Lower game prices

In a previous article I pointed out that the inflation adjusted price of the Doom shareware demo is about the same as what you’d pay for a copy of Deus Ex (a complete game that is technologically more sophisticated) today. There is a longer range comparison in the loot box article (the good one) and the conclusion is the same: Games have never been better and we have never paid less for them. I see this as good, but someone pointed out how alarming the fall in prices is, and I can understand why. If your livelihood depends on selling a product, price decreases are not met with enthusiasm. This article will unpack what I mean by falling game prices, and what this model of thinking can tell us about what’s happening right now.

I made an effort to make the article shorter and couldn’t manage it, so there is something of a summary at the end, and I’ve tried to make the sections reasonably self-contained.

Comparing prices

There is a game jam where participants are invited to create a game in 0 hours, starting at 2AM daylight saving time and finishing at 2AM standard time. The joke is clear: the difference in measurement is being reported as the duration, but it’s easy to let this kind of mismeasurement creep into discussions on price.

Comparing products like games is difficult because they’re so varied. A cigar is never just a cigar. Visit a forum for enthusiasts of any given product and you will quickly find all the differentiating characteristics of their chosen brand and how dare you even think of comparing it to the garbage that other guy makes. Even within the same product quality changes over time. The car today may cost more than it did last year, but last year’s model didn’t have seat warmers, built in GPS, an automatic parking assistant, directions voiced by Mark Hamill, and perfumed airbags. We need to be clear about what we are trying to measure and then make sure what we’re using is appropriate.

In the case of games we are looking to measure the welfare of the consumers and producers of games. Consumer welfare improves when the same game costs less or the game is improved and costs the same. Producer welfare improves when they can make the same game for less or charge more for it. The price is easy to measure, but the concept of same game is not.

The ideal world for this kind of measurement is one in which I go to a nondescript building with the words GAME STORE written on the front, put down some money, say “One video games please!” and am handed a grey box with the word GAME written on it taken at random from a drawer. All changes in price directly translate into welfare changes, since all the products are identical. We don’t live in this world, but we can approximate it in order to analyze changes in the price of video games.

Imagine we had some objective measure of quality that accounted for all characteristics and differences in games. We could then pick one game as our benchmark and adjust the prices of all the other games by the quality according to the list. If Pillars of Eternity (PoE) was our benchmark then maybe Tyranny is worth one and a half PoEs, and Nantucket is worth half a PoE. Since Tyranny gives you ‘more game’ per dollar the quality adjusted price of Tyranny should be lower than PoE, while Nantucket would be higher by comparison. The underlying product would be the grey box with GAME written on it since we’ve transformed all quality characteristics directly into the price.

We won’t attempt to develop an authoritative list of quality adjustments since our objective is to measure welfare, but it is useful to keep this framework in mind as we work through its implications in the following sections.

Consumer welfare

Personal circumstances aside, video game consumers are unambiguously better off today than in the past and there are multiple ways of showing this. First we can directly compare the back catalogue available on game publisher’s websites. We don’t need a quality adjustment here since we’re comparing the same product. Purchasing Half-Life  costs you less than it did when it came out in 1998 (happy 20th). This would also be true if Half-Life cost $10 (US) in 1998, since prices, including the price of labour (wages), have gone up over 20 years and so Half-Life will claim less of your income today than 20 years ago.

Alternatively, we could try to infer a change in welfare based on game quality by comparing a $60 (US) game from the past to today. The Elder Scrolls IV: Oblivion (2009) cost the same as Fallout 4 (2015) on release in nominal (not inflation adjusted) dollars. If we allow that the gameplay experience is roughly comparable then Fallout 4 is  better as it clearly has a substantial improvement in graphical fidelity and, as measured by howlongtobeat.com, gives you more things to do. Pure playtime is a poor measure of quality on its own, but since I’ve assumed near-equality in the gameplay experience, Fallout 4 is quite literally ‘more game’ than Oblivion. Our $60 has gotten us more and we’ve not yet adjusted for inflation which makes Fallout 4 even more attractive in real terms.

The quality adjusted price described in the previous section needs to fight against nostalgia. While classic games are wonderful, I would argue the examples above suggest that an honest accounting would show that games today are of a higher quality than games in the past. Producers have been able to learn from the great games of the past and build on them. If the classics really were so much better than what we have now, we would not need such a substantial discount before we buy them. Over a 20 year time horizon, we don’t really need the abstraction of a quality adjusted price to see the difference, but provided we have a convincing indicator of quality improvement, it does allow us to say that game consumers are better off year over year.

The consumer side is only part of the story. Why were games so expensive on a quality adjusted basis in the past and why have prices gone down now? For that, we need to look at video game production.

Supply side gaming

The current model is ambiguous as to whether or not game developers should be panicking. Producers are paid with actual money, not quality adjusted or inflation adjusted dollars. The fact that prices have not kept up with inflation implies a welfare loss, since producers need to pay those higher wages (including to themselves) and grocers don’t offer discounts to the people polluting their children’s minds with Grand Theft Satanism: Ignore Your Homework Edition. But there are also more people playing games now than in the past, and the amount of money the games industry is bringing in has grown substantially.

At least part of the increase in revenue is attributable to the fact that gaming is more affordable. But if the only thing keeping the industry from experiencing this growth was a pricing decision, why didn’t companies start charging less earlier and reap the benefits? Any company attempting to do so in the past would have gone bankrupt. Playing games became more affordable over time, and so did making games. Did you like Mass Effect? You can access a better version of the engine they used to make it and only have to pay 5% of revenues (past $3,000) once you start selling your game. In 2007 you could only get Photoshop in a big expensive box and it did a lot less than the one you can rent for $10 a month today. Same with 3ds Max (at a higher price), although I’ll bet Blender ($0) has at least the capabilities of 3D software from over a decade ago.

The one price that has gone up is labour, but the reason for this is that labour today is so much more productive with the improvements in the tools. One hour of labour spent on games today has more knowledge about games, produces higher quality content, and does so faster than it did in the past. Labour costs should also include the payments to the developers themselves, unless they’re the ‘ideas guy’ kicking back and watching everyone else work.

I started by saying producer welfare goes up if they can pay less to make the same game, or if they can charge more for that game. This ties producer welfare to profits, though we need to use quality adjusted prices since no developer would make the exact same game again. Competition should prevent producers from arbitrarily increasing the price of their games and so producer welfare is tied to the efficiency through which they can make their quality adjusted games. If you took one year to make the box with GAME on it and then it takes you six months to make the box with GAME on it, you have six months to make another one or to have a holiday (‘consume leisure’).

Developers are producers of games but they are consumers of game making software, and the same rules apply for 3ds Max as they do for your favourite game. Most of us play games while few of us use these tools and so it’s harder to give examples of quality improvements that don’t come straight from marketing material. Depending on your time horizon the US price index for commercial software publishing is down of at least flat (local indices could be approximated by applying the exchange rate if most of the software used was US produced, or obtained from your national statistical agency), and largely ignores the proliferation of free alternatives for tools. In addition, commercial products tend to contain app stores with inexpensive solutions to things that used to require developer time.

A producer working today can make a game for less on a quality adjusted basis. In practical terms this means that something like the last game can be made for less (including time), or a better game can be made with the same resources to command a higher price. Lower costs also mean people who could not make a game before are able to and so the ability to create a game in the first place is a welfare improvement itself. Our analysis should not limit itself only to incumbents.

These are the positive reasons for quality adjusted prices to go down, even for producers, and they broadly match what is happening to nominal prices. Games cost less now because they cost less to make and competition prevents the producers from simply pocketing the surplus (though there may still be some  if enough additional players buy at the lower price). The gains realized by developers are through the higher wages that increase with the productivity improvements from better software and more knowledge about game development.

A rising tide or Noah’s flood?

Lower prices brought about by technological improvements sound like a wonderful win-win that everyone should be happy with, and it is. But producers who are talking about lower prices are not speaking about it in positive terms, and the existing model presents a puzzle. If price declines are due to decreases in the cost of making games, then why are the prices of smaller games falling so much more than large games?

The lower costs to production inputs are not specific to one segment of the market, but smaller producers are seeing a substantial drop in nominal prices in a way that we don’t see for their larger contemporaries. There may be other factors outside of our current model at play, but there is another side to the entry of new producers into the marketplace that produces negative price effects.

The entry of new producers into the market is generally good as it means more variety in terms of games. New entrants does not always mean harder times for incumbents — Rockstar has little to fear from the hobbyist putting their project up on Steam Direct — but there is likely going to be some competition at the lower level. Competition can manifest itself in healthy ways, but one unhealthy way competition may manifest itself is through higher budget/quality games feeling the need to compete with hobbyist/niche projects on price, and the likely resentment felt towards these new entrants. This is not just unhealthy for producers. In the long run consumers will suffer as well as the lower profitability of games will make it less attractive to the people who make them, and the games that are left will reflect the lower valuation, leading everyone to complain about how games used to be better.

This invites the question as to why higher quality small projects feel like they are in competition with the bottom end of the market. When there isn’t a seasonal sale going on the top sellers on the storefront are not normally low cost games and so consumers are clearly willing to pay up for games, even after the influx of new producers. The titles that appear on the  top seller lists have been able to get across their value proposition to their target market in a way that other titles have not. The question seems to boil down to marketing.

The importance of reaching out to the intended audience and showing why the game is worth its proper value has become more important than it used to be. Large producers are already experienced in at marketing with specialized departments and so have people who are able to identify and respond to shifts faster. Smaller producers are more resource constrained and it’s easy to see how the importance of marketing can be overlooked when a team without marketing experience is trying to optimize the finished product.

