Friday, December 4, 2009

Will Digital Distribution Take Over Gaming?

A lot of companies are talking about digital distribution.  Activision wants it.  Sony wants it.  Microsoft wants it.  Nintendo has been dipping their toes in it.  Steam is taking off.  It seems that digital distribution is the way that things are going, right?  Within ten years, won't it be the norm to download your game or even stream it with a service like OnLive or Gaikai?

You might think so.  There's so much talk about it that you would assume that it's the next big step.  In fact, companies like Apple are showing that it can be done with iTunes on a huge scale and be wildly successful, so that should shut the book, right?  Let's dig in a little deeper and see if we can't figure out where the future of gaming lies.

Obviously, Apple has been amazingly successful with iTunes.  It's really one of the biggest success stories of the digital revolution, with millions of songs bought over the service.  However, most songs are 99 cents.  That's a cup of gas station coffee.  It's easy to drop a buck on a song if you like it, and if you don't like it, it was only a buck, so no huge loss.  It's a service that's set up to cater to the consumer's best interest, so it works.

Therein lies the key.  If a service is in the consumer's best interest, it will work.  Steam is a great example.  Steam not only provides a centralized hub a la XBox Live for your games, but it also provides protection against cheaters and the ability to install your games on any new computer.  It's not difficult to move your Steam account from computer to computer, and once you've purchased a game, it's always there.  Plus, Steam promotes the crap out of indie developers, sets fair prices when they can, and offers fantastic deals.  In the last few months, I've purchased World of Goo for $5 and Team Fortress 2 for $2.50.  Those are prices you would never find in any store under any circumstances.  On top of that, when people purchased the Orange Box, they were able to give away copies of Half-Life 2 and Episode One to other Steam users for free.  The whole system works in the customer's best interest.

Video game companies are trying to push digital distribution because it will help their bottom line.  Imagine, a world without piracy, with nothing but new games as far as the eye can see!  No packaging, manufacturing or shipping costs!  It's enough to make a publisher swoon.  However, here's the kicker: Most services will not be in the customer's best interest.

The PSPGo, for instance, is not in the consumer's best interest.  A system that doesn't work with my previous games or any of my accessories and costs more than other systems?  Where do I sign up?  Therefore, the PSPGo is failing.  Here's a money quote from Traveller's Tales founder Jon Burton: "I'm betting on Sony making PSP Go games much cheaper than the UMD versions, or the PSP Go will die."  It's telling that they haven't released any sales numbers for it but lump it in with their regular PSP numbers, unlike Nintendo who breaks down their numbers for the DS, DS Lite, DSi, and DSi LL.  It wouldn't surprise me if the PSPGo loses support from Sony and gets dropped sooner rather than later, since they tried something that was solely for their own benefit and not for the customers.

Another straight-line comparison is the Kindle, which has attempted to combine books and digital distribution.  The dream?  "All your books in one place!"  The reality?  "Some of your books in one place!  Oh, and you have to buy them from us.  And we can delete them at any time, but we won't do it anymore even though we could."  How is that in the consumer's best interest?  Kindles are selling in decent numbers, but e-books are not going to supplant regular old books anytime soon.  Why?

Well, because as bulky as books are, when you buy a book, it's yours.  No one can delete the book from your library without your knowledge.  You can read it as long as you have decent vision.  You don't need any special equipment to read books.  You pick it up and read it.  You can buy books for 50 cents at a garage sale.  Sure, it can be annoying having to get up from the couch and grab a different book, but no one complains about it.  That's because the majority of the time, it's in the consumer's best interest to own books rather than e-books.

Console makers have dipped heavily into digital distribution, with a plethora of games available for download at any time.  Is this proof that digital distribution is winning?  Not really.  Most of these games are $5 to $10.  In other words, they're cheap.  When Braid was priced at $15, there was a great hue and cry since that was more than consumers wanted to pay for a game.  They did, of course, but not without a lot of complaining.  It was weird to a lot of people, since we'll willingly pay upwards of $50 for a hard copy of a game.

Why the complaints over a simple $5 price hike?  With a game like Modern Warfare 2, if you don't like it you can trade it on Goozex, sell it on eBay or trade it to Gamestop.  You have options.  That $60 isn't lost forever.  If you buy Braid and you don't like it?  Tough.  It's yours now and forevermore.  For instance, I have games on my Wii that I bought and wish I wouldn't have, like StarTropics, Milon's Secret Castle, LostWinds and MegaMan 9.  These are games that received a lot of acclaim when they launched.  They're good games.  Reviews looked really, really good.  I played them and didn't really like them.  That's not a knock on the games themselves, it's just that they weren't to my liking, and now I'm stuck with them.  That's $34 frozen on my Wii that I'm never getting back.  That sort of disappointment is manageable when you're dealing with a $10 game.  Losing $10 isn't worth crying over.  However, losing $30, $40, or $50?  That's worth complaining about, and that's where digital distribution is headed.

Don't believe me?  Here's the cold, hard truth.  Nintendo has sold eight million copies of Super Mario Galaxy.  They've sold over eight million copies of Super Smash Bros. Brawl.  They've sold 16 million copies of Mario Kart Wii.  How much are those games?  They're still $50 apiece new.  Every other company has launched a "Greatest Hits" line putting their best-sellers at $20 apiece, but Nintendo steadfastly refuses.  During the Gamecube years, they reduced the amount of copies that was necessary to label a game a "Greatest Hit" from a million to 250,000 because they were in third place and needed to push more software.  Now that they're in the lead, they have no such need, so they're acting in the company's best interest rather than the consumer's.

