Virtually Physical

Originally posted on 16 May 2008 at 1upGamers.com

With the advent of downloadable gaming content (via the PlayStation Network, Xbox LIVE, and Nintendo’s WiiWare) at a relatively inexpensive cost, are we now seeing the beginning of the end of physical disc based products?

Unless a video games console was specifically purchased to play just one title unavailable on any other dedicated games machine (for example a PS3 for “Gran Turismo 5”, a Wii for “Wii Fit”, and an Xbox 360 for “Halo 3”), then it’s fair to assume that over the lifespan of the console the amount spent on software titles is far in excess of the original purchase price of the hardware. Even when the hardware fails beyond repair outside of a warranty period, it is the selection (and/or quantity) of game titles already owned that enforce the decision to purchase a replacement machine so that the gaming can continue.

In some cases, even when the console is covered by a replacement warranty, but the period to gain a refurbished machine is too long, then a new machine is purchased as soon as practically possible (resulting in many “pre-owned” examples ending up on eBay when the replacements finally arrive).

The existence of custom firmware changes and/or bespoke “Flash Cards” aside, the amount spent on handheld gaming machines (costing around £100) is certainly much lower than the “running costs” of buying a few games (cartridges, or Universal Media Discs, for example) that can be upwards of £25 each for newly released titles, so this after-sales market is really where profits can be made (to offset losses on every console made until a certain quantity have been sold).

Loss Leaders

Reports this week have relayed that Sony is losing 130 or 260 (US) dollars (depending which of the reports you believe) on every PS3 console sold. This is not new information, though. Sony have publicly announced that they hope to finally turn a profit on the PS3 hardware this coming August (2008), and figures on the actual build costs of each component in the console have always been greater than the combined selling price (so far). Whether this is actually true, or not, and whether this may just be a clever marketing strategy to make the public believe they are buying the latest technology for a considerable discount and getting an increased value for their money, I will leave up to you. I would not be surprised, however, if immediately after the PS3 “eventually makes a profit” then the announcement of a new, slimmer, lighter, PS3 console will be made public (another one of the industry’s not very well kept secrets, but it is not difficult to predict given the past history of the PlayStation brand).

This aside, could the profits reaped from game sales be greater by not seeking a Recommended Retail Price of £35-£50 for disc-based titles that sell very little beyond the first week? It has also been reported recently that if a title does not sell in large enough quantities within the first seven days of release then it is considered a “failure”. This may well go some way to explain why new titles always seem to be “out of stock” the week during, or immediately after, release as the store owners are waiting to see how (quickly) the first allocation into stock sell before they go to the expense of ordering more quantities as a regular influx of new titles means that there is always something to fill the shelves and nobody wishes to be left with 3,000 copies of “Asterix at the Olympic Games”, for example.

With the budgets spent on some titles reaching, if not exceeding that of Hollywood movie “blockbusters” it is becoming increasingly important for physical product sale quantities to reach a high turnover as quickly as possible to settle any debts incurred during the development and to ensure that the maximum number of sales are gained before the next “must have” title is release a week later. Those titles that have not sold as well as expected are discounted in price almost immediately, and certainly within a three to six month period the same title can be purchased at a large reduction in price, primarily via online mail order web sites, but also within in-store promotions at dedicated game-related retailers.

Cost Effective

But do games have to cost so much to produce? How much is spent on marketing and advertising? Is this wasted expense? Does word of mouth sell a game alone? Do demonstration video trailers released during development whet the appetites of undecided parties enough that a TV campaign, billboard banners, and/or printed media advertisements are not needed? Does anybody ever read the provided manual, or is a button configuration the only information read before the game is launched?

