Psst … hey, you. Yeah, you with the cash – wanna buy a game?

Digital distribution means a lot of different things to different people. To some, it’s digital rights management (DRM) and the loss of freedom that implies. To others, it’s a convenient way of avoiding the shops. To me, it’s a screaming temptation ranking somewhere between a good single malt and pure crack. Like it or not, it’s here to stay.

But, what does that mean for the average gamer? More than you think – what we’re seeing at the moment is a tectonic shift in the way we buy and play games. And, what that means in practice may surprise you. For those unable to read to the end, here’s the summary – used game sales are going to disappear, you’re going to pay more and less for games even while you play more of them, and the system as you know it today is pretty much going to disappear.

Why’s that?  Well, here’s some insights from someone who’s more than slightly acquainted with this shift and everything it entails.  Full disclosure – I don’t currently work for a distributor, nor do I actively work in the industry. However, I have advised more than a few individuals, consultancies, and companies in this space and am drawing on the experiences of other industries slightly ahead of the curve in their own ways. Long story short, here’s the rundown:

• You’re going to end up spending more, probably much more than you realise. The move to more intelligent marketing and pricing isn’t to maximise profits by screwing people – contrary to popular opinion, it’s actually to provide greater value to the consumer by getting them to buy more stuff that they like. Nefarious paranoia aside, which one do you think retailers prefer in the long run: customers who’re happy and eagerly buying things, or customers who’re permanently pissed at them because they’re selling them the wrong things they don’t need? The on-costs of unhappy customers are pretty prohibitive in the long run – it’s a rare business outside of a monopoly that can weather those costs without going under in the medium term. Better marketing means you’re seeing more things you like which, in turn, means you’ll end up spending more if they’re doing it right. Generally speaking, that’s not a bad thing – it means you’ll have to wade through less crap than you did and, in all likelihood, you’ll end up playing things you probably wouldn’t have discovered otherwise. And, assuming the maths (and the people behind them) are working properly, you’ll probably enjoy them a surprising amount, too!

• On the bright side, you’re probably going to be getting a lot more value than you’ve ever had before. Maybe. Here’s the rub; access to volume-based transactional and usage information allows companies to do significant amounts of number crunching. There’s positives and negatives to this – on the up-side, marketing becomes personalised, relevant, and interesting. On the down-side, the application of discriminatory pricing moves from a time-based model, where prices gradually fall over time or due to temporary promotional activity, to a segment-based model, where individuals receive a personalised discount schedule. Say you’re in a segment that shows a strong propensity to buy in-depth RPGs and, in aggregate, is largely price insensitive. Well, don’t expect a discount on Dragon Age: Origins in the near future. On the other hand, say you’re in a segment that has a high propensity for cross-sell across to hybrid RPG/casual games but are extremely price sensitive. Expect a sharp discount to pull you in. And, don’t expect the discount you get offered to be in any way similar to any of your friends.

• Opportunities for arbitrage are going to become rarer. As the system becomes more and more locked down, parallel imports will gradually disappear; it’s only a matter of time until Steam changes their gifting price mechanisms to match the destination region, not your chosen region. Digital distribution means never having a choice where you buy your game – buy those US-proxy-based copies of Left for Dead 2 while you can, Australia. It won’t last.

• Choice will become king, and what a benevolent ruler it’ll be. As things move online, it’s not just back-catalogs that’ll continue to migrate – standardised, low-cost platforms mean more indie developers, more new entrants, and more variety. Where we have one Braid, we’ll have five within two years. And ten within four. Not since Dani Bunton and M.U.L.E. will we have seen so much innovation through “standard” distribution channels.

Ignoring the issues associated with adequate infrastructure (primarily bandwidth and download caps in a variety of countries) and historical licensing arrangements, the biggest reason digital distribution hasn’t taken off yet is choice. Quite simply, up until relatively recently, there wasn’t any – anyone who used Steam when Half Life 2 launched knows what I’m talking about. It’s only been in roughly the last two years that Valve has managed to build up an adequate back-catalog and indie development scene to create the opportunity for smarter marketing and pricing – to create new offers, you need new products.  To vary the price, you need enough people who didn’t buy the game in the first place.

