Dysfunctional Console Industry Struggles For New Profit Centers

MojoKid writes "The rumor mill is still churning out quite a bit of information on new consoles this week, including new data on Nintendo's upcoming Wii U. According to unnamed developers, the Wii U actually isn't as powerful as the Xbox 360 or PS3, despite boasting HD graphics and significantly improved hardware. Meanwhile, the Xbox 720, codenamed Durango, is reportedly targeting the holiday season of 2013 as a launch window. Rumors are floating about of a required always-on internet connection and of locking out the used game market. What this discussion truly highlights is just how dysfunctional the entire console industry is and how skewed its profits are. Profits on hardware sales are so small, game shops can't survive on console sales alone. $60 MSRPs are subsidized by exchange and trade-in programs. Kicking Gamestop in the teeth may occasionally sound like fun, but the idea of killing the used games market doesn't make much sense. If used title values collapse and MSRPs stay the same or rise, the entire industry could hamstring itself in the name of higher profits."

Comments

Higher profits

[Enderandrew]

Killing used sales doesn't mean higher profits for console makers. Those who are only willing to spend $20 on a used title aren't suddenly going to drop $400+ for a new console and then start paying $60 for new games. They'll likely just spend $20 on used games for current gen titles like they do. Console makers will hurt the adoption of their consoles and lower profits. And some gamers will be less likely to spend $60 on games that already currently do so, if there is no longer an option to sell the game back and make back some of their money.

I don't understand how Microsoft and Sony think this will lead to higher profits. And frankly if Microsoft or Sony does this, but the other does not, then it will just drive business to that console.

Re:Higher profits

[Eponymous Coward]

I don't understand how Microsoft and Sony think this will lead to higher profits.

I sometimes think that high prices aren't all about profit. It almost seems like Microsoft / Sony / Nintendo think it would be an insult to offer their best titles for $15 even if that meant they would make much more money. Prestige matters to them.

Re:Higher profits

[localman57]

They aren't going to be married to a $60 price point. If they cut out the used game market, then it becomes a curve over time. Right now, we have a situation where a small number of die hards pay $100 + for a pre-release version with some extra trinkets, the first-day adopters pay $60 for a new game, a large number of people buy it at retail for $40 a year later, then it goes in the bargin bin for $20 or $30 a few years later. That's the curve. The problem for publishers is that they have to compete with their own used games at the end of this curve.

The new model will look different, and will vary a lot from game to game. Basically, the game publishers will try to maximize revenue by getting each customer to pay the highest price they are willing to pay, with the reward of getting the game sooner than you would have for a lower price. When your distribution costs approach zero as they do with digitial distribution (remember that Wal-Mart probably gets somewhere between $10 and $20 out of that $60), you can sell a game for $7 and still make a profit. And that beats not making a profit. So expect used games on consoles to follow the same thing that's happened on Steam. Eventually some pretty good but old games will show up for a few dollars on the consoles; this is a price point that isn't worth GameStop's trouble. There's already some flavor of this with the fact that you can buy MarioCart for N64 on the Wii market for $5.

Re:Higher profits

[nitehawk214]

Might be granny and auntie christmas purchase marketing. "the $60 game must be better than the $30 game... I'll buy junior the $30 game"

Thanks /. for the post editing button.... not

Or your Auntie or Granny just doesn't like you much.

Re:Higher profits

[Enderandrew]

Technically, it is the game publisher who sets the price. For instance, at one point someone decided to challenge the Madden franchise by offering a $20 alternative.

Developers and publishers have both been going belly up. Budgets on games are going through the roof. You need $20 million to put together a AAA title these days, with some games costing $100 million to make.

NES games in 1985 were $35, which is over $70 in today's dollars. But the cost of making a game is considerably higher today than it was in 1985. Some people claim that there are more consumers today, so you can sell more copies.

