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Shoes are not shoes: a debate about free-to-play

By on April 3, 2014
FlickrCC Thomas Geiregger
FlickrCC Thomas Geiregger
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This is an email exchange between Nicholas Lovell and Chris Bateman following the guest post ‘Games are not shoes‘.

Nicholas Lovell

Games are not shoes. But nor, for that matter, are shoes.

My point is that if the price that is expected falls to zero, it will be hard to maintain premium price points. Some people will prefer to have premium price points, and that’s fine. By the expectation is of falling prices, not rising prices.

And that makes it difficult to compete.

Chris Bateman

I of course agree that shoes are not shoes… I kind of snuck this point into my post, actually, by referring to Nike. 🙂

I think the big unknown here is how much premium pricing continues to hold onto its popularity in the face of competition from free-to-play, and in this space we don’t actually have as much of a precedent as we would need to make a firm prediction. I agree that we should have no expectation of rising prices – but there hasn’t been much of a tradition of rising prices in retail games. I don’t think there’s enough information to predict falling prices in the premium product space either. AAA’s thrive on high development budget, high marketing spend – like premium shoes – and competition ‘from below’ is not guaranteed to affect this. On the basis of other markets, it probably won’t.

It’s going to be an interesting few years, that’s for sure!

Nicholas Lovell

You don’t think that music hasn’t trended downwards yet? I am nervous about both television and books too.

Chris Bateman

Ha – the difference between music and AAA games is that the former was charging a fortune for material that did not cost a fortune to develop! 🙂 Records were always a boondoggle and now they’ve been forced to confront that. Ebooks have not hurt book sales as far as I can tell – in fact, my book royalties have more than doubled since ebook versions of the print books appeared, although bricks and mortar retail of books has been hurt of course. Less certain about television shows as I’ve studied this market a lot less.

I suppose if you want to talk about ‘mean price’ of games, I would agree to a downward trend because more and more smaller scale products are going to be coming in at the bottom. But for premium priced games, the biggest challenge isn’t direct competition from free-to-play but the danger of losing bricks-and-mortar retailers and all the advantages that gives in terms of marketing and promotion.

Nicholas Lovell

I think I have caught you in a logical fallacy: your first sentence suggests that the price of a product is based on how much it costs to make. Bertrand competition argues that is irrelevant. More broadly, we have seen plenty of evidence that a plaintive “but it costs us lots to make” is irrelevant when your competitors figure out how to give away something of approaching similar quality for much cheaper, or for free.

So you are arguing that “because AAA games are expensive, they will remain premium priced”. I am arguing “because we are training consumers to expect free+variable pricing, that is what AAA will need to adapt to. There will be some substantial minority of gamers who hold out for premium, AAA pay-once experiences, but I am convinced that there are not enough of them to maintain the current publishing ecosystem, and probably not the console ecosystem either.

My (slightly ad hominem) take: you are analysing the situation from a incumbent perspective, while I am analysing it from the outsider’s. Of course, we might both suffer from our biases. But I think mine is more right than yours 🙂

Chris Bateman

No, it’s not that I think price is based on cost to make, it’s that premium entertainment products such as films, cars, and AAA games operate in a space where marketing spend is the prime factor. The cost of development for a AAA game sets the scale for its marketing spend – just as the cost of production for a tent-pole movie sets a pace that other blockbuster movies must match. Bertrand competition (at least as much as I understand this term – not an economist!) just doesn’t apply in spaces where marketing is the primary cost. Just ask Nike! 🙂

Perhaps the primary difference between us is that you seem to be taking all commercial games as constituting one single market, whereas I have recently begun to doubt the validity of this simplification. The whole concept of a ‘market’ presumes equality of competition – such that, for instance, tampons are not presumed to compete with razor blades. But the games market just isn’t a single market any more – it’s actually an extremely complex space where many different player needs are being met. You can still model it as a single market – but predictions made on this basis have limited validity.

I work on player studies as one of my primary forms of research – what I’ve been discovering recently is that free-to-play isn’t edging out AAA significantly among the gamer hobbyists… the relationship is closer to the one between movies and television. Having free movies to watch on television does not stop people going to the movies – having free games does not stop players (who want the AAA experience) buying AAA games. Additionally, for many gamer hobbyists (especially those who favour indie games), the free-to-play model – because it affects the play experience of the game – isn’t even on the table. It’s tampons to razor blades for such players. But – crucially – they still buy AAA as well as indie titles…

The crux of our disagreement is actually over consoles: you believe (as I did not very long ago) that the free-to-play business model is going to break the console market wide open, since the margins in this space were already incredibly tight (looks like Sony and Microsoft are both losing money overall, although Nintendo is still profitable on the back of its handhelds). I do agree that if free-to-play took out the consoles, your scenario would win out. But it turns out that controllers are one of the most important aspects of a console’s value proposition (‘the interface is the game’), and so general purpose devices do not eliminate the commercial viability of dedicated consoles, they just provide a channel for reaching the wider (“casual”/mass market) audience. It is solely this latter audience that now get the majority of their play experience via free-to-play – although they certainly generate some impressive revenues by doing so, simply because the mass market outnumbers the hobbyists by an order of magnitude!

If your claim is that free-to-play is going to marginalize the gamer hobbyist markets, well, from an investment perspective this has already happened. But the revenues (if not the profit margins) in the console space are still significant and I now doubt this space is going away any time soon, partly because of the effectiveness of the AAA hype machine, and partly because of the importance of the dedicated controller. So you say ‘besieged, will fall’, I say ‘enclave, will persist.’

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