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Secondhand Deadweight Pirates
by Simon Ludgate on 10/31/12 02:00:00 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.

 

Today's news brings us the story of a company trying to build a marketplace for second-hand sales of digital games. There are all sorts of technical challenges regarding tracking those digital games (like the invasive system-scanning software they propose) and issues with disentangling specific games from accounts (see: Steam). But I think these are small issues compared to the fundamental issue of re-selling "goods."

Just what are "goods" anyways? When I think of second-hand sales of books, I think of the value of trading the physical object rather than the content. A specific edition, for example, is valuable for being a rare physical object and is owned for being a thing, not for being read. The reason collectors buy more than one copy of a book isn't to re-read it, but to collect those editions. If someone simply wants to read a book, they don't spend gobs of cash on an exclusive and rare original.

In contrast, when I think of games, I think of the act of reading a book. It doesn't matter where you get that book: from a store, from a library, from a friend. You may not even keep the book after you read it, but you still want to read it, to experience it.

When most people pay for games, they're paying for the experience, not the object. This is especially so with digital games.

Arguably, when games were delivered on physical media there was a similar value to second-hand sales as there was for books: games would go out of print, the disks or boxes or manuals would become valuable for themselves. But digital games don't share this property. In theory, they never go out of print, continually available from digital distribution stores. There is no need for a second-hand market for collectors.

The only reason people would want to buy a second-hand digitally distributed game is to pay less. At that point, it makes a hell of a lot more sense to pirate the game rather than buy it second-hand. Furthermore, in either case, the developer is getting no money. Why should it be any more legal for a second-hand seller to get your money than no one at all?

Economics of Game Markets

The real source of the problem is price inflexibility in the current digital marketplace. In economics terms, a games company has a monopoly: they alone can sell their game, thus they alone set the price of the game. while it could be argued that similar games are in competition with one another and are substitute goods, most gamers recognize that the differences between games make them non-interchangeable.

This puts games in "weak" competition with each other. Buying one game does not obviate the desire to buy another. A gamer may go into a game store and buy multiple similar games. The price of a game is usually a secondary concern when buying a game and often does not greatly impact the choice between games (eg: people probably don't turn away from Diablo 3 in favour of Torchlight 2, despite the significant price difference).

In other words, the price people are willing to pay for your game is rarely influenced by the price of its competitors, but rather their quality. So, to continue the example, people are willing to pay less for Torchlight 2 not because of Diablo 3's price, but because of Diablo 3's quality.

[note: I use the term "quality" here very broadly to encompass everything from aesthetics to brand recognition]

This means each game's price is weakly linked to the price of other games. This is why we see so many different games today at so many different prices, from "AAA" games ranging from $40 to $80 down to 99cent titles or free to play games.

But it wasn't always that way. Wide price ranges are bad for sellers because they're inconsistent. And consistency builds complacency: when people see the same price everywhere on everything, they stop thinking about the price and just pay it. This is one of the reasons for price fixing in markets and why the $60 blockbuster reigned for so long: if everyone plays along and sells their game at the same price, all the consumers will internalize that price as the "normal" price to pay.

Death of the Blockbuster

Of course, the $60 blockbuster wouldn’t work in every market. Some markets would pay less, some more, and to maximize profits in each market you’ll want a different price in each. This leads to price discrimination: trying to find the best price to sell in each market. Of course, then people try to circumvent price discrimination by importing goods between regional markets, leading to all sorts of lawsuits.

The other problem with price discrimination is that it leads to deadweight loss. Deadweight loss is the loss of money from crude discrimination. If you over-generalize a market, you undercharge people who might be willing to pay more and completely lose out on people only willing to pay less. The opposite ideal is unit-discrimination: charge each and every customer a different price in the hopes of maximizing that price for that customer.

Unit-discrimination is the principle behind negotiating, bargaining, and haggling: the idea that each transaction was unique and based on the conditions of that transaction. It’s a practice that’s been lost in modern economies of scale, but one that’s potentially revivable with intelligent computing.
 
Steam has gone a long way to combating price inflexibility with regular sales and deals. But take it a step further: imagine if Steam introduced a negotiation system, where users can state how much they'd pay for a game and a window in which they'd be willing to pay that price. Publishers can either accept or refuse the offer, or make a counter-offer. This would, in a sense, restore the negotiating power to both consumers and publishers.