Say it with me:  When a company is successful, they feel less responsibility to the consumer.  Think of it this way:  If you have one miniature candy bar and someone asks for it, you'll be extremely hesitant to give it up.  If you have several, you'll be more willing to give one up.  If you're sitting on mountains of miniature candy bars, you'll gladly throw a pile to your friends.  The same thing happens with a business.  If you have a small group of clients, you'll fight tooth and nail for them.  If you have a huge group of clients, you won't panic if a few of them leave the nest.  You'll start shedding some of your problem clients and focusing on the most profitable ones.  For instance, when was the last time Nintendo offered a special on Virtual Console games?  Sony and Microsoft will sometimes offer little deals, but that's only because they're trying to encourage more people to buy.  If they were in first place, they would behave the same or worse as Nintendo has.

A company's sole aim is not to entertain or make the world a better place.  Their only purpose is to make money, pure and simple.  Whatever makes money is what they will do.  If they can get more money out a customer, they'll gladly do it because that's what they're there for.  Their stockholders don't give them any bonus points for being nice people.  Another prime example:  Modern Warfare 2 was $60 in retail and $60 via Steam.  That price wasn't decided by Valve, but rather Activision.  Even though Activision's cost for the digital option is far cheaper than the retail version, they sold the digital version for the same price.  Why?  Well, why not?  People are going to buy Modern Warfare 2 whether or not you charge $60 for it.  Why not get more money out of the customer?

What's the harm?  Well, if you buy a $50 game, you really hope that it's good.  If it isn't, you know you can switch it out for a different game.  If you purchase a game digitally, you really hope that it's good.  If it isn't, you're stuck with it now and forevermore.  This means you will be less willing to purchase a $50 game unless it's a sure thing.  Companies are hesitant to lower prices on their games unless they're not selling as well as they'd like, in which case they'll lower prices reluctantly.  Put it all together and you will purchase fewer games, and only "sure thing," big budget games will succeed in this environment.

There are exceptions to this rule.  Steam has showed that, with proper promotion, indie games can succeed and thrive in a digital environment.  Valve is showing that there's a right way to offer digital distribution, and it's working.  It's valuable to the customer.  They promote games like World of Goo, Zeno Clash, and others that would have had a quick death at retail.  They're working in the customer's interests and not the company's interests, and it's benefiting the company.

But can you trust most companies to behave this way?  Take OnLive, for instance.  They have support from EA, Activision, all the heavy hitters in the industry.  OnLive needs the big companies, not vice versa, and those big companies can exert an enormous pressure on a small startup like OnLive.  Are they going to willingly bow to a nobody indie game?  We can safely say, after all the money that's at stake, that they're probably not going to want smaller indie releases to be promoted.  This means that the indie boom that's gathering steam could be quickly quashed by greedy companies.

Let's bring it all together.  Companies really, really want consumers to adopt digital distribution since it's in the companies' best interest.  However, they refuse to lower prices on their games even though it's cheaper to provide digital distribution than retail distribution.  Consumers buy less games, further weeding out the amount of companies that can do business, paring it down to a lucky few who are able to survive the bloodbath.  These companies will exert even MORE control over the gaming public at large, thereby making prices go higher.

Obviously, this is a worst-case scenario, but it shows how unreliable the idea of pure digital distribution is.  Fortunately, it won't happen.  Consumers simply won't buy something unless it's in their interest to do so.  The marketplace has a way of weeding out good and bad ideas, and we've seen that historically.  For instance, in 1996, McDonalds attempted to launch a line of upscale sandwiches with a $100 million dollar advertising campaign.  Their flagship burger was the Arch Deluxe, which was basically a fancy-pants version of the Big Mac for more money.  It was a bad idea so no one bought it even though McDonalds pushed it incredibly hard.  It wasn't in the interests of the consumer, so it died.

DivX was also a notable failure that launched in 1998.  DivX was a movie rental system that was $4 per disc for two days.  If you wanted to keep watching the movie, you had to pay $2 additional for two more days of use.  It doesn't sound so bad until you realize that they were trying make it the standard instead of the Open DVD format we enjoy today.  Consumers rejected it soundly and it died a death a short time later.  It was a system that was in the interests of the companies promoting it, but not the interests of the consumer.

In the video game world, the PS3 launched to a massive ad campaign and had the best graphics of any next-gen system along with downwards compatibility.  However, the price was ridiculous for the vast majority of users.  It was in the company's best interests, but not the consumers.  It wasn't until the price expectations were closer to the norm that it gained widespread acceptance.

You may argue that consumers will buy any old crap that's thrown their way as long as it's promoted, and to a degree that's true.  A few years ago, Big Mouth Billy Bass was one of the most popular items around.  It wasn't long ago that we were all swept away by the Macarena.  Snuggies are the current "it" product.  However, in each of these cases, these items aren't a fundamental lifestyle change.  They're items that can be used and discarded with minimal loss of money.  They're all cheap.  They're not big deals.

However, charging a customer for what amounts to a glorified rental is a big deal.  DivX failed because people don't want to pay for something that's not theirs.  Even though we're moving to a more virtual economy, we're still the same old people we've always been.  We like trading money for goods and keeping those goods in our physical possession.  Companies don't like that idea, but that's too bad.  You're not going to get consumers to suddenly forget about their own personal property rights when there is virtually no upside.  See, by and large consumers aren't stupid.  They know when someone is just playing them for fools or when they're being presented with an item that's legitimately useful to them.  Digital distribution has no upside.  It's not in the consumer's best interests.  Unless every company adopts Valve's excellent pricing structures and flexibility (which is highly unlikely), expect physical distribution to be the norm for a long, long time.

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