The previous article imagined game developers as processes through which labour, computers, and software were transformed into video games. The market is constantly shifting, and technology is always getting better, and so there is always something new to learn and a new way to get better. In the current environment under resourcing marketing (or following ineffective strategies) is an inefficient allocation of resources that has larger implications for the project than it used to. Failing to reach the target audience and making the value proposition means the producer is no longer choosing their audience. Competition for the default audience is well represented by niche and hobbyist projects that didn’t or couldn’t dedicate resources to outreach. In the absence of other information consumers in this segment can only compare by price. This means that the demographic of people who read dinner menus right to left is one of the most competitive spaces in gaming right now since it is the default audience without intervention from the producer.

In trying to think about this problem, I am struck by how much this resembles crunch. Nobody should want to opt into crunch since labour that is overworked is less productive and costs more. It is most succinctly described as a failure of planning, as it is the result of not enough contingency time budgeted. If problems are not identified early enough, there may not be enough time to bring new hires up to speed to deal with the problems and the choice becomes crunch or miss a milestone and possibly kill the project. Likewise, nobody makes a $20 game with the intention to sell it for $5. The consequence of under resourcing outreach is only apparent at the end of the project and so the choice becomes accept some sales at a lower value, or potentially sell nothing at fair value. The competing games at the low seem like the most direct cause, but the problem was a few steps back in misjudging the audience or the price the audience would bear.

The work that people put into their games should be fairly valued both directly in the price of the final good as well as working conditions that do not ask them to sacrifice their personal life. Undervaluation is also undesirable for producers trying to establish themselves at the low end, since higher quality products are being dumped into their segment at cut rates, and gamers who would have otherwise loved a game that failed to reach out to them have to work harder to find it or deal with the second or third best option.

I don’t have a firm solution for this problem, since simply saying “spend more on marketing” assumes resources that may not exist. If a $20 game is being sold for $5 then in theory resources can be reallocated to find a better balance, but coming from a non-specialist this sounds about as comforting as informing someone they may choose which limb gets hacked off. Despite my inability to offer concrete solutions, I have a strong feeling that this is something most if not all developers can overcome.

Because I am boring I talk a lot about organizing factors of production to make some grey box with GAME on it, but what I’m really talking about is creativity. Anyone who has shipped a game has had a unique way they have organized the resources they had to make a finished product. Some producers may have made something of average quality, while some particularly successful producers found a way to take the same or similar resources and make something really great (or, in the model’s terms, something with a lower quality adjusted price). Creativity isn’t limited to making new levels, mechanics, or genres, it’s also something that can be applied to questions like “How do I get people’s attention?” and “What’s something they don’t even know they want yet?”

Lottie Bevan of Weather Factory has written a wonderful blog post (which is much shorter and better than mine which is why I’ve waited until you’re near the end to bring it to your attention) on the creation of the Church of Merch. She says Cultist Simulator lends itself merchandise, but I certainly didn’t know how much I needed a fancy cultist leather journal until I got a shiny package one day (thank you you-know-who!). All the ups and down of the process are recorded, and it’s a fantastic example of how a member of a two person team was able to do something that was obviously a honking great idea in retrospect, but is not an obvious next step for a company with one game and a bunch of DLC on the roadmap (to me at least. But then, this is one of the many reasons why I’m not a producer/co-founder/wearer of many metaphorical hats). Read into the archives and you will also find a post specifically talking about a partnership with a publisher in order to get help with marketing.

Creative solutions is part of the job description for any producer of games. In trying to minimize the possibility of a game being undervalued the solutions don’t need to be perfect, but they need to be attempted. Some producers may hire a specialist, some may try streaming or various social media platforms. Maybe a producer will license an IP they love and use it as a springboard to find dedicated fans. And, of course the market will shift again in some way in the future and there will be rewards for identifying and solving the new problems we haven’t seen yet. It isn’t easy, but this is how progress gets made.

What have we learned?

We put all games on a level playing field by transforming all quality differences into a theoretical concept of quality adjusted prices. Games higher quality games have a lower quality adjusted price and so are more attractive to consumers. This is an uncommon way of thinking about games but it is equivalent to saying that if two games are $20 and one is higher quality than the other, then more people will buy the higher quality game, just as if the two games were the same and one of them cost $15.

Using this perspective we identified two reasons for lower prices for games, both on a quality adjusted basis as well as a nominal basis. The first is positive: games cost less to make because the tools cost less and the labour is more productive than it was before. Here a game is sold at a fair value that reflects its lower cost. The second is negative: Smaller games in particular have not adapted to a market in which identifying a target market and communicating a value proposition is more important than ever. Here a game is sold at a value lower than it should that reflects an inefficient allocation of resources.

Prescribing the problem of undervaluation is only the beginning, but producers have and will continue to overcome this problem in traditional as well as novel ways. The best selling games on storefronts are no there because they cost the least. As smaller producers recognize their games as products and connect with their audiences, they will not only receive fair value for their product, but they will also reap additional quality benefits from engaging with their community.


Note on affiliate links: I have an affiliate status with GOG.com for which I am given a portion of sales for traffic I drive to the site. The inclusion of a given title is for illustrative purposes first, but when it is available on GOG I will provide such a link. As always, I encourage you to do your own price comparison or buy on your preferred platform.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s