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Valve has just started the PC games race to zero

By on March 3, 2014
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Valve has just announced that developers will now be in charge of their own pricing on Steam. They can run sales, offer discounts and promote their games without talking a Valve representative. This is the beginning of PC games prices drifting downwards, with an endpoint of zero. Here’s why.

The marginal cost argument

In Chapter 3 of The Curve, I set out the economic arguments for why a digital product will tend towards a cost of zero over time. Broadly put, an economist named Joseph Bertrand established that, all things being equal, in a competitive market, the cost of a product falls over time to the marginal cost, driven predominantly by competition.

Let’s imagine a shoe factory supplying shoes to one small town. Leaving aside the cost of the factory, the land and the equipment, the cost to make a pair of shoes is $1. Every extra pair of shoes made costs an extra dollar. Factory A decides to sell its shoes at $5.

An entrepreneur sees that there is an opportunity to make $4 for every $1 he invests in a pair of shoes. He borrows money to build a factory and buy equipment to make shoes. He wants to make sure that he gets some market share, so he decides to sell his shoes for $4, meaning that he only makes $3. His shoes are now 20% cheaper than his rivals. He gets all the customers. So Factory A cuts its prices to stay competitive to $3. The entrepreneur custs his prices to $2 and so on and so on until, according to Bertrand Competition, prices stabilise when they can no longer afford to make one pair of shoes, the marginal cost, in this case, $1.

In the world of digital, the marginal cost is zero, or as close to zero as makes no odds. On iOS and Android, the AppStores swallow the distribution bandwidth costs, which means that the marginal cost is actually zero for many developers. In the world of PC, this is not yet true, but bandwidth costs keep falling, and the marginal cost, if not zero, is pretty small.

There is an issue with Bertrand Competition: it excludes the impact of marketing; it assumes that one pair of shoes is as good as another pair of shoes; it doesn’t factor in the cost of comparison, or the cost of switching, all of which are real. But what it does say is that the thing that drives the cost of products down, particularly in the case of digital products with low marginal costs, is competition, not piracy. And by removing itself from the pricing process on Steam, Valve has just made its platform hyper-competitive.

The hardware argument

Free is the dominant price point on mobile platforms. Why? Because the two main players don’t care much about making money from the sale of software, or even In-App Purchases (IAPs).

The Appstore is less than 1% of Apple’s revenue. Apple has become one of the most valuable companies in the world on the strength of making high-margin, well-designed, highly-desirable hardware. One of the things that makes its hardware desirable is that there are over a million apps available for the platform, many of them for free, that extend the capabilities of the phone in a way that Apple might never have imagined. Steve Jobs wanted to enable the free price point for mobile apps because he hypothesised that having a competitive market of entrepreneurs striving to make their software work on his device would drive the desirability of his hardware. Boy, was he right.

Google didn’t create Android to sell software. It built Android to create an economic moat. Google was dominant in the desktop and makes the majority of its revenue from advertising. It identified the very real threat that Internet usage and search was going to migrate to mobile and it needed to ensure that it did not get left behind. Android was its response.

In the case of both iOS and Android, keeping prices high for software would have been in direct opposition to the core businesses of Apple (hardware) and Google (search-related advertising). The only reason that ebooks are not yet free is that Amazon’s core business is retail, not hardware. If Amazon believed it could make more money selling Kindles than selling ebooks, ebooks would be free. Console games are not going free because the business model of Sony and Microsoft is to subsidise the hardware and make their money back on the software. In this model, subsidising the hardware and taking the risk of free-upfront games seems too high for incumbents.

Which brings me to Steam. The Steambox is a competitor to consoles, created by Valve. It is supposed to provide an out-of-the-box PC gaming experience, although it struggles to compete on either price or on marketing with the consoles. It doesn’t seem as if Steam is keen to subsidise the costs of the box, not to the level that Microsoft and Sony are.

But what if Steam’s USP was thousands or tens of thousands of games for free? What if it competed with consoles by taking the Steve Jobs’ approach of an open platform with the price set by developers (and hence likely to tend to free, according to Bertrand Competition). What if Steam *wants* the PC market to go to free because it will be a powerful competitive weapon as it battles the console manufacturers.

Then I would expect Steam to open Steam to many more developers (Greenlight), to make games available fast (Early Access) and to give the market control over pricing (developers set their own sales).

Which looks just like what is happening.

