November 11, 2007
In this era of pervasive broadband, I'm constantly surprised how often I am forced to buy a physical CD or DVD to obtain the software I want. Physical distribution methods have their place, but they should be on the decline by now. Software is best distributed digitally through our high-speed internet connections-- using BitTorrent if necessary.
Instead, I find that download options for commercial software are quite rare. Even when the download option is available, you end up paying the same price as retail or even more. Here's a typical example. I purchased Titan Quest: Gold from Steam about a month ago. I paid $29.95, which is the standard retail box price. But online discounters sell boxed copies of the very same game for $22.90.
|Digital Distribution: $29.95
||Retail Copy: $22.90
Selling directly to the consumer via download means bypassing the entire brick and mortar sales chain. This should result in cheaper prices than retail, not the same prices-- and it should never result in higher prices. Paying a premium for the privilege of downloading software is complete ripoff, and yet it happens all the time.
In this case, Valve is the distributor, so they're getting a healthy cut of the sale price (rumor says 50%). That's still a fantastic deal compared to retail software sales, where the authors will be lucky to get 10% of the sale price. But this "download is the same cost as retail" pricing strategy is particularly egregious when you buy the software directly from the company who created it. That's pure profit, as Greg Costikyan points out:
If you can retain the right to sell [your software] off your own site, do, obviously. Even if your traffic is low, you keep 90% of the revenues, and that's gravy.
Microsoft does allow us to purchase and download upgrade versions of Vista digitally. But as usual, you'll be paying full retail price for the privilege. The downloadable Vista Ultimate upgrade is $259.95, but you can purchase the same product in a retail box for $249.99.
|Digital Distribution: $259.95
||Retail Copy: $249.99
I don't mean to single out Microsoft here. At least they provide the download option for Vista (but, oddly, not for Office, their other cash cow). I've also purchased games directly from EA using their EA Link download service, and you always pay full retail price there, too. Sadly, paying full retail price to download software is a standard practice in the software industry. Oh sure, sometimes they'll throw in some cheesy extras like downloadable soundtracks and so forth -- but does that really make up for the fact that you just increased their profit margin on the sale by a factor of five? I don't think so. About the only "benefit" of buying game software digitally is that they'll (sometimes) let you unlock it on midnight of the street date, so you get a few bonus hours of play before everyone else.
I can understand the desire not to undercut their own distribution channel. I'm sure Best Buy wouldn't be too happy with Microsoft or EA selling software directly to consumers for less than they can on their store shelves. But do vendors assume we are completely ignorant of basic retail economics? Digital software distribution should cost less:
- When vendors sell direct, it's insanely profitable (90% profit)
- When selling through a third-party portal, it's still extremely profitable, far more than retail sales. (50% profit)
- It's more efficient. There are no trucks full of boxes, manuals, jewelcases, and other atoms to be distributed across the world. Distribution costs effectively drop to zero.
- It's more work for consumers. There are a bunch of additional hoops you don't have with physical media, such as DRM wrappers, helper software to install, and a long download period. It shouldn't be like this. Standard Vista style online activation from an ISO image should be all that's required. But you typically get hogtied into vendor-specific downloaders and wrappers that have to be installed on your machine, such as Steam, and the EA downloader.
Unfortunately, the state of digital software distribution is so bad right now that it's almost a parody of itself. It should be a wondrous, democratizing tool that pushes software pricing down by naturally leveraging the inherent efficiency of bits over atoms. Instead, as it exists today, the digital distribution of commercial software is intentionally crippled. It's only useful for the rich and impatient, a fact vendors exploit to line their pockets with obscene profit margins (even by software industry standards, which is saying a lot). The average consumer avoids digital software distribution entirely in favor of retail discounters. Can you blame them? With every download at retail prices, you're effectively paying vendors five times as much for the same software, and that's a huge ripoff.
It seems to me that, in the area of digital distribution efficiencies, commercial software still has a lot to learn from the open source world-- where everything is downloadable by design. I hope they can adapt before they're forced into extinction.
Posted by Jeff Atwood
I recently had the option of buying the Orange box from steam or from the retail shop. In the end I decide to go with the retail hard copy version.
1. Quicker to buy than download
2. Didn't consume part of my download limit (5Gb out of 20GB) - paying for shipping here I guess (THIS WAS A BIG ONE FOR ME)
3. Plus i felt secure knowing i had a hard copy - lame i know, but if my pc died ect . .
Digital distribution and Steam in particular is making good money for Valve, and created a great way for independent authors to make money. However, Valve's (and other large developers') own sales likely still have a significant retail component. In the age of digital distribution, here's the deal you're proposing:
1) Developer offers retailers a product for 45 dollars wholesale, or whatever the price.
2) Retailers buy the game, stock it on their shelves.
3) Developer offers the product to consumers directly for 40 dollars, undercutting the retailer's wholesale price.
4. Retailer winds up with a lot of unsold stock.
It's great for consumers who get somewhere between 5 and 15 dollars off. Yet retailers, forward thinking businessmen they are, dislike the entire concept, and will put an effort into killing it off or delaying it as long as possible. So rather than just buy significantly less of the product, they use their order as a bargaining chip and extract concessions from developers, who are often cajoled to accept by the publisher, if the decision isn't already up to the publisher. These concessions are basically price guarantees or stock recovery programs.
Nobody undercuts retailers out of fear of losing their substantial business.
With every download at retail prices, you're effectively paying vendors five times as much for the same software, and that's a huge ripoff.
Looking at it the other way round - the software developers are getting ripped-off by the middle men everytime they sell a box retail.
Also good to consider is supporting the author and publisher. I'd rather the game's creators get the most of my money, rather than EB games or Best Buy. The more money the publisher makes, the more likely you are to see a sequel, updates, etc.
Heh, I thought it was bad when I saw the prices for some software were the same, but downloads being priced higher than the box set? Holy crap. There's not even the excuse that they have to rid themselves of older inventory.
This problem also seems to manifest itself in the world of ebooks as well. On release they are the same price if not more than their hardcover counterparts. Later they become much cheaper, but are still the same price, or more, than buying a softcover version.
