Are Video Games Too Expensive?

Are Video Games Too Expensive?


I had an interesting discussion a few days ago about whether or not video games were too expensive, so much so that I lost a night’s worth of sleep trying to come up with a definitive answer. Why are games so expensive? Games from major publishers all are released for $50-$60, be they retail or digital. We’re in the middle of an economic slump. Who can afford to buy more than a few games a month at these prices? Not to mention, many Xbox 360 gamers have to pay a subscription fee to access Xbox Live. The video game industry continues to expand even during this slump, surpassing recently the music and movie industry. Since the gaming industry is making so much money, why can’t publishers lower the cost of their games?

The answer seems pretty obvious: video game publishers are all money-grubbing bastards who want to rob every penny from you. Games from major publishers like Call of Duty: Black Ops have generated over a billion dollars in revenue, completely blowing any production costs out of the water. There is absolutely no justification for games to be so expensive. If gaming companies lowered their prices, games might sell even better and for games like Call of Duty, even if they don’t make quite as much money, Activision will live without the oh… extra $100 million they won’t make if they make Black Ops $10 cheaper. It’s because they don’t care for their fans. It’s injustice I say… injustice!

But is it? The video game industry is huge and is worth about $10 billion in total, and the numbers continue to go up. In fact, even with economic troubles that have hit the music and movie industry, the gaming industry continues to expand as social networking and casual gaming continues to reach new audiences. Since the video game industry is huge and top game publishers like Activision and EA are gambling hundreds of millions of dollars for their investments that could potentially crash and burn, wouldn’t they already have lowered gaming prices and changed their business models to be less fiscally conservative if the answer was this simple? I thought that there had to be a reason why these publishers’ financial analysts had them set their prices at $50-$60 per unit. But first, a little video game history.

History of Pricing

Video games have always been expensive. In fact, they were much more expensive twenty years ago than they are now. A game in 1990 generally sold from $30-$50, as opposed to the $50-$60 we pay today, but adjusting for inflation, gamers were paying much more back then than now.

To give you a little perspective, $30-$50 back in 1990 is by 2011 standard’s, $51.62-$86.04. We now mostly pay $60 per new game, which is $34.87 by 1990’s standards, on the lower spectrum of that range of $30-$50. So, why are real values of games cheaper now than in 1990 if game development costs continue to grow as more people are needed to compensate for better graphics, AI, sound, etc.? Well, as game development costs have gone up, so has video game revenue. CDs and DVDs are cheaper physical mediums on which games are sold than cartridges. So, with that historical perspective in mind, let’s also take a comparison of entertainment value between the movie and the gaming industry.

Games vs. Movies

I’d gladly pay $10-$20 for a DVD, a movie ticket, or a Blu-ray disc (ok maybe not $20 for the DVD or the movie ticket). Really though, if you break down the amount of hours you spend watching a movie versus how long you spend playing a game, you’re getting less out of your money’s worth with movies.

You spend an average of about 2 hours watching a movie. At $10-$20 a unit, you’re looking at $5-$10 per hour of entertainment.

Video games vary in length, but for most games, I’d say it’s a safe bet that

Games vs Movies

you’ll play it for 20-60 hours (maybe even more) per game. First person shooters have short single player campaigns that clock in at maybe 5-7 hours of gameplay, but they offer multiplayer modes that double or triple the amount of time spent playing. So, really that’s $1-$3 per hour of gameplay, not to mention, video games are interactive, adding another dimension of entertainment that movies don’t.

Developers also tend to continue patching games to improve gameplay for a few years after the game’s initial release. Essentially, gamers are getting a lot back for their money, since they’re getting developer support and hours of gameplay from replay value.

Yes, DVDs can always be re-watched, but most people do it only maybe twice or so a year, unless it’s that one movie that can just be watched on an endless loop (or you’re just a nerd like me and can sit through all of The Lord of the Rings again and again… even if it’s the extended version).

Development Costs – Where Does the Money Go?

IGN had an interesting article back in 2006 detailing all the economic info that goes behind publishing a video game.

A game publisher has to front most of the money to develop and market a game. Development costs have been rising as of late, and the average development cost of a game is in the range of $18-$28 million. Big games can easily hit upwards of $50 million. Grand Theft Auto IV, for example, was the most expensive game to develop as of 2010, costing $100 million. So where the hell does all that money go?

First, in the developing aspect of making a game, a publisher has to hire all the crew involved in the development process – that is, fund the programmers, artists, musicians, producers, and QA testers. This is an expensive process, and it’s why a lot of large publishers try to acquire game developers. They can develop the game in-house so that they don’t have to pay developer the 10-20% royalty fees from revenue that they would for an outside developer.