It’s no coincidence that Steam’s increase in time-based sales have increased significantly over the last six months; it’s only been in this timeframe that their catalog has been large enough to credibly start making unique offers to their customer base. Nintendo, in true Nintendo form, is probably sitting on the biggest goldmine out there and yet apparently doesn’t know how to exploit it – while their hardware and first-party sales have been extremely successful, their foray into digital distribution in aggregate has been, by all accounts, less than spectacular. How many more Virtual Console games would people be buying if Nintendo were running Steam-style weekend sales?

Here’s my predictions – within five years, there will fairly definitively be two and no more than three dominant PC-based distribution platforms; quite simply, the network externalities and offer variety can’t support any more that. Value-added services, like in-game chat and server provision, while being the flavour of the week for the next two years or so, are going to eventually become commodities and differentiation will come from catalog selection (and the implied cloud game / savegame storage that carries), pricing variability, and personalised marketing. I’m also picking that we’ll see the PC-based digital distribution companies start to expand into providing off-the-shelf digital distribution platforms for the console manufacturers – as the platform becomes more and more of a commodity, the shift will move from infrastructure (about which Major Nelson cares so much) over to content (which is we, as gamers, actually care about).

Think this stuff doesn’t apply to you, Mr. Console Gamer? Think again – it’s not going to happen this generation, but it will happen. At the rate download speeds are increasing, digital distribution will probably become a viable channel during the next console generation and the only channel the generation after that; there’s a lot of dark fibre out there just waiting to be turned on. Think 2020 as a conservative estimate of when digital distribution becomes the only option, with a significant proportion of all games sales being digitally distributed by around 2014 – once demand for data hits a critical mass point and becomes legitimised through commonplace digital media broadcasting, the game’s pretty much over for Game.

The reasons for the move are pretty straightforward:

• Publishers hate the first-sale doctrine and will do whatever they can to kill it. EA’s taking the “softly-softly” approach with this so far, but bundling in one-time use DLC codes isn’t just going to be the norm within three years, it’s eventually going to be seen as the first salvo in the move to total digital distribution. It’s only a matter of time until someone’s ballsy or stupid enough to make the ending of a game one-time use free DLC whether overtly or implicitly, such as through providing an XP booster that allows the player to avoid five to ten hours of pointless grinding. Think I’m crazy? Just wait and see.

• Piracy, rightly or wrong, is perceived as the industry bogeyman. Digital distribution (with all the server-side verification it entails) not only makes piracy that much harder, it gives the publishers and manufacturers a way of directly punishing pirates, especially if it’s mandatory that your save games be stored in the cloud. Pirated this game? Sorry Mr. Pirate, but we’ve locked those save games you were generating with a pirated copy and banned your console. However, if you’d like to unlock them, feel free to buy a new, unbanned console and a retail copy of the game, and we’ll happily unlock them for you. By owning your assets, they own your ass. So to speak.

• The current system’s a mess. Don’t kid yourself – the publishers hate all this region locking, inflexible pricing, lack of control over discounting and marketing activity, and retail inventory management just as much as you do. While developing a game for digital distribution doesn’t really reduce costs by much, it does extend the development window and allow far greater marketing flexibility and control. And, if Modern Warfare 2 and New Super Mario Bros. Wii‘s red box have shown anything, it’s that you can’t underestimate the impact of effective marketing on making a great game sell spectacularly.

The winds of change they are a’blowin’, and whether you like it or not, things are going to be a’changin’. It’s not all bad, but be ready for it – the way things work now isn’t going to last.

Related posts:

1. Dancing elephants and digital distribution
2. Mining your habits for fun and profit
3. RKD on… 2010: Part 8 – The future

Tags: digital distribution, economics, predictions

This entry was posted on Wednesday, January 20th, 2010 at 12:13 AM and is filed under Industry. You can follow any comments to this entry through the RSS 2.0 feed. You can leave a comment, or trackback from your own site.