Thursday, September 22, 2005

Game Rental Rant

Alice posted a note about Mark Rein and how he's been on a tear lately about game second hand sales (and rentals too, I think), why they should be outlawed or at least regulated in a way that lets publishers get a share of the take.

I've actually been hearing developers complain about this for 5 or 6 years. For some reason, I heard about it first in Japan, where a publisher was suggesting we join them in approaching the government on it (we opted not to get involved, for other reasons).

Here's a rudimentary breakdown of the value chain which highlights the problem. (Don't laugh at the figures. I rounded to nearest 5 just to make it simple, and yes, it will vary widely from one game to the next)

New Game:

  • developer 10
  • publisher 25
  • distributor 5
  • retailer: 10
  • end user total price: $50
Used Game
  • developer $0
  • publisher $0
  • distributor $0
  • retailer $40
  • end user total price: $40
So, 20% savings to the consumer, 400% the revenue for the retailer, and big zero to the dev, pub and disty.

Mark also argued that there's even a loss to the publisher, as the second buyer of the game make also make support calls, return product, etc, etc, thus inflating 'fixed' costs.

At the end of the day, thisn't a discussion that's unique to games. Or media for that matter. Simple supply/demand economics have worked out the value chain, and people short-circuiting that chain pay for it elsewhere. In this case, it's a large increase in margin to retailers and a small savings to consumers; which in turn results in higher prices being sustained. If it were feasible to get away with lower ASPs (as such a 'second hand law' would enable), the market would go there. SOMEONE would take advantage of it, firing the pistol for everyone else.

Another way to think about it: The market has evolved to a certain price point to satisfy all levels of teh supply chain. Let's say for example, that people started grouping together in pairs (or 3's, 4's) and buying a single insurance policy and then saying "if I have an auto accident, I'll just call you to come down, say it was you, and we'll all split the costs of your policy!" - BRILLIANT! Only as it catches on like wildfire, the insurance market reduced by 75% in size, the number of claims stays fixed, in the end rates go up.

No one's saying that consumers shouldn't have choice. Of course they should. But that choice shouldn't be provided by other parts of the supply chain short-changing the developers of the content.

Personally, I feel that the supply chain should be squeezed and made more efficient (e.g. digital distribution, smaller packaging, better inventory management, etc, etc), rather than forcing more efficiency in the hands of publishers/developers.

Valve has chose to address the problem by not selling games. They let you subscribe to a service, steam, and that enables the game to run. Whether you got the game digitally or physically is immaterial. They are in effect saying "if you agree to give us $50; we agree to let you play our game, for as long as you want. But when you are done, you are done. You may not sell the game to someone else."

One way or another, people enjoying games - second hand, rented, whatever - and not paying the developer a single cent for them - is bad for the industry.

It's easy to pick on Epic because their uber-wealthy, but would you say the same thing if it was a small developer teetering on the edge of bankruptcy? Where that extra revenue would make the difference between another 100 people losing their jobs?

My 2c worth on Epic getting their $20 worth.

P.S. Right now I have a strong bias against retailers that is clouding my opinion. I can't find a copy of We (heart) Katamari anywhere, and retailers are telling me "you should have pre-ordered". Pre-ordered? F.U. You are a retailer. Your job is to stock product so that I can come in and buy it at my convenience. If I want to pre-order, I'll do so online and save a few bucks. Meanwhile, stop running your inventory so tight, stock your shelves and I'll be happy to pay your margin so that I can get the game when I want it.

Crap. Maybe I'll just wait for it to become available second hand.


Anonymous said...

Kim, your numbers are way out.

Remember that a retailer has to pay the consumer for the second hand game in order to be able to sell it. Also, second hand games are usually cheaper than $40.

So, if you take around $10-$20 off the price per second hand game, and then also count the $10 or so trade-in value passed back to the consumer, your numbers change considerably.

You need to take into account the fact that second hand games provide an impetus for consumers to buy newer games by being able to offset some of the cost of a new game, which they may find too expensive at $50.

Finally, the right to sell your own property is enshrined in the legal doctrine of first sale. Just because some games publishers provide a value-added service along with your purchase doesn't change your legal rights. Many publishers charge for support, or only provide it to registered owners within the warranty period. (I used to run technical support for one of the largest games publishers.)

In summary, I respectfully suggest that you're wrong on all counts here.

KimPallister said...

I thought about the money back to the consumer for the second hand title after I left the office yesterday. DOh.

It still adds up to a fatter margin for the retailer and thus incentive to sell the second hand title before the new one. I don't know about the 10-20 off the price. I had a look at a few titles at a retailer yesterday. God of War was selling 49$ new and 45$ second hand. I'm guessing the fall-off from hits happens faster for second hand titles.

You are correct about the property arguement. The question then is whether games will continue to be "property". MMO's certainly aren't. They are a service. And Valve's service isn't value-add. You can argue that it is, but you CANNOT play HL2 without subscribing to it, so it ends up being part of the basic package.

So another way to look at it is that if second hand sales continue to eat into publisher revenue (of even if just the perception exists), publishers will continue to find ways to turn their products from goods into services.

Unknown said...

I was going to write a post about this myself, but you beat me to it..

I heart Mark Rein, but I think he is way off here. My opinion is..

Boo hoo. Tough shit. It is like double taxation. Why should the developer get a cut each time a game is sold. That is bullshit. You don't get that for anything else in the world. Gamedevers spend a lot of time complaining about not being treated like everyone else. Why should we get some special exception here?

Now rentals!! That's another story.

Anonymous said...

You're confusing the difference between a service and a product. Sure, HL2 is a service, but that doesn't change your legal entitlement to sell the physical product, it just means that you have to pay to take advantage of the service offering once you've bought the phyiscal medium. The service and the product are two entirely different considerations even if you can't use the product without the service.

If Epic and Atari don't follow this model that's a business choice entirely up to them, but it doesn't give them the right to demand a cut of second-hand sales.

KimPallister said...

OK, I'm going to have to cut my losses here and admit defeat. You guys have made your point.

I will argue that the difference between property and service here is largely arbitrary. So long as the consumer is made clear on what they are buying, then it's largely an implementation discussion. True, there's many years of established precedence for games being "products", but just as there could be a market for a 2-day rental, there could be a market for "indefinite rental for a single user" - which is a service, and is what you get in the Steam+HL2 case.

But I'll drop it now and be quiet :-)

Mark said...

Robin just pointed me toward these comments so thought I'd make a late response.

I too have some distaste toward the massive amount of used sales done by EB and the like. That's purely because I want to see the developers make more money for their hard work. I have no problem with the right of folks to re-sell and etc.

But it doesn't seem like EB's heavy pushing of used titles is the biggest problem. Renting games is something I find more egregious at this time - I've been told that when someone rents a movie at Blockbuster, the studio gets a cut of that. But for the most part that doesn't happen with game rentals. And this bothers me a lot more, if it's true. Do you know anything about this side of the biz, Kim? I've heard different things on this from different people.