Max SteeleUsed game sales and digital distribution are pushing towards a dramatic change in the way that the game industry does business. Max Steele tells us why, and gives his prediction of the eventual outcome.
Issue 26 - A Marginal Business
- Thread starter The Escapist Staff
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Original Comment by: Andrea Appel (a.k.a. Alexandra Erenhart)
http://aerenhart.blogspot.com
In one point of the article, the game retail industry is compared with the rest of the media products. I don't think it's too fair. You can read a book written hundred years ago, hear a classic music, o see old movies, because human eyes and hearing haven't changed through the centuries. You cannot do the same things with games. You definitely cannot play very old games unless you have specialized (and old) hardware for that. And that becomes a rare-and-old-hardware-pieces hunting. I guess that's why games cannot be sold the same way as books, for example.
http://aerenhart.blogspot.com
In one point of the article, the game retail industry is compared with the rest of the media products. I don't think it's too fair. You can read a book written hundred years ago, hear a classic music, o see old movies, because human eyes and hearing haven't changed through the centuries. You cannot do the same things with games. You definitely cannot play very old games unless you have specialized (and old) hardware for that. And that becomes a rare-and-old-hardware-pieces hunting. I guess that's why games cannot be sold the same way as books, for example.
Original Comment by: Munir
Interesting article...and comment above
Personally, I'm a bit confused at how publishers can get away with selling via digital distribution for the same premium price eg EA downloader. As server space is much larger than shelf space and I'm not sure if bandwidth costs are less than packaging and shipping costs, they cant complain about the short lifespan of games 'cos they never have to be 'taken off the shelves' (not until the hardware needed is too old as mentioned above!) and overall costs, I think, should be much lower. So they have no excuse but to offer a cheaper and non-tiered pricing structure.
Secondly, even though I'm a fan of digital distribution done as Greg Costikyan sees it (!), reading this makes me realise that it does completely prevent the idea of redistribution, which I'm a fan of too. I wouldn't want to see my local used game store go under and disappear! Since I tend to keep more of my PC games, I'd like to see PC games go digital and console games stay as physical redistributable products. I'm not betting on any outcomes though, economics was never my strong point!
Interesting article...and comment above
Personally, I'm a bit confused at how publishers can get away with selling via digital distribution for the same premium price eg EA downloader. As server space is much larger than shelf space and I'm not sure if bandwidth costs are less than packaging and shipping costs, they cant complain about the short lifespan of games 'cos they never have to be 'taken off the shelves' (not until the hardware needed is too old as mentioned above!) and overall costs, I think, should be much lower. So they have no excuse but to offer a cheaper and non-tiered pricing structure.
Secondly, even though I'm a fan of digital distribution done as Greg Costikyan sees it (!), reading this makes me realise that it does completely prevent the idea of redistribution, which I'm a fan of too. I wouldn't want to see my local used game store go under and disappear! Since I tend to keep more of my PC games, I'd like to see PC games go digital and console games stay as physical redistributable products. I'm not betting on any outcomes though, economics was never my strong point!
Original Comment by: Slartibartfast
Munir:
Server space isn't really larger than retail space. Even a standard desktop with a few high-capacity HD's could contain all the data you need for numerous games. Let's assume your average PC game uses 2.8 gb (or 4 cd's.) Now imagine the size of your average game box, that desktop PC is probably is the size of 4 game boxes. It's not unreasonable for a desktop to run four 500gb SATA drives (which, with format capacity and the OS etc probably works out to about 1700gb [1.7tb]). So in the space that you have 4 game boxes, a PC could keep 600 hundred full-blown commercial games or so. Not to mention that you could easily fit that much storage space in a much smaller physical space, like rackmount servers. Also, you could use a full-tower instead of your average midtower and easily get at least twice the hd space, for only about 1.5 times the physical space.
So basically, digital storage of games is vastly more efficient than having them on shelves.
