Has ‘freemium’ had its day?

The freemium business model has become increasingly prevalent as online markets grow. But recent troubles raise the question: has the bubble burst?

Freemium is a popular model: with social games such as Farmville, file storage such as Dropbox, and even survey platforms such as Survey Monkey using it, most of us have encountered it at some point. But recent months have been marked by a number of blows that have led some to question whether the freemium model can survive in the future. The producers of Farmville, Zynga, have announced that nearly a fifth of their workforce is being laid off and Flickr, once thought of as the poster child for the model, has quietly shifted their focus to generating advertising revenue instead. Investigations by the UK Office of Fair Trading (OFT) amid concerns that games using the model could be unfairly pressuring children have done little to lighten the cloud of gloom.

Generally, the freemium model involves giving the core product away for free while charging for additional features or enhancements. Giving an offering for free reduces the psychological barriers to trying the product and converting some of the resulting users to ‘paid additions’ generates a continuing revenue stream.

But such an approach faces several limitations. The relatively low conversion rates, from free to paying users, experienced by most offerings – often as low as 1%  – means that for the model to work, a large market is needed: this is not an approach that can work as well in niche fields. However, even in larger markets, attracting the notice of potential customers can often require a big marketing spend. Smaller creators may struggle to break in on their more limited budgets. In addition, the scale of the offering necessary to reach a large market only works if the cost of giving away the free copies (the marginal costs of duplication) is extremely low. After all, for every paying user there will be tens who are not contributing anything to the costs of distribution. All of these additional costs have led some to argue that freemium is a ‘costly trap’.

However, these challenges do not mean that the freemium model must necessarily fade out in the future. It may not be a model that works for everyone. But for those who can cope with the limitations it imposes, it continues to offer a growing source of revenue. In particular, the freemium model continues to gain traction in the MMO videogames field, with even top tier titles such as EA’s ‘Star Wars: The Old Republic’ transitioning from its initial subscription model to freemium and almost doubling its revenue in the process. As recently as march this year, executives from EA continue to stress the importance of freemium to their future commercial strategy and freemium games continue to dominate mobile app stores.

For the gaming industry at least, freemium appears far from dead. The recent troubles faced by those using the model serve to illustrate its limitations but there is nothing fundamentally flawed in the underlying approach. For some creators, it remains a viable way of monetising their works and will continue to do so for the foreseeable future.