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Valve has just started the PC games race to zero
by Nicholas Lovell on 03/03/14 01:09:00 pm   Expert Blogs   Featured Blogs

The following blog post, unless otherwise noted, was written by a member of Gamasutra’s community.
The thoughts and opinions expressed are those of the writer and not Gamasutra or its parent company.

 

This post originally appeared on GAMESbrief

 

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.

 

Nicholas Lovell's latest book, The F2P Toolbox, 54 techniques to make better, more profitable games, is published on Tuesday 4th March 2014.


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Comments


Jay Anne
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Good article. It's unclear if the developers who currently live on Steam's ecosystem are willing or able to make the cultural shift towards F2P. It often means a different kind of product and community. It was interesting to see how that split evolved in mobile game developers.

Alexander Jhin
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If the current developers in Steam's ecosystem are unwilling to shift to F2P, then someone else will, at least, according to Bertrand Competition. That's the race to zero.

Ian Morrison
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How does the ability to control the timing and magnitude sales change any of this? I'm pretty sure developers have been in complete control of their pricing on steam for many years now. There are already free-to-play games on steam, $0 has already been reached.

Tyler King
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Because steam sales have become directly linked to huge spikes in sales for games. Now that developers have control over when they do sales and for how much we are going to start seeing developer A start to put his games on sale every single holiday. Plus don't forget the weekend sales and midweek sales they will start doing. Now because developer A is putting their game on sale more often developers B and C will feel the need to start doing the same thing to compete. So they start putting their games on sale more often.

Maybe their games used to cost $10, with the sale price of $5. However if the game is on sale more often than its not the real price of the game is actually $5, because everyone knows they can get it for $5 if they wait a few weeks. Now that it is established that $5 dollars is the real price of the game for the game to truly be on sale the game must now go on sale for $3.

It is true that there are already games out there for free, and its true that developers had a certain amount of control. But the race to the bottom is very real. We all watched it happen on ios, and it will happen on the pc.

That doesn't mean that one can't still make good money and charge premium prices, it just means your game really needs to be a premium experience.

Lars Doucet
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I can speak from my experience, and that of many, many other developers:

Discounts do nothing.

Discounts + PROMOTION do everything.

Just being on sale does you absolutely no good. Nobody cares, it doesn't move your numbers at all. It's all about getting promotion so that you can count on people to actually show up.

The huge sales where everybody participates are of less and less benefit, because the promotional attention is diluted. I almost don't even pay attention to the seasonal sales anymore, and devote all my attention to larger spotlight opportunities.

Leszek Szczepanski
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This.

There are already some F2P games on Steam and thankfully they are a definite minority. PC gamers in most cases require high quality products and not mobile style F2P crap. Hopefully this prediction will never work out.

BTW Apple's AppStore is nowhere close to being an "Open Platform".

Nicholas Lovell
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"High quality" and "free-to-play" don't have to be in opposition. There are plenty of high quality games. Sure, there are plenty of low quality games on mobile - that's what happens when an open platform lets a million apps on it - but there is also plenty of experimentation and fun.

But I'm not arguing about mobile I am arguing, as Tyler does above, about the trends within PC. And based on Bertrand competition and economic theories of pricing, I believe that means a trend to free.

BTW Oh yes it is

Lars Doucet
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I think the main issue in your argument, Nicholas, is that whether your theory about the iron laws of competition is correct or not, you're focusing on money/price as the chief scarce economic resource.

I think for Steam users Time is honestly a much more important factor than money these days. I've skipped over plenty of humble bundles and steam sales even though I could have them for less than a tenner b/c of my backlog. That's anecdotal evidence from my own experience, sure, but I've seen enough other people say the same that I think it's a good basis for a working hypothesis.

How does your theory change if you look at currencies[1] other than money, chiefly "is this game worth my TIME?"

[1]http://www.gamasutra.com/blogs/LarsDoucet/20120222/91144/Piracy _a
nd_the_four_currencies.php

Nicholas Lovell
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I agree entirely that time is valuable. Particularly to PC gamers. It is possible that "paid" becomes a shorthand quality for "quality". Which would mean that PC games become a Veblen good, one of those few commodities where demand increases as you increase price, rather than falling.

That would put PC games in the same category as diamonds, sportscars and luxury watches. Which is an intriguing thought :-)

Luis Guimaraes
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I was going to say that Nicholas was forgetting a very important part of the equation – the different audience on PC – but Lars already pointed it out perfectly with the Time currency example. The audience is smart.

Also, pricing is only an actual factor when two products are relatively equal, and the PC audience is savvy enough to care for the smallest differences. It takes are complete external bystander to confuse CoD and CS, FIFA and PES or SF and MK as being "the same thing". We all know they are all very different.

In the case of mobile not only there's no real difference between a time-killer and another (or an iTunes song or a cup of coffee around the corner) for the audience that doesn't really care about more than time-killing, which makes selling quality games (or what I call mobile, selling meat to vegetarians) is a though call, there's also yet the sea of clones that makes all those games not only the same in effect but literally the same in everything else.

As long as those two mobile aspects aren't meet on Steam, a race to bottom won't become a real problem anytime soon. I hope so...

Another aspect of PC that's weak on mobile is the press, hype and reviews influence on sales. Steam is not as reliant on the first page discoverability as AppStores are. That's because the Pc audience is active rather than passive. You don't have to force games down their throats and push Ads up their face for them to find out about your existence, and yet still if you aren't free they might just buy a hotdog instead.

If you exist and you're good, even if you try to hide they'll find you.

They're also good at guesstimating the quality of a game just by looking at it. Looking up a trailer or a Let's Play is already the path of least resistence for PC, not only in Money, but also Time as it's cheaper to stream a video than to install a game.

Nicholas Lovell
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I think you are optimistic.

You sound like the audiophile arguing that consumers will prefer analogue vinyl to digital CDs to compressed MP3s. The market still has space for the audiophile, but the mass market is heavily attracted by price and convenience.

Nicholas Lovell
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I'm perturbed that we are talking like 1980s marketing professionals talkng about the 4 Ps: price, product, promotion and placement

You need a great product at an attractive price that people have heard about that is merchandised well in the retail environment.

Free is only one weapon in your arsenal. A powerful one, and one that is easy to implement compared to the others, but only one.

Luis Guimaraes
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"You sound like the audiophile arguing that consumers will prefer analogue vinyl to digital CDs to compressed MP3s."

I believe that's an analogy more fitting to the "Retail vs. Downloadable" discussion. What I' talking about is not MP3 or K7s, but musical genres.

I doubt many fans of Country, Jazz, Metal or House will leave what they like behind because suddenly Brazilian Funk is cheaper.