Munir:
Server space isn't really larger than retail space. Even a standard desktop with a few high-capacity HD's could contain all the data you need for numerous games. Let's assume your average PC game uses 2.8 gb (or 4 cd's.) Now imagine the size of your average game box, that desktop PC is probably is the size of 4 game boxes. It's not unreasonable for a desktop to run four 500gb SATA drives (which, with format capacity and the OS etc probably works out to about 1700gb [1.7tb]). So in the space that you have 4 game boxes, a PC could keep 600 hundred full-blown commercial games or so. Not to mention that you could easily fit that much storage space in a much smaller physical space, like rackmount servers. Also, you could use a full-tower instead of your average midtower and easily get at least twice the hd space, for only about 1.5 times the physical space.
So basically, digital storage of games is vastly more efficient than having them on shelves.
Well there are three ways of getting a videogame:
1) Buy it brand new
2) Buy it used
3) Pirate it
The last two options net game developers and game publishers a big fat $0.00. So, needless to say, they're not attractive. That leaves brand new, full retail, in-store or online purchased games. Steele's article already established that margins on these sales are more or less The Suck. So, while offering a digital download for these titles would increase profit margins, they'd have to be willing to accept that any overhead for already having an existing title on store shelves would be lost. Most people would likely digitally download at a cheaper rate if it was offered. Most people like to save money.
I think the reason it's the same price would be to capture the people for whom going out to buy that game at the store is an obstacle. So, they don't ruin their in-store sales so much, and perhaps gain even more customers at a lower cost. You'd probably do it this way for a gradual change, using existing titles.
The other option would be to launch a new game as a digitial download only. Force people to use the web to get it. Maybe I'm cynical, but I don't think any publisher is going to plunge into those dark waters without getting their feet wet first. It'll be embraced slowly, and over time, your pricing structure could become a reality - but I think we're going to have to baby-step our way there.
1) Buy it brand new
2) Buy it used
3) Pirate it
The last two options net game developers and game publishers a big fat $0.00. So, needless to say, they're not attractive. That leaves brand new, full retail, in-store or online purchased games. Steele's article already established that margins on these sales are more or less The Suck. So, while offering a digital download for these titles would increase profit margins, they'd have to be willing to accept that any overhead for already having an existing title on store shelves would be lost. Most people would likely digitally download at a cheaper rate if it was offered. Most people like to save money.
I think the reason it's the same price would be to capture the people for whom going out to buy that game at the store is an obstacle. So, they don't ruin their in-store sales so much, and perhaps gain even more customers at a lower cost. You'd probably do it this way for a gradual change, using existing titles.
The other option would be to launch a new game as a digitial download only. Force people to use the web to get it. Maybe I'm cynical, but I don't think any publisher is going to plunge into those dark waters without getting their feet wet first. It'll be embraced slowly, and over time, your pricing structure could become a reality - but I think we're going to have to baby-step our way there.
Original Comment by: Munir
Yea sorry my bad. I meant larger to mean more capacity! Meaning they should be able to keep games available on their severs, and not have the excuse of short shelf life=premium tiered prices as explained in the article. But EA are getting away with it as we speak! :s
Yea sorry my bad. I meant larger to mean more capacity!
Meaning they should be able to keep games available on their severs, and not have the excuse of short shelf life=premium tiered prices as explained in the article. But EA are getting away with it as we speak! :s
Original Comment by: Slartibartfast
Munir:
No problem. I have not looked at the EA Downloader at all (no desire to own any EA games), but it really would not surprise me if they're doing that. They probably had some poor math major locked in a basement calculate the cost of keeping games on their servers vs how much money they are likely to make from them, and then decided to erase the games anyway because they like to be evil.
Munir:
No problem. I have not looked at the EA Downloader at all (no desire to own any EA games), but it really would not surprise me if they're doing that. They probably had some poor math major locked in a basement calculate the cost of keeping games on their servers vs how much money they are likely to make from them, and then decided to erase the games anyway because they like to be evil.
Original Comment by: Slartibartfast
andrea:
Maybe this new Game Tap service will change that, I have not looked into it too deeply but my understanding is that it's basically emulators/ROMS for rent. Not a bad idea, really, becuase you can play all of these classics without having to dig up a console, and the developers can continue to make some money from them.
andrea:
Maybe this new Game Tap service will change that, I have not looked into it too deeply but my understanding is that it's basically emulators/ROMS for rent. Not a bad idea, really, becuase you can play all of these classics without having to dig up a console, and the developers can continue to make some money from them.
