Tobold's Blog
Monday, April 27, 2015
The economics of zero marginal cost

Why isn't Ford attracting more customers by giving out cars for free and then charging for additional stuff later? And if that model wouldn't work for cars, why would it work for computer games? The answer is in what an economist calls the marginal cost of an item, which is the cost of producing and selling one more of it. Once your game is finished and you have a distribution platform and everything, the marginal cost of selling one more copy is pretty close to zero. The same isn't true for cars, because even when the car is designed and the factory is built and set up, it still costs thousands of dollars to produce one more car and sell it.

The "culture of free" on the internet is very much linked to that zero marginal cost. Even piracy depends on zero marginal cost, because it doesn't cost the pirate more to make a copy of a game or other content than it costs the developer / owner of that game or content. Free2Play wouldn't work without zero marginal cost. But a lot of people confuse zero marginal cost with zero cost. It does not cost nothing to produce content, because it always costs time, and that time has an opportunity cost. However there are people on the internet who voluntarily produce content for nothing, me included. And that leads to an interesting economical question: What is the difference in quality between free content and paid-for content?

There are two sides of that: People who produce content for nothing are by definition "amateurs", which comes from the Latin word for love, they do something for the love of it, without payment. It can be argued that in certain cases such a work of love can be superior in quality to content produced by "professionals", who only do it for the money. In an environment of zero marginal cost a "professional" might be tempted to steal or rip off successful content from somebody else and sell it to you, like for example many cloned mobile games. On the other hand, if you car had a problem with its brakes, would you prefer a professional garage to fix it, or would you go to somebody who has a sign on his yard "amateur repairing cars for free for the fun of it"? Without financial incentive, an amateur might not be willing to invest too much time and money into a creation. Thus there is a viable economic theory that some very high level content will only be created in the first place if the developer thinks he can make money out of his creation. You can make Flappy Bird for free, but not Destiny, Battlefield, Bloodborne, or Grand Theft Auto.

Last week Valve announced a scheme which would allow people making mods to sell those mods on Steam. Most people reacted very badly to the idea, because they believe that they will have to pay to get the exactly same mods that previously were free. And of course the freeloaders made an immediate appearance, trying to sell mods based on the free work of others. But what about the long run? Isn't it likely that at some point a mod will be made *because* the modder was confident in his ability to sell it, a work he wouldn't have undertaken for free? Up to now very few mods end up being better than the original game. But with a mod economy in the future we might very well see a lot more high quality mods.

What I find curious about game economics is that there appears to be a large population that is always defending the status quo, even if that status quo is contradictory. Thus among the people complaining most loudly that mods are best if they remain free we also find the same people who previously argued that games are better if they are not for free.

Mods are considered a free way to make the core -paid- game better: more content, added longevity, better graphics, new levels, ... you choose.

What if every little addition costs something? It instantly becomes annoying, because you can't simply download the addon, test it and trash it if you didn't enjoy the content.

I'd love to test that cool Shadow Scale set (which valve is currently showcasing on the new workshop page) but... I am not going to pay 1,39€ for an armor set in a single-player game tat costs 14€. 5 cents, maybe. I don't know. But 1,39? No.

This is in my opinion what people don't like. Overpriced hats.
High quality free software seems to be a vanishing phenomenon across the board. On Microsoft Windows the open source movement once held out the promise of a wide selection of tools and utilities which were often better than paid equivalents but in recent years a lot of free software has become monetised in some fashion often with awful spyware attached. In the mobile world high quality free apps have gotten buried under the flood of freeware clones and advert laden crapware.

To be honest I am saddened to see one of the last bastions of doing stuff just for the love of it now also becoming tainted by filty luchre but I suspect there is an inevitability to this. Programmers grow up, leave college and take on financial commitments. On the optimistic front the market will hopefully sort out those mods which are worth paying for from those which are not (the majority I suspect) leading to an overall increase in quality and the best modders getting a just reward for their efforts. I am concerned it will lead to the end of free and open sharing of ideas and content though.
Amateurs can be good at the fun stuff, but they'll also walk when it's not fun.