Second-hand sales are another way to restore consumer negotiating power: if you have an inflexible initial purchase price but a flexible re-sale price, you can navigate the difference as an ultimate cost for the good. It makes a lot of sense that, in the absence of flexible prices from publishers, people would seek alternative means of regaining that negotiation space. The problem here is that publishers are losing out on any of the revenue from secondary sales. Which makes the fact that they’re not engaging in unit-price-discrimination all the more confusing. Who would buy a secondhand game when they could buy a brand new one for less?

Digital Marketplace Confusion

All this could only reasonably happen in the digital marketplace, where marginal costs are zero. Broad price discrimination and secondhand sales make sense in physical markets, where you’re limited by estimates for the production of goods and the grace of storefronts that will shelve those goods.

The simple fact is that traditional publishers just don’t seem to understand the nuances of a non-traditional supply market.

That they still spend money fighting piracy instead of selling games to pirates is a major indicator of this ignorance.

No one likes being told "my way or the highway." No one likes having their voice taken away. What piracy and secondhand sales both have in common is that they are ways gamers have to retaking their voice, of reasserting their worth and their power.

Of course, there are no real examples to point to in terms of massive economic success stories with empowered customers, aside from the limited successes of "pay what you want" bundles. Successful, to be sure, but not in the market ranges the big publishers normally deal with. Off by two or three orders of magnitude.

Maybe companies just have to try something new. Change the digital marketplace around to a different model. Instead of selling games, sell "admit one" tickets to play a game as much as you want. Instead of fixed prices, negotiate with customers (or, rather, build computer systems that negotiate for you). The company that does so will eliminate deadweight loss, secondhand sales, and piracy, all in one masterful stroke.

In theory.


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Comments


Jongwoo Kim
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Really great post on the economics and the psychology of second hand sales, but I'm confused about the proposed solutions.

1. "Instead of selling games, sell "admit one" tickets to play a game as much as you want."
How is this different than existing digital licensing and DRM schemes?

2. "Instead of fixed prices, negotiate with customers (or, rather, build computer systems that negotiate for you)."
How would you prevent buyers from paying anything but rock bottom prices? Is this any different than Pay-What-You-Want models?

Simon Ludgate
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In regards to (1), the idea is linked to the psychology of what you're doing when you're licensing software, rather than a change to the actual model. People think they're "buying" a good when they "buy" a game, but they're paying for a limited use license. Maybe that should be made more explicit. In the same way that people don't think they're "buying" a movie or a seat when they buy a movie theater ticket.

(2) Simple: you refuse offers. Negotiating isn't about lowering the price until you sell: it's about leaving some lee-way to flex the price a bit. You start out at $60. Someone offers you $40. You counter with $50. Maybe they'll take it, maybe they won't. But at least you know what they will take, which can influence future marketing strategies, and at least you know the person is interested, which is again useful information. It's as much about data-mining as it is about selling extra copies.

People give in to price pressure and scarcity often clouds their judgment. Just like being offered a $10,000 settlement offer that's only good for 24 hours before you go to court over an uncertain $1mil lawsuit, players offered a limited duration and PERSONALIZED price will probably take the offer very seriously. Especially if it is a genuine offer. And we won't really know how many of those exist until publishers take this step.

Jongwoo Kim
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1. Isn't the EULA exactly what this is? Maybe it needs to be presented in a manner that players will read and take seriously, instead of just skipping through when installing or booting the game for the first time.

2. The question then is how the personalization is going to work, especially in an automated system. For a standard digital game(i.e. not a digital collector's edition with limited availability), wouldn't everyone try to game the system and try to haggle? Customers got nothing to lose but their time.

Harold Myles
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Interesting article.

One way negotiation of price is being introduced is by player run economies. In GuildWars2 players can buy/sell Gold to Gems and Gems to Gold. In Diablo 3 players go get the loot and decide how much to sell it for, while other players are deciding how much they are willing to pay for it. And of course you have P.L.E.X in Eve Online.

In each of the these cases, the developers are taking a cut out of the final exchange rates that players are negotiating.

And additionally, 'piracy' in the traditional sense is removed because all these games are services running on a remote server.

Uwe Oehler
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It's always irked me that the resale of games is viewed so unfavorably by many of the games studios. Sure, they don't directly get any of the money from the resale of the game but there is one BIG plus for them that they refuse to acknowledge.

As stated in the article, some people will buy new titles regardless of the price. But even these people have financial limits and can't buy EVERY game that they would like to own.