Original Comment by: Munir
Oh and yea, I get what you're saying about the gradual change idea. You're probably right about that.
Oh and yea, I get what you're saying about the gradual change idea. You're probably right about that.
Original Comment by: Weefz
http://theaveragegamer.com
Nice article. One question, since my knowledge of retail beyond being the poor schmuck behing the counter is almost non-existent... What is "selling through" and "sellthrough prices"? A fixed price they have to sell it at or something else entirely?
http://theaveragegamer.com
Nice article. One question, since my knowledge of retail beyond being the poor schmuck behing the counter is almost non-existent... What is "selling through" and "sellthrough prices"? A fixed price they have to sell it at or something else entirely?
To the best of my knowledge, 'sell-through' is when the amount of product solt to consumers is equal to the amount of product distributed to retail outlets. So a sell-through price on a paperback, is $6.99 or whatever - it's a superbly reasonable price to any casual consumer to pay. $16.95 is very reasonable for a newly released DVD, so even casual consumers buy those too.
However for games, their price is too high for casual consumers to comfortably purchase, but since margins are so low on retail gamers, publishers basically need to sell-through to function. Anything less that selling out of every unit shipped is somewhat of a failure.
However for games, their price is too high for casual consumers to comfortably purchase, but since margins are so low on retail gamers, publishers basically need to sell-through to function. Anything less that selling out of every unit shipped is somewhat of a failure.
Original Comment by: Mark
It looks to me like the only possible escape is for retail prices to be raised across the board. A new video game costs less now than ever before, but you can already see the change happening: didn't the Xbox 360 try (or succeed) to sell new games with an MSRV of US$60?
Something will have to give. No retailer is willing to be the first to raise their prices, and few publishers are in a position to raise their MSRVs. I think Sony and Microsoft might be able to get away with raising theirs, being a new console generation and all. Nintendo won't have any trouble with software prices because they're a hardware company, so they don't always have to turn a profit on software (not that it stops them).
It looks to me like the only possible escape is for retail prices to be raised across the board. A new video game costs less now than ever before, but you can already see the change happening: didn't the Xbox 360 try (or succeed) to sell new games with an MSRV of US$60?
Something will have to give. No retailer is willing to be the first to raise their prices, and few publishers are in a position to raise their MSRVs. I think Sony and Microsoft might be able to get away with raising theirs, being a new console generation and all. Nintendo won't have any trouble with software prices because they're a hardware company, so they don't always have to turn a profit on software (not that it stops them).
Original Comment by: Patrick Dugan
http://www.kingludic.blogspot.com
I was shocked, but in a way, not at all suprised to read this very briskly written and informative article. I think withg the Costikyan model you can have games sell through consistently at a 15 -25 dollar price point for a theoretically unlimited amount of time. This kills redistribution, but I think its a worthy sacrifice.
Also, since the online distribution model cuts out so many middle men (even the traditional publisher!) you can get profit margins which are virtually pure. Instead of looking at margins in terms of retail turnover, you can look at it the way film does, in terms of budget versus gross. In this sense, especially with scratchware titles, you can see games with 100%, 200%, even 1000% (the rare hits) profit margins.
Or maybe just stay hungry, either way...
http://www.kingludic.blogspot.com
I was shocked, but in a way, not at all suprised to read this very briskly written and informative article. I think withg the Costikyan model you can have games sell through consistently at a 15 -25 dollar price point for a theoretically unlimited amount of time. This kills redistribution, but I think its a worthy sacrifice.
Also, since the online distribution model cuts out so many middle men (even the traditional publisher!) you can get profit margins which are virtually pure. Instead of looking at margins in terms of retail turnover, you can look at it the way film does, in terms of budget versus gross. In this sense, especially with scratchware titles, you can see games with 100%, 200%, even 1000% (the rare hits) profit margins.
Or maybe just stay hungry, either way...
Original Comment by: Ken Barnes
http://www.rewiredmind.com
Gamers will continue to sell games to stores offering trade-ins, no matter what.