Or that the tiny tasteless hamburguer franchise on the corner is a treat to the Brazilian Steakhouse down the street (yes, I'm counter-balancing the music example).

Maybe I'm being optimistic and overestimating the audience, but I prefer to think I'm not.

Nicholas Lovell
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I see no reason why free models with variable pricing can't be applied to every genre.

Lars Doucet
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Nick: what's your response to my experience with sales and discounts on Steam? It seems to closely parallel just about everyone else I've talked to.

http://www.gamasutra.com/blogs/LarsDoucet/20131216/206916/The_Ste
gosaurus_Tail_when_quotThe_Long_Tailquot_grows_spikes.php

Based on my results, I would *never* put my game on discount unless I could also guarantee it would get some front page promotion. The discount by itself is worthless unless combined with increased attention, and iOS has already shown us that competing on price alone is a fool's game.

Nicholas Lovell
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It's a tragedy of the commons. If everyone believes what you believe, then prices will stay high. The community will self-police to ensure that everyone benefits.

If one person goes "hey, they can stay at $15, but if I drop to $1, I can haz all the bucks", and that works for them, it starts driving the price down.

Of course, if people start realising that a free entry point and a variable pricing strategy also makes more money and gets them more players, that's another driver.

I might be wrong. It might not happen. But that would go against what economics, competition and experience suggests will happen. I'm expecting history to repeat itself.

Kenneth Blaney
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You mention but then gloss over product differentiation as a factor. Considering that your thesis is that prices will fall to zero, this is a non-trivial issue. As such, plenty of games on Steam launch and sell at a full retail price despite so many games that are much cheaper or even free.

If we treat product differentiation as a negligible factor, Steam (and most of the AAA industry) would have never existed in the first place as no one would pay money for "Half Life 2" when NewGrounds could give them virtually unlimited amounts of games completely for free.

Nicholas Lovell
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Actually, I don't. Right now, product differentation really matters. If everyone tacitly colludes to keep prices high, they will stay high. If only a few indies drive the price to zero, prices will stay high.

But if big corporations start figuring out how to get a bigger audience and make the same money by going free, that is what they will do. Then fewer and fewer people will be left behind trying to charge when others are free.

So the issue is not about "indie F2P crap" and "proper games from proper developers", but how do you keep charging high prices when Activision's games are free, when Square Enix's games are free, when Electronic Arts games are free.

I believe in product differentiation. A lot. But if some companies are only competing on product differentiation, while others are competing on product differentiation AND price, my money is on the latter.

Lars Doucet
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Ah! So you're saying if the big guys go all in, they have the power to fundamentally disrupt market pricing?

Nicholas Lovell
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Yes. So, for example, we are seeing Activision paving the way to take World of Warcraft free by introducing IAP into its game. According to SuperDataResearch, WoW made $213 million from IAP in 2013, which isn't bad given that is a subscription game. It's #7 in the list, ahead of Star Wars The Old Republic.

I'm not saying that Activision is about to go fully F2P with WoW. I am saying that they are in a better position to manage that transition than most. If they suddenly decided they could get a bigger audience and make life much harder for the competition by going F2P, I think they would.

Right now, they don't need to. Some of their competitors, on the other hand, do need the added oomph of price to go alongside a great product.

(Superdata Research data: http://venturebeat.com/2014/01/15/chinas-crossfire-is-bigger-than
-league-of-legends-and-world-of-tanks/ )

Kenneth Blaney
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Although you possibly cut it for brevity and you expounded on why you think product differentiation won't create a minimal holding level (the way a materials cost does in the shoe example) in an earlier version, this article offers no insight as to why the the market wouldn't find a non-zero holding level. (Hence my suggestion that it feels glossed over.) Further, despite the plethora of free games available on the PC well before now, why hasn't the PC market already gone significantly cheaper.

As for how one can continue to charge their normal prices while big games go increasingly F2P, such as the Activision example: I'm going to pass that one off to Jon Blow's "The Medium is the Message" video. Tons of product differentiation going on there with vastly different audience expectations going in. It isn't just a matter of "F2P = crap", it is a matter of "F2P =/= Pay up front" and the types of people who want "pay up front" experiences aren't going to get them from F2P games for a number of design reasons.

The whole point I'm making here is that I really don't see much evidence that the cut throat competition suggested by Bertrand practically applies to video games since so much of the market thrives on product differentiation, expanding the size of the market and, as suggested elsewhere, Veblen goods. (Consider that Veblen goods are pretty much the sole source of the excitement around "crowd funding" and "early access" trends.)

Nicholas Lovell
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I'm a big believer in Veblen goods. They feature heavily in The Curve. The heart of my message is that people don't value content. They value how content makes them feel in a social context, amplified by social media. To my mind, many companies can deliver on this by being free with a variable pricing model, rather than paid with a fixed pricing model.

Kenneth Blaney
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There is a certain truth to that, especially in terms of the "pay-to-win" subgenre (using the term loosely). That is, purchasing something to be able to dominate free players is essentially purchasing social status. Phrased "variable pricing model" I am much more likely to agree with it as this could mean a number of things and not just the much more rigid F2P definition. In many cases I believe variable pricing allows developers to generate more income than fixed prices due to the fact that many of the biggest fans probably would pay more for the title than the normal price. (For example, imagine if the next Call of Duty sold a limited 50k prerelease copies for $300 each a month early. They would probably sell out fairly quickly because some people would pay $300 for Call of Duty, even though most wouldn't.)

I apologize if I came off as hostile at all. This felt a little more doom and gloom initially, and I am generally skeptical of anyone claiming that the end times are coming. I see now that, generally, that isn't what you are saying.

Aiden Eades
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Honestly I'll be quite glad to see Valve enter the livingroom space. It's about time somebody shook up the console pricing strategy (as far as games are concerned anyway) I say this based on a personal experience, few years back went to buy a game, thought. "I'll see how much it is on PSN" PSN price was at £49.99, the launch price in stoers was £39.99 at the time stores had it for £27.99 as the game was over a year old. Just seemed silly.

R. Hunter Gough
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I think your argument works on mobile, because most mobile players are looking for "something to kill time", and will take something to kill time for free over something to kill time for $5.

On Steam, however, I would argue that a large number of players are looking for "Dark Souls 2", and they're going to happily pay $60 for Dark Souls 2 (or $15 if they're patient and wait for it to go on sale). They're not going to go to Steam in search of Dark Souls 2 and end up getting a random freemium time-waster instead.

Going back to mobile, if I specifically want Minecraft or Device 6 or 868-HACK, it's more likely that I'm going to buy the game I'm looking for rather than picking up a random freemium game. But I suspect mobile players are more often looking for "anything new" rather than a specific game.