On the other hand, there are people like me who will only shell out full price for the best of the best. So the rest I buy used.

But here's the point. About half of what I pay for a used game goes to the guy who sold the game. And that guy will promptly go and spend that money on more new games they'd otherwise not be able to afford.

So, used sales are not lost sales. Most used sales will put cash directly into some game developer's pocket; cash they otherwise would not have gotten.

So, no need for fancy negotiation schemes. Used sales finance game-geeks who then go buy more new games.

Tom Baird
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"Most used sales will put cash directly into some game developer's pocket"

Since when does directly mean 'via a predicted purchase from a third party, by going through 1 customer and 2 retail outlets (1 for the used purchase, and 1 for the subsequent new purchase)?

It also assumes that ALL used game sales are from people who spend any gained income on future games. It also ignores the case that newly gained money could go to another used purchase, each time the retailer taking another cut, and that the developer who gets paid in the end is being paid because of the challenges of getting his game used, and not on any quality value.

Sure, he may take the money made from the used sale and purchase a game from the same developer, but that's a lot of ifs and assumptions.

Jake Shapiro
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Having lived in a number of different countries throughout Latin America, it seems like they would be much bigger players in the international gaming community if it weren't for their domestic games industry running mostly on pirated sales.

Hakim Boukellif
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I agree that selling used downloaded games, at least in the way ReDigi is doing, isn't going to work, but I disagree with that the only reason someone would want to buy a used downloaded game is because of the lower price. In particular, this point:

"But digital games don't share this property. In theory, they never go out of print, continually available from digital distribution stores. There is no need for a second-hand market for collectors."

...has already been proven false. There are games that have been removed from digital distribution services because of business reasons (Irem games), legal issues (Turtles in Time Reshelled) or seemingly out of foppery and whim (Sonic on Japanese Wii VC). The service itself can also shut down for any number of reasons, which would take any exclusive games it offered with it.
So even with digital distribution, it's still possible for games to become unavailable. But if selling used games doesn't work, then the only solution I see for this is for abandonware to become a legally acknowledged concept.

As for negotiating the price, it's an interesting idea. I get the feeling that if software is handling the negotiation on the publisher's side (which is pretty much the only practical way of achieving this unless you don't expect a lot of sales), it won't take long for people to figure out how to consistently get the lowest possible price, though.

Simon Ludgate
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You do raise a valid point with the withdrawal of digital sales. I was thinking from the economic perspective -- that, with a physical good, sales can be too low to justify producing a new batch of them, but with a digital good you can leave it in the store at no cost.

The possibility that a publisher would remove a digital game for non-economic reasons is... troubling. What kind of legal recourse, if any, would be available to customers or would-be customers?

In regards to software negotiation, it's important to keep in mind the sophistication of computer trading systems and the vast availability of digital identification data. "Gaming" the system may require considerable and time-consuming lifestyle changes, especially if lowest prices are only available many months after a game is released. Other data that might influence negotiation include previous purchasing history, the relative prosperity of a user's neighborhood, or perhaps even an extrapolation of a user's capability to pay for services by measuring the speed of their internet connection. These systems also become more powerful is managed centrally: for example, a Steam negotiator that negotiates on behalf of all publishers selling through Steam, using all the information Steam has at its disposal to maximize sales across all negotiations.

Tom Baird
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People are going to start talking about the prices they pay, and learning that I get to pay 2-3x for the same products as someone else, is probably the fastest way to turn me into a pirate. The most loyal/best customers are going to end up routinely gouged, which is simply alienating your core market, and forcing them to look elsewhere.

All those variables you listed are game-able:
Previous purchase history: Buy each new game on a new account
User's Neighbourhood, make your purchases at a coffee-shop or friend's house in a lower income neighbourhood
Internet Speed: Throttle your bandwidth, or have a second app clogging up your bandwidth.
You can also rely on gifting, proxies, VPNs, and multiple accounts(with incomplete/different names/credentials) to completely obscure any data they could gather on you.

I honestly can't see how you could ever sell someone 'automated bartering based on hidden metrics' that doesn't look horribly greedy and insidious, and an overall crap deal for your most loyal users(the ones who buy lots of stuff already).

Edit: The people that would use a bartering service like that would be people who get good deals on it. People who would have to pay more than average, are simply going to buy their games elsewhere. Unless the entire market could convert overnight, places that swap to bartering are going to lose all their best customers, which would make it a very tough sell to them.