But there were 62 million NES consoles sold. There have been 62 million PS3 consoles sold and 65 million XBox 360 consoles sold. Given that many people have replaced 360's due to defective hardware, I'm not sure you can honestly say you can expect more sales from a console game today than during the height of the NES.

$60 isn't ridiculous when you look at it. I don't know why people felt $35 was fine in 1985, but assume better games today should sell for $15 as you suggest.

Re:Higher profits

[Tharsman]

Those who are only willing to spend $20 on a used title aren't suddenly going to drop $400+ for a new console and then start paying $60 for new games.

Here is the biggest issue with your observation. The problem is not people buying old used games for $20 bucks. The problem is people that just pay $57 bucks at a GameStop for a used game instead of paying the $60 for the new copy.

At every level, the only one winning here is GameStop. The used copies are rarely in a condition where they are only worth 3 bucks less, yet that’s the undercut range they go for with used games is only between $2 to $5. Given the conditions they sell them at, these used games should be worth about 50% of the new copy price.

Given no choice, most these people will just buy new, heck, if GameStop was not pushing the used copy down their throats with "incentives" like free magazine subscriptions and discounts for a yearly fee, they would never had looked at the used copy anyways.

I am not in favor of used copy banning, but it's this predatory actions from chains like GameStop that are actually hurting many studios that barely can make a profit due to not having the marketing backing that you see behind titles like Modern Warfare.

Re:Higher profits

[Rifter13]

One of the MAJOR problems, though, is that inflation has gone up, while general salaries have remained stagnant. So, people don't make a LOT more than they did 10-20 years ago, but things cost more. It's getting to the point right now, that charging $60 for game is going to slow sales for many, MANY titles. I think the REAL gaming success story, over all, is Steam. They are very aggressive on pricing, and they just send you games, when you want them, day or night.

Re:Higher profits

[localman57]

If that's what the market will bear, then that's what the price will be. If people are willing to pay it, then it's a fair price. This sucks for poor people who happen to be video game enthusiasts, but such is the way with a free market.

The other thing to remember is that we're not talking about bread, or water, or heating oil, or any of a variety of fundamental needs. It really is pretty viable for you to decide to go down to the library and read a book for free instead of playing the latest video game. Then buy it when it drops to $40 or whatever your purchase point is.

Re:Higher profits

[Tharsman]

That's the curve. The problem for publishers is that they have to compete with their own used games at the end of this curve.

Excellent statement but this bit is a bit off. The problem for publishers is not at the end of the curve, but at the start. Game chains like GameStop will carefully calculate demand and order as few copies as they need to seed a local market of used copies. They will do their best to brainwash children into beating games and return them for "amazing credit value" (rip-off values) and then push a full wall of these new titles for a $2 dollar discount.

Heck, look at Modern Warfare right now at GameStop's website. Amazing savings, eh? $2 whole bucks saved in exchange of a box filled with store stickers and thorn box!

You will find even great games back in the used bins in large numbers and an artificially created scarcity for new copies of the "hot" title. See, kids eventually are "educated" that should they return the game as soon as they can from release date, they will get more money back (still a rip-off value but a lesser rip-off.) This is not a new practice, but as games get more expensive to produce, and the market becomes more competitive, it becomes a larger issue, especially for smaller game titles (not so much for the Modern Warfare’s of the world.)

I actually perceive the end of the curve used copies to be extremely undesirable for most people. At that point they are so thorn and destroyed that you may as well just get the new copy for $20.

This is one of the reasons online play has become so big in the last few years: online components tend to encourage people to keep their games for longer instead of just beating a campaign and returning the thing.

Re:Higher profits

[Enderandrew]

http://www.destructoid.com/max-payne-3-potentially-cost-105-million-to-develop-211058.phtml

I interviewed Brian Fargo recently, and he cited $20 million dollars as the price point to get in the AAA market.