That said, there are already freemium games on Steam, and I'm sure that there are already Steam players who browse Steam looking for "anything new" and pick up some freemium games because they're less of a risk than paid games. But those freemium games and their players aren't a threat to Dark Souls 2 because they're operating on a whole different kind of "interest" and appeal to a different kind of customer. (The same person can be both kinds of customer at different times depending on their mood, but a person is still unlikely to switch on the fly from "gotta have Dark Souls 2" to "wanna waste some time with a free / super-cheap game".)

Is it likely that the number of players playing freemium and bargain-basement games on Steam will eclipse the number of players playing "full-priced" games, as they have on mobile? Sure.

Will this effect the sales of Dark Souls 2? Nope. The PERCENTAGE of Steam players who want Dark Souls 2 will go down, but I think the actual NUMBER of players who want Dark Souls 2 will stay the same (or possibly increase, if any of those new players attracted to Steam by freemium games are the hypothetical magical unicorns we keep hearing about who "convert" to paid players).

I would also argue that the number of players who pay for mobile games would be exactly the same if freemium never existed; it just seems like there are so few of them because they're drowned out by the overwhelming majority of freemium players. The percentage is miniscule, but the number is large enough that Simogo and Zach Gage and a few others can make a living selling mobile games.

(Obviously I'm using "Dark Souls 2" here as the stock full-priced game because it's the full-priced game I'm most excited about. You're welcome to substitute any other full-priced game instead.)

Nicholas Lovell
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But what if your choice is between Diablo 4 for free and Dark Souls 2 for $40. And what if the majority of publishers start going to free because they figure out how to make more money that way. Sure, there will be some holdouts.

But you assume f2p = crap, while I am confident it will keep getting better and better and better.

Nicholas Lovell
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But what if your choice is between Diablo 4 for free and Dark Souls 2 for $40. And what if the majority of publishers start going to free because they figure out how to make more money that way. Sure, there will be some holdouts.

But you assume f2p = crap, while I am confident it will keep getting better and better and better.

Amir Barak
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depends how you define better; so far, statistically, F2P = Crap is pretty much correct.

Vin St John
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I think what you are saying is true more often on steam than on mobile, for sure, but don't assume it applies to the majority of steam purchases. If that were true, featured spots on Steam wouldn't have the huge impact that they currently do, because people wouldn't be easily swayed by whatever was put in front of them as 'new and cheap.'

Nicholas Lovell
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Statistically, maybe. But that's what happens when you eliminate gatekeepers, and allow 100x, 1000x, 10,000x as many games to be published as could be made under the gatekeeper model.

And I'm all in favour of that

Robert Green
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In this context it seems like the bigger move Valve made was making DOTA2 a F2P game, and in doing so, showing that a high-budget PC game can be F2P, make a lot of money and not annoy the players. I certainly wouldn't want to be a competitor making a similar game right now.

What interests me is how the games that don't work well with F2P will survive this process. Imagine a game like the recently announced Arkham Knight - single player only, [relatively] linear narrative, length probably under 20 hours for most players. How can you do that with a F2P model, and if you can't, how many people would be willing to pay full price for it in a market flooded with free offerings?

Amir Barak
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@Nicholas
I think you misunderstood how statistics work there.
Let's even take the extreme case where a whopping 5% of F2P games are good (they're not) that leaves us with 90% of crap. That's a lot of crap which statistically proves that F2P games are crap. These percentages don't change with the number of F2P games made, it just means that the crap pile gets bigger.

Adam Bishop
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"If Amazon believed it could make more money selling Kindles than selling ebooks, ebooks would be free."

Self-published authors, who make up a huge chunk of Amazon's e-book sales, already have complete control over pricing. And they have found that it's more profitable to sell their books at a lower price than big publishing houses would sell them at. But that price is still well above zero. Why do you believe that would change if Amazon wanted it to? What would be the incentive for these authors - many of whom make good money selling cheaper but not free books - to release their books for free instead? How would they make enough money to continue being able to write for a living?

Nicholas Pp
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You can look to the music industry for an 'answer' to this question. Even though that answer might be, we don't know yet. 15 years ago, people bought albums. 10 years ago, people bought singles through iTunes. Today, people pay for spotify and pandora subscriptions, and payment plans for artists really haven't been solidified in a method that is going to work long term.

Also, an interesting economics point on why publishers and authors price differently. Generally, an author gets royalties on sales and doesn't have to worry about logistics. Their marginal cost is near 0. The publisher selling the same item has to worry about distribution costs, so their marginal cost is not 0. But as distribution costs reach near 0, it will be in both the author and the publisher's interest to drive prices down. (This of course assumes perfect competition, which is difficult to achieve with all of the shady dealings that go on behind the scenes at the moment)

Nathan Mates
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Games, being interactive, have the ability to upsell consumers ingame -- as most (all?) F2P games have taken advantage of. Books haven't managed to do that; they can sell sequels, but not IAPs (in-app purchases).

Should books manage to regularly include IAPs, then I expect initial price to aim towards zero as well for newer titles.

Nicholas Lovell
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Tracy Hickman writes science fiction trilogies. Last year he distributed 2.5 million books. About 600,000 were paid.

You can either see that as 1.9m lost sales, or as a web business with a free offering and a 25% conversion rate.

Adam Bishop
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Could you clarify what you mean by "distributed"? All of the books I can find on his web site are listed as following the standard pay-up-front model.

Nicholas Lovell
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Apologies. I meant Michael R Hicks, author of the In Her Name trilogies.

It's late, and I've just been explaining the Curve to 60 musicians. And musicians can drink :-)

Also, because I've looked it up, I can confirm I misremembered the numbers. The conversion rate was right but not the absolute numbers.

From The Curve, page 48:
"In 2012, Hicks estimated that he gave away 250,000 ebooks for free. He also sold 90,000 ebooks at prices ranging from $4 to $25. A person stuck on predigital thinking might look at those numbers as representing a quarter of a million units of lost sales, costing Hicks between $1 million and $6.25 million. A web business person would think that Hicks had a conversion rate of 36 per cent., which looks pretty good."

Ron Dippold
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Steam has nothing on the Bundles! Every day I get several emails informing me where I can buy Desura/Steam/DL games for < $1 each. And they've been doing this for years.

In a minimum price theory I should be buying them all, (and nobody should ever buy the game on Steam when they can just get it in a Bundle), but I pass on 95% of them because most of the games have a negative value when time and annoyance is considered. Indeed, there are plenty of 'free' games on Steam people can't be bothered with. A game has a mental value, and if it gets down to that I buy - some are $60, some are < $0.