Then, there are licensing fees that the publisher has to pay. Publishing a game on any console or PC means paying the console developer fees. It’s why Sony, Microsoft and Nintendo make bank on any of their financial records. They’re not just milking you for your money when you buy their consoles; they’re also milking game publishers. Sometimes, these licensing fees can be anywhere between $3-$10 for every game unit sold.

There are also licensing fees that publishers have to pay if they use a big name on their games. It’s more costly to do so since there’s a certain level of security going with these names because hey, players are going to buy the next game with Tom Clancy’s name stamped on it, even if he has no affiliation with the game at all.

Money and CalculatorMarketing and advertising is expensive. Most publishers spend most of the money they invest into video games on this front because getting a game well-publicized and hyped means it’s going to sell. Look at the example of Homefront. It wasn’t particularly a great game and it only garnered lackluster reviews at best, and yet it still shipped over 2 million units and hit the top selling charts of March 2011. THQ got it into everyone’s minds that Homefront was going to be the best god damned game of the decade, and while they didn’t deliver, they still made off with everyone’s money.

Finally, product distribution is also an expensive process, especially for retail games. Publishers have to have a good relationship with retailers and wholesalers so that they will stock the company’s games. Retail and wholesale executives are the ones who decide whether or not they will buy the game to stock. They need to ensure that they’re making a good investment. This is also why you don’t see much innovation in game development. Game publishers have to make sure that the retailer or wholesaler will buy the game, so they make a game that’s relatively “safe” and going to appeal to the wider market so that it will sell. (But that’s a rant I’ll leave for another time.) Publishers also have to pay for the physical media the game is stored on and to ship out millions of units of games to different retailers and wholesalers.

Digital distribution removes a lot of these costs and the retailer or wholesaler middleman, which is why digital copies of games are usually cheaper and why indie developers usually opt for digital distribution over retail.

In the end, the publisher makes back about a profit of $5-$7 per unit sold. With the millions of units that the publisher sells, they’re making millions. They essentially do have the means to make games cheaper without hurting them fiscally, particularly with new business ventures such as in-game advertising that allows publishers to make back an extra $1-$2 more dollars per unit sold. This means that by all means, publishers should lower their game prices if they care for their consumers, right?

Yes and no. There’s a lot of behavioral economics that goes behind game pricing that helps games sell.

Valve reported that when Left 4 Dead was a relatively new game, they discounted it at 50% off, so that the game was priced at $25. They saw a whopping 3000% rise in digital sales for Left 4 Dead off Steam that didn’t hurt retail sales. They found a similar case with any other gaming publisher’s games. Games with 10% discounts saw a 35% rise in profit. A drop to 75% meant a 1,470% increase in sales profit, so essentially the size of sales increased almost exponentially with an increase in discount percentage. Therefore, Valve concluded, game publishers are pricing their games too high… which is why Portal 2 still debuted at $50 on Steam. I’d say that Valve is being a little too hasty in their conclusion.

Lowering the cost of a game means that more people are going to have the means to buy the game. Piracy rates may even drop since people are better able to pay for their games. However, a large part of the reason that people bought Left 4 Dead for $25 instead of $50 is because there was a discount, not just for the sole reason that the game was cheaper. If you’ve taken any economics class, you’ll know it’s the discount effect. (I have no idea if this is the real name for it. I kind of skimmed through economics without paying attention.) Essentially, people will buy things at a discounted price, especially for the larger discount, because in their minds the whole thing is a deal. In other words, people bought Left 4 Dead because they arbitrarily assigned the game as worth $50 because the original price tag was as so. Our capitalist brains automatically assume that competition drives prices down (which it usually does), and so whatever we pay for a product is really what the value is. That is to say, we see the $50 price tag on Left 4 Dead as worth the quality of $50 worth of work going behind the game. So, when a discount rolls around, we really see the value of Left 4 Dead as being worth $50, so it’s an awesome deal to be paying $25 for it.

This discount effect is even more effective when there’s a time limit placed on the offer. In fact, this seems to be a tactic that Steam has perfected. They sell a game for half price and then add the pressure that the deal is going to end at the end of the day or the end of the week, then customers will have the mindset that the discount is a great deal that they must cash in on since it will mean $25 saved on an offer that may not ever come up again. In reality, they just lost $25, but twisted behavioral economics and human psychology has the customer patting him or herself on the back for getting a good deal. This is why pricing games at $50-$60 is important. It’s part of the gimmick of getting people to think that the game is actually worth that amount and that they’re buying a quality game.

