Open Source Strategy Research Blog

Updating business strategy for a world embracing open source

Wednesday, August 25, 2010

Let’s Talk About This – A Gamer View Examining Game Purchasing Business Models

In a recent article, Cory Ledesma, the creative director for wrestling games at THQ, is quoted as saying that the used video game market “cheats developers”.  He goes on to say,

“[L]oyal fans who are interested in buying the game first-hand are more important.   I don’t think we really care whether used game buyers are upset because new game buyers get everything. So if used game buyers are upset they don’t get the online feature set I don’t really have much sympathy for them. We hope people understand that when the game’s bought used we get cheated.”

The Internet exploded in furor, as this comment comes in the context of numerous companies moving into the used video game market, including Best Buy and Walmart, and new games often costing $60 or more.

Mike Krahulik, of Penny Arcade, known to many as Gabe, who was recently included in Time Magazine‘s list of Top 100 most influential people, tweeted and posted comments on his blog on the topic, which has proved to be quite controversial.  He issued a call to gamers and developers to give their take on the issue.  Below is my response to Gabe on the subject:

Hi Gabe,

I’m a gamer (over 20 years).  I’m also a PhD researcher in business strategy, and am really interested in gaming (and open source) business models (which share many commonalities).  Here’s my take:

The problem (for me) with your comment,

“not saying you can’t buy used stuff. just when you buy a used game you
are not supporting developers. If that matters to you is your choice.”

is that it implies that the gamer, alone, is responsible for the revenue source that developers have.  It says to gamers that there is one way to support developers because of “industry forces”, and if you don’t like it, you’re not supporting them.  It binds the customer to the business model that game developers have chosen, and makes customers responsible for the shortfalls of this business model, of which the used game market is one.

It is similar to the RIAA insisting that there is only one way to support “artists”, and that if you want to do things differently, you are putting artists in the poor house.  There are lots of analyses that have shown that the decline in music sales is not the “fault” of music lovers, but rather a problem with the evolution of the music industry’s business model.

It’s the same here.  If used game sales are a problem for developers in the gaming industry, like the Internet is a problem for RIAA-era media companies, then it’s time to change the business model so that developers can get more revenue.  This change isn’t the responsibility of gamers.  It’s the responsibility of the developers. Developers have to come up with creative an innovative ways to offer direct value to gamers in a way that cuts out the obsolete parts of the business value chain.

As a gamer, I don’t feel it’s my responsibility to pay $60+ for a new game to “support developers” because, as in the music industry, the lion’s share of that money is going to intermediaries (Best Buy, distributors, production companies, EA, etc.). And I have no control over this value chain, or the business model that set it up.  For every $60 I spend on a new game, the “developers” maybe get a couple of dollars.  This model comes from an era when creating, producing and distributing games (like music in the 20s-30s) was prohibitively expensive. This is no longer the case.

I *will* spend $20 on a new indie game on Steam, knowing that a much larger share of that money goes to the developers. This example shows how new vs used misses the point, and that it’s more about the value-generation channels.  It explains the success of Popcap Games, and others who are changing their business model away from what the mega-studios are doing, to accommodate the change in attitude and definition of value. I could refine this much further, but for brevity’s sake let’s keep it at that.

In summary, I think this is more about business models, value chains, and adapting to evolving definitions of value than it is about “new vs used”.  Gamers by and large want to support developers, but restricting them to a single way of doing that makes no sense, and doesn’t help anyone but the corporate giants. We can come up with smarter business models than that for the game industry.  If we can do it for open source products that are often available at no cost (legally!)–this is my area of expertise–we can figure it out for game companies too.  And I’d like to help. I think research needs to be done in this area to figure out how to overcome the growing pains of the gaming ecosystem.

posted by Mekki at 1:37 pm  

1 Comment »

  1. Crossposted from Facebook:

    You’re absolutely right that the problem is the business model. The great thing is that, just like the music industry before it, the model is slowly shifting. Digital download is already going strong on the PC and is starting to pick up steam (see what I did there?) on consoles as well. Pretty soon, a PS3 or XBox owner will be able to pick up big budget triple-A titles over the wire.

    Problem is, this deals the used game market an even greater wound than the “value added content” model of free DLC for new purchases. You can’t re-sell a digital copy of a game. You can’t buy one off your friend on the cheap. Also, since digital copies don’t really tend to be any cheaper than their retail counterparts, this is a more restrictive model (with respect to the used game market) with very little gains to the consumer.

    Even microtransactions won’t solve the problem. Again, you have purchased content that simply cannot be resold.

    No matter the business model you put in place, the sale of a used game is a sale that will never make it back to the original investors. If a used sale is replacing what would otherwise be a new purchase, then all of the original investors are losing potential revenue. Perhaps developers could incorporate more restrictive DRM and charge “transfer fees,” but something tells me that gamers would hate that even more…

    Maybe one day we will be rid of all the middle-men and developers can deliver content to consumers cheap enough that we won’t bemoan the loss of resale-ability (like your $20 indie games), but that day is not really in sight. The truth is that the “$20 indie game” model may never fit the huge triple-A blockbuster game and, as much as I love indie games, a world without big-budget titles just wouldn’t satisfy.

    Adding an incentive to purchase new is, in my opinion, a totally acceptable stop-gap solution. Ledesma is totally correct in saying that used game buyers are not his customers. Why should developers pander to people who are not (even in a round-about fashion) paying them? Ultimately, consumers have the same choice as they have with respect to Collector’s Edition versions of games: They can have the core experience for $x, or they can have something a little more for $(x+20). Except that you’ll never save $20 buying a game used.

    Comment by Michael — August 25, 2010 @ 2:45 pm

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