Valve Exec Explains How To Compete With Piracy

from the service,-value,-pricing dept

Last month, an exec at Valve Software noted that “Pirates are underserved customers” and said when someone realizes that, they also discover: “I can do some interesting things and make some interesting money off of it.” It looks like the company is sharing some data to back that up now as well. A whole bunch of you have been sending in reports from Gabe Newell’s keynote speech at DICE. Newell is the founder and managing director of Valve, and he provided plenty of reasons that show that “piracy” is not the issue at all: service, value and pricing can easily trump piracy.

He started out by pointing out something that we’ve discussed in the past: digital content is best viewed as a service, not a product. As a service, you focus on providing continual value — and people are paying for that future value (which is a scarce good prior to delivery), rather than an infinite good already created. There’s value in paying for that future (scarce) service, and it trumps paying for an abundantly available good.

From there, he noted that the reason “piracy” is doing so well is that the “pirates are ahead not just on price, but on service.” In fact, he noted that since DRM decreases the service value for customers, it also tends to increase piracy, rather than decrease it.

Then, he showed how that combination of service and smarter pricing allowed the company to run experiments and make a lot more money — competing quite successfully against piracy. The most stunning example: last weekend, the company ran an experiment with the game Left 4 Dead. It heavily discounted the price, and sales shot up 3,000%. And this wasn’t just a case of building off a small base. The sales over the weekend were more than when the game launched.

In fact, it looks like a big part of the problem facing the industry is that they charge way too much for their products. Here are the numbers Newell shared from Valve’s experiments with “sale” pricing:

  • 10% off = 35% increase in sales (real dollars, not units shipped)
  • 25% off = 245% increase in sales
  • 50% off = 320% increase in sales
  • 75% off = 1470% increase in sales

Newell then says when they decrease the price by 75%, they are making 15% more than when they were charging at full price — though, I’m not sure how that math works out from what’s stated above (I’ve been playing around with the numbers, and something is missing…).

Between all of this, it’s pretty clear, yet again, that “piracy” is hardly the issue. If you provide a valuable ongoing service at a much more reasonable price, there’s no problem at all. Once again proving that the issue is a business model issue, rather than a legal issue. It’s too bad so few old school content providers are willing to recognize this, and quite troubling that some folks in our government are still missing this as well. It’s going to lead to bad laws and even worse enforcement of the law.

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Comments on “Valve Exec Explains How To Compete With Piracy”

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Almost Anonymous says:

Re: What's really interesting...

Mike is correct, there is data missing, doesn’t necessarily mean bad data, just incomplete. We don’t know how many ‘units’ sold after being discounted, although one would imagine it would have to be a pretty incredible amount to surpass the total dollar amount of sales when the price was still X.

gheorghe says:

Re: What's really interesting...

No, the is a correlation between profit-per-unit and cost-per-unit which says what is the sales income at which the lower price, which increased the sales, gaves the same total profit.

For an 75% discount and 1470% increase in sales (so, 1570% x the old sales), this correlation is profit-per-unit-after-discount=3 x cost-per-unit / 11.7. If the PpU-AD is bigger, you get bigger profits, if is is smaller, than smaller profits.

So, in case of Valve, the profit which makes per unit at the discounted price is some 1% more than value of (3/11.7 x cost-per-unit).

Simple math from this standpoint.

RD says:


Finally! Someone at a major company who GETS IT. Too bad he will be ignored, ridiculed, and his arguments dismissed by everyone else in the industry. Still, I will support Valve, and L4D is an awesome game. OH and lets not forget one other very important thing: make something PEOPLE WANT. L4D is a FUN game and people are willing to pay for it. Offer a GOOD product at a FAIR price and offer VALUE to the customer, and dont treat them like CRIMINALS when they do buy, and you too can have a successful product.

ToySouljah says:

Re: Re: Yes!

That sucks. I was going to download it as soon as I got home (I’m at work) since I thought it was still on sale. Oh well, I’ll wait for the next sale. I haven’t used Steam (I usually use Impulse), but I might have to check it out and see what else they have to offer. I plan on getting a new GPU (or 2) pretty soon to replace my current one (XFX GT 8600 XXX Edition).

