Cheap distribution model
Apple with iTunes has ushered in an era where CDs and DVDs are fast becoming extinct. CDs and DVDs require packaging to be produced, space in warehouses to store, and discs to be fabricated. Presumably offering the music and movies on iTunes is cheaper because all the costs to manufacture have been cut. The savings get passed on to the customer.
The Lazy Tax
Video games are different though, and I can’t really figure out why that is. You can get the game L.A. Noire from Amazon for under $19. It ships free (if you’re a Prime customer) too. The only problem is it comes on disc. You have to load it into your console when you want to play. You have to find someplace to store the game when you’re not playing it.
You can download the exact same game for $40 on Xbox Live. It gets saved to your console. You don’t need to insert the disc to play. You don’t need to store a case. You don’t have a box laying around.
My friend calls this the “Lazy Tax” because you pay extra for the convenience of not having a disc to insert into your console when you want to play. This doesn’t make sense to me though. App stores seem to be the future, so why are game manufacturers still encouraging gamers to buy physical media?
Fernando
on 30 Dec 11“App stores seem to be the future, so why are game manufacturers still encouraging gamers to buy physical media?”“
Exactly, right? I ask myself the very same thing everytime I use a PS3 Blue-Ray. Like c’mon it’s 2011!!! Why there is, for instance, PSN?
Does anyone have an answer for that? I also want to understand.
Michael Langford
on 30 Dec 11Things aren’t as they seem…yet
Disc based games can actually perform better for the Xbox360 than hard drive loaded games based on the hardware design of the system. Remember, the hardware came out years ago, and isn’t updated like the software is.
And just like YOU have to put the game in a place when they aren’t carrying, they do too. And at the end of the year, they have to pay tax on all inventory…so they’d rather see it sold, gone, and out of the way.
Digital doesn’t have an inventory as such, so no impetus to get rid of it the same way at year end.
ploogman
on 30 Dec 11they are trying to support the brick and mortar game stores that made the console gaming machines what they are today – that is why it is more expensive to download the games – there are price contracts and guarantees with the stores so that they are not shut out of the loop – they are also trying to generate buzz by having folks go to physical game stores, see all the posters, talk to other gamers and buy other games, buying online from amazon? they are making almost no profit on your purchase compared to the stores – amazon gets the games for about the same price as the stores – also there is a historical notion that is tough for some people and parents to accept – that “games” come on cartridges and discs – but that will fade away soon
ploogman
on 30 Dec 11@ Michael Langford
disc based games perform better? only if the media drive is faster than the hard drive – which of course it is not
Matthew
on 30 Dec 11Im not so sure theyre so much encouraging people to buy physical media so much as seeing they can scrape customers for more by charging more for a download.
ploogman
on 30 Dec 11final comment what else would you expect from Microsoft? that pricing and features would make some kind of sense :) !
Daniel Grace
on 30 Dec 11Disc games CAN perform better. There have been notable instances. You’re right that the theoretical max of a harddrive is higher than the theoretical max of a CD. But they order data on the CD specifically so that things can stream better. Once put on a harddrive, they lose that guarantee.
I like the theory about wanting you to see posters for other games. However, to counter that realize how much the industry hates GameStop in the US. I wouldn’t be surprised if this trend reverses at some point as an attempt to screw GameStop.
Trevor
on 30 Dec 11Lazy in the sense that you’re too lazy to shop around for the best price.
Michael Long
on 30 Dec 11Why are you comparing apples and oranges? Look at the Amazon page. The strikethrough LIST price is $39, the same as Microsoft’s Game Center price. GameStop is selling the game for $39.
Amazon, however, is choosing to DISCOUNT the list price down to $18.90. Walmart is also discounting the game, down to $29.
So… now what? Is Microsoft’s online game center supposed to match the lowest discounted price available anywhere? Even if it’s a loss-leader sold under the wholesale price? Are they supposed to undercut all of their other retailers like GameStop?