The new business model argument


But Steam is a retailer, you might cry. It makes its money from the 30% cut it takes from selling games in digital boxes.

Sort of.

Steam is also a successful free-to-play channel. It was an early experimenter with the business model in the West, with Team Fortress 2 staying consistently at the top of its own F2P charts. SuperDataResearch estimated that Team Fortress 2 made $139 million

in In-App Purchases in 2013 alone. Other games like Stronghold Kingdoms from independent UK studio Firefly have been consistently high in Steam’s F2P charts. (Disclaimer: I have worked on Stronghold Kingdoms since its inception).

Valve makes money from the In-App Purchases discovered through its platform. It also makes money from selling games upfront. If customers are becoming more comfortable downloading games for free than paying for them upfront, Valve can make money either way.

That doesn’t mean I expect Valve to stop supporting paid games, in the same way that I don’t expect Apple or Google to do so. I do mean that Valve seems likely to open the market to more developers, to more experimentation and to more price points to see what works for consumers and businesses alike.

It is my expectation that free, driven by the iron laws of competition, economics and technology, will win out.

That may be a meaningful competitive advantage as Valve tries to make the Steambox work.

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:
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  • trans

    Did you even read the article?

  • Differentiation is the way to compete with free. If you can’t compete with free then you just flat out can’t compete. Games are not a commodity market.

  • trans

    The intent is to discourage game makers from using “this is free” to get you in the door when in truth it is not free. If all games had to cost at least a dollar, then it would at least even the playing field some. As it stands, game makers are feeling the pressure to move to in-app purchases b/c there is no way to compete against “free”.

  • The larger distribution channels bring with them a measure of discoverability. There is also a not insignificant segment of the PC games market that won’t bother with a game if its not on steam.

  • Why is that necessary when you could have the same effect personally if you could just filter for games that cost at least $1? Does a free game being on steam really hurt you in any way if you can filter away all the free games?

  • I think you are arguing with people who don’t understand the concept of marginal cost.

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  • I don’t agree. Competition is the driver, not piracy.

  • bib

    No , excessive piracy and idiotic unmaintainable business plans are to blame.

    Its really that simple , you can tell yourself its a digital revolution but tbh its just its easier to pirate than to buy mostly that is the problem.

  • Biib

    This whole article is just wrong on so many levels.

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  • HoneyGoat

    2nd sentence ‘Without talking [to] a Valve rep.’

    Forgot the ‘to’

  • furthur

    you accidentally a word in the second sentence fyi

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  • Krid O’Caign

    There’s theory, and there’s practice.
    In theory, there are plenty of ways to monetize a game which are perfectly ethical and socially acceptable.
    In practice, the “free” products that flood the app stores are by and large engaging in behavior that ranges from unethical to abhorrent and illegal.

    Lets take micro-transactions for example: You have some products which do not have a strong negative effect on consumers, such as Team Fortress 2.
    In the case of TF2 the impact of micro-transactions on the customers is complex, but can be summarized as being a wash overall, with no net ethical concerns or damage to goodwill beyond that common to any attempt at novel monetization.
    Even so, there are many consumers who have abandoned the product as a result. Their complaints depress public opinion of Valve’s, which in turn decreases the average goodwill held for the company. Valve has turned a significant profit, but as a result every gamble they take has a marginally higher risk.
    The lower goodwill means customers will be less likely to assume risks, and by way of example this means the upcoming steambox will have slightly less early adopter demand. I don’t expect this effect is going to have more than a minor effect, but there is a real cost here.

    Then you have Dead Space 3, where micro-transactions were not handled unethically, but were a very poor fit for the product. This resulted in significant lost sales – if a game is being retailed at standard AAA pricing then attempting to further monetize it will inevitably be seen as attempting to double-dip in the customer’s wallet. Customers saw it as anti-consumer behavior, and how the customers see things is only metric for anti-consumer behavior that’s worth using.

    … And then there’s Smurf’s Village. The game which exploited the interplay of young children and Apple’s credential cacheing to rack up untold thousands of dollars in illegitimate purchases. That was extraordinarily both unethical and anti-consumer, violated the laws of many jurisdictions, and prompted changes to both how app stores function and the laws regarding their use.
    While notable in scope and brand recognition, the targeting of young children and attempts to avoid informed consent continue to plague the micro-transaction F2P model and carved a space in consumer opinions of the system.