There are only 25 PS3 titles to ever reach 1 million sales. Most games will not sell 1 million copies. When I look at a practical business model, I'm assuming a relatively low budget ($20 million as opposed to $100 million for titles like Max Payne 3) but also assuming I'm not selling 1 million copies.

And funny that you cite Fallout: New Vegas, but Obsidian just ended up laying off 30 people. The owner of the company hasn't taken any salary in over six months and they're fighting bankruptcy. But surely, they're making too much money and should lay off the rest of their staff.

Re:If they kill the used game market,

[Eponymous Coward]

You're not the only one. It's interesting to note that there's no market for used iPad games either. I suppose when the game is a few dollars, nobody cares.

Mobile device games are a lot like the games we used to play in video arcades. Frankly, I welcome the return of these smaller games.

Well then ...

[gstoddart]

Rumors are floating about of a required always-on internet connection

That pretty much guarantees I won't buy the next XBox.

I have no interest in having my XBox being required to always be connected so they can implement annoying features like ads in my XBox and other nuisances.

I don't play on-line, and I mostly view a console as a stand-alone, mostly off-line game. So, if it truly does require a constant internet connection, it's not going to get bought by me.

Same story over again

[billcarson]

I believe the console market is in the same position as the arcade halls were back in the early '90: filled with 'mature companies', struggling to provide added value to their product over the then relatively new home consoles. If the console market wants to survive, they really need to move away from copying the success factors from the PC market, and provide added value to their product that the PC industry can't easily copy, just like surviving arcade manufacturers are doing nowadays. And, while I agree it is hard to find such elements, they certainly exists. The wii-type thing was a good start. Just adding a faster internet modem and high end graphics card isn't going to do it this time.

Re:If they kill the used game market,

[tripleevenfall]

Console makers realize people aren't going to go for required always-on internet, lockout of online play beyond the original owner, or the various other schemes they have tried to keep people other than the original purchaser from using physical media.

It won't be long before they make games download-only, and linked to your user account only. I'm sure they would sacrifice their firstborn to implement this today, but internet connection speeds simply aren't there yet. Sure, it'll be marketed as being done out of 'convenience' to the user, but it's out of convenience to their profit margins.

On behalf of the rest of the world I say to them - if you want to make more money just raise game prices. Don't require internet connections. Don't continue to try to destroy the secondard market. We aren't going to buy all the games new that we are currently buying used, we'll just play less games. If $60 isn't enough then try $75. If your product is good, the market will bear it.

No sense being a dog in the manger about it. (not that they are listening)

There is no COULD hamstring...

[fallen1]

They WILL hamstring themselves. Even with the overall apathetic appearance of a large portion of the United States, if they attempt to kill off the secondary or used game market they will, in effect, be killing the console game market. The only people who can afford to throw $60+ at a game every time they turn around does not constitute the overall gaming market. I would be willing to bet that those people with large enough bank accounts to buy games AT WILL amounts to less than 10% of the overall gaming market. The VAST majority of the gaming market depends on being able to play a game and then turn it in to lessen the cost of the next game, specially when you can run through the majority of the games on the market in under, what? -- 20 hours per game?

Their need for control and their greed will be their undoing. A lot of people say that voting with your dollars doesn't work. I say that it will work when at least 50% of the market rises up against the corporate overlords who are producing this crap. Who want us, the gamers, to continually pay them for the privilege of using their game - not owning OUR game. As these rumors become fact, I hope that each of you who despises this will begin educating those fellow gamers who may not be following the information. Educate them that the cool thing to do is not to buy that uber new shiny, but to reject the new paradigm that the corporations want to foist upon all of us. Actually vote with your dollars this time and not just pay it lip service. All it takes is enough of us protesting in forums, in direct mails to the companies, in e-mails to the companies, and DO NOT BUY ANY NEW CONSOLES. Make it plain and clear, without resorting to cursing and ranting, that you nor anyone in your family or circle of friends will be purchasing any gaming console that removes the rights of the people* to First Sale Doctrine or the ability to trade it in so you can afford to purchase another new game.

