Tobold's Blog
Thursday, March 25, 2010
Wonder and cynicism

Seems to be the day for thought experiments, as Syp kidnaps his younger self with a time machine and remarks "We complain way, way too much in comparison to the great amount of entertainment that’s put at our fingertips for obscenely low (or no) prices.". But while I agree that a teenager from the past would stare at wonder at the great amount of cheap entertainment on offer, the older and more cynical me, with a mind tuned to economics, thinks that this can't last.

In economic speak, "great amount of X for obscenely low or no prices" is typical for a classic boom, to be followed by a bust. There is simply too much supply for the business to be profitable. Add to that the current economic crisis, where people are bound to diminish discretionary spending, and there will be a lot more game companies laying off people or even closing down. The amount of new games released will diminish, and prices will go up, until game companies are profitable again. For any company to keep going, the total revenue must be higher than the total cost. There might be reserves somewhere to operate at a loss for some time, but that isn't something which can go on.

There is a market for video games, and presumably there will be a market for them for the foreseeable future. So video games won't disappear. But in the end the players somehow must pay for whatever it cost to produce those games.
Not sure that I agree Tobold. My naive understanding of market economics is that it is marginal costs rather than fixed costs which ultimately determine a market clearing price. While the fixed costs of game development are very high the marginal costs of selling one more game are very low. Lots of companies are already giving their games away for free and have managed to find a way to make money out of it. While there is still a gulf between the quality of free games and the quality of paid games that gap is shrinking. Competitive pressure should force overall prices down. Yes a lot of companies will probably go out of business if they cannot sell enough games at the new lower prices to cover their fixed costs. I think the best future strategy for AAA titles will be to price high on the day of release and lower the price fairly quickly in a series of steps down to a low level. This is a proven strategy for milking the maximum revenue out of the demand curve. A slow version of this has always been in replace in retail game sales but I think Valve's aggressive experiments with online price discounting have shown that there is plenty scope to increase revenues by reducing prices more quickly.
It has a lot to do with production values.

The economics of blockbusters like SWTOR and WoW bear little resemblance to the economics of cheaply made Facebook games (which is part of the reason so many designers are excited about the latter).

What will happen in the triple A market is that most people will gravitate towards the best-produced games. This is why WoW is dominant and SWTOR could get up on that pedestal too if their gameplay is enjoyable enough.

It is increasingly becoming a market where the gameplay is known and predictable and all that matters are production values.

Facebook games are headed for a different kind of bust.

Most people don't pay for Facebook games. As more and more conpetitors enter the market the chances of getting anyone to pay for your game sight unseen get even less likely.

So they depend on certain techniques all of which will shrink as the number of competing games grows.

- advertising. The value of this will decrease as people using the internet train themselves to ignore advert.

- lists of friends to send spam to. The value of this will decrease as people increasingly use dummy emails and personal details to sign up for games.

- scams like the mobile phone sms services scams. People will wise up, some countries will regulate against this.

- reciprocation. If your design is to get someone to send points to a friend and ask them to sign up so they can send points back it will only work on each person the first few times. After that people will get bored.

- Facebook. Facebook is itself preparing to change its Terms of Service to take a much larger slice of these revenues.

In both sectors of the market competition and the fall-out from it will mainly hit the less enjoyable games, raising the overall quality. Some games are niche but very satisfactory within that niche - I hope those do well. But I actually think it's a good thing that it will become harder to knock off Farmville or WOW and make a fast buck.
@mbp: While marginal costs are insignificantly low, the number of additional customers is related to the quality of the game. A game must have a certain level of quality to ensure sufficient customers. If it is only slightly too expensive for its quality, it will fail.
I suspect we will see a market that is still very robust for selected titles. A new GTA or MW will still sell millions. It's the studios trying to develop their own hit IP that might have problems.

When you're feeling the pinch, you might buy fewer games. The ones you pass on will be the ones you feel less sure of -- i.e., new IP you haven't experienced before. A new Grand Theft Auto or Modern Warfare is an easy purchase to justify, though.
€50 a €60 a game isn't my idea of cheap.