Don’t believe me? Then let the numbers speak for themselves. Tommy Refenes, Super Meat Boy developer, actually tried something on the iTunes app store that tested this out. He created a joke game called Zits & Giggles, which was just a game to pop zits on screen. At $.99, the app didn’t sell. He increased the price to $15 and it sold 3 copies. From then on, every time he sold a copy, he increased the price of the game. In fact, Zits & Giggles sold in its peak before being banned on the app store at $350. People see that the game is worth more in dollars, and so assume that it’s going to be more. Hey, I never said capitalism isn’t screwed up.

So then what about indie games? They’re usually pretty cheap, why do games like Angry Birds sell well? They operate on the same type of logic that downloadable content runs on… the concept of throw-away money. People generally are really bad with money. They see a game or a DLC that’s going for $10 or less and the mindset is that the game is cheap enough to buy without significantly impacting them in any way. $5 or $10 is the equivalent of one or two meals. It’s easily earned back or so the mindset goes until you’ve suddenly spent $200 on $5 or $10 games. (Don’t you find it hard to resist buying games when you go to the $5 or less section of Steam?) That’s why Rovio, the developer of Angry Birds has been able to make $70 million in gross revenue for a game that only cost $170K to develop. The fact that it was a decently good game for cheap probably helped.

Conclusion

Making video games is a risky business. A publisher never knows how well a game is going to fare. It all depends on how well a game is viewed by reviewers and how well it fares with gamers… and gamers are picky people. Sometimes a game is too new, sometimes a game doesn’t have enough innovation, and sometimes the game may be perfectly fine but there’s just something that gamers decide to pick on like the music or sound effects. Anything and everything just short of the weather (or maybe including the weather) can affect game sales. The current pricing for video games that most major publishers have set is a good safe number and works in playing with gamers’ psyches. Still, you see games like Black Ops, which even after making billions, still does not go down in retail price. This can probably be attributed to greed. Activision knows that it has a desirable commodity as a game and people will buy the game, no matter how much they bitch or moan about the cost.

However, I feel that this sort of business model is prohibitive to improving gaming sales, especially for companies that don’t have runaway successes like EA and Activision. For instance, Ubisoft, Square Enix, and THQ all reported net losses for the last fiscal quarter.

Namco suggested the possibility of making games cheaper by making them shorter, and having publishers release more DLCs to try and increase sales. While that might work, I don’t think many companies will go for it until one company has amazing successes with such a tactic, particularly since it requires companies to drastically change their business models. A better idea that doesn’t radically change the conservative fiscal model that current publishers have would be to sell games for a discount at pre-order. Essentially, the list price of games will still be $50-$60, the pre-order price will look like a good deal,. In that sense, publishers will probably have initial sales skyrocket. Then, when the game is actually released, it will sell for list price. I’m no economist, but this type of plan seems like a no-harm, no-foul method of trying to lower new game sales that benefit the gamer whilst keeping revenue and sales up for gaming publishers since players are more likely to pre-order the game than to wait for price drops, and maybe not buy the game at all because of bad reviews.

Sources:

http://www.digitalbattle.com/2010/02/20/top-10-most-expensive-video-games-budgets-ever/

http://gamerinvestments.com/video-game-stocks/index.php/2011/05/04/electronic-arts-reports-fiscal-year-2011-results-digital-revenue-up-46/

http://gamerinvestments.com/video-game-stocks/index.php/2011/05/09/activision-blizzard-reports-q1-financial-results-eps-up-40/

http://gamerinvestments.com/video-game-stocks/index.php/2011/05/12/ubisoft-reports-fy-2010-11-results-net-loss-e52m/

http://arstechnica.com/gaming/news/2010/10/an-inconvenient-truth-game-prices-have-come-down-with-time.ars

http://www.arcticstartup.com/2011/04/13/rovio-revenue-14me-in-q12011

http://games.ign.com/articles/708/708972p1.html

http://www.develop-online.net/news/33625/Study-Average-dev-cost-as-high-as-28m

http://www.emarketer.com/Report.aspx?code=emarketer_2000386

http://www.esrb.org/about/video-game-industry-statistics.jsp

http://www.theesa.com/gamesindailylife/economy.asp

http://www.next-gen.biz/features/valve-are-games-too-expensive

http://troygilbert.com/2008/09/games-are-too-expensive/

http://www.obscure.co.uk/articles-2/computer-game-publishing/

http://www.gamedev.net/page/resources/_/reference/105/121/295/the-game-industry-and-the-economics-of-failure-r867

http://www.ssagsg.org/LearningSpace/EntertainmentGaming/EconomicsOfGaming.htm

http://www.geek.com/articles/games/super-meat-boy-developer-proves-the-app-store-is-kind-of-sht-20100311/

http://www.economist.com/node/12815694

No comments yet... Be the first to leave a reply!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: