The Long View Part Two: Price

quartersLast time I talked about the history of the video game industry;  how we got from coin-operated games to home consoles, and from open format consoles to proprietary ones, and how — and why — console makers keep control over the speed at which games are released on their consoles.  We also talked about how a mass, rapid-communications medium such as the Internet could perhaps have helped prevent the video game industry crash of 1983, which is still the defining moment of the modern industry.

Today, we’re going to talk about game finances;  how professional games are funded, how they’re purchased, and how these models have affected what kinds of games were built.  And how all of these have changed over time.

At the start of the video game industry, in the days of the coin-op cabinets, games were built for the mass-market.  They were designed to catch people’s attention and entertain them for a short period of time.  People would pay (in the US) a quarter, and receive (on average) about 90 seconds of entertainment.  A single company would both produce the game and construct the game cabinets.  Those cabinets would then be sold or leased to property owners, who would then operate them.

As the industry expanded, things became a little different — studios created products, and those products were then sold via distributors to shops, who on-sold the games to consumers.  On the surface, this seems like a pretty sane approach;  the studio can think about making a great game, leaving the manufacturing and distribution logistics to the distributors, and the retail sales to the shops.  This is how the industry worked for a very long time.

But this approach changed.

The mid-90s were a turbulent time in the video game industry.  There was a lot of new technology coming out which made it more expensive to make video games.  Commercial video games have always, always been sold primarily on their graphics, and something happened in the 90s which changed the world of video games in a very fundamental way.  And that something was a little game called Myst.

Myst was revolutionary in a lot of ways.  It had better 3D graphics than anyone had seen at that point (although they’re quite primitive by today’s standards).  It had a largely non-confrontational plot.  It had real puzzles woven seamlessly into its world.  And all of those were big changes.  But the thing which changed the industry was that it was delivered on a CD-ROM (which previously had primarily been used to deliver encyclopedias and other large reference works).  This was the moment when video games stopped being “as much as we can fit on a 1.4 megabyte floppy disk”, and started being “as much as we can fit on a 600 megabyte CD”.  In a heartbeat, consumer expectations about what would be included in a video game increased by a factor of several hundred.  The amount of work required in order to generate a “modern” game had just increased drastically, in a very short period of time.

The funny thing, of course, was that games still needed to be sold for approximately the same price.  Consumers simply wouldn’t bear higher prices for games, but now games required quite a lot more investment in order to bring to market.

So the cost to create a modern game was spiking upwards on the artistic front (have to generate enough art assets to fill a CD, instead of a floppy disk).  It wasn’t many years until the first consumer 3D accelerator cards were produced and became surprisingly (to me) successful.  As 3D accelerators became more and more complicated, achieving modern visuals started to require more and more programmers, in addition to those extra artists which had been required since Myst.  All of this was dramatically raising game creation costs, without an increase in the sale price of the final game, or much of an increase in the size of the market.  In effect, profits were dropping straight through the floor.

There were adjustments made at about this point, as studios tried to work out how to make finances make sense.  The first notable of these adjustments was made by Ubisoft in 2003, in Prince of Persia: The Sands of Time.  This was the first notable “AAA” game to be released in the new, shorter format which was to become standard within a year or two.  Previously, boxed games were expected to contain enough content to keep players interested for 30-40 hours.  Prince of Persia slashed that down to just six hours.  The theory was that if it cost more to make games, and consumers wouldn’t pay more for those games, we just had to make the games smaller.

By and large, while there was a little consternation over the shortness of the game, people liked the game enough (and were astonished by the fluidity of the animations enough) that they accepted it.  And it has now become the norm for most new games to contain between six and eight hours of content.