I personally think $30 is a good price for a new game, and about $10-$20 for games after the first year of being released (new condition). After that they should only offer it through downloads and so if you bought an actual copy from the store you are now holding a collectors item since no more will be pressed. They could even offer Ultra Limited Editions by only pressing so many and numbering them for true fans of a game, and offering a free download of it so you do not have to even open it up…for instance it could be double packed so you can access a registration number to download it without having to actually break the seal, or maybe get with the retailers to offer a registration code on the receipt.

Anonymous Coward says:

Re: Sales != Profit

You’d be surprised when it comes to games, particularly games like Half Life that are widely modded. The community knows the inner mechanics of how the game works and there are usually a lot of people you can go to for help with a problem. Plus when Valve finds a problem they document the solution pretty well and throw it on the Steam site. I’ve yet to find an issue that if it isn’t new and they haven’t said they are working on it where the issue is already solved and posted on their site.

hegemon13 says:

Bandwidth, maintenance, etc

I can see how the profit would not increase more than that. At 75% off, they are selling 4 times copies for the same amount of money. The margin on each copy is obviously much lower. And, before you say the margin is nearly 100% because it’s digital, remember that they are selling service along with it. Those services include thing such as: bandwidth for initial download and updates, account maintenance, server maintenance to serve a larger number of users, etc. That said, they have probably calculated a “per user” cost estimate from which they determine profit margin.

Max Kayden (user link) says:

I suppose his numbers and your numbers don’t line up because you don’t know whether his “sales” are net or gross and you don’t know whether his percents are percentage points or scaled.

What has happened is that Valve is addressing the tragedy of pricing points. If the price the consumer is willing to pay for the goods is less than the production/distribution/marketing costs (the base cost), there’s no sale and nothing is lost. The problem arises when the consumer is willing to pay an amount that is above the base cost, but not as much as the price tag. In tangible goods, the base price is reasonably ascertainable, and so that preserves per unit prices.

But with digital units, the base cost is virtually nil. So lets say the producer has a digital version and a tangible version, and the consumer is willing to pay $6 to watch the movie (or play the game, etc). If the tangible version costs even $5 base, the producer and retailers may have no interest selling to that consumer because the profit / time is probably lower than 5% (a typical return on a government bond). But the digital version might cost $.20 base, so when the producers/retailers demand $20 per copy, denying that $6 sale, $5.80 is lost. What digital does is makes it so the producer can exploit much more of the demand curve (everything above that $.20 base, or whatever the number happens to be). The old economics of price ~ demand / supply just doesn’t apply to digital. Gather up some applied mathematicians (or economists with a strong math background) and generate the new formula — test it on the market and profit. It seems that Valve is getting closer.

Anonymous Coward says:

Lets see, lower the cost, increase the sales? That actually works? Gee, someone should tell Walmart.

Seems to me there are two ways to go about increasing profits. You screw around with the pricing to determine the elasticity (and this has nothing to do with production cost, it has to do with what price point generates the greatest profit) and/or you try to slow down or combat piracy. A smart business will do both ensuring that their fight against piracy doesn’t slow down their legitimate sales (and profits)

John Cochran says:

I played with the numbers

and what I believe is missing is the handling cost per unit. It looks like they’re reporting gross income based upon discount, and not net income. As an example, let’s try a few numbers.

Manufacturing/Handling cost per unit $11.80

Full price of game = $50.00
Number sold at full price = 1000
Sales = $50,000
Costs = $11,800
Profit = $38,200

Price after 75% discount = $12.50
Number sold at discount = 62,800
Sales = $785,000
Costs = $741,040
Profit = $43,960

So you can sale the sales in real dollars is (785000-50000)/50000 = 1470% higher. Yet at the same time claim that the profit (43960-38200)/38200 = 15% higher.

