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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  1. identicon
    Max Kayden, 19 Feb 2009 @ 12:47pm

    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.

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