And "only" €15 a month? There's a reason every other gaming company in the world is envious of Blizzards income.

None the less, while playing only WoW I spent quite a bit less on games. €15 a month compared to €50 a month.
It's true. In a pinch, last year (unemployed half the year) I reduced video game spending to about $100 for the whole year.

I think the key is making best use of trends...Facebook, iPhone...these things appear, make people millions, then burst almost as quickly. As long as we get new platforms and discover new markets of potential players, game development can continue to maintain its scale and even grow.
I don't think I agree either. To start off, this market is characterized by HUGE economies of scale. So producing an additional unit of a game is almost free once you have developed the first unit of the game.

So in short this industry is plagged by the same phenomenon than books, music and movies: Blockbusters give a ludicrous amount of profit while niche products end up being quite unprofitable.
However, as we can see in the other industries, the market for "niche" products seems to be big enough to still make them profitable (since niche movies, music and books are still there).
So it seems that this kind of business model can dilute quite succesuflly their high fixed costs thanks to their almost non-existant variable costs which are getting even lower with Internet downloads!
Of course the current state of affairs can't last. Markets ebb and flow. If you believe in efficient markets, though, prices and costs will tend to settle into a stable relationship. The MMO market is still finding its footing.

We're already seeing shifts like WAR's perpetual trial, Free Realms' changes, WoW's "value added services" (Cash Shop stuff under a different name), and DDO's changes. What we now laughingly call F2P may well change the most, but sub models will as well. It's all about finding the sweet spots on that market segmentation curve. So far, it's been pretty scattershot, but as the market itself diversifies, savvy publishers are easing themselves into the curve.

Yes, it's likely the gold rush of "free" games won't last (especially in a saturated market) as well as those with a Guild Wars or straight up sub model, but they all tend to cross pollinate, and it's likely that we'll see games like Wizard 101 where there's a little bit of everything in the business model.
A question is will a platform (console, PC, iPhone) makers ever allow a "framework" to exist. What if Google or a less monopolist Microsoft were promoting games: there would be a framework/infrastucture for a designer to build upon: designers would add value in their skins, stories and how interesting the interactions were. but would not have to spend person months/years writing another chat/mail system, or auction house/market, option configuration systems and dialogs as well as physics & skinning engines

P.S.: I think the size of the current advertising market, internet and traditional, says that it still works. Albeit maybe not as profitably as before. So advertising is not doomed. The value of advertising on yet another video mage may decline significantly.
This is why so many games are free to play... they can't compete with the boon of relatively cheap excellent quality games out there. I'm actually currently working on a browser based game myself, and there is no way in hell I would charge a penny for it. Advertising sure, but no one is going to pay for the quality one person working part time can create.
I had a break of several months from playing WoW now. One of the reasons I restarted playing was the money: WoW is cheap.

Without WoW I buy one single player game every 3 weeks. Alone this year I bought Dragon Age, Mass Effect 2 and Star Trek Online (I knew it was a mistake and it was). That's 150€.

That's one year of playing WoW. The sub costs 12.99€ per month if you resubsribe every month.

But these games each took 2 weeks (2 weekends) of playing through. Most of the time I spent with Fallout 3 ignoring the main story. That took some 4 weeks.

Should I lose my job ever (quite unlikely) I will start to play WoW intensively. Because it is amazingly cheap. If you don't play WoW you either play one 50€ single player gameper month or buy 9€ cinema tickets + public transport costs. Or you buy more to eat and get fat. Etc.

Playing WoW + some sports + reasonably priced healthy food is probably the least expensive way to live in modern society in the medium and long run.
Nils, you are right if you are only playing one MMO (like WoW) for an entire year. But, who wants to play one game all the time?

I also tend to buy about 1 single player game every month, but that doesn't change if I am playing an MMO. The MMO may be fun, but I need a variety of experiences to keep me interested. I think if I played only one video game to the exclusion of all others for an entire year I would get totally burned out on that game.

I understand your point about cost effectiveness, but I still think people will spend money for other games on the side.
@ Void:
I can only speak from my own perspective. I play WoW during my studied extensively and I didn't buy even one single player game for approximately three years.
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