Does a “Limited Collector’s Edition” have to be produced to attract higher sales, or would a game sell as much if it came in a clear plastic sleeve at a reduced cost? In the latter case, I was one of the many who bought the “Assassin’s Creed” Special Edition release with a figurine of the lead character, Altair. It did not add to my enjoyment of the game, in fact it added nothing to my gaming experience. I was actually very disappointed with the game content overall. Why can our hero fall several stories onto concrete, but as soon as he gets his feet wet in 2 inches of water he dies? But I digress. Yes, you can argue that the co-release of a Collector’s Edition is only there to make more profit, instead of catering for the needs of the “collector”, and I suspect you would probably be correct in that thought. Extra in-game content such as a larger roster of playable characters, vehicles, weapons, and so on, or additional production video notes and images supplied in the form of supplemental discs are “collectables” if only available in a truly limited supply (and maybe even deleted from stock catalogues on the day of release). But when these so-called “Special” items are then made available weeks later as downloadable content, or unlocked by the player’s ability to use an Internet search engine, then it diminishes the extra value gained in the higher priced physical product.

If a typical consumer (with, let us assume, limited income) is looking to purchase a console (say, £280 for a PS3, £190 for an Xbox 360, or £180 for a Wii), and they review the prices of the game titles (that are priced comparably across the selection of “next generation” consoles), then it is understandable why the cheapest machine is chosen irrespective of any additional features any other may offer (such as the ability to play Blu-ray movies, or the support of the large online communities, or even the established back-catalogue of family-oriented games).

But do games have to be as expensive as they are? Simple economics says that when the price goes down, and with other factors remaining equal, the demand should go up. Thus, selling 100 units at £50 each may look attractive on paper, but selling 1000 units at £30 each is a much better business model. Of course this thinking is completely irrelevant when a high profile title such as “Grand Theft Auto IV” is released that receives so much hype in the lead-up that people will buy it at almost any cost, and will even queue in the lead-up to midnight to be the “first” to own it too. They then moan when it does not deliver the experience they were hoping for, especially with respect to the current issues with online multi-player games on the PS3 console. So, granted, offering a title of this nature at a reduced selling price in the first week would be financial suicide. In fact, the price will probably not drop until sales reach such a low that it is assumed that anybody who would wish to purchase (at the “any cost” price) has now done so, and the Christmas market needs to be targeted instead.

Cheap 'n' Cheerful

There are very few titles that attract this media attention (although the imminent release of “Metal Gear Solid 4: Guns of the Patriots” is another exception to this theory) as there are many new titles released on a regular basis that do not reach the same level of expectations but can be just as enjoyable and just as anticipated by the gaming public.

Personally I spend more time playing downloadable content on my PS3 console (“Tekken 5: Dark Resurrection Online”, “PAIN”, and “PixelJunk Monsters”) than I do on any other title. This could be because of convenience in that these games are instantly available when I switch the console on as they are stored on the integral hard drive as reaching for a different game stored in a box & having to get up to put the disc into the Blu-ray drive can be such a chore [?]. Or it could be that they are particular good games that I enjoy playing, and the fact they were a tenth of the price of other games only available in physical disc-based form does not have any bearing on my choice. These titles all have additional and optional downloadable “add-on” in-game content in the same “low cost” pricing model, and so the games can be bought in stages, or when disposable income allows.

So, is it justifiable to charge high prices for “big budget” games when much smaller budget titles are just as playable (and in some cases are enjoyed over a longer period)?

Change of Direction

Resources should, arguably, be devoted (or re-routed) into producing downloadable titles for less than, say, £10, that can be repeatedly plugged to the dedicated online store punters, with further downloadable content in the form of game packs, add-ons, & updates each costing similarly low-cost fees (£3-£5 each), in an attempt to revitalise sales of older titles and to re-introduce them if they had been dismissed previously. Certainly the “try before you buy” downloadable & playable demonstration versions of upcoming titles available at no extra cost has saved me a fair few pounds in providing a valuable insight to a game I would have bought but then realised it was not for me after all (“Clive Barker’s Jericho” being a prime example). Conversely, playing demonstration versions of certain titles has also meant that I have made subsequent purchases of the full commercial versions that I would never have considered previously (“Burnout Paradise”, being an example here). So, it sort of balances out over time (unless you are the makers of “Jericho”).