In the UK, stores such as GAME offer periodical trade-in deals where you trade in any 4 titles (barring old yearly sports releases) and get a chart game for 99p. Their chart games retail at £39.99, meaning that you're getting just £10.75 for each title you trade in. Sure, when you're trading in SSX Tricky for the PS2, that's a great deal - but when you're trading in Perfect Dark Zero for the 360, it isn't.
Yet still, the used games bays are chock full of the latest releases. There have been times when I've been to the store two days after a top title's release, and seen a "pre-owned" copy of the game for sale for £10 less than a new copy.
Why?
GAME offers a very nice returns policy, where if you don't like the game, just return it in original condition (with the reciept) and they'll exchange it for something else in store - at the price you paid for it. However, they aren't the cheapest store in town by a long shot. So, gamer buys at the cheapest available price, from a store that doesn't allow him to return it or trade it in, finds out that the game isn't exactly his or her thing, and then takes it back to good old GAME, who'll give them £10.75 for it (during one of their "offer" periods) - or £15 - £20 during other times.
They buy for £20, price it at £29.99 and BAM! Its sold quicker than they can get it out on the shelf. 33% markup on the price, 100% profit, since they won't give you cash when you trade in and you have to spend your money in store.
I used to work at my local branch, and the amount of tired old software sitting in their stockrooms is amazing. Madden 2001 through 2004 by the bucketload. FIFA 99 through 2003. Ditto. They end up pricing this stuff at a loss (99p in some cases) - and it still doesn't sell, simply because sitting next to it in the preowned basket is a shinier copy of Madden 2005 for £15 less than the retail price.
If there's going to be a price war on used software, it won't happen in the UK. Only GAME, GameStation (of which there aren't many) and the indie stores allow you to trade. A few video rental places have started doing it recently, but when you're offering £7 for a latest title you don't have a chance, so the monolithic GAME pretty much has the market covered.
http://www.rewiredmind.com
Gamers will continue to sell games to stores offering trade-ins, no matter what.
In the UK, stores such as GAME offer periodical trade-in deals where you trade in any 4 titles (barring old yearly sports releases) and get a chart game for 99p. Their chart games retail at £39.99, meaning that you're getting just £10.75 for each title you trade in. Sure, when you're trading in SSX Tricky for the PS2, that's a great deal - but when you're trading in Perfect Dark Zero for the 360, it isn't.
Yet still, the used games bays are chock full of the latest releases. There have been times when I've been to the store two days after a top title's release, and seen a "pre-owned" copy of the game for sale for £10 less than a new copy.
Why?
GAME offers a very nice returns policy, where if you don't like the game, just return it in original condition (with the reciept) and they'll exchange it for something else in store - at the price you paid for it. However, they aren't the cheapest store in town by a long shot. So, gamer buys at the cheapest available price, from a store that doesn't allow him to return it or trade it in, finds out that the game isn't exactly his or her thing, and then takes it back to good old GAME, who'll give them £10.75 for it (during one of their "offer" periods) - or £15 - £20 during other times.
They buy for £20, price it at £29.99 and BAM! Its sold quicker than they can get it out on the shelf. 33% markup on the price, 100% profit, since they won't give you cash when you trade in and you have to spend your money in store.
I used to work at my local branch, and the amount of tired old software sitting in their stockrooms is amazing. Madden 2001 through 2004 by the bucketload. FIFA 99 through 2003. Ditto. They end up pricing this stuff at a loss (99p in some cases) - and it still doesn't sell, simply because sitting next to it in the preowned basket is a shinier copy of Madden 2005 for £15 less than the retail price.
If there's going to be a price war on used software, it won't happen in the UK. Only GAME, GameStation (of which there aren't many) and the indie stores allow you to trade. A few video rental places have started doing it recently, but when you're offering £7 for a latest title you don't have a chance, so the monolithic GAME pretty much has the market covered.
Original Comment by: Zeke
I hate to say it, but for once I'm siding with Gamestop.
My family's business was starting into game sales to go with books and dvds.
Then we found out how much it would cost.