In practice, the favored strategy seems to be a minor pre-sale to encourage launch window sales, then full price and slowly ramp that down with the occasional sale during publicity windows to eventually hit everyone's mental value for the game without hopefully leaving too much money on the table. This is what Valve (who are very data driven) thinks is the maximum return, or every pay game would launch at 99 cents (or $9.99 with 90% sale).

As a side note, watch the Steam Sales Tracker for an extended time: http://steamdb.info/sales/ It's fascinating. There are old games that do exist at a near permanent 80-90% sale (Trine, Shadowgrounds, Hydrophobia) for months at a time. These games are never on the best seller lists unless they come with a front page promotion. Nobody notices.

I think the big issue is assuming the rational consumer exists, in any industry. If S/He did in any numbers everyone would be playing 3 year old games on last gen consoles. The games industry, like others, relies on their consumers being deeply irrational and impulse driven (and I don't exclude myself, with my currently near useless next gen consoles). Advertising wouldn't work without it!

Tyler King
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A lot of these comments remind me of listening to Nintendo execs a couple of years ago scoffing at apple saying "They will in no way impact us!". The reality of it is that the app store plus steam sales affect everyone. There will always be premium games that can be bought for premium prices. However the app store generation of gamers is growing and playing games on different platforms, and there is a good chance they will take their spending habits with them.

Again I'm not saying that there will come a day when there will be no games that can be purchased for $60. What I am saying is that within the next 5 years there is probably going to be hundreds of developers more than there are now who are making pc games, if not thousands. The entry point is much lower now than it was 5 years ago. 5 years from now it will be even lower. The reason why all of the smaller developers go to mobile is the potential to make money where there is no barrier to entry. When there is no barrier to entry for Steam you will see just as many developers making games for the PC.

Out of all of these developers a few of them are bound to release some amazing, even if they are simple or small, games for a low price. Once they have success and make some serious cash off a game they sold for $3 or $1, there is going to be a wave of developers who will start releasing games for $1. There will be enough success off $1 games that the expectation will eventually come to the point to where games can be quality and still sold for $1. So gamers will start to expect more for less.

Will this hurt the AAA studio that is releasing games for $60? Not as much as they will probably be affected more so by a studio releasing Diablo 4 for free as Nicholas said. However Indie studios will be hit as more will be expected for less. Everyone says pc is different and immune to such problems, but when the app store first started everyone was selling games for $5-$10. It won't change over night, but it will change.

Thomas Happ
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It seems like once people realize PC games are all $0 with in-app purchases, while console games are higher-priced but higher-quality, they would abandon the PC for consoles and handhelds. Or whatever exists. And so that's what we develop for, instead of PC. I just can't see there being a future world where there is no demand for paid game experiences.

Bob Johnson
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F2P games were already being introduced on Steam right?!??

There was nothing stopping anyone from making a F2P game afaik. The F2P forces were already in play.

And the big guys could probably already run sales on their games when they wanted to. They just had to contact Valve.

Thus these new tools are about Valve reducing their costs to run the online store and about the smaller developers who also wanted the same ability to run sales.

So I'm not sure this changes anything. It seems like there was already a trend towards cheaper games and free games with in-app purchases. I would assume many were already working on F2P game models just like Valve is.

In the end, a developer still needs to make money. Whether you give your game away for free and make it up on the back end somehow or charge up front, you still need to eat unless it isn't your day job.

And consumers still only have so much time to play games. And there are only so many truly great games out there.

Simon Ludgate
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I want to put aside the steam discounts issue momentarily and re-discuss the economic competition issue.

The original shoe manufacturer is making shoes for $1, selling them for $5, and making $4 profit. Lets assume annual sales of 1 million. That means that the total market is paying $5 million and his company has profits of $4 million. He also has a profit margin of 80%.

The second shoe company sees a lucrative market, but what, exactly, do they see? Surely, they don't see the possibility that THEY could ALSO be making $4 million in profits. At best, they see themselves taking half that market, $2 million, right?

Assume they enter the market, and also assume they charge less in order to build their market segment. They charge $4, a profit of $3, and gain market share. Lets slice at the 50/50 mark: Original company is now making $2 million profits on 500,000 sales at $5, and new company is making $1.5 million profits on 500,000 sales at $4, both with a cost of $1 a shoe.

First of all, right at this slice, the original company WILL NOT lower its price yet. They're still making more profit, it's still in their interest to stay where they are. Original company still has 50% market share. How much more market share will they get by lowing prices? Well, if they match price, none. They'd have to undercut. If they lower their price to $3, they could theoretically recapture the WHOLE market, but then they'd be making $2 million profit ($2 profit per shoe, total market share of 1 million), which is just what they're making now, so it isn't a good move.

KEY POINT: as a profit-maximizing company, you take actions that will maximize your profits. You only lower price if lowering price increases profits.

The second company now faces a choice: they have 50% of the market. If they stay at their lower price point, they could potentially get the whole market, and increase their profits from $1.5 mil to $3 mil. But then they know the original company will act. On the other hand, they could chose to RAISE their price to $5, stay with 50% of the market, and both companies will make $2 million. The optimal choice would be to RAISE price to $5, returning the situation for the consumer to the original $5 monopoly.

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There are two exceptions where the price would go down.

First, company 2 could be able to make its shoes cheaper. Maybe it uses slave labour, so it only costs $0.50 per shoe. If they cut their prices to $0.99 a shoe, they could still make profit per shoe, but the original company couldn't. The original company would lose all market share and be driven out of business. Then the new company could raise its prices up as high as it wanted, making way more profits. However, this may run afoul of anti-competitive laws.

Second, the market size could increase with the arrival of a new manufacturer. Perhaps, in addition to the 1 million people willing to buy shoes at $5, there's a million MORE only willing to pay $4. In this case, the second company would have 1.5 million customers at $4 and the original company would have 0.5 million customers at $5 at the 50/50 slash. Now it's $2 million to $4.5 million. The original company would cut its prices down to match to share in this new market, and both would end up with 1 million customers at $4 a shoe, for $3 million profits each.

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Apply these lessons to video games:

Major assumption: video game producers are in it for the profits, the same way these theoretical shoe companies are.

That could be totally wrong.

What if the second shoe company doesn't see a lucrative $4 million profit industry, what if they have a pathological passion about shoes and they just want everyone to feel as cozy in their footwear as they are? What if they just want to shod the world, and they don't care about prices? What if they sell their shoes AT COST, at $1, not to undercut the competition, but simply because they don't need the profits?

