I’ve been meaning to write this post for a while. The video game industry as a whole fascinates me. There is great competition among console manufacturers and software makers. With the notable exception of licensed sports games, the industry is a reasonably level playing field. In the retail space, however, power continues to consolidate into the major players. Wal-mart, Best Buy, Gamestop, Target, and Circuit City. Of the five listed retailers, only one sells used games. That one is Gamestop.
The game industry, and really all media industries, have a major issue with used sales. Only the retailer makes any money off the transaction. Due to the first sale doctrine, Gamestop is legally protected in reselling games.
Here is a typical cycle:
-Game Developer & Publisher sell new game to retailer and split proceeds ~$45
-Retailer sells new game to consumer ~$60
-Retailer buys game back from consumer – $22.50
-Retailer sells used game to consumer 2 – $45
-Repeat resale loop at progressively lower values
In this scene, the game developer, publisher, and console maker all get money from the first sale and not any of the subsequent sales. I can see why they would be unhappy with this situation. They want their cut of the subsequent sales. Because Gamestop is such a large seller of new games, none of the publishers are really in a position to call them on it. Gamestop makes a lot more money per unit on used sales than they do new sales. New titles bring in the foot traffic due to large total volume numbers. Used titles make the money on a profit per sale basis. As demonstrated in the example, if Gamestop cycles the used title even a couple of times they will make more than twice as much as on the new sale.
I give the industry some credit for trying to fight resale by offering the “greatest hits” version of titles that drops prices to $20 or $30 per title for high volume sellers later in life. That price drop forces the used prices to drop to a low level. A used version of a $20 title usually sells for about $15. At that price point, a consumer would think twice about buying the used copy. At $60 vs $45 for a full price title, even though the used price is still 75%, the consumer is likely to select used.
The only real way for developers & publishers to get their cut of these “used sales” is to offer games for download at *gasp* substantially lower prices. That’s it, you heard it right. The problem is that developers rarely do it.
Let’s go through the math:
-Revenue on sale of typical new game to retailer $45
- Sale price of download game (Warhawk) $40 ($5 probably is the cost of producing the disc, case, and artwork)
Seems fair right? The game seller is kept whole. The problem is that the developer and publisher now capture 100% of the resale market. For the buyer of the game, they pay about the same for a “virtual” copy of the game that they would have if they bought the physical disc and just sold it when they were done with it. They might be paying even a slightly higher price. In the case of Warhawk, the physical game even came with a headset.
Over the life-cycle of the game, the developer and publisher could drop the price to $30 and even $20 to incent more sales and keep the money. At that point, the later in life transactions are essentially pure profit for the company. The result is that the developer and publisher make even more money.
I don’t have a problem with the developer and publisher making more money. They certainly deserve it more than Gamestop. I have personally tried to minimize my used game purchases as I want the developer to get some of the money from my purchases. The problem is that they are trying to keep all of the potential profit. It is not just the video game industry. Movies, TV, and Music are acting the same way. They only want to used digital distribution when they can keep 100% of any upside produced by digital productivity.
The answer is to find a happy medium somewhere in the middle. Developers and publishers need to give up on the idea of capturing 100% of the upside potential and start focusing on finding a split that helps drive consumers toward digital downloads.
Choice 1: Keep pricing the same, no one buys the digital version and the developer/publisher generate their $45 of revenue through the typical channel.
Choice 2: Drop the price to $30-$35 for a digital download. Additional volume is driven into the market. The opportunity exists for incremental sales at $25 and $20. Since no secondary market exists, the developer and publisher get a cut of every sale.
It does not take a great assumption for increased sales in Choice 2 to see that the total revenue produced would far exceed the current business model in choice 1. Lowering prices for digital downloads is the direction that the industry has to take for future success
Implementation Issues:
I’m not naive enough not to see some potential issues in this solution. The first is perception around a “value” title. By releasing the $30 digital download and $60 retail copy along with positive game reviews this should not be an issue. The second is around the retailer’s reaction. This is a risk, but the developers and publishers need to start making some moves if they are ever to break out of the current distribution model. The third issue is around time value of money and game payback. Since virtually all of the dollars spent on a game are sunk once the game ships, there is an interest in trying to recoup the cash quickly. This new model has a slower recoup schedule but a larger total profit. On a present value basis it should be fine and with today’s efficient markets there is capital available for anything like this that makes good business sense. The fourth issue is with the console maker’s charges for digital distribution. I have no idea how much these are, but the console manufacturer should want to sell as many titles as possible for the royalty money. Trying to extract too much extra from the digital distribution seems like a bad idea. Digital production is much cheaper than the physical production that they currently undertake.
Conclusion:
I would like see someone try this. In my opinion, Microsoft would be a best bet to try this. Their game publishing is going well, they produce the console, Xbox Live is the best online offering, and they have plenty of money/power to wield. The problem is that not all of their consoles come with a hard drive. Sony is the other candidate that could give it a shot. I am curious to see how their Warhawk experiment worked out. Who will be the first to give it a shot?
