Sometimes the prices of products are mysterious -- or just don't make much sense. Why is gasoline sold per gallon to nine-tenths of a cent? How can rare artwork really be worth millions of dollars? Sometimes, pricing puzzles can stump economists, but more often than not, there's a well-known economic explanation that's just not very intuitive. The invisible hand works in strange ways, and here are a few examples.
One of the more bizarre things that we see in the debate over "piracy" is that when we ask people what's more important -- stopping piracy or making more money -- there are some who actually argue that stopping piracy is more important. I have to admit that I can't get my head around this concept, but apparently it extends even beyond the issue of "piracy" to the issue of pricing as well. vegetaman points us to an absolutely bizarre interview with the head of EA's Origin platform, David DeMartini, in which he's asked by GamesIndustry.biz how he feels about Valve's regular deep discounting of games, something we've discussed at length before. DeMartini is not impressed, claiming that it cheapens your intellectual property:
We won't be doing that. Obviously they think it's the right thing to do after a certain amount of time. I just think it cheapens your intellectual property. I know both sides of it, I understand it. If you want to sell a whole bunch of units, that is certainly a way to do that, to sell a whole bunch of stuff at a low price. The gamemakers work incredibly hard to make this intellectual property, and we're not trying to be Target. We're trying to be Nordstrom. When I say that, I mean good value - we're trying to give you a fair price point, and occasionally there will be things that are on sale you could look for a discount, just don't look for 75 percent off going-out-of-business sales.
Except that totally ignores the reality of the situation and suggests big trouble for the way EA does business. As Valve has made clear, when it does those deep discounts, the increase in sales greatly surpasses the revenue made prior to those discounts. That's not a "going out of business" sale. It's a "let's make a hell of a lot more money" sale.
I'm honestly at a complete loss here. DeMartini literally seems to be claiming that making less money is a better business strategy because it doesn't "cheapen your intellectual property." Apparently the man is entirely unfamiliar with price elasticity, and how lowering your price can lead to more revenue (something which most people think is a good thing). So here's a case where we aren't even talking about "piracy," but instead DeMartini's assessment of what games must be priced at -- and against what the market says is the profit maximizing price. In what world is it a smart business strategy to keep prices high if it's guaranteed to make you less money... all because you want some perceived "value" to be higher, even if fewer people want to buy it?
We recently pointed out that book publishers are fooling themselves by thinking that they must charge super high prices on ebooks. That post seemed to set off some angry folks inside the publishing industry who did the standard thing: talking about all of the overhead that goes into publishing a book. We hear this all the time. But it's meaningless. It's cost-based accounting, rather than value-based accounting.
The consumer doesn't care how much it cost you to make the original.
Nor should they. They only care about the value to them of the single copy they get. And this makes sense for a variety of reasons, both economically and psychologically. This is the point that economists have been making for ages, trying to get people to understand the difference between fixed costs and marginal costs. Fixed costs don't impact pricing. Maginal costs (the cost to produce the copy) do. That's not to say that the fixed costs aren't important -- they are -- but they don't factor into the pricing decision, they factor into the investment decision. That is, you don't take on a project if you don't think you can create a business model that will give a total return on investment over the fixed and marginal costs. But the pricing on the individual item is entirely about the marginal costs. And this is actually a good thing. If you did pricing based on the average cost, including fixed costs, you actually lose the incentive to be more efficient and lower your fixed costs, since you get to just bake them into the price. But the public doesn't care about how much you spent. As far as they're concerned, you may have spent stupidly and inefficiently. They only care about the marginal benefit they get from the copy.
In many ways this is reminiscent of the stupid debate we've had for years, where a lobbyist from NBC Universal kept challenging me to explain how he could keep making $200 million movies. But that's stupid. If you start from the assumption of a high cost, you're not building value, you're just spending budget. All we should care about is how people can make profitable offerings, and there are lots of ways to do that at a variety of price points -- but you should never set the pricing decisions on the fixed costs, because the buyer simply doesn't care.
An e-book is a digital good. Ephemeral and intangible. Sometimes we don’t even have access to the e-book itself in the form of a file — in the case of Amazon, we’re just “renting” the e-book the same way you rent Taco Bell food. You bought it. It’s inside your device. But if Amazon decides you don’t need it anymore, one snap of the wizard’s fingers and the e-books are poof, gone, siphoned from your reader like gas from a gas-tank. E-books have no supply — if I buy one, it doesn’t reduce how many remain, because theoretically infinite copies remain. No cost to reprint. No cost to remake. It just… sits out there, attempting to be the very embodiment of the Long Tail.
This is what the audience sees and believes.
It matters little what the e-book actually costs.
It only matters what the audience thinks they should cost.
Your costs don't determine the price. The market determines the price, and ignoring what the market thinks is a big mistake.
And, of course, this applies to all sorts of content. As I was writing this, I came across a similar discussion, but on the movie side of things. It's a post by Stacey Parks at the Independent Filmblog, which notes that nobody cares what you spent on your film. She's not talking about end consumers per se (though it applies to them as well), but distributors who buy films. And this actually drives home the overall point: in a functioning market, no buyer -- whether a middleman/wholesaler or an end user -- cares one bit what the total cost of production was. They only care about the marginal benefit to them in relation to the supply. This is just classic economics -- and those who seek to price it outside of what economics suggests is reasonable will discover that people just don't pay. It's not because they don't understand how much money you put into fixed costs. It's because you spending so much on fixed costs is your problem, not the buyer's.
"The issue that we're struggling with quite a bit is something I've kind of talked about before, which is how do you properly value people's contributions to a community?” he said, reflecting on a discussion he had with Develop last year.
Last year Newell told Develop that “the games industry has this broken model, which is one price for everyone. That’s actually a bug, and it’s something that we want to solve through our philosophy of how we create entertainment products".
“An example is – and this is something as an industry we should be doing better – is charging customers based on how much fun they are to play with.
“So, in practice, a really likable person in our community should get Dota 2 for free, because of past behaviour in Team Fortress 2. Now, a real jerk that annoys everyone, they can still play, but a game is full price and they have to pay an extra hundred dollars if they want voice.”
And the latest news is that they are going beyond this crazy idea into seeing what's actually possible:
“We're trying to figure out ways so that people who are more valuable to everybody else [are] recognized and accommodated. We all know people where if they're playing we want to play, and there are other people where if they're playing we would [rather] be on the other side of the planet.
"It's just a question of coming up with mechanisms that recognize and reward people who are doing things that are valuable to other groups of people."
I'm curious as to how exactly this would work. I think there are lots of community-based properties would love to be able to charge trolls more. However, this could be really, really difficult to work in practice, and create some problems, depending on what the overall goals are. It would be nice, of course, if you could come up with a perfect system to get rid of trolls, but distinguishing true trolls can often be much more difficult in practice than in theory.
from the you-don't-price-based-on-your-bloated-infrastructure dept
With the legal dispute over ebook pricing going on, one thing we've heard over and over again from the traditional publishing industry and their supporters is that higher prices for ebooks make sense because of all of the "costs" that the publishers have to cover. This is a fundamental error in how pricing (and economics) works. It reminds me of the MPAA folks who demand to know the business model for making $200 million movies. Years ago, someone who understood these things taught me why cost-based pricing will always get you into trouble. If you start from the overall pricing, including overhead and other fixed costs, then you're not basing the price on what the consumer values -- and, more importantly, you're taking away your own incentives to become more efficient and decrease costs. Instead, you're just "baking them in." But the most important reason not to base pricing on overhead costs is that your competitors won't do that, and they'll under cut your price and then you're in serious trouble.
That moment of reckoning is coming for book publishers, even if they don't realize it yet. David Pakman, who watched all of this happen in the music industry for years, is pointing out that publishers are fooling themselves if they keep trying to rationalize higher ebook pricing:
In all the discussions about why book publishers demand that eBooks should be $15 and not $10, they say it is because they cannot afford to sell books at $10. That is, they cannot cover their legacy cost models on that number. Right. Which is why you must rebuild your cost structure for a digital goods industry with far lower prices. You start by paying your top execs much less than millions of dollars a year. Then you move your offices out of fancy midtown office buildings. Why should eBooks cost $15? Amazon is far more of an expert on optimal book pricing. They have far more data than publishers, since they experiment with pricing hundreds of thousands of times a day across millions of titles. Amazon can tell you the exact price for a title that will produce the most number of copies sold. Amazon is pretty sure that number is closer to $10 than to $15. Yes, they want to sell more Kindles. And they believe that lower eBook prices mean more eBooks sold which means more demand for Kindle. The negative coverage of Amazon is centered on them selling eBooks below cost in order to reach the $10 price point. But that is a function of publishers setting the cost higher than $10. If the profit-maximizing price for an eBook is $10, then publishers must adapt to set a wholesale price lower than that, even if it means your legacy cost structure doesn’t allow it. And that’s the rub.
