Price Pressures

The question of pricing for videogames is a perennial conversation piece within the industry. That's hardly surprising, given the variation we've seen over the decades - from cassette games for home computers selling for two or three pounds in the early eighties through to the latter days of the Nintendo 64, when cartridge price tags could hit fifty or sixty pounds, right through to the modern day when consumers happily spend well over a hundred pounds on a box full of plastic instruments for Rock Band.

Despite such historical fluctuations in the price of interactive entertainment, price has never been quite such a hot topic as it is today. Everyone in the industry, it seems, has a viewpoint, but few of those viewpoints are particularly aligned. Prices are set to rise, say some groups. Prices are in free-fall, say others. Others again argue that traditional pricing is becoming entirely obsolete and will soon give way to more novel ways of generating income.

The most recent ripples in this particular pond have been caused by the launch of EA's hotly anticipated annual update to FIFA, the critically acclaimed FIFA '10. On the weekend of its launch, some major UK supermarket chains had dropped its price below £25 - using their mass-purchasing muscle and willingness to push loss leading headline products to sell the game for less than some other stores were paying for it wholesale.

Perhaps unsurprisingly, this has generated quite a level of resentment from specialist retailers, especially smaller chains and independent stores who feel that there's something innately unfair about supermarket giants treating as a loss leader a product which, to the smaller stores, is their lifeblood. There are even anecdotal tales of independent retailers actually buying supermarket stock to sell in their own stores.

This whole story is something of a hoary old chestnut, of course. Specialist retailers complaining about the effects of supermarkets muscling in on the games business has been a feature of the trade press for as long as I can remember, and indeed for as long as many people rather a lot older than I am can remember.

However, there's a particular urgency to these complaints, and an unusual tone to some of the comments coming from many specialist retailers. There are various common refrains doing the rounds, such as claims that the supermarkets will drive competitors out of business and then hike prices (not true - the supermarkets don't really care about competing with specialist retailers, only with one another) or that price drops create consumer confusion (unless consumers are easily confused by having more money left in their wallets than they'd expected, I suspect that this is as untrue as it is condescending). Buried amongst this nonsense, however, is another common theme - how can such price slashing make sense, when game prices are actually on their way up?

That particular claim is based, presumably, on the elevated price point of the forthcoming Modern Warfare 2, the high SRPs of games with bundled peripherals (an increasingly common sight on store shelves, ever since publishers realised that a piece of shoddy plastic made in mainland China for pennies can add ten pounds or more to the price tag of a game package) and some pretty aggressive statements from various publishers about widespread price rises at some point in the ill-defined future.

The justification, as ever, is that development costs are rising, so the price of games needs to rise in order to pay for those rising costs. This is a piece of business logic which would only be praiseworthy if it had been scribbled in crayon by a not particularly bright five year old, and illustrated with a nice picture of a smiling sun and some trees. Coming from the mouths of supposedly economically aware businessmen, it's enough to raise question marks about the education and common sense of some of the people at the top of our industry.

As the costs of development rise - fuelled by technological advances which mean that games require more detailed and extensive assets and more complex code - a healthy, growing market should mean that sales are also rising in parallel. We're not only talking about growth in boxed game sales as the market expands, at that - after-market sales of DLC and add-ons, in-game advertising, merchandising and even the possibilities of highly profitable special editions for high profile games all add up to extra revenue, which means that you can develop more expensively, sell at the same price, and still watch your profits grow.

But what if more expensive development isn't resulting in higher sales? Bluntly, in that case, you're doing it wrong. Either you need to reign in your development costs - and god knows there are plenty of cheaper platforms to develop for right now, ranging from the iPhone and the DS up to the Wii and digital distribution on PC - or you need to start looking hard at your product and business strategy. If you find yourself pushing your prices up, you're making a schoolboy error. If development costs are rising and your customer base is stagnant or declining, up-front price rises, however tempting, will simply hasten the decline of the customer base and give you a nice shove on the path to insolvency.

Moreover, you can stop pointing to Modern Warfare 2 as your justification. Not only is the game not yet on shelves - so we don't yet know the impact of Activision's price hike - it's also a special case. It's probably high profile enough that the supermarkets will hammer prices on it, as they did with FIFA. Moreover, it's probably the year's most anticipated top-flight multiplayer game, with a pre-built audience of millions who will pick it up in the first week to play online - and crucially, won't trade it in, thus choking off the second hand market to some degree. Your game almost certainly doesn't have that. You can't compare your business model and audience profile to Modern Warfare 2's.

Besides, all of this talk about price hikes flies totally in the face of what we're actually seeing happen among consumers - where the perceived value of media in general, including games, is steadily dropping off rather than rising. Piracy doesn't help, obviously, and a whole generation of consumers now feels that paying significant money for a media product is frankly ridiculous - which you can huff and puff about all you like, but it's not going to change how they think, and your business model needs to adapt to your consumers rather than vice versa. Blacksmiths probably huffed and puffed when car drivers decided that keeping horses wasn't really practical any more, and it didn't do them a damned bit of good.

It's not just piracy that's changing perceptions. Along with other types of media, more and more games and interactive experiences are going "free", be it ad-supported or "freemium" - from free-to-play MMOGs to Facebook games - while other gaming experiences are hammering perceived value by being launched at miniscule price points. Thirty quid for a PSP game or three quid for an iPhone game? Say what you like about relative quality, but most consumers, in the long term, are unlikely to decide that the PSP experience is worth a full order of magnitude more money than the iPhone one.

There are upward pressures on price, too, be it from publishers, retailers or even from platform holders whose digital distribution offerings bypass discounting and second hand sales prices and charge pretty much full price for their products. In this, however, they don't seem so much to be shoring up prices, as simply to be totally out of step with where the industry - and more importantly, the industry's consumer audience - is going.

The tantalising prospect of higher prices on the horizon simply doesn't seem realistic. The industry must follow its consumers, not vice versa, and hiking prices will do little other than whittling down your audience to a receding hardcore while the rest seek their fun elsewhere. Instead, it's time to start thinking differently - exploring high volume, low cost strategies, experimenting with cheaper development, and perhaps even thinking of revenues in terms of ARPU (Average Revenue Per User, commonly used by subscription services like cable TV or mobile phone networks) rather than up-front SRP figures. The pricing debate isn't going to go away, but it's about time it got realistic.