Headbhang says:

Re: I played with the numbers

Nice numbers, but there is a problem with them. The thing is that precisely because games a digital goods (at least in this context), there simply is no fixed manufacturing/handling cost. Sure, the game DID cost quite a bit of money to develop, but once it’s done, it is essentially an almost infinite good. Sure, there are some costs of transfer (hello, P2P) and some extra development for updates and so on, but ultimately I think it’s safe to dismiss them as negligible. As consequence, the costs associated with the increase in sales will not increase proportionally at all, and the profit would likely be higher.
In any case, even if the profit did not increase significantly at all, it’s should still be regarded as a win-win situation: there are 61,800 additional happy gamers!

Joel Coehoorn says:

Re: Re: I played with the numbers

That’s just not true: the marginal cost of a digital good is _not_ always zero. This is especially true for video games. If you have a 1GB or larger install file the bandwidth costs are noticeable. And since it’s a service, you’re not figuring that just once: you’re figuring that the customer may download the installer many times (steam allows this). There may also be technology licensing deals that require a payment to another company for every sale.

PaulT (profile) says:

Re: Re: Re: I played with the numbers

“If you have a 1GB or larger install file the bandwidth costs are noticeable”

There’s no reason why a company can’t use P2P (or 3rd party mirrors) for content delivery to reduce bandwidth costs to close to zero. I’d also be willing to bet that the majority of users only download content once even if the option is there to redownload.

“There may also be technology licensing deals that require a payment to another company for every sale.”

Again, that’s a decision on the part of the company. It’s not a necessary part of the process.

The basic marginal cost of a digital good is *always* close to zero, unless it’s artificially inflated by decisions such as the above.

Freedom says:

Convenience and Value Win...

I think the conclusion that games are over-priced is a bit of leap. If I discount anything by 75%, sales are going to go up when the rest of the industry doesn’t discount their prices or the assumption is the price will be back up in week. That doesn’t mean that the pricing is wrong, just that you got a surge in ‘can’t miss out on this deal’ type shoppers.

With that said, the combination of lower priced games (and movies for that matter) combined with non-DRM’d versions that you can get from legit sources is a winning combination.

Right now, illegal downloads win – no cost, no DRM, etc. However, a game sold via a legit channel would win over a lot of the pirates – easier to download than torrent, etc., no worries about hidden code, no worries about getting dragged into a lawsuit net, and if you don’t include DRM it is a pretty easy choice for most folks.

I also am really happy to see that someone in the industry final gets that DRM causes piracy. Anybody knows the best way to get someone to do something is tell them they can’t.


Albert Nonymous says:

Re: Convenience and Value Win...

Speaking as a long-time game purchaser (2+ decades), I’d say the conclusion that games are over-priced is spot on. I purchase fewer games on impulse than I used to, and only rarely purchase games on or near the release date. As prices rose over the years, I found myself thinking harder about each purchase and more frequently coming to the conclusion that “I don’t really want this so badly after all”. And this is during a period where my income rose significantly (and so my ‘entertainment’ budget) – this wasn’t about affordability but rather about value. Oh, and having a child reach “gaming age” during this time actually increased the pressure to buy more games as well, albeit not always games I was interested in. DRM didn’t help my perception of value, either.

Something else to consider is the affect of a too-high price on subsequent purchases. It used to be the case that when I headed to the store to pick up a new game I was interested in, I would look around and pick up another that I was interested in but didn’t purchase earlier. Sometimes it was because the older game was discounted a bit, sometimes because the two together still didn’t add up to enough to dissuade me in my buying mood. Some of this had to do with psychological barriers – some years ago it was possible to leave the store with 2 new(ish) games for around $60US, still a comfortable distance from the $100 mark). Now, 2 games will put me near or over that mark rather easily, so rarely do I buy 2 games during a single store visit. In fact, the effect of a single large purchase decreasing the likelihood of a second seems to be tied to my mental tally of the monthly credit card balance, so 2 or more games are less likely to be purchased in a given month, let along a single store visit.

Given all that, I can easily see how Valve’s pricing experiments could give the results they have, because I could very easily see myself buying more games on impulse when the sweet-spot is reached. 2 thumbs up for Valve, who seems to have a clue.

Xander (profile) says:

Steam (the content delivery service by Valve) has become one of my favorite programs lately, which was a complete turn-around back when it was first released. Not only they have content that I look forward to, but their pricing and deals have made me consider and purchase games that I would usually hold off on.

I usually play Team Fortress 2 now, and one thing I loved about the Keynotes was the mention of TF2 Comics to be released by the same group that worked on the game. To quote from The Feed:

“Gabe brings up an excellent point that successful entertainment companies will realize that fans of properties like the property, not the specific product. They are Harry Potter fans, not just fans of the books. The team that’s making the TF2 character videos (which are awesome!) are going to be working on comics.”

That one time payment for a game can me hundred fold in returns from an excited and eager fanbase. Even someone that pirated the game (and enjoyed it) can be turned into a consumer.

Jim (profile) says:

Re: Interesting but not going to work.

I can’t disagree more with that statement. If all movies and games were discounted 75% I could certainly see myself purchasing up to 10x more of them. 50$ for a game (that sometimes only take 8-10 hours to finish) and 30$+ for a movie is insane when they can be sold online with practically no cost other than the initial cost of development.

some old guy (user link) says:

Re: Interesting but not going to work.

uh, ya, you would. People have been saying this for years.

The problem is that the people funding these huge money endeavors don’t want to fund anything with low margins. It’s uh.. “not fun” or something.

The entire entertainment industry focuses narrowly on widening its margins. NOT increasing its profits.

Prof, John Shade, Terminus Collegium (profile) says:

Re: Re: Re: Interesting but not going to work.

The issue is one of much wider scope.
First and formost, Valve is NOT a non/not for profit organization. They are in business to make money.
This, in of itself, is not a bad thing.
The issue is actually one of the most often misquoted verses of the Judeo-Christian bible.
“Money is the root of all evil” is incorrect.
The actual phrase translates better as “The LUST for money is the root of all evil”
If you consider this, you will see how this affects most, if not all, of early 21st century human interactions

SteveD says:

Re: Interesting but not going to work.

“You might see these numbers if you discount a few games or movies, but if you discount all games and movies, will you grow 10x the current gaming/movie market? Not likely.”

Its not just a flat discount that makes it work.

First, its time-limited for weekends so people rush in to buy it before the price goes back up.

Second, Valve are very big on supporting communities (integrating chat programmes and event organisers into steam). The resulting peer pressure from a bunch of people buying a game will often mean extra sales from those who want to join in the fun.


Re: Interesting but not going to work.

Actually, it is VERY likely.

It’s like boiling frogs. Do it slowly, a little at at a time and the frogs don’t notice they’re being cooked. Blast the heat all the way up and they will jump right out.

It’s a lot easier for most people to spend money in small increments. It makes “impulse” buying a lot easier. A cheaper product becomes something that the consumer has to think less about.

Casually buying a $20 game is pretty easy. A $50 game is probably something you will want to put more thought into.

Rob (profile) says:

Finally Someone that Gets It

I enjoy that he mentioned “continued” value as opposed to just value. It sickens me to see games announcing their first pay-for downloadable content packages THE DAY BEFORE THE GAME EVEN SHIPS (COUGH CAPCOM COUGH).

Or other games that ship for $60 and have content to download at a pay-for level on day one. This is disgusting. Add to that most companies failing to ship stable products from the factory and you’ve got all around a giant mess that leads to more piracy.

Valve wins again, Scout update next week; holla!

Yakko Warner says:

Re: Finally Someone that Gets It

Since you brought it up, it’s interesting to note that, with this same game, Valve recently announced that they were releasing DLC for the low low price of… FREE.

It’d be interesting to see if that announcement (which was over a week ago) had an effect on sales as well, independent of the sale (even noting that an actual release date of the DLC hasn’t been specified). Perhaps that’s part of their experiment as well?

Pete says:

It worked for me.

I had wanted to purchase left for dead 4 after seeing the good reviews and demos, but the $50 was more than I was willing to spend. After I saw it on sale I jumped at the opportunity. $25 is just so much more palatable. Also, the knowledge that it was a limited time offer definitely helped me decide to purchase it right away. I didn’t want to miss the opportunity. Now I just wish I had bought a copy for my brother as well!