Make them understand they will pay for their hubris by us, the gamers, simply saying "No."

* Do NOT, under any circumstance, call yourself a consumer. We should always remind them that even if we act as a group, we are individuals who are much more than just a consumer.

What's wrong with "good enough?!"

[erroneus]

These damned MBAs out there seeing only what they want to see and not understanding the whole picture is a problem. For one, the used market is actually vital to the game industry. Without it, people are less inclined to buy new things as they [rightly] feel that the ability to sell something they bought for a rather high price is a way to lessen the sting of the high prices and the high risk when some games end up being rather disappointing. After all, there are no returns on most of these which is a huge risk for the buyer.

But beyond this, it's clear that the technology of games has just about plateaued for now. Things aren't getting any better or more exciting until the next earth-shattering invention. The Wii and Kinect and whatever the PS3 has are fun and all, but when it comes to long-play games, I'm sorry, but endurance shouldn't be a requirement. The gimmick has already worn off on me. I do like sword fighting games though... just not enough good ones and anything for Kinect will just suck.

But what's wrong with keeping things as they are for a while?! The PC market "matured" from always wanting to upgrade. The gaming market is there right now, I believe. Let's just sit on our laurels for a while and let the innovation in game creativity run on its own for a while. The greed and unrealistic perspective of change and control and getting people to buy new things every 5 minutes needs to fade.

Re:To the games industry:

[tripleevenfall]

They've already been massively cheaping out by churning out these games that are basically just unreal clones.

Make a few maps and a few weapons, corral a server or two, you're done. No need to invest in an actual story or developing an expensive single player campaign. Force everyone into online play.

Online play also has the bonus effect of making a game useless after most people have moved on to the next big game, thus encouraging the player of the current game to buy something new.

Re:If they kill the used game market,

[localman57]

Perhaps, but you may be getting more product in return. In the end, most companies don't really care how much money they make per customer, as much as they care about how much of a return they get on the money they invested. If they can make more money from their development expense by selling more copies at a lower price, they will. If they can make more money by selling less copies at a higher price, they'll do that. That's why companies sink money into marketing. If a marketing dollar spent results in $1.10 worth of additional profit, then they'll spend it. Generally speaking, they'd love it if you buy older games for not much money, as that's icing on the cake for them.

Re:Worked for the PC game market

[Moheeheeko]

The main reason that the PC is doing better is that the development companies dont have to make expensive we-lose-our-ass-on-each-sale hardware every 5 years. All they have to do is pop some new parts in the dev machines every 2-3.

Same goes for the consumer. The last time I spent 300+ on PC parts (the cost of a new console by a very modest estimate) My purchase Included one of the most expensive parts to buy, a new monitor. And even then, it isnt NECCISARY to upgrade all that often, I know people who game on PC who havent upgraded in 6+ years.

Then we have Things like steam sales, and if you are patient with your gaming, you can come away smelling like a rose most of the time. That one game you kinda wanted to try 6 months ago but never gort around to it? if it was good, you are looking at $30, not so good? $5-$10.

The videogame hobby as a whole, is cheaper for the consumer on the PC

Re:If they kill the used game market,

[AngryDeuce]

Oh yeah, also, historically speaking, we're paying much less for a new game than we used to be. Ditto consoles.

According to The Inflation Calculator:

Atari 2600 - $199 in 1977 - $707 today (in 2010 dollars, anyway)
Intellivision - $299 in 1979 - $886 today
NES - $199 in 1985 (US release) - $398 today
PC Engine/TG-16 - $249 in 1989 - $432 today

Games were also pretty expensive. I didn't actually buy my own games until the NES-era (and I'm having a hard time finding historical retail prices on video game cartridges), but even then, a new game was somewhere in the neighborhood of $50 back then, which would translate to $100 today. And look at how little you got for it in the case of a lot of games! I paid the equivalent of $100 for Mario Bros. 2 and beat it in a day. Ditto Mega Man 2 and 3. Ditto a lot of games.