One of the major driving forces lowering video game prices isn't profit-seeking behaviour, but game-making behaviour. I've actually seen the same thing happen IN THE GAMES THEMSELVES with in-game economies: players drive down prices because they have stuff to sell, not because they're looking to get stuff to sell at a profit. They just have the stuff.

When people make games because they're passionate about games, then they have a game. What next? they sell it. Why not? How much? It doesn't matter. Whatever. A buck.


The second major assumption is that games are exclusionary goods: that consumers only buy one. That's ridiculous. Game bundles alone prove this wrong: people love to buy big bundles and get tons of games. Being able to buy one game cheaply doesn't preclude buying another game at a pricier price point. Games don't have to compete in price the way goods like bread or shoes do.

Whilst one could make the argument that perceived acceptable price points could be negatively impacted by generally low prices. However, anecdotal evidence suggests this does not hold, primarily due to the continued sales of higher-priced games. While it certainly seems that the value of "low-value" games is certainly depressed to $1 or free, the value of "high-value" games remains well buttressed in the perceptions of game buyers.

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TLDR: I think the biggest effect of Valve sales is to pull the rug out from under the "shovelware" industry, while letting the quality middle-tier and top-tier games stand out with their deserving price tags.

Nicholas Lovell
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I think you at marvellously optimistic :-) Let's hope you are right

Nicholas Lovell
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It sounds to me that you are describing Cournot pricing, an equilibrium where both parties (in economic theory) limit the quantity they produce to maximise revenue. Bertrand's theory arose because he thought Cournot's theory was flawed

In practice, we now tend to think that Cournot wins when comparison is difficult and switching costs are high. Bertrand wins when switching is easy and competition is fierce.

We are about to see an economic theory competition where rival theories compete. In the digital space, my money is on Bertrand.

Simon Ludgate
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Optimism is great! :-)

I think it's very difficult to apply certain economic theories that are concerned with continuously-consumed goods (eg: food, clothing, fuel) where there is some sort of external force that would preserve a specific choice (eg: once you buy a gasoline-based car, you aren't going to put diesel or hydrogen fuel cells into it, I hope). So, once you buy a gas-driven car, and you have to buy gas, from whom do you buy gas?

The appropriate comparison when discussing cost of switching here would be comparing a PLATFORM of games rather than specific games. For example, my friend has an iPhone, and he buys iPhone games, and I have an Android, and I buy Android games, the cost of switching in this case is him switching to Android or me switching to iPhone.

The cost of switching from one game to another on the same platform is zero, same as going to a different gas station. There's plenty of interesting analysis to be made in this space, but "cost of switching" isn't part of it. If you're applying a theory that's based on cost of switching to price wars within the same platform, I think an error is being made.

I think there's also an error in expecting markets to be purely supply-driven. A goods producer doesn't only control prices by controlling supply; that's a very old idea and it doesn't apply to a lot of modern goods for which supply is basically infinite. Game sellers don't "limit quantity" to maximize revenue. I mean, I suppose they could, and we've seen games get sold out, but in a purely digital storefront that shouldn't really be happening (at least not to a point to be a major part of an economic theory).

I think, on the other hand, we have to look at the vast differences in games in terms of comparisons. How many games are really substitutes for another? We see lots of clones, or games that are accused of being too similar to others, but really: how often are two games so similar that price is the only deciding factor between the two?

I think most traditional economic theories are based on the following train of thought: "I need X, I will buy X at the lowest price I can get it at." I think when discussing games, we need a different train of thought: "This game looks like it's worth X, I'll pay no more than X to buy it." Unlike most goods, this thought process has to be repeated independently for EVERY game consideration.

Ultimately, price is more psychological than market-driven: what we are interested in is not how market forces affect game prices, but how psychological forces affect the perception of a game's worth. To be sure, a field of low-priced games can affect that perception tremendously. But when people see a lot of $1 games and then balk at a $15 title, it has less to do with ECONOMICS (I'm buying the $1 game instead of the $15 game because it's cheaper) but rather with PSYCHOLOGY (Woah how do they get away with charging $15 when everyone else is only charging $1! No way that game is 15 times better!).

But that's exactly why I think higher prices games will prevail. When people are sick of $1 drivel, they'll use higher prices as a guide to finding better games. When you want a good game, you're going to look for one that's priced at $50, because if it's selling at $50 is must be damned good, so you're going to buy that one instead of the $1 crap you've been wasting your time with.

Nicholas Lovell
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You are arguing for games becoming Veblen goods. I don't think the music industry gives us a great precedent for believing that people will pay lots of money for tracks from bands that are "damned good"

Ron Dippold
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Simon, I admire this level of analysis (thumbs up!), but believe that attributing this level of cold hard rationality to either consumers or producers is just not reality. You do mention this possibility.

Will Hendrickson
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Adapt, or die.

Lance Thornblad
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Mm, mm, Top Ramen for dinner! Again..! ;)

ron carmel
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the premise of this article is incorrect. developers have always set their own price on steam. when your game goes up there, you tell them how much you want to charge for it. when you want to change the price, they change it for you.

making it more efficient to change the price doesn't "start a race to the bottom".

also consider that developers change prices to maximize revenue. if i make twice as much selling my game for $5 than $10, then $5 is the better price. to say this is a "race to the bottom" implies that our profits get squeezed out of us. this is incorrect.

Nicholas Lovell
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It's not the pricing alone. It's Greenlight. It's Steambox. It's a fundamental principle of marginal pricing.

Alexander Jhin
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The nice thing about this article, and the ensuing debate, is that we will soon see who's correct. Let's all jump back on this thread in 6 months and see how if the race to zero has started, completed, or never began at all. See you in September!

Nicholas Lovell
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True. But I reckon we have a decade. Although if think everyone was surprised by how fast iOS fell to zero.

Luis Guimaraes
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Games for non-gamers (meet for vegetarians) are already zero through the Internet just like iOS and Android. that happens when you're selling a product for which there's no demand.

Nicholas Lovell
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230 million people played Candy Crush Saga last month. 93 million played it yesterday. Looks like demand to me.

Luis Guimaraes
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Thing is, is that a demand for games, or for "whatever kills time when you have nothing else to do"?

People playing CCS aren't playing other games, "killing time" is an exclusionary product for them. Next month they'll be popping bubble wrap or counting how many yellow cars pass by, or watching videos about cats on YouTube. It doesn't make a difference for them, that's what CSS is competing with, and that's why it has to be free.

Michael Joseph
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Fear of zombies? I no longer believe in this inertia argument.

