Pricing On Demand

How much does a videogame cost? It's a trickier question than it looks - and perhaps the most important question which the games market faces today.

Many in the industry would answer that question by pointing to the standard Suggested Retail Prices for games, which vary across a fairly broad spectrum from GBP 20 for many handheld games up to GBP 55 for Activision's Call of Duty: Modern Warfare 2. Some would even point to higher prices, with games bundled with accessories being slapped with SRPs of over GBP 100.

The problem is, those SRPs aren't really relevant to what the consumer actually pays. They're routinely discounted by around 20 per cent by high street stores at launch, with even steeper discounts online. Within a month, they're in second-hand bins with as much as 50 per cent knocked off the original price. A year later, a game launched at GBP 45 may be selling for as little as GBP 15 or even GBP 10.

Besides, SRPs apply only to one small part of the industry. There's a whole sector worth tens of millions of dollars already where prices range from 59 pence up to GBP 4.99 - the iPhone App Store. There's a billion-dollar product called World of Warcraft, and a host of smaller rivals, which charge a monthly subscription. For some games, the cost is variable - you pay according to how much you play, or which items you want to use. For some, it's free - revenue comes instead through advertising or promotional value.

Things get even more complex when you change the question slightly, and ask how much a game is actually worth. How can this be calculated? In terms of money paid per hour of enjoyment?

That's a common enough measure, but it's far too simple - whereas the vast potential of the multiplayer modes in games like Call of Duty or StarCraft make them immensely valuable, for many players, making a single-player game 20 hours long rather than 10 hours long is actually a negative point, since it makes it less likely that they'll find time to finish it. Value is an intensely personal measurement, one which bears little relationship to actual cost - many gamers will find themselves spending more time playing a free game like Bejeweled Blitz than they spend on some full-price console games.

In other words, there's no simple answer to the questions of cost or value. The diversity of the market is a topic I've touched upon repeatedly, and here it plays itself out in full view - as the market's diversity grows, so too do the number of "right" answers to these questions.

That is not, however, to say that every answer is right. There are also wrong answers to these questions - such as the one which Microsoft has hit upon for its much-trumpeted Games On Demand service on the Xbox 360.

In theory, Games On Demand should be a major leap forward for digital distribution - the ability for another popular console to download and play full retail versions of games is a major milestone in the step towards the rather inevitable digital future. In practice, however, Games On Demand is a huge disappointment - illustrating the huge challenges faced by digital distribution far better than it illustrates the potential.

Aside from the fact that the basic Xbox 360 hard drive is somewhat smaller than the USB stick on my keychain, and upgrades are laughably expensive, the fundamental problem with Games On Demand is price. The prices of games on the service, especially older games, are significantly higher than what consumers would pay at retail - where these games are available in large volumes second-hand, and heavily discounted even when brand new.

Some, perhaps including Microsoft, would argue that the trade-off is convenience. You can pick up a game off the Games On Demand service whenever you like - surely it's worth a small premium to be able to grab a copy of Kameo at three in the morning while wearing nothing but your boxer shorts?

This is something of a misleading argument, since it implies that on-demand games are more convenient overall than their retail counterparts - a blatantly flawed statement. A boxed version of the game can be loaned to a friend, traded in for another game or sold second-hand on eBay. None of these things are possible with a games on demand title - in fact, its actual value to the consumer is significantly lower than a retail game would be.

The problem with the pricing is easy to understand, and yet will require titanic shifts in the thinking of publishers and the configuration of the supply chain to change. There is, quite simply, a fantasy of game pricing and value to which publishers adhere with all the passion of a nun clutching rosary beads on a rapidly sinking ship. In this fantasy, game SRPs are a meaningful measure of what consumers actually pay for games, and the retail prices discussed in executive meetings are a reflection of the perceived value of those games.

In this fantasy, second hand sales are an aberration, a negative force which damages the market. Heavy retailer discounting is a mistake, a foolish move that allows consumers to buy games at lower prices when they'd be perfectly happy to pay more otherwise. Needless to say, this is the same fantasy which causes publishing executives to seemingly believe that everyone who pirates a game would buy it at full price were the pirate copy unavailable.

This is not only a fantasy, it is patent nonsense. SRPs are consistently set at a level which the market would not support. The second-hand market, and retailer discounting, have been absolutely essential in driving the expansion of the games business and the high sales of modern games. Publishers under the sway of this appealing fantasy consistently misjudge the perceived value of their games, believing that consumers will honestly pay GBP 45 for a game experience with a Metacritic rating in the 70s or 80s.

The reality, of course, is that as the market has expanded, taking in more and more people for whom videogames are well down the pecking order of their hobbies, perceived value and willingness to pay high prices has fallen off dramatically. The emergence of games for a few quid on the iPhone, or games for nothing on Facebook, has hammered the perceived value even further. Piracy, demonstrating that the distribution costs of digital copies are essentially zero if you're remotely competent, has delivered a further blow.

And yet, in all of this, there are still companies - Microsoft apparently among them - who think that digital distribution is going to allow them to "fix" prices, that it will give them the leeway to shunt prices back up to what they have somehow decided is their "natural" level. It is, quite simply, a corporate fantasy. Digital distribution will support marginally higher prices than retail, because it offers instant delivery - but it will never, ever support a wide market paying anything close to the SRPs publishers believe in so fervently. Until that lesson is learned, services like Games On Demand are doomed, if not to failure, then at the very least to utter mediocrity.