Spectere (profile) says:

Re: It worked for me.

I had wanted to purchase left for dead 4 after seeing the good reviews and demos, but the $50 was more than I was willing to spend. After I saw it on sale I jumped at the opportunity.

I wound up buying my friend and myself a copy during the 50% off sale. The only reason that I didn’t buy L4D is because I didn’t have anyone to play it with. Valve wound up getting two sales instead of zero as a result of that deal.

I’m sure I’m not the only person who did this, either.

DS78 says:

Its all about Steam

To address this:

“Newell then says when they decrease the price by 75%, they are making 15% more than when they were charging at full price — though, I’m not sure how that math works out from what’s stated above (I’ve been playing around with the numbers, and something is missing”

It’s because they deliver the game via their Steam service. Its not a box you buy in a store. It’s a digital copy that’s close to (if not) infinite, save bandwidth and hosting costs. They have insane deals if you buy via Steam.

I’ll admit, I’m addicted to Left 4 Dead. I bought it via Steam, and I paid full price…

Off to kill some zombies!


Jeff says:

I download pirated versions of almost everything. Aside from not having to deal with the DRM hassles, the price is usually right. Out of what I download, I probably actually use less than 5% of it. Amazingly enough, I paid Valve $4.95 to download S.T.A.L.K.E.R – Shadow of Chernobyl. Supposed to be a pretty decent game, now that the bugs have been ironed out. Will I ever get around to playing it? Who knows, but at that price it was worth buying just in case I do. At that price, I’d have bought a heck of a lot more games, rather than hassle with downloading the pirated version, burning a DVD, installing it, installing the updates, installing the crack, etc., and they’d have transformed a pirate into a customer. I strongly considered buying Left 4 Dead, but as I’d already downloaded and burned it previously, the price was still slightly above my purchase point. Had it been $10 or less, I’d probably have bought it.

Neverhood says:

Good strategy

I think that the numbers makes a lot of sense. But the reason that Valve doesn’t always have the prices that low is that they take advantage of the “Limited time offer” hype.
I know for a fact that my, and two other of my friends purchase of L4D is a direct result of the this “Weekend deal only” hyping strategy.

L4D is designed for co-op game play, and only really shines when you are playing it with 1, 2 or 3 buddies. The “Weekend deal only” offer made us all buy it, but more importantly it made us buy it at same time.

If it was a permanent price reduction then at least one of us would think “Well, I can always buy it, and I don’t _really_ need it right now”, which would make the rest of us think twice about it because we would not be able to play together at the same time.

Philip Storry (profile) says:

And then there's the halo effect...

I’m one of those many that bought Left 4 Dead at that great price.

I bought it not just because it’s cheap though. I bought it because it was from Valve, and Valve rock. Steam is a great content delivery platform (ugh! corporate-ese!).

The halo effect I allude to is that I bought Left 4 Dead and then bought a completely unrelated Crazy Machines bundle pack at the same time. I spent 50 quid on Sunday, but that 50 quid bought me four games and two expansion packs, as far as I recall.

The complete Crazy Machines pack included version 1, two packs of additional levels for version 1, Version 1.5 and Version 2. (I think. Something like that, anyway.) And it was about 35 quid – which I thought was fair given the many hours of tinkering it’ll give me.

But I’d not have bought it if not for that Left 4 Dead deal. Much as I love Steam, I tend not to go into the shop – I already have 61 games from them, and I’ve become quite picky about what other games I might want given how many I already have to play!

I wonder how may other games were sold that weekend because of the Left 4 Dead deal – games which might not have been bought otherwise, and which pull people further into the Steam community and systems.

And I suspect that’s also why Valve do these sales. They’re not just good for one game…

Philip Storry (profile) says:

And furthermore...

Oh yes – one more thing that’s great about Steam.

They’ve managed to convince many companies to do bundle packs. Of the 61+ games I have, just over half came from one purchase – a pack of every game iD ever did. Every version of DOOM, Quake, and goodies like Wolfenstien 3D.

It probably cost iD very little in terms of modifications to get them running in Steam. Yet – and this is the kicker – they and Valve had a $99 sale to me. *Despite me owning some of the games already*.

