Video Games and Contractual Business Models

The video game industry used to be very flexible. You bought a game, popped it into your console, and let the magic begin. If you wanted to, you could invite a friend over for some two-player action. No restrictions, no subscriptions, and no DRM since it was unneeded. The internet, however, changed how we play, purchase, and pay for our games -- for better or worse.

Quick one-time purchases, video game rentals, and even used copies will become a thing of the past. Since the advent of online music distribution, many other intellectual property owners have embraced contractual payment plans to assure customers continually pay for the same product. Though there are positive ways to market these services (Netflix being one example before they lost it in July), many companies are still using old fashioned marketing methods to lock consumers in and watch the nickel-and-dime carnage unfold.

Microsoft was the first company to successfully market online console subscription services through their Xbox LIVE program. Aside from usual internet fees, gamers could access multiplayer play for no extra charge on a PC or PlayStation 2. But Xbox LIVE did, and still has, two unique trump cards -- mass appeal and community. Thanks to successful marketing of the services, when you pay for your yearly Xbox LIVE subscription, you’re supposedly getting the best experience for your buck. And consumer voters from Mashable seemed to agree in 2010, where 57 percent preferred Xbox Live and 41 percent went with PSN in a community poll.

Since the service has been available longer (and requires users to pay for online access), it’s arguable to say Microsoft has the upper edge -- and that’s exactly how their new trap will probably take off.

Just recently, Microsoft advertised details regarding a “discounted” offer on an Xbox 360 4GB Kinect (what a mouthful) Microsoft Store bundle costing only $99. The catch? Users must also sign up for a two-year contractual agreement requiring $14.99 a month for LIVE services over two years. Without the contract, the current 4GB Kinect bundle goes for $299, and LIVE subscriptions remain at the proposed $50 to $60 a year (about $4.20-5 a month). When you do the math, this monthly “deal” costs an extra $40 to $60.

Expect this image on your next bank statement.

Now the fun doesn’t stop there. Like in any contract, there are consequences. Let’s say you unexpectedly lost your job, and so you sacrifice your monthly payment of $14.99. Not only will Microsoft automatically cancel your subscription if a prompt payment isn’t made, but you'll be required to pay what you owed over the remainder of the two-year period. For instance, if you break your contract during the fifth month of the first year, you’ll still owe Microsoft an additional $228 for... well, let's be nice and call it "compensation." But no problem, because the full terms and conditions clearly state how "the early termination fee (ETF) is part of this offer and is not a penalty."

In this industry, one company follows another if a path seems profitable. For example, Sony released PlayStation Plus! packages after noticing the long term success of Xbox LIVE. If Microsoft’s contracts succeed, there’s a good chance Sony and other companies -- including publishers like EA and Activision -- will embrace their own contractual marketing methods. As the internet age progresses, newer generations could expect to pay more over a period of time, and all for “service” options customers used to get for free.

When signing up for a new contract, read it thoroughly. Make sure you're not overpaying for something you could buy immediately. No hidden fees, no repercussions, and best of all, no stealth attacks from your friendly neighborhood collection agency.