The public seems much more interested in lower prices, not higher prices. You can understand why the publishers don't like it, but they really ought to learn how pricing elasticity works. They can make a lot more money with more optimal pricing.
Almost exactly two years ago, when the big publishers, along with Apple, effectively forced Amazon to allow the publishers to jack up prices on ebooks, I noted that this looked like a classic case of price fixing. Apparently, the US government agrees -- and found enough evidence to go after the publishers and Apple for price fixing. There are settlement talks ongoing, but if they fall through, the government is likely to sue. This probably means that we'll start seeing some lower prices on ebooks. Of course, the stupid thing is that these super high ebook prices have probably hurt the market more than helped. Lots of indie authors have experimented with ebook pricing, and found that the sweet spot for maximizing revenue is often under $5. So while big publishers may have been getting more per sale, it seems likely they were leaving a ton of money on the table by limiting the size of their ebook market with prices that were just too high.
Over the last couple of weeks, there has been growing buzz about Matter, a startup that is proposing a new business model for long-form science journalism and is raising funds on Kickstarter. Their approach is fairly straightforward: each week, they will produce one piece of ultra-high-quality journalism on a science or tech issue, and sell it for 99 cents on as many platforms as possible. It's less a paywall around a publication, and more an attempt to commoditize articles as discrete, sellable objects.
Will it work? The big debate has been between Felix Salmon (who likes the idea, and has been quite sanguine on paid content ever since the moderate success of the New York Times paywall) and Stephen Morse (who called Matter a "scam" and its creators "snake oil salesmen"—though he later said those terms were intentional hyperbole). Yesterday, they took to YouTube to hash it out in person:
There are a lot of good points both for and against Matter. For one thing, they've already doubled their $50,000 funding goal on Kickstarter, which at least demonstrates that people are willing to part with their money for something like this—but Kickstarter backers aren't necessarily representative of the broader consumer crowds they will need to court with the actual product. One of Salmon's key points is that since they are raising funds there, instead of going to venture capitalists, their business goals are less daunting: they just need to build something sustainable, not something that will make millions of dollars. The creators have said they don't plan to pull salaries unless the company is a massive hit. They've put a lot of focus on keeping their costs down, so, overall, their financial goals are very different, and a lot more attainable, than the average startup.
On the other hand, as Morse points out, there is plenty of great content out there for free. He doesn't believe there is truly an untapped demand for this kind of content, so Matter won't be able to compete. Salmon thinks the Kickstarter numbers say otherwise. Either way, the question is the same: can Matter produce content that is so good and so unique that people will want to pay for it?
I'm reminded of News Corp.'s iPad-only product The Daily, which launched last year to a lot of hype but quickly began losing engagement and talent. People were asking the same question: could The Daily manage to include such great content that people will need to read it in order to stay in the loop? Obviously, it couldn't.
Matter is more focused than The Daily and is targeting an entirely different audience with a higher standard of journalism, which gives it a leg up in that regard—but I still doubt its potential for one key reason that isn't getting much attention: the sharing barrier. The problem with putting a price tag on online content is that it actually reduces the appeal of that content, because one of the things people value most about good content is the ability to share and discuss it with their social circle. Exclusivity is a minus, not a plus, with most kinds of content (financial news being an exception, which is why most of the more successful paywalls online are on financial sites). Some people will be willing to pay 99 cents for an article, but a lot of them won't be willing to ask their friends to pay too by posting a link on Facebook, Twitter or their blog. Those who do are sure to get a lot of confused replies asking "wait, I have to pay?" Moreover, with a pay-per-article model instead of a subscription model, readers are going to have to decide each week if they want to keep paying. The mental transaction cost of 99 cents may be extremely low, but it adds up when you multiply it like that. These factors are going to make it very difficult to grow and retain their readership.
If Matter streamlines their costs enough, and their content is good enough, it's entirely possible that they can build a small core group of readers that keeps the one-article-a-week model afloat—but if that's the best possible outcome, is this really the best possible approach? Journalism online needs more than small-scale sustainable models, it needs ways to grow and expand, and that is never going to happen without advertising dollars. As Salmon says, Matter is trying to do "something which has historically been extremely rare, in the world of journalism: selling stories to readers, as opposed to selling readers to advertisers", and that means they are tackling the wrong problem. They still plan to include some advertising in the articles, but they should be putting a lot more focus on that side of the equation. There are companies out there that want to support this kind of content, and Matter's low-cost, VC-free model puts them in the perfect position to experiment with innovative sponsorship models—an approach that would be bolstered by opening up the content instead of locking it down, ultimately creating much bigger opportunities to fund quality journalism and turn a profit.
