State Of The Video Game Industry: The Distribution Dilemmas

 

Distribution of goods is something that every business constantly evaluates based on cost and effectiveness. In today’s connected world, a lot of traditional distribution has gone to the digital format, and video games are no exception. However one thing that separates games from other products is it’s consumer base. Gamer’s are some of the most passionate, and sometimes irrational group of customers on this planet, and understandably so. Unlike other forms of products, especially media, games create an investment of time, emotion, and interactivity that no other medium can touch. So the Gamer feels more connected to their product on a personal level than most non-gamers can understand.

This issue becomes apparent whenever the discussion of Digital Distribution vs. Disc Based Distribution comes up on any website or forum.  Especially amongst those that are collectors as part of their hobby.  Sadly though that when rational explanations and thoughts are expressed, it requires digging through pages of rants and hissy fits to find them.  So in this week’s State of the Industry, I’m going to attempt to explain why Digital Distribution is important, and why it will soon become the normal way of buying your games.  Whether we like it or not.

The Economics

EconomicsDesigner1

Economics can be boring and complicated.  But I’m going to keep it simple as to hopefully not bore you.

No other saying could be more true than “It Takes Money to Make Money”.  That is unless you like operating in debt.  Usually when I mention this, the first response I hear is “Activision makes millions off of Call of Duty every year”.  This is true, but lets not confuse sales figures with profits.  Activision loves to shout out their sales figures at every big game launch, but these numbers show only how much money the game made in sales, but not in company profits.  However those profits are the important number.  Profits pay developers salaries, they pay for the power for lights and computers so they can make the games we love, and they also cover the cost of the next game.  Often overlooked or unknown is when a game makes millions of dollars, it’s not all going into some fat cat’s pockets.  Most of this money is turned around to finance the next game, and should that next game do poorly that development team may never make another game again or get disbanded or sold.  This is also vital in subscribers when discussing MMO models, as now you have the added cost of updates, expansions, patches, and multiple servers across the world to pay for and maintain.

Profit is crucial to other factors as well.  Now we know that these developers and publishers aren’t sitting in a pool of money, how do they keep going?  That answer is investors, both public and private.  Investors are a funny bunch.  They don’t put their money into companies because they like them, they do it simply to try and turn a profit.  Being that the profit made rests solely on the success of a product, these people will pull their money and run at the first sign of failure.  And without those checks from investors, many companies would fall and not have enough money to operate, yet finance your next game you want.  These are a key component on why we are seeing so many annual releases and not many new IP’s.  Those annual releases are safe, the publishers know they can sell them.  And when they have their Investors Meetings they can easily sell the idea, and provide proof of profits to those investors and keep them paying in their money, that without, you wouldn’t be playing any games.

 

The Resources

So if you’ve made it this far congratulations.  And thank you.  While economics is the primary reason Digital Distribution is so relevant, the resources required to put out your product are nothing compared to physical means.

Digital, on a basic level, means getting a contract together with the company you want your product on, and providing that product to them.  This also means unlimited copies can be purchased, and later content can be added to the same download without the need to create, press, and ship it all again.  This also means that it may never become unavailable, or only available through second hand options.  This is great for both the developer and the gamer.  We’ve already seen many instances of online passes to attempt to circumvent second hand sales, and classic titles that are now available for current systems without the need to keep your old systems around.  But of course you can if you prefer.  And lets not leave out guaranteed Day 1 availability.

Physical distribution requires a huge network of people, trucks, fuel, boxes, discs, shipping labels, and of course the added cost of keeping a warehouse building open with possible property rental and utility costs.  And then it takes days to weeks to get to your living room.  This may seem like a minor issue, but lets say that one disc costs only $1 to get from production to your hands.  It would cost something around $500,000.00 just to ship Halo 4 for release day.  Not including replenishment shipments etc.  That’s half a million for just one title on release day that would go back to company profits if it was digital only.

 

The Third Party

This is the most controversial aspect of distribution for me.  The biggest potential of Digital Distribution is cutting out the third party.  Costs of using places like Game, Gamestop, Walmart, or even Amazon vary, but usually they take about 30% of the games sales.  So on a $60 game, we are talking about $18-$20 for holding it in inventory and selling it.  While this may not seem like much, multiply that times the 1,000’s of stores, and then multiply the amount of copies per store and the number is astronomical.  Digital company’s like Steam also take a percentage of sales, but the last figure I saw was a measly 5%.  That barely covers the wages of the employees helping you when you have a problem.

My concern with eliminating the third party however is jobs.  These are great jobs for young adults, gaming enthusiasts, college kids, or anyone just needing a job period.  Also a lot of game purchasers, especially parents who get a lot of assistance here and may or may not know otherwise how to buy games as gifts.

 

The Internet Service Provider

This is the one thing preventing all games from going 100% digital.  People are used to buying music, movies, books all digital and it doesn’t phase them.  But these media products are small in size and quick to nab.  This applies to mobile games also.  However some games, such as Battlefield 3 are about 12 Gb in size.  And if you purchased Star Wars: The Force Unleashed on PC you were greeted with a mind blowing 32 Gb download, only met in comparison by Unreal 3 and some MMO’s.

With the majority of the world having slower download speeds then the big cities, this is an issue for those who are impatient or over excited about their new game.  The other big monster in this closet is bandwidth caps.  And while not every provider uses them, it’s only a matter of time until it’s an industry standard.  With some caps as low as 5 Gb a month, Digital Distribution is near impossible to gain foothold.  But don’t blame the ISP too quickly.  Remember they need money to operate also and many business models such as Netflix, Hulu, and even online gaming are making money off of the billions of dollars the ISP invested to make them even possible.  Yet these digital media models are getting a free ride at the cost of the ISP’s efforts.  For now anyways.

 

The Conclusion

So you’ve made it this far, and again I thank you.  Whether it’s because your find this article interesting, or are just thinking I’m crazy I’ve done my job.  To get you thinking.

In today’s economy and business investment structure, Digital Distribution is a must.  It’s here to stay, and will only get bigger.  Sony, Microsoft, and Nintendo all are still figuring out the right way to make the content easy to find and use, but they are getting better.  Steam and Origin have come out with the right balance of advertising, consumer awareness, and sales to make digital the way to go on PC.  Sooner or later the consoles will figure it out too, they are close.

I imagine that soon some investors, publishers, or even developers will refuse to release a game as a physical item.  While this might upset some collectors, it’s a necessary evil to ensure the future of our favorite hobby stays relevant, accessible, and profitable.  If it fails to meet any one of those three factors, we may see a steep decline in content and quality as profits fall further.

Digital is also is a means to circumvent most piracy methods and has done it well for the most part.  While most gamers don’t see this as an issue, someone investing thousands of dollars into a company sees this as a huge concern if sales are lost.  And remember, even though a developer has a dream, and a publisher sees potential, in the end it’s the investor both private and public that makes the ultimate decision on what games get done.  Even though they don’t even know, nor care what the gamers want.

Another cool thing I’ve been seeing with Sony is digitally selling split games.  Meaning you can buy the Single Player and Multiplayer parts of the game separately at a reduced cost.  I’ve personally been waiting years for this option.

Digital Distribution is here to stay, and if anything it will continue to take a larger percentage of video game purchases over the next 5 years. Probably almost up to 75% of them.
We see gaming as a passion, a hobby, or a pastime.  To those that give us that enjoyment, it’s business first.

  • Anonymous

    Well written; enough information to grab reader’s attention on several levels. Appreciative of the way the writer took ‘points-of-view’ from developers, distributors, players, etc. Looking forward to reading more!

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