Friday, July 2, 2010

Let's talk economics!

We all know that games are an expensive business.  I've already posted at length about how hobbyist development has largely dried up as an effective model for generating money, and has mostly been replaced with big-budget products which rely on mass appeal in order to sell.  As a result, the prices of games have climbed through the roof while gamers have generally expected things to say the same.

The ongoing Steam summer sale has caused me to think a little bit about what sorts of business models are effective for gaming.  The thing that initially hit me about it is just how cheap these games are going for.  When I can buy Gothic 2 and Gothic 3, together, for $2, and many other games for similarly low prices, well, that's practically giving them away.  In fact, it's hard to believe that anyone's making any money from this sort of practice.  The obvious refutation, of course, is that they wouldn't do it if it wasn't worthwhile, and, slightly less obviously, that most of the games that are on sale for little money are older, and thus likely aren't generating much revenue in the first place; put simply, a 75% drop in price can exponentially increase sales.  So why is it that these sorts of sales are limited to Steam?

Ah, summer, the longest Christmas holiday of the year.

Part of it is, of course, that Steam is digital distribution, and has no physical cost to getting the games to customers beyond the game content servers (which Valve provides, and are likely paid for by the 15% or whatever Valve takes from each sale).  In fact, players actually pick up the slack as part of their own Internet bill, since in an abstract way, they are paying for the shipping.  The only downside to this method for the publishers of games is that they might run out of CD keys, which has happened in the case of older games that have gone on sale, most notably with Prey, but also with other games like Fuel and FlatOut: Ultimate Carnage.  In the case of something like Prey, it may be impossible to get new CD keys because the original developer or key generation software no longer exists, but this can be easily avoided with a little forethought and, as we move towards an increasingly online distribution model, publishers will no longer have to think about the costs of supply vs. demand.

Another aspect, undoubtedly, is that the huge sales Valve holds inspire competition or at least a "keep up with the Joneses" reaction.  If EA, Ubisoft and THQ all have games on sale, well, does Take-Two want to look like the odd one out?  No, of course not!  This becomes even more apparent when one notices that prices are even adjusted during the sale periods themselves, some due to errors but some also likely due to the fact that publishers don't want to charge "too little" or "too much" in relation to their competitors.  Giant sales don't happen in retail stores unless it's time for clearance, which in the case of games is pretty much never, so this isn't a concern under traditional business models.  Can you imagine if Best Buy suddenly said "all games 66% off, two weeks only"?  It could happen, but they'd be sold out of everything in a day and ultimately wouldn't be worth the money lost by charging so little

However, what's to stop the industry from adopting lower prices as the standard?  For years we have been bombarded with the argument that higher production costs mean higher prices and more failures at retail, but do we really need to solve this problem by charging increasing amounts of money?  Some gamers will bite, sure.  If your game is big enough, enough people will be willing to pay whatever you charge for it that it won't matter that you've lost a few sales.  However, it's unreasonable expect every game to be the next Modern Warfare 2, even if publishers do exactly this.  Why do games that don't have the same demand, the same legions of loyal fanboys, the same mainstream appeal, need to have the same price?

According to several polls I've seen recently, the biggest problem gamers have is, wait for it, affording all the games that are coming out.  The games industry is getting so large that there is scarely a drought anymore, and publishers have gotten better at spacing their releases strategically to take advantage of holiday seasons and periods in between where the market is less competitive.  This means that there is a constant stream of games hitting shelves, and gamers, especially during a recession, don't have the money to keep up with all of them.  It's easy to excuse this by saying "they don't have to buy them", but when your entire business model revolves around selling millions of copies at high retail prices, by way of creating as much demand for those games as possible, well, you have to expect that it's going to lead to market saturation and even cannibalisation.

In addition to being more affordable for gamers, however, publishers also stand to sell more copies.  Gamers have relatively fixed budgets, and often do whatever they can to save money, unless a game is one of those rare "must-have" titles.  Web sites like CheapAssGamer demonstrate that gamers are mindful of their money and what they spend it on.  The logical question that extends from this is, why sell one game at $60 when you can sell two games at $40 each?  If gamers are conscious of their budgets, and publishers are going to keep churning out games, it makes sense to charge less for them to ultimately sell more copies.  This means that avid gamers will buy more games that they want, and it'll even reign in gamers who wouldn't normally buy something for brand-new prices.