EA is the worst offender of all. Battlefield II, for a reseller, through a distributor, cost 48 dollars. In bulk.
48 dollars, for something to be sold between 50-60 dollars, and that's ONLY if it sells in the first month or two. After that, it sells at a loss. The average new game cost 43 dollars in bulk. Even those fall into sale at a loss rapidly.
The only money with this structure is in used games. Until the publishers start lowering their initial prices, they're going to be stuck "losing money" on used game sales. If they charged 25 for a big shipment of a new game, you can be assured the used game sales would drop rapidly.
I hate to say it, but for once I'm siding with Gamestop.
My family's business was starting into game sales to go with books and dvds.
Then we found out how much it would cost.
EA is the worst offender of all. Battlefield II, for a reseller, through a distributor, cost 48 dollars. In bulk.
48 dollars, for something to be sold between 50-60 dollars, and that's ONLY if it sells in the first month or two. After that, it sells at a loss. The average new game cost 43 dollars in bulk. Even those fall into sale at a loss rapidly.
The only money with this structure is in used games. Until the publishers start lowering their initial prices, they're going to be stuck "losing money" on used game sales. If they charged 25 for a big shipment of a new game, you can be assured the used game sales would drop rapidly.
Original Comment by: Paul Jenkins
I think the industry is in a catch-22 here, and switching to an electronic distribution model won't really fix it, only shift the burden. The real fix would be to make games that invested a player, and made the continued value of a game higher than the resell.
For instance, I still own GTA: SA and my PS2 memory card, despite having sold my PS2 several months ago. Why? Because I feel that reselling the game would not be worth the value offered.
Now, don't get me wrong... not every game can be GTA: SA or The Sims... but if a publisher really expects to consistently sell a game with 15 hours of play value for $50 - $60, then they are ignoring the real issue, which is that their price point is simply too high. Um... maybe that's because they keep pushing out high-budget crap with strong marketing as an attempt to subsitute for solid gameplay? Meh. Maybe I'm wrong.
I think the industry is in a catch-22 here, and switching to an electronic distribution model won't really fix it, only shift the burden. The real fix would be to make games that invested a player, and made the continued value of a game higher than the resell.
For instance, I still own GTA: SA and my PS2 memory card, despite having sold my PS2 several months ago. Why? Because I feel that reselling the game would not be worth the value offered.
Now, don't get me wrong... not every game can be GTA: SA or The Sims... but if a publisher really expects to consistently sell a game with 15 hours of play value for $50 - $60, then they are ignoring the real issue, which is that their price point is simply too high. Um... maybe that's because they keep pushing out high-budget crap with strong marketing as an attempt to subsitute for solid gameplay? Meh. Maybe I'm wrong.
Original Comment by: Jonas
I think the problem goes wider, into pirateing..By downloads of pirated games the publishers lose a lot of money. So, why do people download (steal) games?? Everyone you talk to mentions price as the first reason, whether it´s Battlefield 2 they want or Madonnas new CD. In the gaming world there is also -distrust. Gamers are actually starting to distrust all the hype around new games, since they too often doesn't meet the hype. And lets face it- how many part 2, 3 or 4 can you take??
So, as games go, the price is way too high, and most, if not all, game developers take no chances at all, just dressing old games in new graphics.
Just lok at these fairly recent games:
Civilization IV
Battlefield 2
Sims 2
Any EA sports game
And then you have all the expansions which are most often than not also way overpriced.
Hopefully digital distribution can change this..But i doubt it.
I think the problem goes wider, into pirateing..By downloads of pirated games the publishers lose a lot of money. So, why do people download (steal) games?? Everyone you talk to mentions price as the first reason, whether it´s Battlefield 2 they want or Madonnas new CD. In the gaming world there is also -distrust. Gamers are actually starting to distrust all the hype around new games, since they too often doesn't meet the hype. And lets face it- how many part 2, 3 or 4 can you take??
So, as games go, the price is way too high, and most, if not all, game developers take no chances at all, just dressing old games in new graphics.
Just lok at these fairly recent games:
Civilization IV
Battlefield 2
Sims 2
Any EA sports game
And then you have all the expansions which are most often than not also way overpriced.