    Selling ads seems benign on the surface, except that targeted ads are significantly more profitable and thus tracking and spying on users is strongly encouraged. This ties in to the larger issue of datamining and user privacy. Unlike with micro-transactions there is no direct financial trail between the consumer and the developer, which makes tracking bad actors and holding them accountable significantly more difficult.

    A some F2P apps have monetized by using the consumer’s CPU/GPU for computation (typically Bitcoins), but the users are almost never informed of this. There is potential here, but transparency is required and informed consent requires the user understand to what they are agreeing. These sorts of methods are generally too technical for users to understand, which would inhibit adoption.

    Then there are F2P monetization methods which are outright illegal – identity theft, silent phone calls to 900 numbers, etc… This isn’t a baseless concern; these are monetization tactics which are occasionally found in F2P shovelware, typically when walled gardens decide to lower the barrier to entry.
    This has the effect of reducing demand for F2P products.

    Piracy is your product competing with itself. I would say that is quite relevant to competition.

  • I love that response. It’s marvellous.

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  • anon

    I was going to re-post the whole thing, but decided to just link to his Twitter comment instead.

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  • trans

    Lower, yes. None, no. I would much prefer they require all games to cost at least $1.

  • I sort of agree but: the AppStore? Pretty well every MMO since The Old Republic? The vast browser-based gaming business in Asia?

  • I reject your assertion that F2P models are unethical and anti-consumer, even with the “often” modifier, which means I struggle to agree with your eloquent argument.

    I agree with your piracy point, but as I said, the real threat to paid prices is competition, not piracy.

  • When a platform lets anything on, there will be a lot is stuff on there that isn’t very good. There will also be some good stuff. And lower barriers to entry is a good thing.

  • Thank you Thomas, that’s a useful addition to the debate

  • Krid O’Caign

    Gabe Newell has said that Greenlight was a huge mistake, and they intend to get rid of it. They intend to look into other ways to streamline the process of selecting titles, but Greenlight is not likely to stick around.
    It’s partly because it failed to sufficiently reduce the bottleneck at Valve’s end, but also because there have been incidents where Valve approved some Greenlight-selected games and suffered horrible PR when the games did not even come close to meeting expectations – and in the case of The War Z the developers made outright fraudulent claims to sell their product.

  • Krid O’Caign

    Oh, where to begin, where to begin…

    To start off, the adage goes “When the service is free, you are the product”. Selling in-game ads is likely the least unethical way to do this and that directly degrades your customer experience, micro-transactions have a low conversion rate and a strong negative response, selling user information is poor ethics and outright illegal in some jurisdictions, etc…

    If a company wants to get into the free-to-play model then the best option is to split the product into ‘free’ and paid versions, where the paid version behaves as would be expected of a traditional purchase. It’s not a perfect solution – it doesn’t work so well when paired with micro-transactions, for example – but it minimizes conflict with customers.

    Which leads into the second point: For digital downloads of games nearly the entire price of a product is goodwill. Games are purely a luxury good, and as such purchasing decisions regarding them are made on an emotional basis. You are selling a game, but what the consumer is buying the enjoyment they will get out of it. If the customer doesn’t think buying your game will bring them enjoyment then they will not purchase your game. Every lost sale is lost here.

    Continuing this point, DRM does not work. Completely aside from being utterly ineffective at preventing piracy, DRM degrades the customers enjoyment of the product they purchased.
    When a customer can’t play one of their games while visiting a friend, their enjoyment has been degraded.
    When a customer suffers an internet service interruption and that causes their single-player experience to be halted, their enjoyment has been degraded.
    When a customer reaches their install limit and can no longer install their product, their enjoyment has been degraded.
    The developer’s goal is to maximize the customer’s enjoyment, and these sorts of things run contrary to that goal.

    But lets touch on the “does not work” portion, since that actually matters here.
    Nearly any game can be easily found online and pirated for free, sometimes even before the game is available for purchase. Yet people still buy games in spite of them being available without cost. Not just some people either, but the vast majority of people. What’s really interesting is that there does not appear to be a correlation between price and ratio of copies sold to copies pirated. However, there is a strong link between piracy and service issues.

