Friday, August 27, 2010

How game retailing really works.

In what appears to be a growing trend, Penny Arcade has taken a position on the used game "controversy". As the comic points out, used game customers are customers not of a game publisher, but of the retailer. What it doesn't point out is that new game customers are also customers of the retailer alone. Only if the publisher happens to sell games directly can an end user be a customer of the publisher.

Here's how it works in general terms for the packaged game industry:

  1. A development company creates a new title. Sometimes they are funded by a publisher and other times they build on spec.
  2. A publishing company begins marketing the title. Sometimes a developer will handle their own marketing and distribution, but most developers are divisions of or partners with larger publishing companies.
  3. The publisher works with manufacturing and distribution subcontractors to get copies of the game to retailers.
  4. Publishers and retailers begin negotiations to how they will work together to sell the title. While there has always been some partnership between publishers and retailers in the video game business (going at least as far back as the Sears branded Atari 2600), the relationship has become more elaborate in recent years. Consider the coordination required to develop pre-order bonus DLC for instance.
  5. Retailers purchase copies of the title in order to stock their locations. These purchases are far more complicated than simply filling out an order form, but the purchase transfers risk from the publisher to the retailer in general.
  6. End users purchase the game from the retailer.

Notice that for these sorts of games, the customer sits at one end of the supply chain and the developer sits at the far end. Along the way, each party takes a slice of the profits and a slice of the risks as well. The more risk a company takes on, the more money they stand to make or lose. In particular, a developer who builds a game to spec risks losing everything if they can't sell it to a publisher, but also stand to make more than usual if the game sells well. On the other end of the chain, a retailer may see their profit vanish if they can't move copies of a game they invested heavily in.

Now it isn't talked about much these days, but there is also a risk for the consumer. Once the seal is broken on the game package, no retailer will take it back no matter how garbage the game in question turned out to be. The industry seems to be doing its level best to get consumers to take on more risk through tactics such as pre-orders and DLC. Fortunately, there are remedies a consumer can take in order to reduce risk. Two of the simplest are buying used and selling unwanted games to retailers who sell used games. Used games provide consumers with an outlet to take risks on games that might otherwise have a harder time selling.

Ironically, one category of games that has no true used market is annual sports titles, such as the one that kicked off this round of controversy. Smackdown vs. Raw 2011's shelf-life is about one year, which is not really enough time for a robust used market to develop. Unless the game is total garbage. Since there is always a newer edition right around the corner, used copies of sports games begin gathering dust within weeks of a game's release.

Monday, August 23, 2010

Used games don't cheat publishers

Some executive for THQ apparently said, "I don't think we really care whether used game buyers are upset because new game buyers get everything. So if used game buyers are upset they don't get the online feature set I don't really have much sympathy for them." The thinking here seems to be that consumers who see a used copy on a retailer's shelf or on eBay will buy it, take it home, discover they only received half a game and conclude they should swear off buying used games. A tiny bit of analysis of human psychology reveals that most consumers will instead blame THQ who is holding the other half ransom. Most people won't feel shamed or chastised, but cheated.

Speaking of which, he also stated, "That's a little blunt but we hope it doesn't disappoint people. We hope people understand that when the game's bought used we get cheated." Now this is a bold claim that can be evaluated on strictly objective standards. I believe the publisher feels cheated because a used sale represents a customer who does not directly provide income to the publisher. The retailer makes 100% of the profit, so the publisher gets nothing from that sale. Seems pretty straightforward.

Unfortunately, the reality is often more complicated. Publishers, especially large publisher who handle their own distribution like THQ, have lots of options when it comes to selling games. There are dozens of huge retail channels that a publisher can choose from including selling from their own online store, as THQ does. Direct online sales allows publishers to pocket the share that retailers normally extract from each sale. That means publishers are in direct competition with the handful of retailers who sell used games. As it turns out, the retailers who offer used games are among the heavyweights of the industry: GameStop, Amazon and now Toys R Us. Other large retailers who have dabbled in the used market are Best Buy and Walmart. Retailers are attracted to the business since they avoid paying publishers their pound of flesh which, despite the added cost of managing inventory, results in good profits.

So this is actually a squabble between publishers and retailers with consumers caught in the middle. If publishers really wanted to end used game sales, they have a number of tools to make it happen including refusing to sell physical copies of games. But most big-name publishers can't afford to give up physical-media sales because they represent too much of their sales and profit. While times are changing, consumers still see disk-based games as a good value in part because they can be resold on the used market. So in a slightly round-about way THQ and other publishers benefit from the used market.

Contrary to intentions, this whole "new game buyers get everything" probably hurts new game buyers as much as it helps. For instance, eventually used game buyers will catch on to the scheme and refuse to pay the usual discount for games which means new games will have a smaller resale value than usual. Also, problems with the one-time-use DLC will hurt new game buyers disproportionally as they will be the prime users. If by chance the online mode fails, tech support will naturally assume the problem is that the game was bought secondhand. If your gaming machine gets stolen, can you be sure that you'll recover your DLC without a hassle? Meanwhile, used game buyers get access to the core game for an even cheaper price than normal.

As usual, I think the best advice from developers who think they are getting cheated is to go out of their way to treat the customer well. Sure it's counterintuitive, but look how the strategy pays off for Nintendo. They have games that remain in the best-seller lists for months because customers feel they are getting exceptional value. There's no need to worry about a few used game sales when new games are selling as fast as you get them to the store.