For many of us who are located elsewhere, the exchange rates discount the digital downloads quite significantly, and the lack of shops that ship out of North America makes purchasing boxed copies infeasible.
What I have heard is that publishers are afraid of cutting out BM stores from their distribution chain entirely, and fear that making digital distribution too good will cause retailers not to carry their product. Until a large enough proportion of the population purchases online, the BMs will still have the balance of power for anything but smaller products.
I have to say, my experience with digital distribution has been the exact opposite of what you describe. Living in Australia, game prices are stupidly high and it costs me about half as much to buy through Steam as in a store. For example, the Orange Box sells for AU$100 in stores, but I purchased it through steam for about AU$55. But that may not be as much an advantage of digital distribution as it is the current exchange rate...
The only advantage of digital distribution is maybe time. If you have a good internet connection, you'll have the game in few hours, maybe less. However, if your ISP does limit your badwith, then you don't want to be paying more to download a full DVD. Plus, you don't get a nice box, paper manual, and you have to stock it on yout own hard-drive, at your own expense!
I will always go for box model as long as there aren't at LEAST 20% discount on digital copies.
Looks to me like something called "channel conflict": the people who decide how to distribute have decided to encourage retail sales at the expense of online sales. This could be because they feel they need as much support as possible from retailers like Wal-Mart and hole-in-the-wall places like "Joe's Code Shack" so they don't want to do anything that would undercut them (a little mom-n-pop operation would get really mad if the company offered a big discount on their website). Or it could be a form of price discrimination ( http://www.joelonsoftware.com/articles/CamelsandRubberDuckies.html ), we all know the people on the Internet are rich, after all. Or it could just be that they will charge full price as long as people pay it.
Regardless, it's a backwards and half-baked strategy.
Broadband is not pervasive. In the UK things are still rather poor, and in other parts of the world they are worse. I object when programs insist on connecting to the internet for information when they don't need to. I particularly object when this is for help topics in Vista, on a laptop. (After all, Unix has had a decent set of documentation distributed with it since at least the 1980s.) The whole point of a laptop is that you can use it anywhere, in particular, in places with no network at all.
Jeff, i was thinking about the same thing yesterday when i wanted to buy a book from Amazon. I could not buy it as a PDF. Today it is all about the feedback. So if i can't have the book now, i do not want it.
As already mentioned, I think currency conversion rorts on physical boxes for those of us who don't live in the US are far worse. It does *not* cost $40+ to ship a DVD-sized case to Australia, yet that, apparently, is the markup charged for it.
And that's without going into the unnatural delays on actually making products available over here. Movies, games, etcetera. I absolutely refuse to believe that a major publisher can't make enough copies of a *DVD* to ship some out of the country by the release date.
And then there's the major delays on new movies in the cinemas. Major box office hits frequently come out weeks after they open in the US. TV shows can take months. WTF?
*sigh* Rant out.
Could it be suggested that software developers are concerned over piracy when using digital distribution? I get the impression some publishers would prefer the BM route due to fear of finding the ISO of their product all over the web 24 hours after going gold. Despite the complete irrationality in this fear, do you think that perhaps it has a factor? I certainly think so.
Jeff, you need to look at this from a broader perspective, or to be more precise - worldwide. In Croatia, Europe: Titan Quest BOX costs 68 US$, and the addon Immortal Throne is 50 US$.
Purchasing the game from Steam directly saves me 88 US$ !!!
Regarding the "charge what the market will bear" arguments ... you have too simplistic a view of the market.
Digital downloads are great for the publisher. They WANT you to download from them. In fact, if they could put Best Buy out of business tomorrow and never again have to worry about their concerns, they would.
There is a certain value per digital download on the publisher's part. It's not equal to the extra profit they'd get there versus shipping hard product. It's also not zero. It's between those two. You have to also take into account market sculpting (in a new market, if you set your profits razor-thin you are shooting yourself in the foot for the next decade; you price high so you can periodically reduce prices) which pressures the price back up, hidden utility (the disc buyer can resell the product six months later; if he buys a digital download the would-be buyer in six months instead pays YOU) which pressures the price back down, and existing channel splintering which pressures the price back up.
All in all, the one thing that can be said is that when you tally the factors up for the average publisher, they end up with no substantial incentive to foster a download market. So, they sign the afore-mentioned distribution deals which instead give them a slightly better profit margin from the brick-and-mortar channel.
All that having been said, there is a significant factor - by far the largest in the above calculation - which is at play right now. How much do publishers gain from a non-fractured physical distribution market? As broadband becomes more pervasive, smaller publishers will start finding that they gain little or nothing from the retail channel which is already for the most part snubbing them. The threshold of the size of publisher who falls into that camp is increasing. I don't know if we'll see it plateau, or if we'll see it climb until there is no more retail distribution. Still, right now, today, it is moving.
Physical media also have a resale value - sell the item on eBay or trade it in at your local game store for credit, for example. I'm guessing you can't do that with downloaded games.
I cant remember what software it was, but not to long ago I purchesed a software online that allowed a download, and then also shipped out the box at retail price(I paid retail for both a download and the box). So I was able to use it immediately and I still got the box and disk for my shelf. I think that if more software vendors offered this option we would see a LARGE boost in online sales.
But I will give the $249.99 for a copy of windows and addons a miss.
Heh, and you are complaining you're being ripped off? Try buying a game in Europe ;). XBox360/PS3 games, typically retail at 64.99 euros. That's 95.55$. Compare that to typical US prices of 59$.
Add to that that we're paying 1$==1Euro prices for our hardware and you have an idea how lucky you are that retail prices are that low. :)
I have to also point out that on steam, if you're not in America, you're getting the short end of the stick for Call of Duty 4, it comes out a week later than in stores, and costs $20 more, and it is actually Activision's fault, they set the price, and release date.
Digital distribution has a long way to come and it won't get major market acceptance until software developers pass on the savings to the consumers.
Also, Microsoft does offer the digital distribution option on their Office line of products
Have you considered comparing digital downloads to something like iTunes? Although Digital music is not software. You can still draw a comparision between the two.
