When is a $60 Game a $0.99 Game?

There has been a lot of discussion about the erosion of game prices. Most of the blame has been levelled at smartphone marketplaces and free-to-play games, which both offer play experiences at a disruptively low price point.

Unsurprisingly, the most outspoken of all companies has been Nintendo, who've had the hand-held market sewn up for the past 22 years. It seems like every single executive got the memo to go on the defensive about their games' value. There is an element of irony to this, as part of Nintendo's success with its portable consoles has been their cheap and cheerful pricing. It's telling that they had to slash the price of their latest console, the 3DS, when they broke this low-cost model.

However, it's not just those businesses who are directly in the firing line who are worried. Epic Games' president, Mike Capps, publicly registered his concern that this value proposition shock-wave will change the whole industry.

I agree that change is inevitable, but I think lower pricing is only a secondary effect of the true cause of this disruption. Digital distribution is the actual driver of the entropy we're seeing, as it eliminates any type of physical delivery. Without the risk of having to eat the up-front costs of manufacturing and distribution, more developers are able to compete in the marketplace, and this competition is what's driving prices down. These new operations are much leaner than the old-guard, and are doing it cheaper, faster and better. Your ability to write a large cheque doesn't guarantee your place at the table any more; having something valid to say determines whether you can sit and be heard.

This got me thinking about the comparative costs of the content delivery methods used on each of the competing platforms: download for smartphones, and physical media for consoles. Is there that much difference between the 'real', like-for-like price of a game sold using bricks and mortar distribution, and one sold in a digital marketplace? The headline figures are: $60 for a console game, and between $1-$5 for a smartphone game.

From a developer's perspective, delivery cost in a digital marketplace is simple to quantify: 30% of the sale price goes to the vendor. That's it. Done.

The retail shop route is considerably more complex. A contemporary article by Forbes puts the friction costs of manufacturing at 5%, distribution at 1.5%, console owner's fees at 11.5%, and retailer margin at 20%. That totals 38%, which isn't a million miles away from the 30% a digital marketplace rakes (which suggests Apple, Valve and other providers take too much, but that's a discussion for another day).

If the costs of the routes to market are similar, then what other factors are there that can explain how the price of a smartphone game can be a fraction of the price of a retail game (2-10%), and still be sustainable?

Let's consider the population of people who play a retail game: how many of them actually pay the full retail price for it?

It's telling that I had to look up a typical retail price for a game before writing this post; I can't remember the last time I paid full whack for a title. In the US, Brink for the Xbox 360 was priced at $60 for release in May. Using camelcamelcamel.com, I can see that even before the first week of sales, the price had dropped to $45. The price then fell again after 6 weeks to $30, and after 10 weeks, it's now around the $25 range. Of all those who have bought Brink new, how much did they pay for it on average? It's difficult to say without the sales data, but another online charting tool, VGChartz, indicates that 88.3% of lifetime sales were made between weeks 1 to 6, 6.4% between weeks 6 to 10, and 5.3% thereafter. This implies a rough average sale price of $43.

Of course, this is one game among thousands, but it's a fair example of a title with an average critical reception, decent sales, and whose multiplayer population appears to have waned after the first couple of weeks, precluding significant Long Tail sales.

We're still nowhere near our smartphone game price yet, but the average price of a retail game drops dramatically if we consider the population who play the game borrowed, second-hand or rented. This is an inherent factor for games delivered on physical media, and in these cases the developer will see no revenue. There are large numbers thrown around quantifying those that rent games (50%), and those that buy used games over new games (53%). Even discounting players who borrow games from their friends, the impact of rentals and used sales implies that only one quarter of those playing a retail game will have paid the developer. Comparably, everyone who plays a digitally distributed game will have purchased it in the primary market, paying the developer directly. Adjusting for paying player populations, a physically distributed game's like-for-like price now falls 75% to $11.

There is another significant difference between the population of smartphone and console games players: the size. Not including iPad 2 sales, Apple has sold 189 million iOS devices... This is the same number as the Wii (88M), Xbox 360 (55M) and Playstation 3 (50M) combined. Due to hardware differences, it's common for a developer to sell their game on either the Wii, or both the Xbox 360 and Playstation 3. Each approach addresses roughly 50% of the retail console market. If you're only reaching a market 50% the size of a larger market, then your sales potential is only 50% of that larger market's. Let's scale our like-for-like price again, down to $5.50.

Suddenly, a $4.99 price for a smartphone game isn't sounding unreasonable at all.

You may say that you can increase sales of a traditional, $60 game by releasing it on the PC too. However, that would only give you a market population boost of around 30 million. Easily offsetting this, Google's Android devices contribute another 130 million to the smartphone user base. For simplicity's sake, let's assume that we're investigating the feasibility of taking a non-PC retail game, and only releasing it on Apple's iOS devices.

There's another factor that can affect your sales potential: the quality of consumers in each market. How many games does a player purchase a year? Tie ratio research suggest that iOS owners buy a similar number of games as console owners. This isn't surprising given the recent analysis that indicates a typical iOS device owner has downloaded 75 applications. It's highly plausible that a small portion of these are paid games, so assuming parity between the quality of smartphone and console consumers seems a fair.

We've come a long way from the vehemently defended $60 price point. Like-for-like, we're all the way down to $5, but how do we get from there to $0.99? It's simple actually: no-one is spending $10 million to make a smartphone game.

We've got like-for-like prices, but not like-for-like products. A particularly large budget on a smartphone game is tens of thousands of dollars, whereas a $10M budget is considered relatively small for a console game. Being generous, let's assume that a smartphone game costs $100K to make. That's still 100x less money needed to be recouped in sales than an average console game. Perhaps it's a good thing that Apple stipulates a 99c minimum price on the App Store. Accounting for product budgets, our true like-for-like price is a ludicrous 5c!

The fact is, most traditional, heavy-weight game developers aren't making big-budget titles for smartphones, but it's entirely feasible for them to do so. Want to keep you're multi-million dollar budget? Charge $5 for your game; EA is already doing this. Better still, create freemium games whose revenue is driven by in-app purchases; research indicates that you'd be able to triple your budget (IAP total spend per game averages $14).

It's little wonder that these publicly owned companies are coming under fire from their investors for not getting involved. With all the new development talent joining the fray, can they afford to simply cross their arms and pout?