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If you sell access to content, start looking for a new business

By on June 30, 2011
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This post originally appeared in the Digital Content Monetization newsletter and is reproduced by kind permission. You can find further posts under the DCM tag.

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Earlier this week, I gave a lecture to 25 students on a game design course. I asked them to put their hands up if they had bought a CD this year. Not one person put up their hand.

I have a two year old son. We don’t own any DVDs of Bob the Builder or Chuggington, because we can get access to enough of his favourite programme of the moment via the BBC iPlayer.

I consider myself a core gamer (at least I did until I had the aformentioned son), but I haven’t bought a single game so far this year. Instead I’ve been playing freemium games such as Stronghold Kingdoms, Cityville and Millionaire City.

These datapoints, while anecdotal, are symptomatic of a fundamental change sweeping through all the media industries. As we transition from atoms (CDS, DVDs, books) to bits (MP3s, streamed movies, ebooks), the cost of making one more copy falls to zero. The original costs of content creation remain broadly the same, but distribution costs trend towards zero.

That means that charging a premium – and possibly any price at all – for that content becomes harder.

image
Stronghold Kingdoms – a free-to-play core game

It is harder because brands realise that when distribution costs are zero, they can fund and seed content that is high quality and far-reaching. Barclaycard invested a six figure sum, perhaps as much as €250,000, into the creation of Waterslide Extreme, which took the premise of their television advertisements and turned it into an iPhone game. Over 10 million downloads later, the brand is happy and millions of consumers have had a high-quality, free experience.

It is harder because companies are taking advantage of close-to-free distribution to develop new business models. Zynga has a secondary market valuation of $7 billion based on a business model of allowing users to play their games entirely for free, but with the opportunity to spend money on virtual goods or faster progress in the game. ngMoco and Playfish, both of which sold for around $400  million last year, allow users to play their games for free on the iPhone and Facebook respectively. These companies are developing new business models predicated on giving basic access to their content for free.

It is harder because once DRM is broken (which it always will be), pirates can distribute your content for free.

In short, when people with motivations different from yours – whether they be pirates, competitors with different business models or brands, push their prices down to zero – it will be very difficult to compete.

It won’t be possible to charge for basic access to content

So much so that, on a ten year view, I don’t believe it will be possible to charge for basic access to content at all. We will all expect to have access to all the music, all the books, all the television and all the games that we could ever want. Sure, someone could invest in content and tell me that I can’t have it unless I pay. But there will be so many alternatives, both legal and illegal, that the model of paying access will be close to impossible to sustain.

On the other hand, content creators will still need to be paid, and there has never been a better time to be a content creator. I am much less positive about the future of content distributors such as publishers though. In my next column, I will look at the things that consumers will pay for if they won’t pay for access. Things like self-expression, status, emotional connections and achievement. The trick will be working out how to harness the power of the Internet to distribute your content for free and still find a way to persuade consumers to pay you enough to pay for its creation in the first place.

Now excuse me, I got a Kindle for my birthday yesterday, and I’m off to download Great Expectations and The Wind in the Willows.

For nothing.

You can read more about this topic in GAMESbrief Unplugged: Volume 1, available as free pdf, paperback, hardback or signed, numbered, limited edition.

About Nicholas Lovell

Nicholas is the founder of Gamesbrief, a blog dedicated to the business of games. It aims to be informative, authoritative and above all helpful to developers grappling with business strategy. He is the author of a growing list of books about making money in the games industry and other digital media, including How to Publish a Game and Design Rules for Free-to-Play Games, and Penguin-published title The Curve: thecurveonline.com
  • Arby

    I don’t disagree with the fundamental point of this short article, but I laughed at one of the opening lines:
    “I asked them to put their hands up if they had bought a CD this year. Not one person put up their hand.”
    The year is 2012 and you were in front of a group of people who had to be mostly in their early 20’s, maybe even late teens. You may as well have asked them if they had bought VHS tapes!!

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  • Mesak1

    Fair enough. But you are eliminating let’s say “subscribtion services”entirely leaving only virtual goods to be the drive channel? I say that at least for my platform it works 50-50 now…

  • I don’t believe that the answer is advertising-led. It is about finding a way to make those of your customers that love what you do to pay more.

  • I don’t agree that it is a poor example. It is an example of how different businesses are using different business models to offer the content for free. For the BBC, it is a mandatory levy on all British viewers. For YouTube it’s advertising and cross-subsidy from the core search business. For others it is advertising, or a mechanism of drawing users into the top of a sales funnel.

  • The BBC iPlayer was a poor example given that it is provided via TV Licensing…

  • Mesak1

    Nick, i am sure that the model sounds fantastic – you
    pay nothing for playing and buy goods, content costs nothing etc. But someone
    has to pay for it this way or another. Traffic, servers, marketing, staff –
    this all costs a hell lot. I recently had a look at OpenFeint platform that was
    acquired for 100M – many free mobile games – their revenues stood on 200K/year
    with operational losses of 6M. Zynga could barely make any money had it agreed
    to 30% revshare with facebook.

    Although i agree with you about direction, i am not entirely
    sure that advertising is the only power behind it….

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  • Anonymous

    Nick: you make some good points, but I think you still underestimate the degree to which retail is important to the marketing drive that makes a mega-franchise like Call of Duty operate. Now I agree that if you’re coming into the market you cannot operate on that scale, but as long as *anyone* is operating at that scale, retail remains important – and kids (in particular) must own the must-have-game because everyone “must” have it, and the sign they must have it is queues on the day of launch. 🙂 The number of games able to operate in this space is falling, but the revenues in the space continue to rise. 

    I don’t think the retail of console games in the blockbuster market is that close to an end. I just think you’d be a fool to invest in that space directly. Distribution costs are still only roughly 10% of budget for these products – if you think of that cost as a kind of marketing, it’s trivial that you could also distribute for a much lower cost because your sales figures (for a blockbuster game, that is, and only for such a game) are raised way more than the ~10% saving you might make by missing out of retail. 

    Retail pays for itself if you already have a hit. For the rest of us, there are indeed other, far more sensible options…

    All the best!

    Chris.

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