I recently rediscovered the Sam and Max series (http://www.telltalegames.com/samandmax) But besides being a cool game, I thought the distribution model was quite nice too. Instead of shipping one big game they decided to split the game up in episodes. They're shipping out the separate episodes via their website. You can either buy separate episodes, or get a subscription for a whole season. Now they've completed the first season, and there's a DVD with all the episodes on it.
I don't like digital downloads of software packages. I'd rather have the physical media. What if your hard drive dies or somehow the download gets damaged? They don't cover this and I'd rather not have to pay for it again.
And in regard to publishers being afraid of digital copies being pirated, this argument is total BS. Most software can be found on torrent sites and P2P apps hours after its public release. The download is only going to expedite this by a matter of an hour or two.
The same things is true for books.
The publisher's web site has the full list price, plus shipping, and in many cases (I'm in California so O'Reilly in particular) sales tax anyway.
I suppose it's so they don't get accused of undercutting the retail channels but it's certainly annoying.
The idea that broadband is ubiquitous is a myth. Outside of a few select countries (Korea, Netherlands) it's simply not the case. In the U.S. it's actually much worse than most people think. Congress recently reprimanded the FCC for their intentionally misleading metrics of broadband availability. The FCC was interested in making it appear that there is plenty of competition in the area and there was no need to require the embedded local telco monopolies to open up.
The way they were counting broadband availability was that if a single house in a zip code had access to broadband, they counted the entire zip code as having access. Having worked for DSL companies and also having been a DSL customer for the past 10 years I can categorically say that's not the case. Leaving aside the absurdity of breaking it up by zip code (which the telcos largely ignore in terms of dsl provisioning), it's not at all unusual for one home to be able to get it while a home half a block up the street in the same zip to not have access.
Once you get outside major metropolitan areas broadband access is iffy at best. Even in some metros there are large swaths where it simply hasn't been rolled out. For those of you on the coasts it might seem like everyone has broadband access, but it's simply not the case. The real broadband availability (ignoring affordability, as for most people broadband qualifies as a luxury rather than a necessity) is signigicantly below 50% in the U.S.
Same applies for Hellgate:London, the new game from Flagship studios (with EA behind it). 29.99 for a digital download (last time I checked)
when retail it costs less (except some cases)
Shows you how greedy the corporations are I guess. Apart from that, its a pretty good game and totally worth it.
I have the same experience, and it makes me angry and sad. Not only for the pricing, I have problems with games from steam I dont have from physical dvd installed games.
I have one question directed to the game industry: Why would I buy a game online when a retail one is better in every sense. I get a box, manuals and I dvd I can store off the cpu? The way things are with the buggy overpriced games and the problems with them. why would I not download cracked games instead?
@Akira: DVDs scratch easily and may damage, too. With invasive copyright protection it's generally not possible to make a working copy at home.
If it's done right, there's a digital locker of sorts that keeps track of which software you actually own. For my audio software (Native Instruments, Ableton) this is the case; I can just download the latest version from the site and I don't need the original installer CD or DVD. A good thing, since the latest version usually won't need a load of updates.
@Akira, not true for some, for example: Steam lets you download a game as many times as you wish after purchasing it, as long as you can login.
I kinda like STEAM, although I agree it's sicksad we don't get a decent price cut. And add to that the fact that they don't use a distributed delivery method, so for popular releases (*cough* HL2 Orange Box *cough*), you're stuck on a single overloaded content server. Sucks downloading with 100kbyte/s on a 20mbit connection.
Magazines suffer the same fate. I'm a KitPlanes subscriber and I can subscribe through Amazon for (+/-) $20/yr for the dead tree version, with all the printing and mailing costs, or I can subscribe to the eEdition for $30/yr and get each issue as a 20 or so separate PDFs (each on their own page, but that's a separate issue...). I know that distribution costs are near zero for their electronic edition, and it steams me that it costs more. Mind you I have complained to them about this (and about the multiple dowloads issue) so I'm not just fuming on my own.
Maybe the common answer to all of these is to the same kind of competition in the download versions that we have in the physical verison.
Things are as expected, really. If people are willing to pay X for a product, it will be sold for at least X. There is no reason for a company to undercut the retail price of their own product, it just lessens their own profit. No company is going to choose fairness or logic over profit.
I didn't like digital distribution - that was until I shoved my Half Life 2 DVD in the computer and the install refused to complete. Tried cleaning the disc, installing it on my laptop and such, nothing. Annoying, since I wanted to complete HL2 finally.
I shoved the game back on the shelve, annoyed that there was no way to play the game..
Until I launched steam for some reason, and noticed the "Download game" option - I had bought the physical HL2 box in a shop, installed it, registered a Steam account, and entered the serial number. But here was the option to download it from Steam's servers!
Suddenly Steam seemed like a good idea! I can install HL2 via the DVD, takes 15 minutes. Or, if the DVD was dropped in a Volcano (or scratched), I can click "Install game" in Steam, and it starts downloading! It might take a few hours, but that's preferable to staring at a dead DVD.
If I want to replace the damaged DVD, I can backup the game files to a folder, and burn them.
The only problem I still have with Steam is offline play. I can't install the game on my laptop without an internet connection. I can't play the game reliably without an internet connection. Although it's probably improved since I last tried to play HL2 offline (over a year ago).
Telos your failing to realise the main point if the makers of the game don't have to make as many dvd's, manuals, boxes and factor in the shops delivery costs and own profit margins which I would guess totals upto about half the price of the game then they can afford to charge half the amount for an online download. Ok in the real world they wouldn't half the cost but a cut of say 20% would encourage downloaders and boost the game makers profits. WIN WIN I don't know of anyone who would regularly download games if you can buy them in the shops for the same price including the dvd, box and manual.
Um, actually this is situation normal when it comes to retailing. Try buying any product directly from the manufacturer, if you even can. You generally aren't going to pay a penny less than list price.
The reason is fairly simple. The manufacturer _can't_ sell for less. That is part of the distribution agreement. Only an idiot would distribute a product if the manufacturer could undercut the retailers at will. And if you were a retailer would you want to carry a product when the manufacturer is competing with you?