I do like the implications of a near tomorrow where their are 100x more game developers than there are right now all selling games for pennies because "anyone can be a successful game developer!" I like it because I find it amusing at how it implicitly degrades everyone working in the industry by making everyone a dime a dozen and taking the industry's ego down a few pegs is not something I'm opposed to. But I still think it will prove to be incorrect.

Seems to me most games these days are created as a means to an end and that motivation imposes certain limitations on game designs AND on development effort. Game development can be as difficult as one wants to make it. Most developers in the mobile space don't want it to be particularly difficult.

Technology will change and new markets will be created and there will always be a separation between those games developed by passionate developers who "get it" and who are willing to go that extra mile to deliver something special. And they will never be competing with developers of the $1.00 or FREE games of the world even if their games are sitting side by side on the same shelf.

Darren Aronofsky, Ang Lee and Lars von Trier don't compete with Uwe Boll, J.J. Abrams, and Michael Bay even though their films are played in the same theaters. And maybe the latter group makes more money, but so what. They're also cynical, unimaginative hacks who make unmemorable films at best and infamous ones at worst.

Ha! So to the extent that anyone need be worried about a race to the bottom, I suppose it's only if you fall into group B aka the pit of the writhing mass of zombies. But they do have their own lottery. And I know there are many folks out there who think it can be cracked. Good luck.

re: the popularity lottery
http://www.npr.org/2014/02/27/282939233/good-art-is-popular-becau
se-its-good-right

Nicholas Lovell
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Erm, yes Aronofsky, Lee and Trier compete with the big boys. There is room for both.

But your idea that if a game is free the developers can't be passionate is elitist nonsense.

Michael Joseph
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To me Aronofsky, Lee and von Trier ARE "the big boys." So clearly we have different values when it comes to the arts.

My meaning must have flown over your head. When I said "they will never be competing with..." I meant it in the sense that a steak house isn't competing with McDonald's in the way McDonald's is competing with Burger King and Wendy's.

As for the "elitist nonsense" bit, I actually like the look of the list of elitist game developers out there. So I find your use of the word "elitist" to be rather empty. Which just leaves "I think it's nonsense."

Well... OK. In case you misunderstood, I'm saying the larger the degree to which money is the dominant motivation for doing one's art/craft, the lesser the passion by definition. Lots of great games don't get made if money is the number one concern. Similarly lots of games are ruined by their attempts to appeal to the largest possible audience. If this is elitist thinking so be it. But this kind of elitism is not country club elitism. It is open to anyone who should desire to walk through the door.

While it's truth that both Moderate_One-Time-Up-Front and F2P spaces are littered with lots of unmemorable, disposable, fad-ish, junk, the F2P (and ultra cheap) spaces are largely comprised of nothing else. They are virtually devoid of games that are LOVED. Loved F2P games are rare exceptions to the rule.

So I'm saying the lack of developer passion actually manifests itself as this lack of beloved games.

Amir Barak
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The difference between a craftsman and Ikea. How many people have Ikea family heirlooms and how many have tables/chairs handed down through generations that were handmade?

The difference between Justin Bieber and Beethoven, Miley Cyrus and Mozart.

I dunno, it seems to me like most people making F2P games try really really hard to convince themselves that they're making nihonto like Gassan Tadatoshi rather than wallhangers like you find on eBay.

Matt Jahns
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I'm not sure there will actually be a race to the bottom in the long run. You have to ask why games are becoming cheaper. Did engineers suddenly agree to pay cuts? No. Did game developers and artists become cheaper? No. Does game development require less labor than it used to? Again, no. So what is it?

I think the answer is 3rd party software just got a lot better and a lot cheaper. Making a game used to require extensive proprietary code or expensive licensing fees. Now you can bypass all that with something like Unity or Ogre.

But there is a catch: the engineers, developers, and artists have not disappeared. They are as crucial as ever. If game prices drop too low, 3rd party tools and resources disappear. Since indie developers cannot live without those tools, there is a hard floor on game prices.

edit - There is a mathematical way to make the same argument, which I could give if pressed for it. Basically, because technology is always progressing, the marginal costs of game development are nonzero. The trick is to treat time as a function of sales, and note that the function is strictly increasing.

Jason Ryan
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I consider myself somewhat oblivious to economics.
I make my hardware, software, and ultimately life decisions based off of simple questions like: Is this something I would use or enjoy? I can honestly say I play a total of zero games on my phone, or on any mobile platform for that matter, if relating to books you could say I enjoy a novel over a magazine.
I believe Steam consists of some of the most forward thinking people on the planet. The games I find on steam are fantastic, easy access, and I can sit down with one on my off day(should I be so lucky to get one) and have a great read.

If this ever changes, there will always be another place along the tail for people like me to go.
Yet I don't fear the worst will come to bear on Steam the way it is coming for the other platforms, they have a great deal already invested in people like me, and their push to freedom is likely going to only support them and their customers. They have always had an eye on quality.

Bruno Xavier
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(insert bear here)
How about 'no'?!

JoseArias NikanoruS
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I've always thought that the marginal cost being zero is a fallacy. The reason? Software does have a cost. Even if distribution is free you have to pay for the development. Now, since you have to develop before publishing, a lot of people seem to forget that the software had a cost that has already been paid. And when you start giving it away for free, you are actually paying for the software yourself. It's like spending your savings making shoes and later giving them for free because you already have them and it doesn't cost you anything to give them away. There is a difference, I know, software can be easily and cheaply replicated. But still, you need to sell enough copies to recoup costs before it’s actually logical to give it away for free, isn't it?

I feel that there are too many people right now dumping money into games that are later given away for free, without realizing that they are making the market a hole that only consumes money but doesn't gives back anything. And it will last until people start to realize that it is a bad business... or all their money is used up.

Now, how many years it took before people stopped foolishly "investing" money to get into the "gold rush"? Because that mentality is the one making the "race to the bottom" work.

Nicholas Lovell
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Eom, that's not a fallacy. That is the definition. And you are now arguing against an established economic principle that we have seen played out in mobile games, in cloud storage, in free email. All of which have substantial upfront costs (and even ongoing costs, but competition has now established a price of free)

Matej Martinkovic
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But there is big difference between PC gaming and mobile games and other services you mentioned. Cloud storage and free e-mail are mostly ad funded(also notice the two biggest free e-mails belong to companies that make majority of their revenue elsewhere).

Making most mobile games is relatively cheap and quick. Just take Flappy bird. It was created an few days with almost no costs. Now take Deus Ex Human Revolution. Production of that game must have cost a fortune. Making the money back if it was F2P would be damn difficult. Console and PC gamers don't want their games riddled with micro-transactions or ads. They want to pay once and get the whole experience uninterrupted. You can't sell weapons or upgrades because you will most likely destroy the balance, possibly entire gameplay. You could try to sell useless cosmetic stuff but who would buy it in singleplayer game? Thus selling the game traditionally is the only viable way. Same goes for most PC titles.