    Gabe Newell predicted this ages ago, and the facts bear him out. Games with staggered regional releases suffer higher piracy and reduced sales in regions where the release is delayed, games with harsher DRM suffer higher piracy and reduced sales, etc…

    This is all because the price people are willing to pay is determined by how much goodwill value the customer assesses the game *and* its developer are worth. If the developer has a poor relationship with their customers then their sales will suffer at any possible price point; if your relationship with customers is negative enough then customers will assess a positive value to NOT doing business with you.

    However, the inverse is also true. If you build a positive relationship with your customers then they will start assessing the act of giving you money as itself having a positive value, as well as providing aid where they can.

    This manifests in interesting phenomena – if a game is available for purchase from one source without DRM and others with, you’ll often find that the versions with DRM will be pirated while the DRM-free release can only be downloaded through legitimate channels.

    To tie things back together:
    F2P models are often unethical or anti-consumer.
    Games purchases are a function of goodwill.
    There is value in giving money to good companies, and keeping it away from bad companies.

    There may be a ‘gold rush’ for F2P on Steam, but that’ll be a cash grab.
    The developers customers (should) want to do business with won’t jump on the bandwagon, and ultimately prices will remain largely unchanged.

    As I quoted at the beginning, “When the service is free, you are the product”. People will happily spend $5 to not be a pound of meat, and $15 to avoid a butcher.

  • Noah Yetter

    It’s not a competitive market, in the technical sense in which you are using that phrase. There is substantial product differentiation. Entry is not free. Information is not perfect P will have some tendency to approach MC but we have no reason to believe it will ever equal it in this market.

  • anon

    The theory that price = marginal cost does not apply here for two reasons. First, it only applies for undistinguishable goods, which videogames most certainly are not. For example, if I am *only* be willing to play Team Fortress 2, then there is zero competition, so Valve can charge monopoly pricing on the game.

    Second, since videogame development is ongoing (new games, patches, new content, etc.), it is a mistake to think of it as a sunk cost. In the long term, the ongoing development cost should actually be considered as part of the marginal cost.

    One final point is that by your argument, in app purchases should also have zero cost (since their marginal cost is truly zero). Clearly this is not the case. It just happens to be the case that the the in game purchases business model can be more successful than the upfront cost business model. In my mind this is more because of psychology than economics, since users are willing to repeatedly pay $5 for new content, which adds up to much more than the traditional $50 upfront cost of buying a videogame.

  • Seven

    Valve isn’t trying to compete with XBOne or PS4, it’s trying to compete against AppleTV. GabeN explicitly stated as much in interviews and at panels. It’s a completely different market segment.

  • Javier Wilcox

    I don’t undesrstand why indie devs don’t sell their games directly. bitcoin seems to be the easiest way of doing this. Whatever…. If you want to give Bitcoin a try without spending money, have a look at

  • trans

    If this is true and consequently Steam becomes like the Android games market –full of “free” games w/ in-app purchases, then I for one will never bother with it and I do not think it will ever be able to compete with the other consoles b/c it will be full of garbage.

  • Thomas

    I think the whole MMO business describes the situation pretty well.

    There are dozens of MMOs not able to differentiate themselves from the competion. The result ist that they all become F2P. This is the race to the bottom. If you cannot differentiate yourself from the competion, you eventually have to give away your game for free, or you even have to pay people to play it, because the people have limited time and there are hundreds of more or less equal games.

    BUT if you can differentiate (GTA, Star Citizen, Minecraft, Ultima Online (back in the days), you can charge (nearly) every price. There were people wasting hundreds on Ultima Online every month, because it was unique and people pledged hundreds for Star Citizen, because it is currently unique.

    What do we learn from this? Never invest in a third generation me too game, that cannot differentiate itself from the competion.
    Money is made with unique games and superior second generation clones (Starcraft, World of Warcaraft) and the occasional gap in the marketplace (Star Citizen, Baldurs Gate). The last one are basically clones of orginals, but the orignals are outdated . When Baldurs Gate came out tradional fantasy RPGs were dead for years. The same applies for Star Citizen and Space Simulations.

    There exist similar gaps even today. Try to get a Risk (bordgame) like stratey game for any platform. They do not exist. Try to get a polished 4X (Master of Orion) game with modern user interface. There is only Civilisation.

  • No I’m not.

  • Jim Smith

    listen, it is clear you have no clue what you are talking about. Have prices on iTunes gone up or down?

    Rest my case. thanks for playing.