The price at which labels want to sell music and the price customers are willing to pay are often two totally different things. Yet, as we talk about this price disparity, we very rarely consider the price at which the artist wants to sell the music. This point of contention has come to a head with the release of Elvis Costello's latest music collection. In a post titled "Steal This Record", Costello states his album, "The Return Of The Spectacular Spinning Songbook", just plain costs too much.
Unfortunately, we at www.elviscostello.com find ourselves unable to recommend this lovely item to you as the price appears to be either a misprint or a satire.
Yeah, I would say that $202.66 is a joke. For that price you get 1 CD, 1 DVD and 1 Vinyl EP. That's it. You would think that for that price you would get a lot more, but no. along with other memorabilia including a coffe table book and autographed commemoration card. But still, if the artist thinks even with those extras the price is just way too high, then perhaps he is right. I can imagine how frustrating it must be for Costello to try and get the price changed with no luck. This is one of the downsides of working with a label.
After hitting a brick wall with his label, Costello has decided to take drastic measures to get his point heard. He is suggesting that his fans avoid buying the album and instead buy something he feels is far superior and cheaper to boot:
All our attempts to have this number revised have been fruitless but rather than detain you with tedious arguments about morality, panache and book-keeping - when there are really bigger fish to filet these days - we are taking the following unusual step.
If you should really want to buy something special for your loved one at this time of seasonal giving, we can whole-heartedly recommend, "Ambassador Of Jazz" - a cute little imitation suitcase, covered in travel stickers and embossed with the name "Satchmo" but more importantly containing TEN re-mastered albums by one of the most beautiful and loving revolutionaries who ever lived - Louis Armstrong.
The box should be available for under one hundred and fifty American dollars and includes a number of other tricks and treats. Frankly, the music is vastly superior.
That is quite a show of humility. Not only does he suggest Armstrong's album as a better buy for the money, he also gives Armstrong props for making better music. This is a pretty good endorsement and according to Amazon, "Ambassador of Jazz" is already sold out. So people are listening. Perhaps the end goal here is to get the label to admit that it screwed up the pricing and to soon change it. However, if even the artist cannot get the price changed, what hope is there for a consumer boycott?
We talk a lot about the need for artists to connect with fans as a way to give them a reason to buy. Here, we have an artist connecting with fans and asking them to avoid buying. You would think that this would be counter productive for the artist but this move shows that Costello has the best interests of his fans in mind and will do anything to protect them from unscrupulous business moves. That is certainly a reason to support an artist.
If you really want to support him, Costello gives his fans other options if they really want this album but don't want to pay the current asking price:
If on the other hand you should still want to hear and view the component parts of the above mentioned elaborate hoax, then those items will be available separately at a more affordable price in the New Year, assuming that you have not already obtained them by more unconventional means.
In a pair of interviews with Develop, Epic Games' Mike Capps shares his thoughts on some of the problems the industry faces by having focused on AAA game development for so long. According to Capps, this focus on AAA games, or games with large budgets and high production values, has led to the death of lower quality but still good AA games.
No, no I don't think so at all. Certainly as a gamer I don't think what's going on is a good thing. Triple-A is as much about marketing these days as it is about production values.
Take a game like BulletStorm, for example. That game was supported and well reviewed but just didn't break out. It wasn't a failure, but it wasn't a success that could fund a series of projects either. That's a game that I think people loved but it's not one that gets the $100 million marketing budget, because that amount of money is only spent on a few sure-fire hits and annualised sequels.
There's a lot of great games out there that don't take off. How many games have you loved that sell less than three million units? There's probably dozens. Those games can't get made in today's games economy. So no, I don't think it's a good thing that the middle-class of games have gone away.
Here he lays out some of the concerns over marketing allocation for games. While publishers will release a number of games during the year, the vast majority of the marketing budget is spent on only one or two hits. However, he feels that this is changing in gaming. Capps feels that there is a marketing shift from direct marketing to building a community behind games.
I'm not an expert here, but there is a huge impact from non-commercial marketing these days with things like Facebook and Twitter. If you don't spam people then you can be very useful to your customers. We were not forward-thinking in that area, but we're really driving in this space now and have more than one million Facebook fans.
But other forms of marketing and PR are starting to change things. The focus is changing from shoving TV ads in people's faces to actually building a community.