You could try to build the game around purchasable boosts to EXP/ currency etc. but we can't trust you to make the game not too grindy and playable for free. Plus, pacing and balancing the game to achieve that would be a nightmare. You can get away with selling cosmetic stuff in multiplayer games (like TF2) and some boosts (like Loadout) but that is it. You certainly can't do anything that would destroy the balance or people will not play the game.

Furthermore, you previously mentioned that mobile gamers (who mostly don't care about micro-transactions) will bring their habits of cheap/ free games to PC. I disagree. I have never met anyone that would play mobile games as a hobby, something they like. It's usually to kill time and because of that they don't care about PCs and will not play on them. Playing PC or console games is not a time killer but a hobby, just like reading books or watching television.

Matt Jahns
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I think you're simplifying too much. Mobile games are never free. Either the game has an upfront cost, ads, or in-app purchases.

With cloud storage, it's only free in small amounts. People who use it to store anything substantial will need to pay significant costs.

With free email, you're ignoring who actually provides the email: companies with ulterior motives like Google and Yahoo. They ultimately get a great deal out of their email services.

Not to mention the marginal cost of software development is *definitely* not zero. Software vendors can only dream of that possibility. In the cold light of day, they have to higher software engineers.

Nicholas Lovell
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Again, you are wrong. The marginal cost of software development is zero. you are talking about the fixed cost.

JoseArias NikanoruS
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The fallacy, as I see it, it's in assuming that the Software 'per se' doesn't have a cost, and it doesn't paint the whole picture. What I see is that a lot of companies seem to forget that they have fixed cost. One company that is against this "economic principle" is Nintendo, since they need a lot of money to develop their games and maintain their quality (they know they can't keep their quality with this business model, and are trying some interesting angles in order to get some benefit from it).

Now, the fact that a lot of people do something absurd or wrong doesn't make it right ('ad populum' fallacy). In fact, I would love to see the statistics of the number of mobile games that have failed against the number of games that did get some money back.

Finally, as Matt Jahns mentions, Cloud Storage and Free Email have other meanings to get money, but they are different type of Software contrasted against many types of games. Is there an opportunity for Games to have access to this sort of income (ads and data mining)? No doubt. But their genre and style will be quite different from the games we get. It's like having all the movie blockbusters directly in Netflix, I don't think that would be profitable but it doesn't doom Cinema altogether. But I think we may see some kind of audiovisual media sprout directly on services like Netflix.

In other words, we may be at an "evolutionary crossroads" were different types of games will evolve. Some will go extinct and other will find their niche or even a new market.

Sounds quite interesting...

Nicholas Lovell
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I agree it's interesting. But the statistics over how many companies fail is essentially irrelevant: if not succeed, they risk changing consumer perception of how much it is appropriate to pay for something. And for games, on mobile, that has trended towards zero upfront. It seems the same has occurred, for many consumers, for music and news. News and music are having to discover new business models to deal with this.

And I think we are likely to have to do the same. We've got one - F2P. There may be others. They will need ot have a strategy to compete with free.

Matt Jahns
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I'm not sure you are getting the point of the argument. Technological progress fits the mathematical definition of a marginal cost, meaning it behaves - in Bertrand's model - as a marginal cost.

In mathematics, the philosophical interpretation you attach to a function does nothing to change its behavior.

JoseArias NikanoruS
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I think it is relevant because sometimes people believe something blindly and make it possible just by sheer will. In this case, they invest a lot of money in these games and don't realize that they are losing money 9 out of 10 times (I'm making it up, obviously). If they realized that it isn0t such a good business, they wouldn't try it anymore, but the song of the whales is too strong right now.

Also, I don't think that all the games will follow the same path, especially because I see a lot of value in games that aren't free and there are enough people that perceive that value (as the sales of the PS4 would suggest). Maybe the market has grew so much that the "traditional gamers" now seem like a niche, but they are still a big enough and pretty lucrative one.

Or maybe you are right, I accept that a part of me doesn't want the future to be like that (and that is more feeling that reason), essentially because the types of games I like don't seem to mingle well with F2P and the like. Also, I don't like this because it doesn't seem "healthy" to me. For me, healthy would be a situation where the goods are paid by themselves, not by a "third party" that sometimes is kind of shadowy (Google's data mining paying for Google's mail service). I feel that right now a lot of "services" are living with "borrowed" money. Things like Music and News cost money but they aren't getting any money by themselves, so other goods are the ones bringing in the money.

George Bryant
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This seems overtly simplistic. Mobile market pricing has been volatile but to a certain extent the current environment has only been exaggerated by software development's long tail. It is hard to say that even the current climate on the mobile markets will persist for long much less that it will spread to every other game market inevitably. It seems more likely the current climate is unsustainable and will begun to fall apart.

Someone else referenced Jonathon Blow's lecture on this matter that the type of product that is possible in a F2P environment is not only the type of product people crave. You can't reduce leisure spending to simplistic dollar maximizing. There's a giant 3D movie theater near my apt that's always busy despite youtube, Redbox, etc.

This is especially relevant because of the above quoted examples. Lengthy detailed games are no more like cloud storage, email, or most mobile games than comparing goofy youtube videos to the Avengers. Youtube might cannibalize the market for an updated version of American's Home Videos but it doesn't threaten the entire entertainment world.

Robert Green
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This all leads to an obvious follow-on question. If F2P is inevitable in a digital market, as it seems to be, isn't completely free inevitable for the same reasons?
It's not entirely analogous of course, because each game has a monopoly over its own IAP's (so long as the stores disallow having cross-game currencies). Candy Crush is therefore the only place you can buy extra lives for Candy Crush. But at a wider view, this is similar to paid games - there may be 100,000 free games you could be playing, but if you want to play the new South Park game, then you have to pay Ubisoft for it.
So if you take the view that all games are essentially interchangeable, as this theory seems to, then a F2P game where I can get everything in the game for $20 is preferable to a F2P game where everything costs $25, which is preferable to a F2P game where getting everything will cost me $30, and so on.
All of the other examples cited (gmail for example) do not have this problem because they're generally ad-funded beyond the point of requirement for most people. I.E. It doesn't matter to me how much optional extras in gmail cost, because I have no need for them. This seems contrary to the situation in most F2P games, especially on mobile, where I imagine almost every player would prefer the limitations removed.

All of this might have just been a tired man rambling, so perhaps an example would help. Let's imagine someone made a pretty good match-3 game, like CCS, but with no limit on retries, and funded entirely through ads. For the majority of players, wouldn't this be preferable to CCS? And if so, doesn't that suggest that F2P isn't the endpoint, it's just another step towards it?