In the case of the Sony PS3 console, continuing their current trend of re-issuing PlayStation [One] titles as downloadable purchases from the “PlayStation Store” at a cost of £3 per time is, in some cases, three to six times the cost that the original CD-based titles are sold pre-owned in bespoke gaming-related high street stores & car boot sales, exchange/trade centres, and so on. Using the same approach, PlayStation 2 titles could also be considered for a future revenue stream at, say, £6 per time. The Wii “Virtual Console” also offers past Nintendo, Sega, and (just recently) Commodore 64 titles amongst others to the same audience who wish to reminisce in days gone by at a fraction of the cost of the initial selling price. The Microsoft platform also offers a similar service by way of the “Xbox LIVE Arcade” facility.

The only downside is that if there is no longer as much of a demand for pre-owned titles in high street stores then these organisations will have to adjust the selling prices of other items to generate the same profits, or move their operations online to reduce overall costs. I believe the internet is quite popular these days, so this may be a worthwhile venture [?]. Retaining a bricks’n’mortar presence will lead to higher shelf prices for disc-based games resulting in fewer console sales as the public choose cheaper (but, not necessarily, better) console options. Also, buying a present for a loved one may well prove less than personal if all you do is go into a shop, hand over your payment, and receive a “download serial key” in a card.

Small Price to Pay

The ability of a small child to cause a fuss, stamp their feet, shout, scream, grab the door frames with all available limbs and show no sign of letting go, and say embarrassing things they should never have overheard until they get a game in their hand when attempting to leave the shopping centre should not be underestimated as a viable sales trend. Look out for the signs of pitching in-store “deals of the week” during school holiday periods, offering demonstration “pods” of upcoming titles or dedicated competitions, and placing “real life” human-sized loveable gaming characters inside shops to attract kids with their reluctant parents bringing up the rear. Then keeping watching when the same parents want to go home & how they have to bribe their little bundles of joy with an over-priced game before they will be “allowed” to leave.

Maybe the absence of physical games in shopping centres may be a good idea for parents? There will still be the sweet selection at the checkout at the supermarket, though, so kids still win. Damn them.

But back to the point… there is obviously a balance to be struck between the prices and availability of downloadable content versus physical product, as well as ensuring further consoles have sufficient on-board hard drive capacities to cope especially given the plans for TV programme content to be remotely streamed & stored locally to video games consoles. Unless you own a Wii console, of course, and welcome the BBC supporting access to their “iPlayer” facility. Or, unless you know where to look for the PS3 iPlayer “hacker project”, and have not discovered “Google” either.

In the future, when the supporting network connection infrastructure bandwidth is in place (subject to significant investment from appropriate Government bodies so that speed restrictions are not imposed on connections no matter how far away a consumer is from a telephone exchange), consoles may well not have hard drives at all, but just larger on-board memory capacities to retain the entire game (or media) content without the need for any other local storage medium.

If the delivery of any media item to a domestic outlet (TV, personal computing device, video games console, mobile telephone handset, fridge, car dashboard, or whatever “multimedia entertainment centre” is deemed appropriate) is relatively instantaneous then the need to own the physical product no longer becomes a necessity.

How many of Earth’s scarce resources go into the manufacture/delivery of plastic cases & metal discs to high street shelving racks that remain unwanted? The products are probably not even made from recyclable materials. If the demand for physical products was not there then supply would need to be lessened.

I have many past purchases for varying games consoles still unopened and unplayed from the day I bought them as the price was “too good” to pass by. If the product was not physically on offer for me to waste my finite income upon, and it was always going to be available online at the same (fixed) cost then I would not feel the need to fill my basket full of top quality, reduced-price titles on the off-chance I will ever have enough time to play them.

Future Prospects

As Sony are already underway developing the “PS-Four”, and the other ‘major players’ are also in the design process of their respective next-”next generation” machines, we should really make our thoughts heard now about how we want to see the industry progress into the following decade and beyond.