Same thing happens with ebooks, only there the publishers DO list the ebook price as lower than the hardback price. Thing is, Amazon often discounts many hardbacks to prices lower than the ebook price, which in turn launches similar cries of rage throughout the Internet.
“Why does the PUBLISHER sell ebooks for more than the KINDLE price?”
Though, of course, the publisher did no such thing. Amazon set the price.
Bill
on 30 Dec 11I like the idea of calling it the Lazy tax. The game manufacturers know that gamers, especially savvy ones, like downloads over disks for the reasons mentioned. As long as they can get the full price for downloads, the will.
Think of it as supply and demand from the manufacturers side. Additionally, retailers like amazon are running very low margins, allowing them to offer the product at such a discounted price. The title manufacturer gets their cut and I assume the console maker gets their royalty.
With online downloads though, the manufacturer is the retailer and they may not yet be willing to take those razor thin margins. They will get the royalty either way since people are unlikely to forego a purchase just because the download price is too high.
Michael Long
on 30 Dec 11Oops. Typo. That should have been, “Why does the PUBLISHER sell ebooks for more than the HARDBACK price?”
Deg
on 30 Dec 11Some game companies get it though. Just look at all the ridiculous Christmas deals at http://store.steampowered.com/promotion/holiday_publishers
perrycollective
on 30 Dec 11The game industry has a couple of things that make it different: a used games market, so when you are bored with a game or finished the campaign, you can sell or trade it; a huge demographic that doesn’t necessarily have a persistent internet connection (preteen-college age kids) and consistent income (online memberships) which make DRM less appealing.
Scott B
on 30 Dec 11My first two working theories were: 1. Not everyone is fortunate enough to have broadband internet access. Charging more for discs would “punish” them.
2. Physical media takes up space. Better to move it at modest profit than sit on it.
But perhaps it’s simpler than that: supply and demand. Amazon sells both CDs and MP3s of the same music, often at different prices, yet I rarely compare costs since I’m not shopping for a CD and don’t view it as the same product.
Daniel
on 30 Dec 11@ploogman:
Not out of the goodness of their hearts, they’re not!
The brick and mortar stores depend on game sales. Without them, customers would only come by every 5-6 years, when a new console comes out. The stores would be long gone in the meantime.
Meanwhile, the console-makers depend on the brick and mortar stores – you can’t download hardware. Neither Sony, Microsoft or Nintendo have a retail presence of their own to match the game stores.
So the game stores have all of those console-makers by the balls. If a store refuses to carry the Xbox, it hurts Microsoft. If Microsoft decides to undercut the stores, the stores go out of business, and again it hurts Microsoft.
It certainly has nothing to do with nostalgia or paying back the stores for all their kind help. I don’t think it’s a friendly relationship at all. It’s more of a adversarial equilibrium where everyone is equally aligned against each other.
Meanwhile the publishers are pumping out downloadable content. Even if the extra content is same-day as the game and could just be on the disk (or worse: it is on the disk, and you pay again to unlock it), the game still costs the same at retail, because the stores demand it. But the publishers want a bigger slice of the pie, too, and the console makers are eager to sell them a digital distribution channel. So in the end, the pie just gets bigger all ‘round, since the stores won’t budge on the size of their slice.
(Amazon is a special case: They’re big enough, and diversified enough - without being a publisher or console-maker themselves - that they can get away with a lot of stuff.)
Ben Boyle
on 30 Dec 11Hey it retails for closer to $100 in Australia, whether online or in stores :/
Squeamish Ossifrage
on 30 Dec 11The margins aren’t razor-thin in that case, even when the end-price is the same, because the cost of acquisition is roughly $0. 00. Retailers have “margins” because they have to buy the game from the manufacturer and mark it up. The manufacturer can make a game for basically nothing.
If Gamestop buys a game for $12 wholesale and sells it for $15, that’s a tiny margin. If the manufacturer sells that same game for $15, that’s an incredible margin because they didn’t have to pay the $12 in the first place, so the $15 is all markup.