This leads to the third advantage cheap games have: they cut like a hot knife into the used games market.  EA's well-known Project Ten Dollar and other anti-used games initiatives have sparked a lot of controversy, and the reason for this is because value-minded gamers want to maximise the games they are able to play.  Campaigns like forced online activations and withholding content to those who buy new copies are perceived as hostile, and while nobody yet has the numbers of such efforts except for the publishers themselves, my assumption is that they aren't so effective as to be worthwhile, especially considering the amount of effort (and money) it takes marketing to educate customers about the advantages of new games.  Even then, it's pretentious to assume gamers care that much about a couple of in-game weapons, and if you push too hard (cut off half the game from used players for example), gamers will push back.  The only reason people buy used games is because of the lower price, and by making new games cheaper, used games become far less profitable for retailers like GameStop to sell.  If you can get a used copy for $10 less, that's a big deal, but what about $2 less?  When your game is retailing for $30 brand new, a dollar or two isn't nearly as enticing a savings.

The first refutation of this that comes to mind is simply "it won't work".  I'm not an economist, and I certainly don't have raw facts and figures to back up my claims in the same way a games publisher like EA might.  For all I know, I'm totally wrong, and it really isn't profitable to charge less money for games.  To this, I'd submit that nobody's really tried it outside of certain budget games and downloadable titles, and you'll never know until you release Medal of Honor for half the price of Call of Duty (though as I mentioned above, these names might be so popular that it doesn't matter what you charge for them).

 Dead Space 2 is now one of my more anticipated games,
and only because I was able to get the original for such a great price. 

Slightly more convincing is the argument that projects cost too much money to take the risk on charging less.  When you're pouring millions and millions into getting your hot new game on the shelves, selling double the copies at half the regular price might not be worthwhile, especially if it's safer to stick with what people are used to.  To this I'd respond that not all games need to be the same price.  EA was injured a couple of years ago when its new games Dead Space and Mirror's Edge performed far below expectations.  I didn't buy them at $60 in part because I wasn't sure about taking the risk on a new franchise, and I'm sure more mainstream gamers are even more reluctant than I am; however, I did buy them on sale recently for about $15 total, and they were worth every penny I paid.  By selling cheap, EA has made me much more likely to buy follow-up games, and at a higher price to boot.

The major upside beyond the economics, however, is that this encourages creativity in the industry.  Let's face it, people like new games with new ideas, but they aren't willing to part with their money.  Gamers constantly complain about a lack of "innovation" even as they shell out their money for sequel after sequel of tired game franchises.  If there is one way to encourage gamers to accept new things, it's by charging them less money.  In cases where gamers might feel ripped off by a bad purchase, they won't feel the sting nearly as much for $30 as they will for $60.  New things are a risk, both to publishers and gamers, but gamers are far less concerned about that risk when they aren't worried about wasting their money.

Anyone who reads this blog knows that I'm the type to be concerned about where the industry is headed.  I love games and want to see them continue to flourish.  A healthy industry is one that is constantly coming up with new ideas to sell to customers.  The videogame crash of the 1980s showed that even a hugely successful entertainment industry is prone to failure, and I don't think games are beyond the same thing happening again, nor are they beyond the same sort of entropy that has affected the print industry since the appearance of television.  If we are going to continue creating games that challenge us as gamers, as intellectuals, and as socially-conscious people, then we also need a business model that can sustain itself for years to come.  Cheaper games isn't a permanent solution, but it's a stepping-stone that will lead to better things, and may well give us better games in the meantime.

[Image credit]


  1. "EA's well-known Project Ten Dollar"
    Never heard of that with that name, but ok. Also questions of legality at least in Europe: Can you legally exercise control over what people do with a product they buy from you? If this becomes more than just "one extra gun", it could become a problem. Same with asshats like Stardock being all "yeah you can re-sell the game but you won't get any updates, hahaha have fun good luck playing it" - seeing how broken most games are @RTM, you get fucked over a lot. I'd sure like some way to transfer/trade games on Steam :P.

