Monday, August 01, 2005
The Price Point Dilemma
If digital distribution cuts out the middle man and increases profit margins, why does the Half-Life 2 Bronze package still carry the full $50 pricetag? The Valve-Vivendi contact is why, and when it ends in a little under two months prices look set to plummet: Valve’s new contract with EA does not extend past manufacturing. With publisher royalties, manufacturing costs and retail mark-ups out of the way gamers can enjoy top-notch entertainment at unprecedented prices from the minute a game is released.
Needless to say, it isn’t quite that simple.
Selling games online is not something new. Companies like Microsoft and AtomShockwave along with a horde of indie developers have already formed an online economy with its own price points. And the bedrock of these price points is the common notion that AAA titles cost $50.
As you might expect, exact figures on the proportion of money that goes to Valve from each Steam sale are not public information. Accurate information with which to make an estimate is hard to come by not least due to the many factors involved, but Scott Miller explains that for large developers who own the IP and largely self-fund development, both of which Valve do, revenue can be as high as a $20 lump sum per sale. This is, then, what we must conclude the game can be sold for on Steam without any impact on Valve’s profit margins. If you are thinking that’s pretty good spare a thought for poor Shockwave and MSN Zone who sell the 2D puzzle game Bejewelled for the same amount.
You might grin at their misfortune, but this is serious. Although the Shockwaves of this world can probably survive a low-price Half-Life 2 with only a tarnished image thanks to the wildly different target audiences they serve they cannot survive the industry in general. Games like Worms and Lumines arguably cross over into the casual customer base and when they start being released at $10 Shockwave and other companies like them will be in real trouble. Or will they?
Let’s take a step back at this point and remind ourselves why Valve can afford $20 or lower. They own the IP, have already covered the development cost of tech they intend to use and upgrade for years to come, have a strong retail presence, and are generally developer bigwigs. The same isn’t true of smaller developers. To make comparable profits the two games I mentioned earlier, Worms and Lumines, would have to be priced higher than Half-Life 2 had they been online only despite their comparatively tiny production costs (thus Source licensees receiving a discount if they use Steam). I don’t pretend to be able to guess exactly what these titles would sell for, but it will be nowhere near $50.
By now you have probably gathered that the situation isn’t quite as bad as I have been making out. None of the triple-A developers who are strong enough to wrest control of their IP and go digital make arcade-like games, and when boxed arcade games begin to be distributed without publisher shackles they will likely be at a higher price than $20 – worrying for Shockwave and co., but not necessarily devastating if they react in time.
There’s only one remaining problem. What will happen when two games that were once sold at $50 each find themselves at unique price points? To try and answer this I’m going to bring in two more games, Unreal Tournament 2004 and Darwinia. Both cost the same yet one was a content monster on six CDs and the other was developed by two people and, discounting the sound package file, fits on a floppy disk. Yes, Darwinia is far less popular than UT, but that doesn’t matter to buyers. The main reason Darwinia was priced at $50, or to be precise £30, was because of the consumer’s reaction to cut price games; they are either old or otherwise unable to justify a normal price tag.
Fortunately there is a saving grace unique to online distribution that can counter this: the games can speak for themselves. If the distribution channel is done right, and currently all-round black sheep Direct2Drive is the only one that isn’t, trial versions of the games can be effortlessly converted into full versions. In a store Joe Average will walk in and probably choose a game based on the blurb on the back of the box, while on Steam or the MSN Zone he can make his choice from direct experience without expending any extra time, seeing as he’s going to be downloading it anyway. On top of that there are the new distribution models like micropayments, an example of which would be the selling of UT2004’s Deathmatch, Onslaught, Assault and CTF gametypes in separate packages along with a bundle of the less popular ones and a discounted all-in-one. Not only can Joe save himself money by only paying for what he actually enjoys, Epic can charge prices more suited to the amount of effort that went in to the title and smaller developers, Epic permitting, could even make and market their own gametypes to try-and-buy as well. It doesn’t matter what price the other gametypes are going at, as long as the charge is reasonable, because the decision will be made based on the game itself. Red Orchestra for $4? Completely reasonable, and it gives the developers a reward and foothold in development world.
In fact the only roadblock is the consumers themselves. Go into a UT forum and ask people what they think about charging $4, even $2 for RO and you wouldn’t be surprised at the response. This doesn’t mean attitudes can’t change though: Gunbound’s micropayment model demonstrates Eastern markets’ adaptation, the black market for MMORPG goods thrives on eBay and other such sites, even to the point that it was legitimised by Sony for Everquest II, and the recent Halo 2 map pack has been generally well-received.