Nothing to see here. Move along now.
Part of the problem, I imagine, is that software companies want to maintain a degree of control over how their software is distributed.
Take your windows example: $250 retail, $260 online. Let's pretend the reverse were true ($260 retail, $250 online)-
That means that (vista sales performance aside) in theory, I could make an out-of-my-garage business downloading copies of vista for $250 a pop, burning them to DVD, and selling them for $255. By making online copies cheaper, Microsoft has just CREATED a retailer who they have no business relationship with, who has no return policy or customer service department- Brick Mortar's have more purpose than moving software; they serve as a buffer between the customer and the creator, handling things like refunds basic customer service. Also, if instead of going to CompUSA for versions of windows, millions of users were buying from thousands of home-retailers like my hypothetical self, it would be nearly impossible to apply pressure and stop us from, say, writing the word "STUPID" on every copy before we sell it, or displaying it in the same "aisle" as a copy of Ubuntu, or whatever- A chain like CompUSA, they could just stop providing the supplies to. The garage retailer, they'd have to increase the price AFTER RELEASE of online downloads in such a way to cripple our business- which would be a PR nightmare.
So, I think it's probably more than just charging lazy-tax. They're just trying to put a leash on distribution of their own product
@dbr: Steam added a feature I think about a month ago that's supposed to make it easier to play your games offline.
Since HL2 has come out If a game is on Steam that I want, I'll buy it there. Steam has no download limits, I can re-format, and install on as many computers as I want. You can get the pre-order discount, and save 10%, and they usually have some bonus content, like the TF2 beta. You can also pre-load the files int he week or so before the release, which means you don't have to fight with the masses at the store or to download.
The final reason I like to do this, is buying a copy over Steam sends all of the money STRAIGHT to the developer. They can break even on selling fewer copies of the game, which in turn allows them to take more chances. I don't want/care/desire to support the Suits at EA, or the pimply faced geeks selling games at EB.
Max Lybbert on November 12, 2007 02:39 AM said:
Or it could just be that they will charge full price as long as people pay it.
I worked on the "digital distribution*"+DRM industry on my previous job and every time anyone from my team asked "Why the prices are so high?", the answer from our manager was exactly that: "If people is buying it at those prices, Why should we lower them?"
* digital distribution is such a stupid name I almost hate it because it's used as if CDs DVDs were not digital
GG on November 12, 2007 05:39 AM said:
Try buying any product directly from the manufacturer, if you even can.
Then I'm sorry to disappoint you, because where I live you can purchase some goods from shop at shop price, or actually from a warehouse/manufacturer at a way cheaper price.
And that's usually the reason you can find the same product from a shop in a street market but at a cheaper price too: they purchase it from the manufacturer at manufacturing price, and sell it at lower price than ordinary shops.
I really hope there is Steam available in Argentina, where I live. With no really high prices. Over here, legit console games are about 80-100 dollars, with PC games at about 60-70 dollars (the newest ones). The price is very high as most people can't afford those games, and most who can wouldn't pay that much for anything but Orange Box. As in Brasil, it's so bad that the police allows people to set up businesses selling pirated software, including pirated copies of Windows selling for 10 dollars each. Not to mention games and expensive professional software. And it's close to impossible to find a PS2 or Wii without a modchip. If there is a videogame market in Argentina, it's 100% pirate. No wonder why Nintendo and Microsoft don't even think about selling their consoles over here.
GG is correct - the BM distributors like Best Buy, Target, GameStop, etc will *not* distribute your product unless there are clauses in the agreement stating things like: Manufacturer can not undercut; Minimum price for all distributors. Sometimes they will state that the manufacturer can not sell directly.
And despite our wishes, at this point being a featured game or title at Best Buy still results in quite a bit more sales than being downloadable. So what would you do? Make 90% profit from 10K sales, or bow down to the BM and make 10% profit from 1M?
You say we're not ignorant of distrubution economics, but perhaps most people are. The fact is, game publishers have to pay distributors. And distributors have to pay the retail outlets. Each step does this by adding a markup. But they want to protect thier profits, so they require certain agreements. I mean, If I said "advertise, stock, display this game, and you can have 10% off the top, but I'm going to undercut you. You'll probably still sell a good number to people who don't know. Thanks for the free ads!" Would you sell for me?
*note: Let's not discuss the terms required by wal-mart. wow.
Why hasn't anyone set up XBox 360 gray market sales channel for people in Europe? Sounds like they are getting ripped off!
Jeff, you're paying for the convenience. And it is convenient. Discs are a waste of time. And for games, 99% of the time you're getting the disc and a cardboard box and maybe a 4-page installation guide. And that 1% of the time that something like a nice guidebook comes with the game, you're not actually going to use it. It's just going to take up space on your shelf.
For games, also you have to deal with copy protection. If you buy a digital downloaded version (ala Steam), you get the convenience of not having to download a nocd patch from a dark alley of the internet or having to dig out the physical cd and hear you cd drive whine when you start the game. Also, you don't have to deal with disabling Daemon tools or uninstall CloneCD to install the stupid game.
Also, the deals that digital distribution systems like those from Microsoft and Valve have to make with traditional publishers would prohibit them from undercutting the distributors on price. The theory goes that brick and mortar chains (Best Buy, Office Depot, et cetera) would be very upset if the manufacturer were undercutting their prices.
This is basically the same reasoning for higher prices on music on iTunes than what you'd pay for the physical CD in a store.
Eventually brick and mortar stores will go away and no one will miss them. The people who worked there and managed the stores may have some adjusting to do, but eventually they'll find new jobs that will hopefully be more rewarding. Sort of like how the horse and buggy companies went out of business and their employees found new things to do with their time.
So, I'm a big believer in Steam, and the reasons I use to justify the negligible price differential is such:
1. I don't have to go into one of those shitty game stores and have to deal with those universal assholes at the counter, and pay all that extra money to pay their rent, rather then to the actual game company.
END OF LIST. Seriously. That hassle is worth that money to me. This weekend, I bought Bioshock on steam, got it at a meg a second, was playing it within the hour. Plus, I'm saving the environment! No plastic CD, no paper manuals that I would never look at anyway, no boxspam. It's lovely. EB can fuck off, Steam is their death knell.