    No, Steam has not just started the PC games race to zero. The blog post is completely incorrect and logically flawed. If you can’t see that, you are too low IQ to continue the discussion.

  • If you are genuinely arguing that the emergence of digital distribution has not seen the price of music trend towards free over the last 20 years, I am done with this dialogue.

  • Off the top of my head, markets that have trended towards zero because the product has a zero marginal cost (or failing that, a low price because the marginal cost is so close to zero that someone is prepared to swallow that cost)
    – news
    – encyclopedias
    – music
    – mobile games
    – email
    – cloud storage
    – video hosting (although admittedly that is more of a media play on advertising)
    – sports reporting
    – classified advertising (although some is still paid for)
    – the A-Z (or more generally: atlases)
    – Rolodex/filofax

  • Jim Smith

    just as there is ongoing costs in software. Again, drifting way off topic and to where i have no idea since the entire blog is totally off the mark.

    There is ongoing cost for software. the price of something is no solely determined by production. Look at the Beatles catalog. The costs of making all those records have been recouped who knows how many times. By your and this bloggers logic they should be free because there is no “additional unit” cost. Totally illogical and demonstratively false.

  • no most markets will tend towards non-zero costs because there is a cost inherent in producing an additional unit for sale.

  • Jim Smith

    no kidding, but the whole premise is stupid. _Any_ market with competition will trend toward paying you take the product. See how dumb that sounds and how pointless it is. The price will _never_ be zero. Again, my brain hurts from reading such a poorly written blog post.

  • It’s pretty basic economics. if someone else can absorb the up front costs and produce a comparable product for cheaper then they can do so to undercut their competition as long as they make more then it costs to produce an additional unit. As long as the cost of an additional unit is $0 they are going to tend TOWARDS zero. There are other factors such as marketing and branding and other differentiation which keep prices from hitting zero but that is where economic pressure is pushing the prices.

  • ET3D

    My understanding is that developers were always able to set their prices, it’s just that now Valve lets them discount the game at will, i.e., create their own sales. This has already happened outside Steam, with bundles selling some games with Steam keys for well under $1. These games continued to sell at their normal price later.

  • You equate a higher initial price with a higher profit. I don’t.

  • Jim Smith

    but the price is not zero. the whole premise of this blog story is false. The sole factor in selling a good or service is not a lower price. If there is value in a product, people will pay a premium for it. Make a good game, and it will command a higher price (more profit) than a crappy game.

  • I’d also point out that free does not mean “makes no revenue”. Not by a
    long way. If that is what you think, you are not ready for the

  • I’m not sure that is right. What happens if some developers figure out a way to make money from a free price point. e.g. cross-promotion. IAP. Advertising. Something else I haven’t thought of yet.

    The idea that the value of something is the cost+20% struggles to work in the digital economy.

  • Jim Smith

    this is the stupidest thing i have ever read. How does letting developers set their own prices mean the prices are going to race to zero? Here in the real world, developers want to earn a living. you know do things like eat, have a roof over their head, clothes on their backs. A game developer is no different than any other sell of goods and services..they will price their products at a point where they can make money or they will be out of business.

  • imadous

    I don’t think this will bring the prices to zero at all, games for PC are nothing to compare to phone games, both markets are very different, it’s true that this will probably make it a bit more competitive but i think that will only hit the crappy games, the publishers and developers that put lot of effort on their games will always stand by them and try to get the best profit they can from them, and people will always want to spend their times with better, more fun and well developed games, by playing TF2 i don’t feel one bit a need for every multiplayer shooter game to be the same (A F2P)

    one thing that i think can be really bad is if Valve opens the steam doors to any crappy game that exist in the planet, if that happens .. yes, that would take the customer confidence down and make him always feel unsafe from buying games and tend to go for the F2P module.