    Medal of Honor does cost around 66% of a new Call of Duty Black Ops. When Bad Company 2 was new, it cost a lot less than they still wanted for MW2.

    I see you like your Dead Space.

    I guess the core point is that when you release a game with the possibility in mind that the price might be down to 30-50% after two weeks (thus keeping production costs so that is still profitable), you're very well off first demanding full price, and then going down if demand is lacking.
    What does support your view though is that Disciples 3, a Russian-made sequel to the HoMM-esque TBS series, shot up from nowhere to #1 on the preorder and then subsequently the sales charts for PC games on zavvi due to its ~30 CAD price point. Maybe the release date a few days ago fit, as there's not much else coming out, and there are a billion people who love HoMM-style games (just like there are five billion who will buy everything Civilization) - the Western release is a good few months after the Russian one, and it's not like it had glowing reviews. It's just a solid $30 month of gameplay until SC2 hits.
    It's still #7. Guess what's #1? The ArmA2 standalone expansion for $30.

    (Why not add something about pricing as a tag ("label")?)

  2. Thanks for replying.

    End User License Agreements are always ambiguous in terms of legality, to the point where in the United States nobody seems to be sure exactly how far you can take them. In general, though, a country's laws take priority over the EULA, so anything a company makes you agree to is invalid if it's not legal for them to ask it of you.

    Additionally, a EULA is a contract, and almost always delivered after purchase, rather than before. Since it's impossible to agree to the EULA until you've bought the product, I'm quite certain that, at least in some countries, EULAs are totally invalidated by this. Unfortunately I don't know the specifics of this.

    I can't comment on European prices, but in North America, retailers strictly adhere to the RRSP upon a game's launch. It's very rare for someone to sell something for significantly less unless it's on sale.

    Dead Space is a good game, but you evidently missed my rants about how bad the story is and how I dislike some of its gamey aspects. :P

  3. I didn't dig through your entire blog (I didn't even know you had a blog till today) but the whole point of putting ridiculous price tags on new games is so that those developers working 90hr weeks on a shoestring budget get their paycheck for sustenance. With burnout and turnover so high the gaming industry seems to be built on this crash and burn model, most unfortunately.

    You did mention economics, how's this different from any other industry? The first product of the assembly line is the most expensive one, it took the most effort and will need most of the fixing once it's released out in the wild, over time defects will come down and so will the costs. Same goes for games...

    Anyways, nice to see that you're up and alive again, hadn't heard from you in a while :P


  4. Oh wow, hey Kai, it's been forever since I've spoken with you. Nice to see you decided to check out my ramblings.

    Yeah, I'm well aware of the model that the business uses, and it's definitely true that the industry is centred around the whole blockbuster approach, but as I pointed out in my post, I don't think that's the only effective way for generating profit. There are a lot of so-called sleeper hits that become successful through word of mouth. It's just not healthy to have one product sustain your entire business and make up for the other ten failures, and it doesn't have to be that way. Smart management and budgeting is just as important as a quality product and can make the difference between a profit and a loss.

    As for sequels and your assembly line comparison, it's definitely true that sequels are often built on existing technology, and when a universe, characters, etc. are already established, a lot of that creative work goes on autopilot and it becomes a matter of making things "more and better". On the technical side, it also means that you can turn your focus towards things like bug fixing and enhancing the look and feel of a game, rather than just trying to get the thing to work without crashing every five minutes.

    I'm actually a big proponent of smart use of middleware and easy-to-use tools for artists. I've done some hobbyist level design in my time, and the difference in productivity and enjoyment between well-designed tools like, say, Crytek's Sandbox editor, and Valve's Hammer SDK is, well, pretty incredible. It's a greater initial investment to have those good tools, but if we are somehow able to come up with standardised tools for the industry (like Photoshop, but not made by Satan), that can only mean good things - less time and money spent on art production, programming and level building all around.