See also: http://www.penny-arcade.com/comic/2007/03/30
Jeff, the article has a typo: "ingnorant."
GG and Philip have portrayed a great perspective on the whole situation from the Distributors and Retailers end. Kind of makes you think before calling regular consumers ignorant or not. There's a lot of info we don't know, and we might never know, that occurs between manufacturers, distributors, and retailers. Like everything else it's important to know that our perspective affects our judgment. In this case, the perspective of a consumer. I believe in order to know exactly if people are being unfair, greedy, or making "pure profit" we have to understand the situation from the perspective of every party.
I know it’s virtually a niche compared to Windows software, but lots of popular third party Apple software is sold exclusively online. Retail never comes into it.
I guess when you’re in a market small enough to be ignored by retail, you don’t have to try to protect their interests.
I DL'd office 07 from MSFT. If you have a .edu email you can get full version for $60 www.ultimatesteal.com Not bad.
I worked on a game published recently, and our team asked our execs this very same question. We were told that retailers are sensitive to losing sales to websites. The bad online pricing is an agreement required in order to secure shelf space (which is extremely important).
And this was a subscription MMO, so we had an even greater reason to distribute the client online as cheaply as possible.
GG is correct that the normal situation is the manufacturer cannot sell for less than list price.
You don't have to like the situation, but there is a good reason for it. Consider what could happen otherwise (especially in today's environment with widespread broadband):
1. Best Buy sells product from Company X for $40.
2. Company X, taking advantage of the massive savings available to them by not having to distribute the physical product, sells it online for $15.
3. Best Buy's sales of Company X's product plummet.
4. Best Buy stops selling Company X's product.
5. Company X does well initially but with no retail presence they become less visible and sales begin to drop steadily.
Basically this can very quickly turn into a lose/lose situation for both the brick and mortar retailer and the manufacturer. This is why ironclad contracts are typically in place to force the manufacturer to sell no lower than retail price.
This is not a new thing, as Atari and Nintendo used to sell games through their fan club newsletters, and those games were always sold at full list price for the same reason.
Getting people to sell your product when you're going to compete with them at a level they mathematically cannot achieve is next to impossible. About the only company that could pull it off is someone like Microsoft who is so gigantic that Best Buy wouldn't consider not stocking its core products.
I discussed this very topic with a friend who works rather high up in an online game company, and he said that the "old school" distributors force them to do it - according to him, they were threatened with a total block on all products if they were to sell their product online for cheap.
Brendan and a few others have it right, but today Jeff gets an "F" for economics.
The price of a product has very little to do with the cost of the raw materials, distribution, etc. Ideally, the price is precisely what people are willing to pay for a product. And the consumers are willing to pay the amount that the product makes their life better. That's the whole story. (The only place that the cost of manufacture and distribution enter the picture is in the business decision of whether to enter the market in the first place, or to stay in it)
If two companies make similar widgets, but company X's cost of goods sold per widget is $10, while company Y's cost is $15 for the same stuff, that does NOT mean that consumers will be willing to pay $5 more for company Y's widget. The market price for a widget is what it is, regardless of underlying costs.
So if, as you and many commenters have already illustrated, downloadable products make your life better, then you should be willing to pay a premium for that service.
That's why, for example, woot.com was recently selling brown Zunes for $20 less than white or black. People don't like poopy-colored MP3 players as much, so they can't be sold for as much. You don't think that brown was cheaper to manufacture, do you?
For years the phone company charged a couple of dollars extra for touchtone dialing service. However, it's my understanding that in later years, it was actually cheaper for them to decode the DTMF tones than to interpret the make-break pulses of dial phones. In other words, it saved them money to use the technology that they forced customers to pay extra for.
This is how economics works.
Woops, should have read all the comments first, guess I'm not the only one who heard about that. Sorry for posting dupe info.
I have pondered this very thing Jeff. I actually wrote and indepenantly sold some software about 8 years ago. I made 100% of the retail, which because I had extremely low sales wound up just barely covering my cost to produce the CDs and market. Now I am seriously thinking of making an online version of the same thing and making it free, but with ads running in it.....stay tuned.
Well, yeah. Of course it's bad... With the big names.
I've had lots of great experiences with independent games. Ditto for music. As a rule I will only buy MP3s with no DRM. Of course, not many big names give you that option (They Might Be Giants being a very notable exception).
Steam is infuriating, irrespective of price issues.
Fuck Steam. That is the end of discussion on this issue.
I play and buy lots of games. What I find particularly amusing (or disheartening, take your pick) is that many companies will actually provide BONUSES with the in-store boxes, that you cannot get with the same-priced digital download. I could understand this, if the digital download was some kind of bargain deal, but it's not.
For example, if you buy an Everquest expansion digitally, you get just that 1 expansion. Buy the same expansion in a box in a store, get all 13 (!) previous expansions for free.
I have a sinking feeling that the brick-and-mortar publishers are putting tight contractual restrictions against development studios, that restrict their digital distribution options.
I recently purchased The Orange Box and the price at my local London Drugs was the same as the online Steam price. Call me old school (ok, should I really be playing Half Life 2 at almost 50 years old ;-), but I went and got my "hard copy" at London Drugs...
Btw, Brad Cox, inventor of Objective-C amongst other things, had all of this figured out in 1996 with a book entitled, "Superdistribution - objects as property on the electronic frontier." A man (way) ahead of his time.
I disagree with some of the sentiment you express here. I purchase games like Half-Life 2 and Bioshock via Steam with the full knowledge that the author is getting a bigger cut than if I had bought at the store. I *want* that. It helps me vote with my dollars better. It's like I'm sending them a donation.
That's not to say that all digital downloads are created equally, of course, like Vance's Everquest example.
One point that I think has been missed here is that of RD costs.
While digital distribution should logically be cheaper than boxed software, we should remember that just because there is no jewel case doesn't mean it didn't cost anything to produce. (Come on developers, your brain cycles are worth something!)