Steam’s convenient, and I was prepared to pay $99 for the supreme convenience of just downloading all those old classics, rather than rooting through boxes in the loft looking for install media and CD keys. (Or worse – floppies! Ugh!)

To install the various versions of Quake I had, it’d take me about a day of CD shuffling and poking and prodding. Or I could let Steam take the strain out of it.
To be honest, the bundle was a bargain even though I knew I was paying a second time for many of the games.

I’ve bought games outside of bundles, but I’ve noticed that bundling a game with lots of others seems to make them more attractive to me. Valve have nurtured a great catalogue of games available on Steam, and then made it easy for publishers to make them even more inviting by bundling.

They’re a canny lot, this Valve crew. I’d just like to be the first to say that I for one welcome our new Game Publisher Overlords…

ash says:

Valve and Piracy

You really need to give some credit to those execs at Valve. I may not agree with everything that was said, but there are a lot of companies in the industry that could learn something from these guys. Finally a company learns that offering customers or potential customers something they really want (the product with a lower price) is how you get more customers vs the music industry model where you make enemies out of your customers or potential customers. The MPAA and RIAA could learn quite a bit from these guys. I take my hat off to the people at Valve who at least sound like they are headed in the right direction and are at least trying to be consumer friendly. I do buy and will continue to buy more of there games.

Moi says:


Since i was a kid, i’d always send my parents out to get me the newest game for whatever console i had at the time (which were normally around 50 pound, and i haven’t got a rich family!) As i then got into the internet thing, i worked out how to get ripped copies, since for some strange reason, prices of games have always froze at the 50 mark.I even had a left 4 dead rip copy, but bought it for xbox 360, why? Because it was 25 quid! POPULAR games have ALWAYS been way too overpriced, i understand companies have to make money, but please, come on now.Popular games would make alot more money keeping their prices at the 30 mark, people like me who rip copies of console games are normally doing it for price reasons, companies who make games who sold them at the 30 mark would gain pirates too! = MORE MONEY! Sorry if i’ve made any points already said, i couldn’t handle most of the comments to read 😀

ahmd says:

Valve have a point there..
Because I or maybe many others would choose to buy a game at a reasonable price rather than download pirated copies…
Original game win on everything (service, multiplayer,etc) except price, that said if Valve could come out with price that both reasonable and profitable at the same time (and the games are good course), I believe piracy will be supressed to the point where its no longer a big issue..

Pino (profile) says:

Sometimes there is a fixed cost.

Fixed cost 1: Royalties due to licensors. Some video games are based on a sports league, a book, a movie, or some music. If the cost for licensing these includes a royalty in dollars per copy, as opposed to a buyout per title or a percentage royalty per copy, then the game’s publisher won’t be able to lower the price as aggressively because it still has to pay the minimum royalty per copy.

Fixed cost 2: Distribution to Internet have-nots. Rural customers will still need discs because their home ISPs cap data transfer at less than a dual layer DVD per month.

captain-D-bag says:

Pirates will always be pirates

Yeah you increase user base and therefore increase the number of people aware of your products for the future.

This doesn’t necessarily combat piracy. The people that pirate things will always pirate things. Even if the price drops from $50 to $5 they will still see it as $5 more than they need to pay. There is no enforcement for piracy. No threat, and no reason not to. So they will keep doing it so long as there is no consequence to compare to. I mean live consequence, like their friend going to jail for a few years for piracy. Nobody knows anyone that’s ever been busted for piracy. So why quit?

I used to make video games. One of our titles was pirated and up on some site the day before launch! Sad part: the pirates FIXED an install bug the game was shipped with! The pirated version was more stable. Someone in the comments mentioned something about crappy products being shipped and I couldn’t agree more.

EG says:

Not enough data

Do the number of pirated copies really go down when the prices go down? We do not get any of those numbers.
Without this a decrease in piracy is only implied and assumed.
What we can see is that decreasing cost results in enough sales to surpass that of the higher cost.
It could just as easily be that Valve subscribers who just sit on the sidelines and neither pirate or buy decide to buy when prices drop.

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