Dmitry Nikolaev
on 30 Dec 11I think there are two answers for this question. First – game industry is clumsy on progress. Second – there are some psychological aspects that affected buyers.
Aris
on 30 Dec 11The simple answer is this: There are are depreciation models for physical goods. Whethere they are based on shelf life or popularity, those models exists. Depreciation models aren’t really applied to digital goods. It seems as if they are applied because older stuff are sometimes cheaper, but in reality most older stuff is becoming available again.
Given that hard drive space and band width costs are the real constraints (maybe computation time for search and catalog space). How do we depreciation a digital product over time?
Aza
on 30 Dec 11Retailers, especially amazon, put an intense pressure on game publishers to have very low prices, even on AAA games. I think only extraordinary forecasted mega hits (modern warfare) can elude this phenomenon.
They can still do this because physical POS have a huge impact in marketing and potential sales.
Aza
on 30 Dec 11...I posted too fast : and you just can’t be without Amazon, with low margins and high volumes (with deals impacting your whole catalog and not on a game by game basis)
G.Irish
on 30 Dec 11@Aris The only digital products that I can see depreciate over time are periodicals and software. No one would pay for Windows 95 at this point, nor would anyone pay full price for a videogame released 20 years ago. Both products are outdated at this point.
A book (fiction) or song on the other hand wouldn’t really depreciate much because your enjoyment of it is not influenced much by the progress of time. There are still people enjoying a book written 2000 years ago. For some sorts of nonfiction they’d depreciate as a function of their usefulness. Take Coldfusion books for example.
Nate
on 30 Dec 11Ticketmaster was the first one that brought the lazy tax to my attention. Here’s a model that could and is saving Ticketmaster tons of money. They have to have so many fewer ticket console station type things all over the cities. Remember the days of waiting early in the morning in a line in front of a department store waiting for them to open because they had a ticketmaster department?
I’ve don’t see those lines anymore. I’m sure ticketmaster got to reduce a ton of overhead. And then they charge me like crazy for the convenience they have of saving a bunch of money.
Ian
on 30 Dec 11I’ve also seen this described as “convenience tax” – downloading is more convenient than buying physical product/no need for physical storage/no wait for delivery, so charge the customer more.
Remarkable, and possibly morally ambiguous, but that is the way things are going, it seems.
I’m sure someone has a value argument out there in favor of charging more for downloads though :)
Marco
on 30 Dec 11Economists call this price descrimination. It’s a try to cream different customer groups and optimize revenue.
But Lazy Tax sound much better-
Michael Long
on 30 Dec 11@Squeamish: “If the manufacturer sells that same game for $15, that’s an incredible margin …”
So again, what? Is the manufacturer supposed to undercut all of its retailers? Do that, and you end up with no retailers. If you knew you could download a $39 GameStop game online for $29, would you ever buy it at GameStop?
Secondarily, the combination of full price online sales and discounted wholesale sales makes up the total profit. Drop margins, and you make less money and possibly even need to raise prices across the board, just to get back to where you were in the first place.
Stacy
on 30 Dec 11Not all pricing models are “cost+” based. That’s commodity thinking. Market-based pricing models offer better flexibility and total profitability; IF you can pull it off by selling other value rather than the underlying commodity.
Dan Hill
on 30 Dec 11It’s not just games. DirecTV want $5.99 for a 1080p movie on demand that I can drive a mile to a Redbox kiosk and get on Blu-Ray for $1.50. I’d pay a buck to avoid the drive, but not $4.50!
ploogman
on 30 Dec 11@ Daniel
CD/DVD drive speed vs. hard drive – come on, streaming from a hard drive file even with disparate parts all over the drive is faster than a CD/DVD drive with ordered data – plus hard drives typically have onboard hardware caching too – so to say some CD/DVD games are faster is just not really true at all and even if there is some single game on disc that is faster, that does not justify using a physical disc over a downloaded program for the majority of games@ Daniel my comment about the stores was really just that they have price guarantees and contracts in place, that’s all, many industries have MAP (minimum advertised price) rules – including…Apple – which is why you don’t see huge discounts on Apple equipment from anyone, even online, because it would undermine Apple retail
@Dmitry Yes, the gaming industry is slow and clumsy with progress – I totally agree! When you make a console intended to remain the same for years and years and expect it to remain the same with minimal new engineering on the hardware end that is what you get!
ok, last comment for today! the amount of time spent by our generation(s) playing video games has been a little extreme for some people!