There is nothing stopping Tobold from going, eh, I'm bored, and slowing down or quitting altogether. In a sense that is the difference with a professional. They keep working when it's not fun or convenient I'd imagine that there's a lot of stuff like that (to my mind all of it) in developing a mod.

I think it would be great for the talented modern to be able to make money at it. If they can make a living doing that, they won't have to turn their attention and talent away to something else to eat. The gaming community gets better mods because now the best modders can mod for a living and keep doing it even when the power bill needs to be paid.

There's a lot knee-jerk reactions in the gaming community, presumably because it's the internet and also because odds are a lot of the more vocal gamers are broke teens and 20 somethings who don't want to pay an extra $10 for that free mod and also have never had to make a choice between their hobby and their careers.
Payment comes with obligations. I expect support, patches, compatability with the game and other mods and recourse should something break due to the mod in the future. If I buy a product, this is the basic expectation, and if they can't provide that they don't deserve a single penny up front.

Notably, Dota and tf2 items are user submitted but fixed and moderated by valve, with a guarantee to fix a broken skin or hat should it break.
There are several more legitimate reasons why paid mods are bad.

You alluded to the most evident one. It is very difficult to find decent mobile games through the sea of blatant copies, money grabs, and crap. Already, this seems the direction paid mods are headed, and I see no reason you could predict anything else.

There is also an issue with how the payment is distributed, which is decided by the core game developer. Currently, 45% goes to the game developer, 30% goes to Valve, and 25% goes to the mod creator.

Probably the most problematic issue is that because mod creators are independent of the actual game developers, every game patch basically breaks all mods. Some modders will eventually fix the mod, but it is extremely common for mods to be abandoned (with the last update claiming "fixed for the current patch," which was true 3 patches ago when it was posted). No one is worked up about this for mods that were free (just uninstall and find a new one), but you could easily wind up paying for a mod that breaks soon after and is never fixed, or never worked at all.
Aren't the problems you are describing the inherent problems of a free product? When a mod is A) paid for, and B) both Valve and the developer of the original game got a cut, wouldn't it be natural to expect that stuff like updates gets better?

Yet, in just one day, a popular mod developer made more on the Skyrim paid workshop than he made in all the years he asked for donations.


IMO, life is too short to make a product to sell to lawyers or gamers.

Problems definitely do exist, but the mod market functions differently than other markets. It basically HAS to be free to function how it does. You spend a good amount of time simply trying mods out, some of which are good, but some of which don't deliver on what they promise (and this is on free mods, imagine someone trying to take your money), some of which will stop working after some patch (and may or may not eventually be fixed), and some of which never work at all.

This is fine, because since they are free it costs you nothing to just try stuff out, and the community has lowered expectations. It doesn't matter that most of them won't deliver on their promises, because you paid nothing, and you can just experiment until you find the ones that do.

This is all theoretical now anyway, Valve has reversed their policy and fully refunded every mod purchase.
I don't use mods much, because I don;t want to waste my time experimenting with stuff that likely doesn't work or is poorly designed. I will usually only try mods that have lots of good community reviews. (If it's a map for a wargame or something really self-contained, of course I will be less rigid.)

In the current climate, there's little prospect of finding an easy way to a better mode, so i guess they will be staying as they are. Indeed, it might be argued that the degenerate marketing models encouraged by the mobile market are dragging all games in the direction of mods.

Remember, there is one person who can still sell mods - the publisher. Perhaps, now that the ice has been broken, some publishers will dip a finger in the concept of curated mods as IAP. Of course they have been wary of it in the past largely due to legal risks.

No, because the mod goes through the developer without valve or bethesda performing a quality control check. So the updates are at the behest of whoever is doing the mod with no guarantees of support. I'm not sure why the developer deserves a cut at all, let alone a 40 percent one. When I got the game is when the developer got its cut, if it wants a cut, it needs to be doing something other than giving permission.

Like I said before, Dota and tf2 are clear contrasts in that user submitted stuff is cleaned up by valve and fixed if a patch breaks it.
"I have enjoyed hours of effort from other people for free - I will find fault with my supply of free being taken from me because why on earth would I have the charity within me to accept me missing out on something for free? I am gamer"
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