Simon Ludgate
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While I appreciate your arugments, I think you're drawing the wrong conclusions.

Anyone who would go to such lengths to "game" a system would probably just pirate the game; that'd be way, way easier. As has long been argued here on Gamastura, it's ease and convenience that beats piracy, not complexity or control. The purpose of negotiating a price is to make it easier to buy a game and a reasonable price, not to gouge the faithful.

I am not suggesting that digital markeplaces "swap to bartering" but rather add price negotiation as an option. Furthermore, I don't think anyone in their right mind would leave a negotiation-enabled store for a store without one: would you feel so angry if you were offered $40 and your friend was offered $30 that you'd go to another store and pay the full $60?

Perhaps my emphasis on negotiation is misguided too. What if the system were merely one where you could mark your price on a game and the store would notify you when a sale reduced that game to your desired price? You're not "negotiating" per say, but you're saying "OK, neat game, but tell me when it's only $20." Publishers could see stats on sales notifications and could build campaigns around specific price points or could issue coupons (an otherwise underutilized feature recently added to Steam) to target those interested gamers.

Ultimately, what I'm really pointing to is opening a dialogue between customers and publishers.

Matt Wilson
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I find myself in disagreement with the foundation of your argument. How can I get my customers to agree that my work only has value if they buy from me, and once bought, has a value of zero (unless they violate copyright as a distributor) - and with a straight face?

Maybe it's pride, but I vastly prefer the idea that my games continue to have value even when I'm not involved in the transaction. If it is pride - well, fine. I can definitely live with that.

Simon Ludgate
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The same way a movie theater operator can sell tickets, or an amusement park can sell rides on a rollercoaster? The same way a restaurant can sell food? The same way a taxi or a train or an airplane can sell travel? The same way a dentist can sell a filling, or a doctor can sell a set bone and a cast? The same way a contractor can sell you a fresh coat of paint on your walls, or a housekeeper can sell you cleaned floors?

Are you selling a product or a service? Are people buying a thing from you or an experience?

There are many things in this world that continue to have value even if they cannot be resold. Arguably, the most valuable things can't be.

Thom Q
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First,

"The only reason people would want to buy a second-hand digitally distributed game is to pay less. At that point, it makes a hell of a lot more sense to pirate the game rather than buy it second-hand."

What a ridiculous assumption. Of course people's prime interest in 2nd hand goods is to pay less, this isn't just confined to digitally distributed media. For me, someone who's family buys a lot of 2nd hand goods, it's borderline offensive to say that "at that point, it makes more sense to steal then to buy it 2nd hand"..


Second:

Although Digital distribution is a new phenomenon, it's not the first non-material trade human society has been involved with. The core principal of Buying and Selling aplies to almost everything. Last time I checked with Steam, I'm buying the game, not renting it. Why on earth I wouldn't be able to resell my license for that content is beyond me.

Basicly the entertainment industry has already shown it isn't to big on morals. Based on a totally unfounded claim that they can control what customers do with their products, through things like DRM, Region Locks, et, they have been fighting reselling for almost 20 years now. All of it is totally based on squeezing as much money as they can from a rapidly changing, new industry. Why? Because they can. The only reason.

As a Industry that's been the victim of Mass Piracy for more then 40 years, they should really try something different then trying to screw the people that Do buy their products. Embrace "piracy"..

Thom Q
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A good example on how you should market your game in regards to piracy is Minecraft.. Notch basicly encourages it, based on a understanding that trying to fight them is impossible, and in the believe that he had a good enough product that people where willing to pay money for.

Of course, 99,9% of the games aren't Minecraft's. So a lot of mediocre games will fail that way..

Timo Heinapurola
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In the past games have always been regarded as goods that are sold through retail. This thinking is a persisting one in that we expect to own the product once we have bought it. But actually, legally we have never owned the product. We have absent mindedly accepted the EULA that comes with it that, in most cases, states our right to use the title within certain restrictions. We are, for instance, not allowed to disassemble the product or copy it in anyway. To me that sounds like a right to only USE the product. This means that providing the title as a service is not that different from the traditional way of buying games at retail.

I agree with trying to find more innovative ways to get around piracy. One way is to appeal to the good will of players and hope they pay something for the game. Support us if you like the game. But I think it's important to realize that we are slowly drifting towards a more service oriented world. Everything is a service nowadays and I'm starting to think that the gaming industry is destined to go the same way too.


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