I don't disagree with the notion that the distribution costs are lower (but not zero) with a downloadable product, but it's certainly not "all profit."
(As an aside, this is the same argument I always hear against the pharmaceuticals companies, the music industry, and increasingly book publishers. People -even people in the industry!- forget to amortize the development costs of the intellectual property and think that huge profits are being made where they may only be modest.)
Valve may not pass on the savings to the consumer, but I still do think they charge a reasonable price.
I want Valve to get stinking rich so they dare experiment with new, creative, games like "Portal" and don't feel like they have to watch their bottom line by just churning out new versions of old franchises.
[Digital software distribution should cost less.]
What economics text are you reading? The one I'm reading says that a monopoly can charge any price it wants, subject to the constraints imposed by "inferior goods" to which consumers might switch. Since there is only one publisher of any given game, it does not surprise me in the least that they charge the same price online as in the brick and mortar:
1. Online is easier for the consumer. He does not have to go to the store, buy the game, keep track of a DVD, etc.
2. If he was willing to pay a certain amount at a store, he should be willing to pay the same amount online. Why in the world would a company charge less for something even when the willingness-to-pay is the same?
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So it's ok to raise the price because of manufacturing costs but it's not ok to drop the price because of reduced distribution costs?
It has nothing to do with "OK," "good," or "moral." It has everything to do with what people will pay. Since enough people will pay $60 rather than $50, Microsoft and others have made the decision that that is the most profitable price point for them. The part about RD costs are a load of crap they say just to spin it in a favorable direction. If seven times as many people would buy the game at $15 per package, then they would sell it at $15 per package, assuming costs are less than or equal to $6.42 per unit in both scenarios. RD has nothing to do with it.
Here's the takeaway: companies don't charge prices based on what it costs to develop a game. They charge prices based on the maximizing profit (or minimizing loss in the case that they are in the red). The reason why games which cost less to develop are cheaper is not that they cost less to develop. Rather, it's because no one would buy them at the more expensive prices and their producers would not make money.
I still purchase music cds rather than downloading mp3 files.
A cd in a music store now can easily run $20 while the same album downloaded probably cost about $12.
In this case, you are buying two versions of the same product but with different fidelity. If you are listening on a nice stereo, the different between 44k wave files and mp3 files is plainly obvious.
This is not really analogous because the software versions that you receive though a download or on physical media have identical fidelity.
The problem with the "digital locker" concept where you can only get the software online is the same problem that I have with copy protection. Renting software doesn't make sense for the consumer.
I still use software that I purchased from companies that have been out of business for years. I had to find cracks to run these software packages which makes me a "criminal".
How would people react if their Studebaker sedans quit running permanently when the company went out of business?
It's never in the interest of established companies to undercut hard-won relationships and infrastructure they've invested in. It's always in the interest of new companies to innovate. This situation is absolutely what you expect if you look at it from an economic viewpoint.
"...Distribution costs effectively drop to zero"
That's not true. Do you know how much it costs to get the bandwidth to distribute big games over wires? Do the math. Cost of a T3 line x number of lines = $$tens of the thousands of dollars. That's if you go with a T3. Faster lines are even more expensive. Then you have to pay the people who administer the web sites, the servers, the firewalls, the hardware, the electricity to run the servers and AC the.... Even if they outsource the whole process, it still costs a ton of money.
The total cost is nowhere near zero. It's zero for *YOU* to download the game as a cost of bandwidth because you're already paying a flat fee for broadband.
Although Steam suck in prices, it has it#8217;s discounts too (Orange box came with 5$ discount in pre-order). And for old games it insures compatibility and viability (it#8217;s the only place you can find some games, like Excellent Game Psychonauts). And with a broadband it#8217;s some times faster to download the game than it#8217;s to go to the store and buy it. No no-cd cracks problem.
And in the topic of prices, Steam is a wonder for me. I live in Brazil, and games are imported and resold at insanely high prices. It#8217;s so bad that it#8217;s almost impossible to buy a playstation 2 not unblocked (without mod-chips). The problem with more memory use of having steam on, if you let it at the tray bar it consumes less than 10 MB. I also find easier to install a game in steam than it is with the cd/dvd. But like the Australian guys the prices depend on the exchange rate for me too. Buy the game although, it#8217;s still a problem with all the credit card stuff#8230;
Also, for the all the off-line story, Does Offline Mode Still Matter?
And then there's the fantastic Ticketmaster "convenience charge" for the privilege to print out your purchased tickets at home using your very own paper and ink! Wow! I get to pay Ticketmaster to lower their costs? Sweet!
A small software vendor may rely upon BrickMortar stores for exposure. Some software is bought because a user sees it on the shelf and likes it. For the right price, they'll try it.
If the maker prices the software below what the BM stores sell it for, then the BM stores quit selling it.
That is why direct digital download sales are at FullRetailListPrice.
Yes indeedy, broadband is pervasive, all right. Broadband is so pervasive in these Benighted States of America that more than 50% of Americans on the internet do NOT have broadband.
I don't have broaband.
Nobody I know has broaband.
Maybe your premise is deluded and bizarre. Maybe the reality (as statistics inctrontrovertibly prove) remains that most Americans are stuck on dialup, and will be until they die.
That answer your question?
There's no need to be nitpicking on jeff's numbers. Anyone whom has worked in retail knows that they are not wholly accurate. However, I think Jeff's purpose was not to evangelize to the early adopters, but to the PHB's out there. ;) Its up to the engineers and accountants to nitpick on numbers, but to the PHB's, numbers like that can make them change their mind. Of course, it all depends on what Jeff has to say. I just get annoyed when people try to nitpick a good article, and use that as blog fodder.
I do quite agree with the article, and the fact is, if there is no drm on the download... you can ease your bandwidth costs by using bittorrent :). Like what Blizzard does.
I find it difficult to agree with Jeff's view. Just becasue there are fewer middlemen in the digital distribution chain, the price of a digital product should cost less than a physical retail copy? Are you saying that Valve and Iron Lore do not deserve more profit share generated from the product?