G.Irish
on 30 Dec 11@Michael Long If the manufacturer of a product could cut out the middle man and make more money why wouldn’t they? I imagine the reason they are not doing so right now is because they don’t think going all digital would be a net positive. Once it hits that inflection point you’d best believe video game publishers will go all digital.
After all, it allows them raise margins and kill used sales in one fell swoop. Just wait until the subscription model becomes more widespread in games.
Johnnie B Goode
on 30 Dec 11The reason for this is simple. Microsoft is not able to sell at a lower price than the recommended retail price, or they’d upset all their retail partners. That’s why the Microsoft Store is about the most expensive place you can buy Windows 7, MS Office etc.
The RRP of the disc is the same as the download, it’s just that Amazon have discounted and Microsoft, as the sole download seller, can’t match that.
Joe
on 30 Dec 11Your Xbox 360 example is because Amazon and other resellers are allowed to discount while Microsoft has agreed to sell at retail price. This practice of manufacturers steering customers to retailers is very common with manufacturers across the board, not just games.
Check it: you can buy “Rework” online from Random House for the cover price of $22.00, or you can buy it from Amazon for much less. http://tinypic.com/r/5zfmo1/5
pwb
on 31 Dec 11Well, in theory, pricing should be based on what the market will bear and need not be linked to the product/service cost.
Jon H
on 31 Dec 11It’s just a premium for faster access. Rather than waiting for the physical object to be delivered, you can get it as fast as your net connection allows.
Given that some game fans will camp out to get a game as quickly as possible, there’s clearly a faction where impatience outweighs practical concerns. And paying $40 is easier than sleeping out on a sidewalk.
Nick B
on 31 Dec 11Physical media is yours. You have the license in your hands, so to speak. When you buy something digitally, you don’t own it, you just own a license and can only do with it what you are allowed by the seller.
For instance, if I bought digitally on xBox Live, I can’t loan the game to a friend, or even resell it once I am done with it. I also could never rent a game if the only source was digital distribution.
As another example, take a look at the recent issues on EA’s Origin gaming network. Recently, they’ve had issues where people logged into the forums and perhaps used foul language or offended someone and they were banned from the forums. This also banned them from playing the games which they’ve purchased licenses to. Single-player games where it is just you and the game. If you don’t see something wrong with this, you need to check your head.
Digital distribution will never be as good as physical media so long as you aren’t allowed to do the same things with the digital copies of whatever it is you’ve purchased.
pell
on 01 Jan 12You have a point, Michael Long.
Jason Dabrowski
on 01 Jan 12It’s real simple. Physical Media costs the same, or less than digital because video game, movie, and book companies still have valid contracts with manufacturers and suppliers. What would happen if they dropped the price on digital media to below physical media? They would sell less physical media, which means warehouses full of discs, books, merchandise that costs them money to store. They would then have to cut the amount of media they order from the manufacturers. It’s likely, to make it worth their while, they have long-range contracts with people who supply the goods, who assemble the packaging, who stamp the discs. This is a process. Paper, plastic, ink supplies and manufacturers have quite a hold on various industries, one they’re not going to give up unless someone gives them an easy transition path.
JonathanN
on 01 Jan 12Thank you for this blog. Thats all I can say. You most definitely have made this blog into something thats eye opening and important!
Brad
on 02 Jan 12@DHH – Does this not want to make you short GME?
Widespread downloading of games will guarantee GME ends up like Borders.
Bill
on 02 Jan 12I misspoke when I referenced Sony/Microsoft as the manufacturer. In most cases they are not the game manufacturer, but the console maker and online distributer.