I think many of us are more cognizant of how much were paying for games today because we're not using birthday money and allowance to buy them anymore, coupled with the fact that it's harder and harder to justify the expense with the economy being rough like it is. But in truth, we used to get charged a hell of a lot more.

That's not to say that I don't have my own misgivings, particularly related to the abuse of DLC as a concept. It seems like more and more games are coming out with 2/3 of the content they used to, with the intention of selling the remaining 1/3 in a few $10 increments down the road. The DLC on disc bullshit is even more ridiculous and unforgivable in my opinion.

Oh the hyperbole ...

[tgd]

I may be odd-man out on here, but I don't find $60 a particularly large amount of money to spend on something I get 10-20 hours of enjoyment out of. And there are plenty of games that I've gotten 10x that out of for the same $60. I happen to like the big, detailed, long games that require teams of 250 people a couple of years to make. I don't expect to pay $5 for a game like that, nor do I feel its right to thank them for their hard work by buying the game from someone else used.

Hell, I even like having authors of books I happen to like actually being paid for the work they did for me.

Here's the reality: If you don't value your entertainment to that level, don't buy it. The game makers will get the hint. Maybe the market really has shifted to $5 throw-away casual games, with companies like Zynga shooting for quantity, not quality. Maybe the market can only really sustain a dozen or two games with mid-eight-figure development budgets a year.

I do find it baffling how little people value the efforts of those who are providing entertainment to them. I'm not so poor that paying $10 to see a movie I'm excited about is a problem, nor am I so poor or easily amused that I value my entertainment at $1 an hour.

Re:If they kill the used game market,

[tbannist]

I'm pretty sure that most of the big players in the content industries think control precedes profits. They're predisposed to think so by corporate environments. There's an old saying among business people that businesses are not a democracy. That always struck me as one of the stupidest things you could say to any employee. Essentially, it's "your [expert] opinions don't matter because you work for me". I've met some people who think like these media conglomerates, and I'd be willing to bet that many of these guys are absolutely enraged by the second hand market in addition to unauthorised sharing. They view used [game, CD, record, DVD] sales as theft just like "piracy". They think the people selling these used products are profiting from their work without paying them which is their new definition of theft.

Because many of these executives got to their positions by being petty, controlling and possessive jerks, they are now unable to see the benefit in any other sort of behaviour. So they expect once they have eliminated the used game sales, people will have no choice but to give them tons of money. When they don't get it, they will blame piracy, because it's safe for them to blame every strategic failure on piracy.

Re:Stores

[DuckDodgers]

Profits aren't evil. But you have to weigh the value of money gained by implementing a policy against money lost by pissing a potential customer off.

So for example, I buy most of my games used. If I can't buy used games for a PSNext or XboxNext, I won't buy one at all. They don't sell the hardware to me. They don't get the sales that might come from me recommending the console to friends. They don't get to count my purchase among the total number of consoles sold when trying to convince a software company to make a port of the game for their console. And they don't get the profits from the 5-10 new games I would buy over the life of the console. Maybe they figure the loss of my purchase and the loss of purchases from others like me is acceptable for the gain of cutting out used game sales... and maybe not.

Also consider the requirement that my internet access always work to play games. So if I lose my internet access, I can't play on the console until it's restored. If the console vendor has a server outage, like for example if the Sony Playstation Network services might be hacked and offline for a few weeks, then I can't play on my console either. I'm the type of person who considers that restriction onerous and won't purchase the console because of it. So again, the vendors can try to guess how many other people will be similarly alienated and decide whether the lost sales is worth the lockdown it gets them.

They have every right to defend their digital property. And I have every right to tell them to go fuck themselves and not use their products if they decide to enforce those rights by making their product more trouble than it is worth to own.