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Nintendo is going to be the first major platform to embrace F2P. Here’s why.

By on September 11, 2013
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Nintendo has decided to adopt the agency model for its self-publishing e-store. Microsoft has confirmed that it will be using the wholesale model, and I believe that Sony is doing the same. If that is the case, Nintendo seems likely to be the first platform to fully embrace F2P.

I attended the Indie Game Collective How To event last week, where organisers Byron Atkinson-Jones and Andy Payne gathered over 100 indie developers in the offices of UKIE in London to talk about making games. Even more impressively, they got attendees from Microsoft, Sony and Nintendo, plus Amazon, to talk about the way indies can work on their platforms. It was the first time that Nintendo had spoken publicly in Europe about how indie game developers can get on their platform.

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It was fascinating, but the thing that grabbed my attention was the pricing model.

There are two basic different models: wholesale and agency. The difference is a little arcane, but so important that an alleged attempt by five book publishers to force Amazon to shift from wholesale to agency pricing by colluding with Apple has recently resulted in a major Department of Justice court case in the US, a number of settlements and ongoing litigation between the US government and Apple. The whole story is available in a short ebook entitled The Battle of $9.99 by Andrew Richard Albanese and is fascinating reading. Really, it is.

Here’s the basic difference:

  • The wholesale model is how Amazon currently operates. Penguin, the publisher of my book The Curve, sets the wholesale price. That is how much Amazon pays it for every book sold. Amazon can then choose how much it wants to sell the book for. It can sell it at a price above the wholesale price and make a profit. It can sell it below the wholesale price and make a loss. It is up to Amazon, as the retailer, to determine how much it wants to sell a product for. This is protected by law (I think) and is designed to encourage competition amongst retailers for the benefit of consumers but has potential disadvantages, such as allowing a retailer to sell popular frontlist hardbacks at massive discounts (for example, the heavy discounting that JK Rowling’s latest book, The Casual Vacancy, saw on Amazon or in supermarkets) which leads some to worry that the value of the product is being permanently reduced in the eyes of consumers for short-term game by retailers with little interest in the long-term health of their suppliers.
  • The agency model is how the AppStore currently operates. The publisher/developer decides how much they want to sell their product for. Apple sets certain price points that are acceptable and takes a 30 per cent. cut. Broadly, the publisher can decide to put the price wherever it likes, and Apple has no pricing control. In practice, it does have some influence, but publishers have reasonably free reign.

Price wars can still be a feature of the agency model. Earlier this year, Amazon got into a price war with Sony over certain books in the bestseller lists. Sony was trying to lure readers to its Nook device with heavy discounts, offering new books such as Chris Ewan’s Safe House or established ones, such as Yann Martel’s Life of Pi, for 20p. Amazon matched the offer. Because both organisations operated on the wholesale model, the publishers still got the wholesale price. I am not privy to their agreements, but I would guess that the wholesale price was £3 or more, which means that both Sony and Amazon were losing a whopping £2.80 per copy. The publishers were theoretically happy (because they sold bucketloads of books, but still got paid a reasonable price for them) but they are also worried about the long term prices on books that discounts like these, run for the benefit of the retailer, not the publisher, will have.

With the agency model, the publishers can set the price. However, in a competitive environment, that often drives the price downwards, not upwards. When the AppStore first launched with an agency model, publishers like Electronic Arts and Sega tried to push iOS titles for $9.99 or more. Mobile publishers pushed cheap sudoku games for $7.99, used as they were to the gatekept environment of mobile operator decks and the ability to shift any old rubbish provided they had schmoozed the appropriate operator employee to ensure good placement.

Suddenly indie developers came along, offering better Sudoku games for half the price. At the same time, publishers realised that chart position was dependent on volume, not value (this was in the days before the Top Grossing chart) and started dropping their prices. EA launched a 99c price war to dominate the charts around the time of Christmas 2009 and the race to 99c was done.

From 99c, there was only place to go: free. Apple wanted to encourage free apps because it makes its money from hardware. Only around 1% of its revenue comes from the AppStore, and unlike most businesses which make low margins on its hardware, Apple makes fantastically high margins on its hardware. The primary reason that Apple supports the AppStore is to drive hardware sales, not to make money from its 30% revenue share.

So games went free, and free-to-play emerged as the dominant business model that both maximised the number of users playing a game while also generating sufficient revenue to justify its development in the first place, as well as ongoing iteration.

Which brings me back to Nintendo.

The company has announced that it will not control pricing. Other than some basic checks for obscenity and other objectionable content, it will not curate what is published in its eshop. (Asked about whether it would allow political content, such as Littleloud’s Sweatshop which was recently banned from the AppStore for being too, well, interesting, Nintendo would not say). The company will take an “industry standard revenue share”. I asked if that was 30%. Nintendo said the fee would be “industry standard”.

At one level, Nintendo has the same ambitions as Apple: it has historically made a profit on its hardware, and it needs a bigger installed base. A well-stocked eShop full of high quality content would help. On the other hand, it has a track record of wanting to curate its content. Iwata-san is on record saying that he does not believe that you can make a quality game unless you charge a high price for it (although I suspect that statement was made from ignorance of the F2P model, and Nintendo may be changing its mind on that). Nintendo may be nervous about a backlash over F2P games and In-App Purchases in general on its platform.

But the signs are there that Nintendo is more serious about F2P and IAP than its rivals. There are other signs to watch for~: Whether it makes it easy for independent developers to implement microtransactions in their games. How it manages the charts and discoverability in the eShop: the more they focus on downloads, the more likely Nintendo is to be accepting a race to the bottom in terms of price, which puts free as a likely outcome. It’s even possible that Nintendo will resist the free price point, or allow an agency model with a minimum price of, say, $2.99.

I am not deeply embedded in the Nintendo ecosystem. You may already have answers to some of the questions I have. What I can say is that I was convinced the Nintendo would be the last console manufacturer to embrace F2P or IAP, focusing instead on making great games for its niche, profitable ecosystem of Nintendo fans buying profitable hardware and a limited number of first party games.

The talk that Nintendo gave last week opened my eyes to another possibility: that Nintendo will be the leading F2P platform after Apple. I don’t think that is likely, but I now think it is a possibility.

But, as always, remember the first rule of analysis: it is a foolish analyst who forecasts what Nintendo will do.

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