When they sell an online game download they have to pay the manufacturer whatever fee they have negotiated, which may not be much less than what they charge say Amazon or Gamestop to sell the disk version. In fact depending on the strategy of the game maker it could be more.
Sony/Microsoft don’t have the net volume of sales that say Amazon does that is more diversified. They likely have other reasons as well, such as hurting the brick and mortar stores which sell their consoles. That is not something Amazon has to worry about when they price their products.
John
on 03 Jan 12There are two main reasons physical games are cheaper on Amazon than digital games are on Xbox Live. 1) Microsoft controls Xbox Live pricing, while Amazon controls Amazon pricing, and 2) physical games carry inventory risk.
Microsoft (and most other game publishers) don’t like low retail prices, even though they get paid the same wholesale price by the retailers because it puts pricing pressure across sales channels and they believe it hurts the game’s value perception. However, since Amazon owns the retail product, Amazon gets to set the price.
Now if Amazon buys too much of a physical game like LA Noire – and video games typically cannot be returned to the publisher – discounts are likely. If multiple retailers buy too much – you see price cuts everywhere, like what happened with Bioshock 2, Guitar Hero and one of the last Final Fantasy titles. This is a scenario that publishers don’t like either, but because of the lead times required to print games and distribute to stores, overstock situations on physical games are not uncommon, in contrast to digital games.
One could call the disparity a Lazy Tax, but it’s really driven by production lead times, demand uncertainty and price competition.
There is one contract type that creates inventory risk for digital goods – I know of at least one publisher that has tried to sell non-returnable quantities of digital content to a retailer. That, along with many other disagreements over who controlled pricing, stalled larger negotiations on bringing the publisher’s digital content into the retailer’s catalog.
Grover
on 03 Jan 12It’s not a lazy tax, it’s a virtual monopoly tax. The reason Amazon charges $20 (which is far below the standard retail price) for that game is that it is competing with lots of other retailers for your purchase. If you want to download that game to play on your Xbox, you have exactly one choice. MS wishes you had to pay $40 for the boxed copy too (to be clear, I’m not bagging on MS here, Sony and Nintendo feel the same way I’m certain). When game discs disappear, so will Amazon’s crazy deals.
Rob Colburn
on 03 Jan 12As I understand, the process works something like this.
A game publisher has a contract with the Platform Developer (MS Xbox in this case), to sell games to hit a certain range of final retail prices. Retailers like Amazon or GameStop will therefor demand the game be sold to them at some discount to allow for profit, let’s say 50%. At this point, the retailer can actually price the game how they see fit (well, sort of, they likely have a side contract with the publisher). So, iAmazon may see fit to be competitive against GameStop and Xbox Live. App Stores work a bit different though. They do not purchase and manage inventory, they sell and pass back a fixed percentage of the price. They are not under compulsion to compete. At least, not as much. They do not lose money from inventory sitting on their shelves, and they are not entirely in charge of pricing – they are obligated to sell at the publisher’s price. At most, they can sell games cheaply by supplementing the sale with their own cash. Again, this doesn’t benefit them that much. I believe the Platforms forsee a new Golden Era, where they and Apple can sell things without competition in the retail space. Publishers don’t really like GameStop right now (used games), don’t entirely mind digital distribution (somewhat simpler) and really enjoy keeping a higher margin.
So, Xbox Lazy Tax is really the “tax” of an idealistic future monopoly.
Also, remember that AAA and Indie Game Developers are not so different than we web programmers, hawking code for profit. If the market moves in such a way that developers can charge more money for their labors, is that such a bad thing?
Will
on 03 Jan 12Interestingly enough, if you want the game on a PC, amazon is currently offering it as a direct download for $12.49, but if you want the box and DVD from them it’ll cost you $49.96
Scott Christopherson
on 03 Jan 12I’d love for game downloads to be the preferred distribution model. Digital distribution is so much more convenient. Though, I assume consoles will need to have beefier hard drive space for those with large game libraries.
This discussion is closed.