Hopefully digital distribution can change this..But i doubt it.
Original Comment by: ravenus
A quite well-written article to examine this relevant issue. Even Epic's Mark Rein has repeatedly said that games ought to be cheaper if they realy want to expand the market sufficiently to offset the costs of development.
I think that episodic content in lower price points is really the way to go for future gaming, atleast for the non top tier companies.
A quite well-written article to examine this relevant issue. Even Epic's Mark Rein has repeatedly said that games ought to be cheaper if they realy want to expand the market sufficiently to offset the costs of development.
I think that episodic content in lower price points is really the way to go for future gaming, atleast for the non top tier companies.
Original Comment by: Tim McCarron
An interesting article but it does not make sense practically to talk of the likes of Gamestop.
To somehow equate the buisness practice of Gamestop or EB with the PC game software market is just folly from the word go...Their shelf space is 98% console these days and what little they do offer for the PC market is usually so far off the mainstream it is A) not worth purchasing or B) Their used resale games are even worse junk than their "new titles" they offer. The selection is that bad.
EB and Gamestop will bail the PC market altogether the next couple of years. Digital distribution will be the preferred method of publishers and customers for the following A) more users complete the switch to broadband, larger, more powerful PC's. and B) the publishers will stuff their coffers with more profits sending stocks soaring - a win situation for investors.
An interesting article but it does not make sense practically to talk of the likes of Gamestop.
To somehow equate the buisness practice of Gamestop or EB with the PC game software market is just folly from the word go...Their shelf space is 98% console these days and what little they do offer for the PC market is usually so far off the mainstream it is A) not worth purchasing or B) Their used resale games are even worse junk than their "new titles" they offer. The selection is that bad.
EB and Gamestop will bail the PC market altogether the next couple of years. Digital distribution will be the preferred method of publishers and customers for the following A) more users complete the switch to broadband, larger, more powerful PC's. and B) the publishers will stuff their coffers with more profits sending stocks soaring - a win situation for investors.
Original Comment by: Nick Twining
I'm just thinking aloud here but I wonder if the following scenario is possible for publishers and a particular supported retail chain:
Publishers provide game stores with serveral high capacity computers that are firewire enabled. They also provide these stores with, say, a thousand 5 gig mini hardrives that can be hooked up through usb or firewire. The customers can set up an account similar to a rental account which would require a credit card so the temptation to simply keep the hardrive is negated.
The purchase process could then work whereby the customer asks for a game which is then loaded onto the hardrive. The retailer then provides the customer with the hardrive and a (CD) key to activate the game once it is loaded onto the computer, just like when you buy standard DVD's or CD's.
Then the customer would simply need to return the hardrive, which could be written over or stored for another customer wanting the same game.
This process would cut out a number of middlemen involved with cds, shipping, packing and so forth. The game could be offered as a discount in lieu of the hard copy game cd/dvd. Publishers would also have the advantage of not requiring an internet connection, giving 'nonline' (not online) players a 'digital distribution' as well. Of course this would only work for pc games but thats my two cents.
I'm just thinking aloud here but I wonder if the following scenario is possible for publishers and a particular supported retail chain:
Publishers provide game stores with serveral high capacity computers that are firewire enabled. They also provide these stores with, say, a thousand 5 gig mini hardrives that can be hooked up through usb or firewire. The customers can set up an account similar to a rental account which would require a credit card so the temptation to simply keep the hardrive is negated.
The purchase process could then work whereby the customer asks for a game which is then loaded onto the hardrive. The retailer then provides the customer with the hardrive and a (CD) key to activate the game once it is loaded onto the computer, just like when you buy standard DVD's or CD's.
Then the customer would simply need to return the hardrive, which could be written over or stored for another customer wanting the same game.
This process would cut out a number of middlemen involved with cds, shipping, packing and so forth. The game could be offered as a discount in lieu of the hard copy game cd/dvd. Publishers would also have the advantage of not requiring an internet connection, giving 'nonline' (not online) players a 'digital distribution' as well. Of course this would only work for pc games but thats my two cents.