can get a PC effectively on exactly the same subscription model as a Switch. For example, buy this laptop:
and pay up-front $303.28 (about the same as the introductory price of a Switch), pay the other $65.21 with a credit card (23.76% effective yearly interest rate), and then make 7 yearly payments of $19.99 on that credit card.
My guess is that if there was space for gaining meaningful market share by dropping the subscription price or even getting rid of it completely, one of Sony, Nintendo, or Microsoft would have already done it. You'd expect that the first one to do it would immediately steal a good chunk from the other two, especially if they waited for one of the other two to announce a pricing change, like when Sony added two more higher tiers to their subscription service. It's also possible that while their market research may show an average improvement in profit margins if they abolish subscriptions, the standard deviation is too high, meaning there's a good chance of reducing their profits below some threshold that would force them to re-implement subscriptions, with unpredictable effects on their users' nerves and reputation. They would certainly look desperate if they were the only company that had to bring back subscriptions. My guess is that their market research shows the opposite: that moving even more of the cost of the console away from the games and hardware and into subscriptions makes more sense in the current market. At least Sony seems to think so, as they showed by recently adding higher tiers, and both Sony and Microsoft now provide games "for free" as long as you pay the subscription. It looks like this model is working for many people. And with Steam Deck and other PC handhelds on the market, Nintendo has even less reason now to try and capture gamers interested in paying up-front for hardware as long as later costs are low.
Comparing to the Commodore 64
To put things into perspective let's compare to one of the best selling computers ever, that was also widely used for gaming: A Commodore 64 would cost $395 to months after release. A floppy drive would about a year after release cost $300. That's a total of $2275.96 in today's money. A 21" CRT uses about 100W, the Commodore 64 uses 21W, for a total of 121W. At $0.076/KWh in 1982 and with 2 hours of gameplay per day, that's $6.71 per year or $22.36 in today's money, more than your yearly Nintendo subscription. Commodore 64 games typically cost $30 around 1984 (really hard to find original pricing information) which is $92.50 in today's money. A Switch uses 8W and a modern monitor of similar size uses 25W for a total of 33W. At 2 hours of gameplay and at $0.1643/KWh, that's $3.96 per year on top of your $19.99 subscription. Or if you play handheld, $0.96 per year on top of the subscription. So a Commodore 64 was 488% more expensive than a Switch, its games cost 54% more than those of the Switch, and the costs for playing it 2 hours per day were about 7% less than those of a Switch on a 21" monitor, or around 6% more expensive compared to a Switch played handheld. And it was not online.
| Commodore 64 (adj. for infl.) | Switch (some adj. for infl.) | |
|---|---|---|
| Hardware cost | $2275.96 | $386.58 |
| Game cost | $92.50 | $60 |
| 730 hours of electricity cost | $22.36 | $3.96 (on a monitor) $0.96 (handheld) |
| Online multiplayer cost | N/A | $19.99 |
Conclusion - Fix It Yourself
If you're still certain that Nintendo would actually increase their profit by offering the option to pay the full price up front, I recommend you put your money where your mouth is and offer that service yourself on the market, and become rich. Sell Switches with an add-on service: Your clients pay an extra $131.96 up-front, and you cover their Nintendo subscription costs for 7 years. You should be able to sell more consoles than anyone offering just the console.
Otherwise, don't fuss. As we saw, any up-front cost is equivalent to some recurring cost and vice versa, whether it's paid per game you buy, or per month, or per year. And there are more options than there ever were. But "don't fuss" doesn't mean don't ask console manufacturers to improve their offers. Just don't accuse them of not choosing the price structure of your choice. Convert everything to a present value and compare the different offers. Then use a credit card to move up-front payments to the future, or deposit money up-front in an account to bring future payments to the present.