I don't know if there will be the same amount of TV adverts in five years' time. No one gets fired for buying TV ads, because they make sense, but soon they will start to make less and less sense. I think what could happen is a lot of money can be saved with less TV adverts and that itself, perhaps, could free up more money to take more risks and be more creative.
Such a move can certainly help the viability of AA games in the market. Many game developers, specifically in the indie scene, have learned that building a community behind a game increases the word of mouth exposure of the game and the developer. As AAA publishers shift to a community focused marketing strategy, they will be able to focus more on the games themselves.
I think another thing that's changed is the way people are willing to spend their money. Consoles need to adapt to this. Game revenue has moved to the service model and the microtransactions model. Consoles need to start being comfortable with that. They need to be able to do something where small virtual items can be sold and bought for 20¢ without a long certification process and a price approval process.
Right now we're not even allowed to change the prices of virtual content. We're not even allowed to set the prices. I just don't think this protectionist approach is going to be successful in a world where the price of virtual items changes on a day-today basis.
Double-A games will never come back unless we get rid of this notion of a game being $60 or not released. The console manufacturers need to let this happen. The best way of driving developers to PC is telling them they have no freedom in what prices they can set for virtual items. It would be great to have the level of freedom that, say, Steam gives you.
On the surface, this may seem contridictory to comments Capps made earlier in the year about how $1 games are destroying the games industry. Hopefully, Capps is just seeing the folly of that view point and instead feels as he is expressing now, that console manufacturers need too allow more price flexibility. While they probably don't need to let prices drop to $1, having more available pricing options will only help some games.
As game development further moves into the realities brought by the digital age, there will be companies lost as they try to hold onto old business models that may have worked in the past but do not work today or will not work tomorrow. As Capps has shared, marketing and pricing are two aspects that will change the fastest. As gamers rely less and less on television and print media for gaming announcements and move more toward social media for that information, game publishers will need to adapt or they will be left behind. As console manufacturers continue to insist on complete control over game pricing, gamers will move toward platforms that allow for less expensive fare that provides just as much enjoyment. Times change and so do markets. Epic Games seems to be on a path toward success in this new age, how many other developers and publishers will join them?
In preparation for the London Game Conference, Edge Magazine spoke with Guillaume Rambourg about the path Good Old Games has taken on DRM and what other game companies can learn from it. While Rambourg was light on the details of just what he will be speaking on at the conference, he remains confident that other publishers can learn from GOG's experiment with The Witcher 2.
I will be sharing the sales numbers on GOG compared to the competition. I think the numbers will speak for themselves, what DRM-free sales of even a triple-A title can achieve. Our values are universal and they don't only apply to older content. They apply to triple-A, day-one releases.
I certainly look forward to learning more about what this experience has to show other developers but I am glad he still leaves plenty to glean from this interview. He continues by explaining that publishers have always had the ability to do exactly what GOG is doing, but they refused to do it, citing unreasonable expenses for low returns. In the early days of GOG, they were met with animosity from publishers over the idea of releasing older games. These publishers didn't want to dedicate time and resources to preparing these games to run on modern computers. They figured it was a losing strategy.
This is something that I have observed over the years. Very few PC game companies have released older games for any price. This led to the creation of a number of abandonware and warez websites. These sites have made available a good number of unauthorized games to the public. GOG specifically took notice of this and has actually used those sites to its advantage.
When we sign content for GOG, we contact abandonware websites and make them our affiliates. So they remove the illegal content, and instead they put a GOG banner and they direct sales and traffic to us. Step by step, we are cleaning up the market and we are making the back catalogue segment a visible, and viable, market for the industry.
This is a winning strategy. I have been to a number of these sites in the past and have observed that most of the well respected sites have policies in place to remove games that are available through legal channels and even link to that legal content when it is available. Not only does this build confidence in the abandonware site, it also builds a positive attitude toward the publisher that makes these games available.
The idea of releasing older games is a proposition that only recently took hold with most publishers. A lot of it had to do with GOG and Nintendo's Virtual Console. Prior to these two platforms, most of the work done in bringing older games to modern machines was done by the fan community through the use of emulators and cracks. Most of those efforts were either ignored or attacked by the industry. Now that the experiment has been proven a success in most avenues, I would hope that game publishers will see value in bringing their older games back. The gamers want it. The publishers just need to provide it. Not only will this move provide more legal content for the fans of the games, it will also bring in more revenue that did not exist before.