Why games are $60. And what it has to do with the used game market.

With the Xbox One announcement, there has been a loud outcry over the restrictions impacting used games. The popular sentiment, in the context of how the used game market relates to new game prices, is represented fairly well in this video:

Quickly, can I just make a comment on how sad it is that a video like this represents our industry? With the costume he’s wearing, I can’t help but be reminded of Idiocracy.

Anyway, this guy with a doll posits that the one thing keeping games expensive is greedy publishers. He argues that without used games, publishers will have a monopoly and game prices will rise. It sounds logical, but only through omitting a huge piece of the puzzle: price competition amongst publishers!

Before we go further, I want to bring up why I think games are $60 in the first place. More importantly, why there’s a standard price for games at all. The only reason I can think of is retail. With used games, the retailer decides how much to buy/sell inventory at, so it’s their profit margin they’re playing with (and the result is used game prices vary from game to game and from store to store). That’s not the case with new games that wholesale for a fixed price. It’s also virtually impossible for publishers to, for example, hold a weekend sale where the game is 50% off because of the logistical nightmare that is retailers. Thus, everyone basically agrees that new games are $60 and that’s the way it is 99% of the time.

I also want to make a distinction. We have two kinds of digital distribution services. We have those that have direct retail competition (Origin, Steam, PSN, Xbox Marketplace, WiiWare, etc) and we have those that are 100% free of retail influence (iOS App Store, Android Google Play, etc). This distinction is important. Retail success lives and dies by shelf space — if you don’t get prominent position within the store to attract eyes, you don’t sell. To answer Jim Sterling’s question about “why publishers are so eager to please GameStop”: they want shelf space, because unfortunately for everybody, retail is still important to the success of console games.

What do you think would happen if Ubisoft undercut GameStop and sold WATCH_DOGS for $30 digitally on PSN or Xbox Marketplace? GameStop would predict their own WATCH_DOGS sales would go down (because they bought their inventory at $55 and can’t afford to sell it at $30 to remain competitive) and replace the WATCH_DOGS boxes they had on the shelves with something else (and perhaps do the same for other Ubisoft titles to discourage such actions in the future). This would turn around and hurt Ubisoft’s bottom line, so Ubisoft’s hands are tied and they are stuck with an inflexible pricing model.

This is in absolute contrast to digital distribution stores that don’t compete with physical retailers (such as iOS). Ubisoft is free to change the price whenever they want and there’s no used game market at all. If you believe Jim Sterling’s argument, Ubisoft has a monopoly on the price of Rayman 2 so they’d raise the price out of greed so they make more money. But mysteriously, they sell the game for $5 on iOS instead of $30 for 3DS and they regularly have sales where the game sells for only $1 and they’ve even given it away for free!

But what about the monopoly they have on selling Rayman 2?!?!? Oh right, they’re competing with other publishers and other games! Ubisoft isn’t alone — EVERY publisher on iOS can change their prices on the fly. This is where the true strength of digital distribution lies: when publishers can change the price on the fly, they will compete on price (in addition to competing on game quality as they always have). iOS games are cheap as can be (arguably too cheap) and sales are everywhere. This price competition amongst publishers is totally absent from the current console market where game prices are standardized and retailers still have influence.

Jim Sterling was partially mischaracterizing Penny Arcade’s argument (Penny Arcade could have been more clear, though). It’s not that publishers will lower prices and pass on the savings of digital distribution because they feel generous — they’ll do it because if they don’t, they’ll be undercut by another game and their bottom line will take a hit. Unlike the current market for new console games, prices will actually reflect the value of the game. Better games will be more expensive than bad games as they should be, but it’s almost inevitable that you’d see prices generally fall (and have more frequent sales) as publishers try to grab more market share from each other (though I wouldn’t expect a mainline Call of Duty to MSRP for 99c). When retailers are out of the picture and publishers can change the price of their games on the fly, I guarantee competition will heat up — those are the two magical ingredients of a more competitive video game industry and it’s been proven in existing markets.

Will this sort of price-competition happen this next generation? I predict not.. at least not fully. I think Gamestop and other retailers will still have plenty of influence, so new digital games (that you can also buy at a store) will likely still be a standard price that doesn’t undercut physical prices. This behavior does seem to scale, though not perfectly. I think PC gaming has seen measurable benefit from relying less on retail — Steam sales are evidence of this, I’d argue. Same thing with PS+ Instant Game Library on PSN. Both Valve and Sony realize that there’s marketshare to be gained when you afford customers more value. Personally, I think this transition away from buying games at physical retail stores will be messy (with things like the Xbox One disc DRM, online passes, etc), but inevitable and necessary. Let’s rip this bandaid off quickly so we can get some real competition going.

edit: I was considering a followup article explaining how games and other digital products are inherently different from the market for used physical goods, but this guy covers most of what I was going to touch on:

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