Experiments with the economics of video games

[miguel1626]

The lesson is important, and it (almost) fully applies to ebooks:

http://www.geekwire.com/2011/experim...es-gabe-newell

Highlights from the interview:

One thing that we have learned is that piracy is not a pricing issue. It’s a service issue. The easiest way to stop piracy is not by putting antipiracy technology to work. It’s by giving those people a service that’s better than what they’re receiving from the pirates. For example, Russia. You say, oh, we’re going to enter Russia, people say, you’re doomed, they’ll pirate everything in Russia. Russia now outside of Germany is our largest continental European market.

Now we did something where we decided to look at price elasticity. Without making announcements, we varied the price of one of our products. (...) What we saw was that pricing was perfectly elastic. In other words, our gross revenue would remain constant.

But then we did this different experiment where we did a sale. The sale is a highly promoted event that has ancillary media like comic books and movies associated with it. We do a 75 percent price reduction, our Counter-Strike experience tells us that our gross revenue would remain constant. Instead what we saw was our gross revenue increased by a factor of 40. Not 40 percent, but a factor of 40. Which is completely not predicted by our previous experience with silent price variation.

We don’t understand what’s going on. All we know is we’re going to keep running these experiments to try and understand better what it is that our customers are telling us. And there are clearly things that we don’t understand because a simple analysis of these statistics implies very contradictory yet reproducible results. So clearly there are things that we don’t understand, and we’re trying to develop theories for them.

Read the full interview. Its certainly worth your time.

Anyway, too many times I've seen people claim that a sharp reduction in ebook prices would lead to an increase in revenue. As the Steam experiment shows, this isn't always true (sometimes demand is perfectly elastic). In many cases, I think that total revenue would decrease, due to demand inelasticity.

The point is, it is nigh impossible to reach accurate conclusions without experimental data (and its not fair to call publishing execs stupid - you don't know whether they have the data). Unfortunately, most businesses keep a close lid on their data (with good reason - competition is fierce). But maybe indie publishers would be willing to be more forthcoming about their natural experiments. I'm sure it would be quite enlightening.

[Ninjalawyer]

Off-topicness ensues, read at your own risk:

Gabe made very similar comments, with respect to DRM, in an interview with Kotaku. I bring that up only because almost at the same time, Martin Edmonson from Ubisoft was interviewed by Eurogamer and basically came to the exact opposite conclusion from Gabe. Here's a slice of the Ubisoft interview:

You have to do something

It's just, simply, PC piracy is at the most incredible rates. This game cost a huge amount of money to develop, and it has to be, quite rightly - quite morally correctly - protected.

If there was very little trouble with piracy then we wouldn't need it.

The above comments by Martin Edmonson were made after Ubisoft received a well deserved thrashing in the press for the DRM in Driver: San Francisco. That was a game where you had to be online at all times to play the single-player; if your connection was interrupted for even a second, you'd be dumped out of the game.

Edit

I don't want to derail an interesting pricing discussion with a dull DRM-fest, but I thought Gabe's comment that piracy isn't a pricing issue was worth commenting on, and seeing if anyone else in the games industry had a similar opinion.

[RainingLemur]

I tend to agree with the "reduce piracy by giving better service" idea. I don't think that pricing ISN'T a contributing factor to piracy, though.

I think that Steam has both aspects covered with them doing big sales on big titles making it enticing for users to buy rather than torrent and having a service that's easy and friendly to use (for the most part).

[miguel1626]

Originally Posted by Ninjalawyer

I don't want to derail an interesting pricing discussion with a dull DRM-fest, but I thought Gabe's comment that piracy isn't a pricing issue was worth commenting on, and seeing if anyone else in the games industry had a similar opinion.

Its quite all right. I highlighted that part for a reason

Ubisoft's DRM schemes are particularly obnoxious. Its no wonder Edmonson has to grasp at straws to defend it.

Originally Posted by RainingLemur

I tend to agree with the "reduce piracy by giving better service" idea. I don't think that pricing ISN'T a contributing factor to piracy, though.

Pricing is a factor, but its much smaller than most think (and a lot smaller than the industry wants us to think). Steam's success in Russia shows this clearly.

[teh603]

Nice to see they're at least experimenting and not going with business school dogma. I've seen too many people who would always fall back onto what they learned in some basic economics class instead of trying to find out how the market really was behaving.

Edmonson fails to recognize is that these pirates are not their customers: they never did and never will pay for the quantity of material that they are pirating. That means that publishers wouldn't see an increase of sales if DRM produced a decrease in piracy. So DRM is effectively an attack on paying customers.

Gabe takes the exact opposite stance, and likely the far more productive stance, by asking what would it take to pull paying customers in.

[teh603]

Originally Posted by BWinmill

So DRM is effectively an attack on paying customers.

Since the advent of home computing, though, when have publishers not treated their paying customers like thieves?

[anamardoll]

I use Steam and I think the quirk they saw with pricing may in part be because their interface for Wish Listing and Price Watching is not... very intuitive. There IS a Wish List, but I used Steam for months before I figured out that it exists, and it doesn't send you notices when prices drop. This means that the only time you KNOW the price drops is when you search at the right time.

In contrast, when prices drop on Amazon, whether there's a "sale" or not, I know -- eReaderIQ sends me an email and I make the purchase then and there.

Tl;dr: Interesting article; Steam could be doing better as far as customer interfaces.

[Quexos]

I really gotta ask, considering many threads regarding the business of selling a product, piracy, the good formula for successful sales and so on ...
Why are we consumers (I'm assuming most people on this forum are consumers) so concerned about how well book companies are selling their product ? it's not like we are share holders that are waiting for our share of the pie. We are the consumers, we buy what we deem worthy of our money and keep away from what is not, and that is all. Why worry, analyze, understand ... in one word: "care" so much for the business establishment ?

[anamardoll]

Originally Posted by Quexos

I really gotta ask, considering many threads regarding the business of selling a product, piracy, the good formula for successful sales and so on ...
Why are we consumers (I'm assuming most people on this forum are consumers) so concerned about how well book companies are selling their product ? it's not like we are share holders that are waiting for our share of the pie. We are the consumers, we buy what we deem worthy of our money and keep away from what is not, and that is all. Why worry, analyze, understand ... in one word: "care" so much for the business establishment ?

Everyone needs a hobby.

ETA: Although a fair share of Mobile Readers are authors, so... yeah.