Two bits of interesting news came my way in the last day, both of which reinforced a thought I've had for a while now. The video game industry has been doing it wrong, it being unit pricing. I am known as one cheap bastard, this I will confess. My initial reaction to the announcement of the XBox 360's release was that the console was too expensive, and I was practically apoplectic at the PS3's insane release price point. The fact that games for both those systems are $10 more than their predecessors and their competitors on the Wii makes me even more stabby. PC Games have thankfully not followed suit, hovering between $40 and $50 for a new release - a price I rarely pay. But in such trying economic times, when many people are worried about losing their jobs and their homes and much of the video game industry is quivering in fear of impending layoffs and forced relocation and consolidations, those numbers are a pretty big spend. The times are dire and entertainment is one of the first things cut. So why are games so goddamn expensive?

The industry would have you believe that the high price points are a vital necessity due to low sales, and for PC games, they may be right. However, the entire video game industry has continued to grow and despite the shitting itself layoff reactions many of the publishers have been having lately, the numbers seem to say the industry as a whole is doing ok even with flat sales. In times like these, businesses are more concerned with not losing money as opposed to growing profits - keeping the lights on as it were. Generating revenue at a break even point is success - anything more is gravy, anything less is dire. This is the time to examine long-held beliefs about the way to do business and see if there's a better way. I believe that the better way forward is in lowering unit prices on video games.

I realize that is heresy to some. After all, the industry model is that most of the money to be made on a product (excluding recurring revenue products like subscription-based MMOG's) is made in the first two weeks to a month. If a product isn't a hit in that time, it's a failure and any sales after that are just residuals. Entire studios have folded because their product didn't immediately fly off the shelf. The early adopter customer is forced to pay a premium, while the lollygaggers get the game on discount six months or more from release. If there are more of the former than the latter, success. Thus, we have price points in the $50-$60 range.

Gabe Newell of Valve has put paid to the notion, however. During a DICE keynote, he threw out some interesting numbers relating to discount sales they've run on Steam lately. Last weekend's 50% off sale of the hit product Left 4 Dead produced an astounding 3000% increase in sales - and those numbers outstripped the release date sales of the product. The huge holiday sale on Steam which saw some products discounted as much as 75% saw even more jaw-dropping increases. To quote:

10% sale = 35% increase in sales (real dollars, not units shipped)
25% sale = 245% increase in sales
50% sale = 320% increase in sales
75% sale = 1470% increase in sales

Notice those numbers are not units shipped - those are REAL DOLLAR SALES INCREASES. That's money in the bank. We can certainly assume that some of that increase is attributable to the fact that these are SALES - everyone loves a sale. But even if half of those increases are due to the lowered price point, that's a monumental difference.

Let's take the 50% price point reduction. If the game sells for half price ($25 instead of $50), the company makes half as much money per unit sold. If that 320% increase in sales is halved (assuming half the purchases were because of ZOMGSALEFEVER!), that's a 160% increase in real dollar sales over the $50 price point. So you make 1.6 times more revenue than you made at the higher price point. Revenue keeps the lights on, keeps the employees paid and funds future development. Even if you only made the same amount of money at the lower price point but you shipped more units, the upshot is that you had more people buying videogames. And that means you have more potential FUTURE customers - not only of new products but of expansions to the product they just bought?

The second bit of news is not a surprising one. Gamestop, that by now monolithic shitheap of a company that has nevertheless become just about the only exclusively video-game brick and mortar merchant out there, is still making money. In fact, their 2008 sales showed an increase of 24% over their 2007 sales, and this was with the economy dropping a deuce for the last six months of the year. This was without any new console releases and one of the worst Christmas seasons in memory. They predict that 2009 will be even better even with the economy in tatters. How do they do it?

Used games. That's right, as fucked up as that system is, as disgusting as it is to sell a returned game for $5 off the new game price only a week after the release even though they "paid" half the retail price in trade, the system makes Gamestop money. Lots and lots of money. It's what has not only kept them afloat, it's made them blockbuster profits. The simple reason is that people like me can't or won't pay those insane price points for a game. The last game I bought with my own money at full price was Warhammer Online for the PC. I'd rather wait a few months until it's gone down to about half the release price (and for PC games, when the game has been patch-fixed) and either buy it used or at a discount. I'd wager there will be more like me as the economy worsens.

Certainly there are other mitigating factors than price. For Valve, the success of the Steam platform and its concurrent efficiencies (no physical product, cheaper distribution costs, ability to stockpile a huge backcatalog) can certainly contribute to the ability to sell products for less. Digital distribution is something console video games are only now getting into with Live Marketplace, PSN and WiiWare titles. And no matter how cheap a game is, it still must be a good game to succeed. But for the future of the industry, I think now is the time to take a hard look at the price point assumptions and distribution methods that have led the industry to the point it's at today. While it has made the industry money, that doesn't mean it isn't currently broken.

Labels: Video Games