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  • LC

    I think your comparison of Valve’s Steam with Apple’s (and Google’s) business model for their app market makes only little sense. The big difference between Valve and Apple is that the former sells software and the latter sells hardware.
    For Apple the app market is only an incentive for people to buy an iPhone (for a high price) since that’s how they make money. Can we transer that to Valve? I don’t think so since Valve lives from the cut they get from each game sold through Steam. Like Mircosoft or Sony they don’t earn money with hardware.
    So why do they even want Steamboxes and what’s their purpose? Their purpose is to gain more users and keep the ones they already have. That makes them – like you said – a direct competitor to the consoles. But the problem with your conclusion that free pricing would lead to almost zero prices for games on Steam is that this would also lead to a serious harm of Valve’s own income. It’s the 30% cut of each game which is the very basis of their busines modell. Ingame items in free-to-play game are only a minor income so far compared to the regular pricing model.
    So why this decision? Valve’s strategy with Steam always was to gain new customers by offering superior services. Offering an easy way to distribute patches was the initial reason to develop the platform in the first place and little has changed here over the years. But in the last years the prices of games have become more and more important. Valve noticed that and they began their sales strategy. But sales only reflect the development of prices over time and not the initial prices. Release prices were always a sole decision of the publisher. So nothing is changed here. The only thing changed is the control of the prices over time to even better adjust the prices to demand. That caters to developers and publishers but not necessarily to Valve themselves as a strategy to bring down prices even sooner and therefore to raise the pressure on traditional consoles. It’s more or less another step in bringing customers and creators closer together without the need of Valve to control every major aspect of their transactions. The step makes Steam a lot more like a financial platform which just handles the exchange of money vs. goods and takes its cut by doing so. It’s a decision to strengthen the price-demand model which not necessarily leads to lower prices, especially since the video game market seems to be more lead by target pricing for new games in general. Valve knows that and so they try to convince people to use their platform (no matter if on PC or Steamboxes, Valve don’t care about that) by offering good services and fair prices over time. That’s the real reason of their strategy. Of course that again strengthens their competitive stance in the market but imo by a far less extend than you seem to predict. 😉

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  • What’s different is that up until now, Steam has curated it. It has limited what is on the platform, and it has limited the times when a sale can run to manage its storefront.

    That is changing. It is not yet Appstore-open, but with Greenlight opening access and this move changing pricing, it is a big step towards it.

    Of course, to get Greenlit, you need to mobilise a tribe. And if you can mobilise a tribe, you can probably get them to pay for your game. So Greenlight itself is not enough to drive the race to free. You need a much lighter curation system to make that happen. And it is possible that Steam won’t let that happen.

    My question is whether that is in Valve’s best interest. I think it might be in their best interests to have an enormous amount of high quality free content on their platform.

  • The thing that has changed is not free-to-play. What changed is that digital distribution changed the marginal cost from expensive (printing a copy, shipping a copy, retailing a copy, the working capital required to have a million copies in existence before you have sold any of them) to cheap (If someone wants a game, just send them a link).

    Gamers may have had “tradition”. But tradition has a habit of changing in the face of fundamental change.

  • Interesting. What do you think it is competing with?

  • Turo Orvel

    “The Steambox is a competitor to consoles”

    It’s not.

  • Ian Aspden

    Real difference between developer based market when you compared market A (mobile) to market b (steam), the main difference is what we expecting to pay.

    As a gamer, my standard expectation for a brand new game from triple A developer/publisher, let’s say Ubi Soft for another Assassin’s Creed game, I’m expecting to pay 59 at the most to 49 which seems to be the norm.

    While the typical game price point on android/iphone is in a flux of .99 to 5.99 even sometimes hitting 10, it’s a wild jump between selections both in the amount of games being published, the actual content of the game and the huge differences between free to play and paid (the gameplay ALONE is different from the addition of micro transitions).

    Steam generated a mind set for gamers when it comes to price points, just like consoles have done since Nintendo/Famicom launched. The next big hype is mostly that in itself, a lot of talk about what ifs while tradition has already told us what will be expected from a structure that has been around longer than the hyped product in itself.

  • what2

    Developers have already been able to make their games as cheap as they want, or even free. How is this substantially different, from a race to zero perspective?

  • I think you are making a flawed judgment. Sure, when there are a million apps, there are a lot of clones, and Steam has not yet opened the door to anything (Greenlight is still curated, after all).

    I am confident that in any digital market, entrepreneurs will find a way to make money despite making the entry price zero. That means people focusing on existing ways of doing business will have to figure out ways to stand out. But I see the price falling to zero for many games on Steam. (Given the success of Team Fortress 2 and many other F2P games on Steam, I would say that the path is already clear)

  • Saria

    I’d be hard pressed to reach the point where I’d compare the AppStore and flappy bird to Steam and Dark Souls. Most things in the AppStore, to my knowledge, is rather interchangeable in the regard that you’ll find a clone just around the corner, with a few noticable exceptions.