Companies experimented with other payment formats as well.  One particularly popular theory was “episodic gaming”, in which a studio would theoretically produce small “episodes” of a game, with players purchasing each one as they were released.  The idea being that if a game didn’t do well in the market, you could stop making it and instead try something different, instead of needing to complete a full game before you could sell it at all.  It was an interesting idea, but due to the front-loaded costs in game development (it’s typically much more expensive to get the first level up on the screen than the second one), nobody actually wanted to try it for a long time, before Telltale Studios reckoned that they had solved the problem and gave it a shot.  They made several games in this style, but they’ve since stopped — episodes simply couldn’t be created and released fast enough to keep players interested.  They’re still releasing games as ‘episodes’ today, but now they make you pay for the whole set upfront, which also locks them into creating and releasing the whole set of games.  (On the plus side, releasing a game in five ‘episodes’ means that they get five times the media exposure, which has to be great for their sales)

In any case, nothing really solved the fundamental issues:  it was getting more and more expensive to make games, and game prices weren’t increasing to make up for the extra costs.  So it was at this point where the industry began a long, slow transition toward its current state. Studios became risk-averse — the only thing which provided a statistically significant predictor of sales of a game was the sales of a previous game in the series, so suddenly games all became franchises. The logic was this:  if the profit margin is small, then it’s very risky to gamble a lot of money on implementing a brand new idea, instead of producing an update on what the market has already demonstrated that it wants.

As studios had games which failed and came in danger of running out of money, they were purchased by the distributors — distributors were the ones who could afford to take the risks inherent in the games industry — if only one out of ten games makes back its cost (and also more than pays for the other nine), the only sensible thing to do is to release ten games at once, and assume that at least one of them will do well. An individual studio can’t do that, but a big publisher can.

The vast majority of game sales aren’t made to hard-core gamers.

While I was working at Atari (the Infogrames-Atari, not the original Atari which was subsumed into Midway) around 2008, we were given some information about sales demographics. The tricky thing about the games industry is that most of the people who bought games at that time didn’t consider themselves “gamers”. They didn’t read review websites, they didn’t read gaming magazines, they didn’t buy a lot of games. The average game buyer might buy two games a year. They wouldn’t plan it — they’d just randomly wander into a game shop one day, pick up something from the shelf based on its box art, and buy it. These customers were effectively impossible to reach except through word-of-mouth. And these were the vast majority of the market.

I’m making a big deal about this because it’s really the most important thing in this whole article, in terms of understanding why the industry works the way that it works today.  The issue is that most big game purchases aren’t being made by informed consumers:  they’re being made by people who, on a whim, will wander into a game shop once or twice a year .  They don’t read game magazines, they don’t play demos, they don’t visit game web sites, they don’t check metacritic.  These purchases are based on only three things:  title, box art, and word-of-mouth.

So into this world where most video game purchases weren’t being made by people who would self-identify as “gamers”, came the smartphone.  Suddenly that mass-market of consumers who would previously wander into a game shop on a whim once or twice per year suddenly had the shop with them on their phone, winking at them from their home screen, ready to be browsed at any moment.  And things exploded.  These tiny games which cost (comparatively) little to make suddenly reached the mass market of casual game players who had largely been ignored since way back in the coin-op era, and many people became quite wealthy as this old market became tapped again.  And the gold rush of competition which followed the discovery of the sheer size of this market caused the asking prices for games to rapidly plummet.

In a lot of ways, at this point in the story we’ve come full circle.  We’re more or less back where we started — small companies making small games for small amounts of money, targetting the mass-market who are looking for 90 seconds of entertainment, not the self-described “gamer” demographic who are looking for a longer, meatier experience.  There are some differences too, of course — there are a lot more producers now than before, and we’re selling directly to consumers, instead of to a middleman.  But the general thrust of the games is surprisingly similar.  Look at “Cut the Rope” or “Tilt to Live” or any really popular modern iOS game from four or five years ago — virtually any of them would work just as well as a coin-op game from thirty years ago.

One big change still with us at that time, though, was that end-users are “buying” these games outright (albeit at an extremely low price).  They are not paying a small amount per game session as they had been doing on coin-op games thirty years earlier.

Not yet, that is.

Next time, we’ll be talking about the rise of “in-app purchases”, “Freemium”, “Pay2Win”, and similar payment models.  And comparing them against much, much older payment models.