Competitive businesses never operate on "cost plus" model because it is so reactive to your business environment that by the time you realize your margin is too small you're already too late. What you strive for is what economists called "surplus capacity" - the maximum amount of profit you can get. And how do you know the maximum profit? That's the market price. And what is price? It's the value customers are willing to pay for the product.
Which goes back to what I said in the beginning: this whole discussion of digital vs. physical distribution is irrelevant as it is not about who gets more money. The real issue is the value of the product - does Jeff consider his copy of Titan Quest worth the 29.95 that he paid for?
Sigh. A complete failing of the workings of how prices are determined. A common, amateur mistake.
Jeff, stop thinking that production costs have anything to do with pricing. If that was true, then everything ever sold would be profitable and everybody would have a license to print money by simply manufacturing something, adding a markup that makes you rich, and then sitting back and have people buy the product.
No, prices are determined by what the _market will bear_. Put aside your foolish, silly notions about "well, physical media is expensive and electrons cost nothing!". That has nothing to do with anything. It's _all about what people will pay_. And people are paying $50 for downloads. What's the problem?
Let me put this into perspective for you. That coffee maker you have on your counter? That's maybe, at most, 5 cents worth of plastic (that's a REALLY high number, BTW). It cost, maybe, $5 to manufacture (again, a REALLY high number). So why is it $50? It's because you were willing to pay $50.
I'm actually surprised no one else mentioned this (at least, a page search didn't bring anything up).
Considering the industry's level of fear of piracy, it seems like a good reason for why digital distribution actually cost more. It'd have to be less productive to pirate software when you have to wait for the box to reach store shelves or be delivered (at least, more costly with sales taxes and/or SH).
To be fair to Microsoft, their Vista digital distribution (from what I've experienced) provides an ISO image. With no further DRM than the boxed copy.
I completely agree that digital software distribution should be cheaper. As it should with music and other media.
What the vendors should realise is that by cutting the price they can draw in more buyers.
Unfortunately, none of the established digital vendors really have much motivation yet to cut prices, as there is little to no competition apart from the BM stores (which are already cutting their own throats).
It would be great if a company was able to get rights to sell significantly cheaper than retail. That could trigger that price-war that is needed.
For me the main reason I buy games off Steam and EA Link is the convenience. I agree the prices should be a little lower, but the convenience justifies them making a larger profit. Steam makes things simple in that I never have to handle physical media. When I reformat my hard drive you simply download the 1.5MB Steam installer, enter your password, and then tell it to install any games you want.
Considering the industry's level of fear of piracy
Piracy is the world's most efficient distribution network. Instead of hiding from it, vendors should be figuring out ways to embrace it, and harness its power. Ad-subsidized software is one way..
Even if they outsource the whole process, [bandwidth] still costs a ton of money.
Well, going by Amazon S3 as a metric ( http://www.amazon.com/gp/browse.html?node=16427261 ), that's around 15 cents a gigabyte. Is that a ton of money? I don't think so, not relative to sales. It's a few percentage points at most.
Jeff, you're paying for the convenience. And it is convenient.
What really bugs me about all this is the massive disincentives designed into the current digital distribution systems. You can *always* find a downloadable bit of software cheaper (often much cheaper!) through a brick and mortar discounter. And having physical media means you can resell the software when you're done with it, to offset your costs even further..
As I said above, digital distribution, as it stands today, is only useful for the rich and the impatient.
Though I am glad to hear it's helpful for non-US residents, who evidently get shafted on software pricing..
I work for a developer that sells their games via Steam, and has a partnership with another big name publisher.
I can tell you that the reason for the prices being that way are largely business.
1. People will buy it for that price, so thats the price it gets sold for
2. The publisher gets a lot more money when people buy it from then, than it gets via online distribution, so it will put a large amount of contractual pressure into bringing the online price to be at least as much as the retail price, or else they will lose a significant portion of their income.
3. despite some problems, Steam is actually a better system than physical distribution... not only do you get your game instantly, and for the most part without stupid Securom copy protection, but you can also get it again at any time, at any place, whenever you're connected to a computer that has an internet connection and steam. Its saved me from hunting for disks so many times. to me its actually better value than disk-based software, since it follows me wherever, and their servers are generally very fast for me.
I don't know if it's the same for other kinds of software, but for games there are really only three retailers that matter: Best Buy, EBX/EB Games/Gamestop, and Wal-Mart. The publishers that sell through these retailers have a whole catalog of games they're trying to sell and they have to keep in the good graces of these three companies to do it. If they release a major game with a cheaper price online these retailers simply won't stock it and will probably penalize that publisher's other games.
The place where this is really offensive is MMOs. Our publisher had to give extra benefits to retail pre-orders over digital pre-orders just to get the retailers to even accept pre-orders. And this is for a game that comes with a downloaded, patches itself immediately after you install it, and will re-download itself many times over the months or years you play it. Many MMOs probably wouldn't even bother with retail, but games without a retail presence don't count as "real games" in the eyes of magazine editors. One day some big MMO publisher is going to tell the retailers to fuck off and that will be the end of the scam, but until then we still have to cope with all this nonsense.
If you really want to see Digital Distribution work, look at Xbox Live Arcade. Microsoft has total control over the list of games that appear there, so they keep the rate at which new games come on low (and the quality level high). They also enforce completely consistent pricing and manage all the credit card transactions for you. The result is an incredibly smooth user experience and some very good games. I wouldn't be surprised if XBLA accounted for a significant portion of the money that Microsoft makes on Xbox software.
"..As I said above, digital distribution, as it stands today, is only useful for the rich and the impatient."
You said it yourself. If you're "rich", you wouldn't mind paying a little more for the convenience? They know this fact and they are keeping the cost savings to themselves as an extra profit.
As a side note, I am surprised they offer games as a download. Usually games are copy protected on the cd/dvd. Are they using online verification as an antipiracy protection?
I think you are wrong to assume that digital downloads necessarily provide the vendor with an increased profit margin. Sure, they get more of the revenue, but they get more of the costs. They have to have a website, process transactions, manage security concerns, process returns, and generally have to take on the role of front line customer support.