    Furthermore, just because we see a decline in gamesprices (though I’d rather say we’ve seen a diversification) it could just as well be due to overpricing of certain titles from the start, and the market adjusting to a new digital form that leaves room for a lot more than just the standard old $60 game.

    Sorry, It’s a talkworthy thought, but far from a certainty.

  • I completely accept that Bertrand Competition at the extreme is an economist’s construct that assumes perfect competition and interchangeable goods.

    So it would be nice to think that this won’t happen in games.

    I would point you in the direction of the AppStore, where Bertrand Competition has been in full force since 2009. Theoretically the games are not interchangeable. Theoretically, Bertrand Competition shouldn’t work. And clearly there are games (Minecraft, Football Manager, Plague Inc) that have done well as paid games.

    But you would be hard pushed not to argue that the price trend has been to zero, just as Bertrand Competition predicts.

  • Saria

    Sorry, but comparing marginal costs with this logic requires that the products are interchangeable. A loaf of bread works in comparison to a loaf of bread made in the same way, since they’ll be interchangeable and you won’t know any difference. Games, on the other hand, are all different. You could drag it along this axis in some aspect, but the pure market example that you paint here is simply wrong.

  • Looks like we are in agreement. My point is not that everyone SHOULD be free: if your customers will stay pay, that’s marvellous. My point is that competition will start to drive the price for many games down to zero. That means that if you are charging anything at all, you are starting at a disadvantage, and you need to have some strategy to overcome that (a brand; a tribe of committed followers; an attempt to harness the indie sensibilities; etc,)

    And thank you for your kind words 🙂

  • Hi Nicholas,

    I am not really disagreeing with the definition of marginal cost. I am personally just not so sure traditional manufacturing definitions strictly apply to video games, software and other digital content. Yes I agree, if you are a well-funded developer that can absorb the cost of development easily then the model works and you can compete at zero marginal cost. BUT the majority of developers cannot easily absorb development costs without considerable external funding or an existing successful product.

    The crucial business decision is whether you choose to follow a free-to-play business model where you give away your product to maximise downloads knowing that a proportion of those customers will enjoy it enough to pay. Or whether you charge a small amount per download to cover your costs and then sell additional IAP to customers that really enjoy it.

    As you point out, Steam now offers publishers/developers the choice to follow whatever business model they want. That is great news for everyone, as we can all try different approaches to see what works.

    By the way, I do love your columns. They always stimulate thoughts and promote healthy debate. Well done. Keep it up.

  • Hello Simon,

    I’m sorry to say it, but you are wrong. The marginal cost indeed does not take into account the fixed costs of designing and developing the software. That is its very definition.

    The point of marginal cost is that it is the cost to make one more of a thing. It explicitly excludes factory costs, design costs, setup costs and so on. The point being that once someone has paid for those things (not earned revenue to cover it, but paid for it), it is a sunk cost. The customer doesn’t care about Factory A or Factory B: they just want (in this theoretical model) to get a pair of shoes for the best price. And they will trend to zero.

    That’s my point about competition. It doesn’t matter about the upfront £500k from the point of view of competitive pricing. It matters very much for the individual developer, but better funded competitors, or ones with a different revenue strategy, will compete towards the marginal cost. Which is zero.

  • I slightly disagree that the marginal cost is zero for games, as that does not take into account the cost of designing and developing the software. In your example, part of the cost of each shoe would have been in designing the shoe in the first place and making the last/tools to mass produce it. Yes, this proportion of the cost per unit will diminish as the number of units sold go up, but the design/development cost will never be zero. So, if your game costs £500k to develop and you generate 500k downloads then you will need to generate an average of £1 from every user (ARPU). Therefore, in this case the marginal cost is £1 not zero. So offering the game for free puts you in a loss position initially until you get enough people buying your IAP. To get an ARPU of £1 with a conversion rate of 2% would mean each paying user would need to spend £50. If you don’t get 500k downloads or get to £1 for your ARPU, then the game will make a loss. This is a big risk for most small developers.

  • Byron

    I’d say Amazon are more of a service provider rather than a pure retailer, many of the retail products they sell are not shipped directly from Amazon and their prime package now includes shipping, video streaming and an ebook lending library. Their hardware pushes people to become prime members which gives them a continued revenue stream. People are pushed further up the curve when they want to watch/read/listen to the newest releases, which aren’t immediately available as part of the all you can eat package.