If past decisions are anything to go by we may well see “SingStar Volume 17″ as a launch title, and executives are probably debating whether 120GB will be ample storage for the next ten years, if 2 USB ports are all anybody will ever need, or if a DUALSHOCK®3 controller is going to be released in the UK when it is bundled with the next console.

This said, Sony are not going to want to kill the cash-cow that is the home video-ownership market unless they have a suitable alternate delivery (and profit making) mechanism to replace it. As was the case with the vinyl/magnetic audio cassette/Compact Disc “upgrade” path where the same punter was conned into buying the same album multiple times (including the formats that were scrapped along the way such as Digital Audio Tape, and Digital Compact Cassette), the home video progression from (<cough> Betamax to) Video Home System cassettes, though LaserDiscs, Digital Versatile Discs, and now (<cough> again, High-Definition Digital Versatile Discs) to the Blu-ray disc format of today has been a very lucrative market especially if an organisation also has interests in movie production and can release incentives in the form of “never seen before extras” for the general public to re-purchase the same movie again and again when each new format is adopted (or forced upon the consumers).

One thing is for sure, is that if Sony does not see the end to the reliance on shiny round discs, certain other manufacturers (still smarting from the loss of support for the HD-DVD format) may well already be forming relationships with telecommunications organisations for their “next generation” console.

Nobody wants to come second … do they? Well, not unless they are a gentleman. So think on when you buy cheap downloadable titles. Who knows what it will lead to ?

Further Comment

Additional comment originally posted on 16 June 2008 at 1upGamers.com

In case you missed this news [like I did], TrustedReviews.com published an article on 7 March 2008 stating that a 60GB Xbox 360 model will be replacing the current 20GB model, probably by the end of the second quarter of this year.

The brief article also speculated on Microsoft’s discussions with Sony concerning the introduction of a Blu-ray drive, but this has recently been debunked by Microsoft (on a few occasions) in statements regarding the Company’s vision of making their gaming console the central hub of downloadable content, rather than relying on increasingly larger capacity external media drives (read: trying to pretend that this was their longer term plan all along, and in no way was as a result of the recent ‘defeat’ in the Blu-ray Disc versus High-Definition Digital Versatile Disc format ‘war’).

Today, TrustedReviews.com have followed-up with the news that Microsoft will make an announcement during the E3 ["Electronic Entertainment Expo"] Media and Business Summit computer & video games industry trade show (15 to 17 July 2008). The source of the information has also relayed that the scheduled release of an addition to the Xbox 360 range would be prior to 10 August 2008.

Of course, just because Microsoft are stressing that Lite-On are not manufacturing Blu-ray drives for the Xbox 360 console is no indication that this has not been considered, is being considered, or indeed is not happening (albeit with another manufacturer).

What you will not see or hear will be a statement where Microsoft admit ‘defeat’ & the announcement that they are going back on previous decisions to not support the Blu-ray media format.

In related news, Nintendo were recently seeking to appoint a “Software/Hardware Tester” on the “Career Opportunities” section of their web site. One of the required candidate’s duties was “Creating and executing a test plan for Wii’s USB devices“.

This employment advertisement has now been removed, but Monster.com are listing a Contract (part-time) position for a “Software/Hardware Tester” based at Nintendo of America Inc. (the Western Hemisphere headquarters of Nintendo Co. Limited of Kyoto, Japan) in Redmond, Washington 98052.

However, if you were interested in applying for this position (with Reference Code “060000001H”), you may well have missed the deadline as the Monster.com listing states:

Applications and resumes will only be accepted through Nintendo’s website as we no longer accept paper, faxed, or emailed resumes

One can only surmise that Nintendo are also looking to support external storage capabilities in the near future, probably in time for the pre-Christmas retail rush so that the Wii console offers the ability to store large capacity downloadable content locally.

BFN,

fp.