50% of what you pay for a game is wasted

· by Steve · Read in about 5 min · (869 Words)

I’ve been an advocate of digital distribution for a while now; I think packaged physical distribution of a product which is essentially entirely complete as a stream of data is hugely wasteful financially and environmentally. Ever since publishers stopped bothering to give you anything worthwhile in that game case - manuals these days are rubbish, carbon-copy affairs that rightly no-one bothers to read because the in-game tutorials are more interesting, and Ultima-style cloth maps and runes are consigned to history - physical game cases are doing precisely nothing but take up space in my house and making me get up to fiddle with disks when I want to play a particular game. My only possible use for a physical product these days is resale value - but then I don’t often sell on games these days anyway, and publishers are getting wise to ways to make this harder / less attractive (see Mass Effect 2’s free DLC for those with an original one-time only game code).

This was only reinforced by an article in the LA Times which included a chart about the average breakdown of a $60 game:

Basically what this indicates is that, on average, $26 of the $60 price tag, or almost 50%, goes to physical overheads - things that have absolutely nothing to do with making the game itself, and everything to do with shifting bits of plastic around. It's also interesting to see that the platform royalty (paid to Microsoft, Nintendo or Sony) is only $7, or about 12% of the price (compare this to a typical 30% on current digital distribution). From this you can see why the platform holders are quite keen on cutting the retailer out of the loop, and game buyers would benefit significantly too.

So what would that latest AAA game cost to you and I if it were on digital distribution on launch day? This is hard to judge because currently this only happens on PC where games are already cheaper (via Steam and Direct2Drive, among others); consoles currently only offer smaller or older games so are harder to compare directly. Let's assume for a second that the platform royalty would be higher (to pay for bandwidth, assuming they host it), but not as high as the typical indie 30% because that can no doubt be negotiated down for big publishers / releases. So let's assume 20% for sake of argument, still quite a bit more than the return platform holders get now. Working back from that, and assuming that the publisher needs the same absolute amount of money to fund development, marketing etc, that means AAA digital games releases should cost (at launch): 27 / 0.8 = $33.75.

That's pretty astonishing. I know some people are attached to the physical manifestation of a purely digital product - frankly, I don't understand this attachment and all the indications are that the new generation of gamers, raised on digital music and grabbing films from the internet, don't either - but surely if you're offered this kind of deal for the same game, plus not having to walk down to the shop in the rain, it's a no-brainer.

This chart actually came from OnLive of course, who propose doing things very differently. I'm not convinced that particular approach will work well enough (particularly since our local internet speeds put us at the arse end of the developed world), but I'm absolutely convinced that digital distribution in some form will be increasingly dominant in the coming years. The only people who will lose out are the retailers, everyone else stands to benefit in both price and convenience.

Of course, what's likely to happen in the immediate term is that publishers and platform holders will have ridiculous prices for digital distribution that bear no relation to the cost structure above; the primary reasons being that:

  1. Big influential retailers will pressure them not to undercut (effectively forming a cartel, which should be illegal, but it happens already)
  2. They like to eat money

But, slowly and surely, provided there’s real competition, prices can’t help but come down. Personally I think radicals like OnLive are key to providing this genuine competition - there’s always talk that having competing proprietary consoles means competition is maintained, but I don’t buy it; console manufacturers know full well that they have a captive audience once a consumer has invested in the console (barring the minority that have all of them) so price elasticity for games is very much higher than normal for other products; no other company can publish a game for that platform and compete after all. It’ll take external competition to make downloadable content cost what it actually should, which means the next console cycle (most believe this will kick off in 2012/3) could be very interesting indeed.

I’ll make a prediction here: the company with the best, most practical, and most reasonably priced digital distribution model will have a massive advantage next time around. And, I wouldn’t rule out this being none of the current encumbents either. People scoffed when the iPhone came out, but effective digital distribution had an absolutely massive influence on its success; I’m sure that hasn’t gone unnoticed by the usual suspects.