When you started reading you probably expected this article to ask ‘what price point will Valve choose, and what will be its impact’. Perhaps a more accurate summary would be ‘will the online market fall into price points, and which outcome would be best’. It will take time, but eventually both the industry and the consumer will adapt to a new age of creative freedom and fresh ideas. Until that happens there will likely be vestigial quasi-price points. But then until that happens, digital distribution is still in its infancy.
Needless to say, it isn’t quite that simple.
Selling games online is not something new. Companies like Microsoft and AtomShockwave along with a horde of indie developers have already formed an online economy with its own price points. And the bedrock of these price points is the common notion that AAA titles cost $50.
As you might expect, exact figures on the proportion of money that goes to Valve from each Steam sale are not public information. Accurate information with which to make an estimate is hard to come by not least due to the many factors involved, but Scott Miller explains that for large developers who own the IP and largely self-fund development, both of which Valve do, revenue can be as high as a $20 lump sum per sale. This is, then, what we must conclude the game can be sold for on Steam without any impact on Valve’s profit margins. If you are thinking that’s pretty good spare a thought for poor Shockwave and MSN Zone who sell the 2D puzzle game Bejewelled for the same amount.
You might grin at their misfortune, but this is serious. Although the Shockwaves of this world can probably survive a low-price Half-Life 2 with only a tarnished image thanks to the wildly different target audiences they serve they cannot survive the industry in general. Games like Worms and Lumines arguably cross over into the casual customer base and when they start being released at $10 Shockwave and other companies like them will be in real trouble. Or will they?
Let’s take a step back at this point and remind ourselves why Valve can afford $20 or lower. They own the IP, have already covered the development cost of tech they intend to use and upgrade for years to come, have a strong retail presence, and are generally developer bigwigs. The same isn’t true of smaller developers. To make comparable profits the two games I mentioned earlier, Worms and Lumines, would have to be priced higher than Half-Life 2 had they been online only despite their comparatively tiny production costs (thus Source licensees receiving a discount if they use Steam). I don’t pretend to be able to guess exactly what these titles would sell for, but it will be nowhere near $50.
By now you have probably gathered that the situation isn’t quite as bad as I have been making out. None of the triple-A developers who are strong enough to wrest control of their IP and go digital make arcade-like games, and when boxed arcade games begin to be distributed without publisher shackles they will likely be at a higher price than $20 – worrying for Shockwave and co., but not necessarily devastating if they react in time.
There’s only one remaining problem. What will happen when two games that were once sold at $50 each find themselves at unique price points? To try and answer this I’m going to bring in two more games, Unreal Tournament 2004 and Darwinia. Both cost the same yet one was a content monster on six CDs and the other was developed by two people and, discounting the sound package file, fits on a floppy disk. Yes, Darwinia is far less popular than UT, but that doesn’t matter to buyers. The main reason Darwinia was priced at $50, or to be precise £30, was because of the consumer’s reaction to cut price games; they are either old or otherwise unable to justify a normal price tag.
Fortunately there is a saving grace unique to online distribution that can counter this: the games can speak for themselves. If the distribution channel is done right, and currently all-round black sheep Direct2Drive is the only one that isn’t, trial versions of the games can be effortlessly converted into full versions. In a store Joe Average will walk in and probably choose a game based on the blurb on the back of the box, while on Steam or the MSN Zone he can make his choice from direct experience without expending any extra time, seeing as he’s going to be downloading it anyway. On top of that there are the new distribution models like micropayments, an example of which would be the selling of UT2004’s Deathmatch, Onslaught, Assault and CTF gametypes in separate packages along with a bundle of the less popular ones and a discounted all-in-one. Not only can Joe save himself money by only paying for what he actually enjoys, Epic can charge prices more suited to the amount of effort that went in to the title and smaller developers, Epic permitting, could even make and market their own gametypes to try-and-buy as well. It doesn’t matter what price the other gametypes are going at, as long as the charge is reasonable, because the decision will be made based on the game itself. Red Orchestra for $4? Completely reasonable, and it gives the developers a reward and foothold in development world.
In fact the only roadblock is the consumers themselves. Go into a UT forum and ask people what they think about charging $4, even $2 for RO and you wouldn’t be surprised at the response. This doesn’t mean attitudes can’t change though: Gunbound’s micropayment model demonstrates Eastern markets’ adaptation, the black market for MMORPG goods thrives on eBay and other such sites, even to the point that it was legitimised by Sony for Everquest II, and the recent Halo 2 map pack has been generally well-received.
When you started reading you probably expected this article to ask ‘what price point will Valve choose, and what will be its impact’. Perhaps a more accurate summary would be ‘will the online market fall into price points, and which outcome would be best’. It will take time, but eventually both the industry and the consumer will adapt to a new age of creative freedom and fresh ideas. Until that happens there will likely be vestigial quasi-price points. But then until that happens, digital distribution is still in its infancy.