Nicholas Lovell
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That is an interesting point. My feeling is that for some players, paying is preferable to ads. (For example, I let my kids play F2P games, but not ad-funded ones. Which is obviously opposite to how some parents feel).

The key is whether someone else figures out how to lower the price due to either a cross-subsidy or a cheaper creation method (and boy, do AAA studios spend more than they need to on development).

The reason free upfront wins so much is because so many of us are more comfortable trying stuff out for free and then spending once a game has earned our money; others prefer to pay upfront. But free is a siren price point, and once a price point falls, it can be hard to go back. Just ask Encyclopedia Britannica how it competed with first Encarta, and then Wikipedia.

Robert Green
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"The reason free upfront wins so much is because so many of us are more comfortable trying stuff out for free and then spending once a game has earned our money"

Perhaps, but the data available (see the Swrve survey last week for example) seems to suggest that it'd be more accurate to say that free upfront wins because so many of us just don't want to spend money at all. And since F2P relies on having these huge numbers of non-payers, it would appear to be vulnerable to a different business model that offered a free game to these non-payers without any of the restrictions that F2P games tend to include.

When I think about it in these terms, F2P seems like a very strange situation. If there really is this large group of people who are committed to not spending money, as it appears, then those people would be better served by completely free games, while the people who pay a lot would be better served by a different business model as well, one that caps the amount they can spend.

I find it interesting that you suggest that it's key that someone figure out how to lower the price of development, because this entire discussion seems to be predicated on the fact that marginal cost is zero (or close enough), which doesn't include fixed costs either way. If someone can make a game completely free, perhaps by being entirely ad-based, then it doesn't necessarily matter how much it cost to make. I thought that was the whole argument of Bertrand Competition you were making above.

One last random thought - what if the confusing success of Flappy Bird was the first sign of this? What if millions of players, used to games that limit their playtime in some way and keep asking for money, got hooked on the idea of a free game that placed no restrictions at all and never asked them to buy anything? I have nothing to back that up, but it's an interesting thought.

Voldemaras ZT
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While reading similar articles I often wonder, how many whales there are? Lots of people agree that one of the reasons behind success of social and mobile gaming were that they both attracted new set of gamers, or so called non-gamers that were not interested in PC or console games. Naturally with them came lots of potential whales.

Now, whales that are interested in PC games are already helping to subsidize social and mobile gaming. They also have bunch of PC f2p games where they can spend their hundreds of dollars. So lets suppose we all race to the zero cost, what happens then? I really don't believe that there is huge reservoir of potential whales that are still not invested in any F2P game. So Is 1% going to sustain whole industry?

Scott Lavigne
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It's difficult for me to imagine this being the case. To what extent has Valve really affected a publisher's desired pricing previously? There are games in all price ranges on Steam, and they've all seemed to be pretty in-line with pricing on other platforms for multi-plat titles. The ability to control sales seems like a topic much more worth conversation.

That said, I think visibility is ultimately the most valuable thing on Steam. The ways you get on the front page are: the banners (Valve-controlled), posting an "update" (just added recently), being a top seller, "coming soon", and being on sale. It's worth mentioning that being on sale nets you two spots of visibility, one of which is the spot to the right of the banners (very high visibility). Additionally, being on sale gives you good odds of boosting into top sellers when your game is regarded well. So, unless the Steam store itself changes, I don't think making your game free and relying on IAPs is the way to go.

For what you're saying to be true, ultimately the AAA single-player game would have to die, which I don't think will happen. I think all multiplayer games will tend towards the model established with TF2 probably, but that's going to happen regardless of pricing control; it's simply what developers will intend to do from the beginning of their projects.

Kai Boernert
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Well wait a second there, as far as I remember the cost is not the Material cost,but the Marginal cost that is the lower limit. This includes material and production and a acceptable loan.

You will not make games according to that model, if you would earn more money working in a supermarket, as the opportunity cost of developing games is higher then.

So while it is to be expected following this, that the prices will be lower, they will not hit zero.

Now if we introduce alternative monetization methods like iap and then further assume that the consumer has no opportunity cost for switching the model, then yes it might happen.

But at least a few people I know have very high opportunity costs to play a f2p game, since they now need to think themselves, if the game is worth the additional money they need to spend, what items to buy, being constantly reminded about the need to pay (which might reduce fun considerably) and similar additional costs.

Then there is also the point that (many not all) pc games are not desigend as a timesink when you are bored, but deliver more than a bit simple distraction. (As you can see with huge fan made wikis about most computer games)

Terry Welsh
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As with many other predictions, I suspect this one is just too extreme. Every time a new technology comes out or there is some big distruption, someone predicts the death of something. In the end, you almost always get a minor rebalancing instead of a sea change. There will always be people looking for experiences that free games do not offer.

This conversation reminds me of people predicting the death of the PC because tablets and smart phones are on the rise. PCs aren't going away, the market is just rebalancing.

Nicholas Lovell
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I'm more worried about the console than the PC

Nicholas Lovell
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And I am not predicting the death of anything. I think that the trend to free could unleash a new wave of creativity, both in design and business models, as creators start thinking about to attract to new audiences and make money through new variable pricing models.

Terry Welsh
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Thanks for clarifying. When you say that free will win out, I interpreted that as the death of pay-once games. But I guess I misunderstood. I hope you're right that the changing climate causes people to try new things.

Simon Dean
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As a developer with an Early Access title on Steam, when Valve first announced the discounting tools, I had mixed thoughts. My immediate reaction perhaps echoed the OP, followed almost immediately by the realisation that it would have almost zero impact and it wouldn't be something we'd make much use of. Why? Echoing a post above - discounting alone is worthless, with promotion being the key. Valve remain the gatekeepers to success.

Mobile and social may have firmly embraced the f2p consumption model, but there is a strong opinion among players on Steam that they don't want - echoing another post above - games riddled with micro-transactions and ads. Nor do they want flash/social style games. I'm one of those players, because I like to be immersed in a game without being interrupted or feeling fleeced. I'm also prepared to financially back niche and innovative games through crowd-funding and early access to get my hands on the types of game I want to play - which generally aren't games with a f2p model.

As an economics graduate from many moons ago, I'd also raise an eyebrow over how applicable Bertrand's arguably narrow scope observation is in this debate. F2P may result in homogenous products with little differentiation, but that's certainly not true of many indie titles in Early Access. KSP anyone?

Both business models will continue to exist in parallel for the foreseeable future.

Thanks for the interesting article and ensuing debate.


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