Additionally, if only 10% of game revenue is going back to you, that means someone else is publishing your game, which in turn means they are incurring a lot of costs beyond the straight distribution costs of your product. There are tons of marketing and promotional costs that are involved as well. Furthermore, they should have some kind of revenue sharing arrangement for online game sales (if they don't, they are stupid, and you should take advantage of it, but it is far from the norm).
Finally, don't underestimate the marketing value of having a shrink wrap box in a high traffic retail environment. That shelf space is highly valuable and far exceeds virtual shelf space on your website (which probably nobody would visit if they weren't *already* interested in your games).
Valve releases a path to allow the games to be played.
Do people really think that the likelihood of Valve going out of business overnight are that high?
I, for one, totally love free software. But I don't know how ANYONE can claim that any piece of software that was imagined, designed, built, and distributed by a company, as a PRODUCT, can be called 'information' instead of a 'product'.
Do you ask Ford for their blueprints, conceptual designs, parts list, and contact information for their partners when you want a car? Or do you go out and pay for one? Total idiocy.
If software is built for the pure intention of distributing for free and sharing how it was built.. fine. But if it's a useful piece of software that took alot of time, effort, and money to create - it cannot be held as free information! It is a product like any other, except much easier to copy and exploit.
Now that's over - steam is awesome for games distribution. But 6gig (cod4) is half of my monthly bandwidth which I really can't afford (we get stiffed on broadband prices in Australia). What I'll be doing is burning a friends' copy, installing that, and using steam to receive my own cd-key. Like others have said, compared to OUR retail prices, we save a very high percentage - but I see your point.
When vendors no longer have to bend over for distributors, and can instead forward the product themselves.. doesn't it make good business sense to sell for at least a little discount? Pass on SOME of the savings to your wonderful consumers. ESPECIALLY when you're not paying for dvds to be copied, packaged, shipped etc. Leverage the torrent protocol to save bandwidth costs, and start bringing the price of software and games down to a more reasonable price.
There's a very easy answer for the question of "why should they keep downloads at the same price as boxed software?"
The answer (or rather the challenge) is: "Why shouldn't they?"
It's just like gas prices, the distributors take advantage of the free market by making sure that all prices remain just as high as the rest.
The problem is - if you start charging less than the recommended retail price the retailers are going to stiff you and stop stocking your product. They have to make a living too. So the only thing you can do is charge the RRP. Then the discounters are going to come in under that price. Very difficult to get around.
Can you imagine the howls of protest from the retailers with shelves and shelves of DVD's and CD's if Microsoft started charging, say, 50% less for the download? And quite rightly - very unfair and MS get to keep it all.
So, maybe drop the RRP and take less of a cut to get the price down for everyone? Hmm ... pigs might fly.
I don't like digital downloads of software packages. I'd rather have
the physical media. What if your hard drive dies or somehow the
download gets damaged? They don't cover this and I'd rather not have
to pay for it again.
Exactly. I really, really dislike online-only distribution of apps that I have to pay for for this exact reason. There's one app that constitutes a ~1GB download that I've had to download no less than four times due to reinstalls or upgrades. Eventually I resorted to getting an (ahem) informally-circulated physical copy purely to bypass this problem - I don't mind paying for it, but the pain of an online install is so high that I eventually gave up in order to get a physical copy that I can reinstall just by dropping in a DVD.
"Move bits, not atoms"
- Nicholas Negroponte
Jules: You do realize that with steam, all you need is the username and password of your account, and you can load games on any PC an infinite number of times? It tracks what games you have so you always have them. I would cosider that SAFER then the hard copy, as it can get lost or broken, or you could lose the key, and then your SOL.
Warren Henning: +1 TROLL!
Bandwidth? What's that?.
I live in Costa Rica and a good internet connection is not something you can have just by having enough money to pay for it, we have only one ISP and is expensive and bad. Costa Rica is very small but they don't even cover the whole country. So even if you have the money to pay for your internet connection, that doesn't mean that the local Internet service provider has the infrastructure to cover the area you live in. :P
I love Costa Rica, but the software engineer in me hates it, we are a little behind here with IT.
Physical vs Download:
The physical product has appreciable value that the digital bits will never have. Take the Wing Commander: Kilrathi Saga CD set for example. Since the CD box set went out of print it has appreciated in value and has sold on ebay for hundreds of dollars.
Dan makes a good point. If Steam has done one thing right, it's the fact that they honor your purchased licenses and give you the ability to download your game anywhere you want. If I install Steam at my mother's house, I can play every game I own on her computer. I can keep my purchased Orange Box in a display case and never have to pop it into any computer ever again.
And I'm pretty sure many years from now an Orange Box DVD/Box will be worth a helluvalot more money than the digital download.
Steam has really worked well for me. I have never had any problems with and the prices (for Valve games) are better than retail if you include sales tax.
Steam games are the easiest ones to play at LAN parties. If someone does not have the game installed, all you have to do is install Steam and copy the correct GCF files over the network. All other game require passing CDs from person to person.
foobar, you completely miss the point with your Economics 101 post. Jeff was pointing out that this particular corner of "the market" (himself, and also me and evidently a few others) will _not_ bear full retail price for downloadable software. We are perfectly free to reason what prices we personally wish to accept, and we are also perfectly free to include the estimated production and distribution costs in our reasoning.
You are confusing statistical evaluation of market behavior with the individual actions that create this behavior in the first place. You are also confusing the theory of an efficient overall market with perfectly efficient pricing of every single individual product, which is obviously not the case.
Downloadable software at high price points is clearly not a sustainable business by itself, as evidenced by the fact that Microsoft, Valve etc. still try very hard to push the same products on retail shelves. It's merely a little extra profit from rich and impatient people, as Jeff pointed out. The publishers did not even select this price point; as others have pointed out, they are forced by brick mortar retailers not to undercut them. Hence, the download price is not actually the price the publishers would have chosen in their own evalution of what the market will bear.
Back on topic, I think it's enlightening that the BM retailers themselves feel that they add no value whatsoever to the downloadable product. They fear their business would go away entirely if the downloadable alternative were significantly cheaper. That more than anything else suggests that they are truly doomed, just like any stores still trying to sell pop music CD singles.