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Internet
Business Models: Editor's note: This paper was originally published in the 2000 Game Developer's Conference proceedings
Since
its inception the games industry has relied primarily on traditional
retail models to sell its product. Developers have faced several intermediaries
in getting their games to customers. The Internet is certain to transform
this industry as much as or more than any other because of the fundamental
characteristics of the product. Unlike most products, games can be distributed
digitally to end users without using a single intermediary. There are,
however, barriers to direct sales that have to be overcome before such
a strategy can be successful. In general, game developers have not chosen to sell a significant volume of their output directly to consumers because it has been very difficult to attract the attention of a large number and then distribute products directly to them. Instead game developers have had to first attract interest from publishers, then negotiate contracts with them so that the publisher completes many of the value added activities that must occur. In software development, the product is largely complete before it goes to the publisher. The publisher may wish to contribute to some aspects of the product such as providing feedback on content, analyzing focus groups of consumers, and testing the product for bugs and balance. Essentially, however, the publisher's key tasks occur after the developer completes the intellectual task of providing a complete product. The publisher must then take the finished work of the developer and mass produce, package, and send it through distribution channels to retail locations where it can be sold to the consumer. Prior to receiving the finished product, the publisher develops and implements a marketing strategy that can include advertising in appropriate media outlets. It also may negotiate special promotional activities with retailers. The retailers then decide how to place the product in their store such that the combination of all choices and special deals with publishers maximizes the overall profit level of the store. Consumers then purchase product that appeal to them, based on the exposure that they have had to them from promotional activities inside and outside of the store that they frequent. There are thus several independent entities that can handle the developer's product between its completion and its purchase by consumers. These include the publisher, the distributor, and the retailer. The key problem with this model from the developer's perspective is that it receives only a small portion of the final consumer purchase price. For example, the developer might receive only a couple of dollars for every $50 purchase of its product made by consumers. The
Traditional Retail Model To obtain
a mass market for any software product has, until recently, required
the use of traditional retail channels. Developers first must find a
method of getting a software title onto the shelves of a high volume
retailer. This often requires the distribution skills of a successful
publisher. For example, Microsoft has developed strong relationships
with retailers over many years and can achieve prominent placement of
its titles. Products can achieve higher sales at retail through promotional
material in stores such as posters and flyers, recommendations from
store employees, and box displays such as end caps between aisles. This
is principally designed to encourage people to buy products on the spur
of the moment or to plant the idea in the customer's head that the product
is worth buying on a future trip to the store. ________________________________________________________ |
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Features
Intermediaries Between the Game Developer and the Consumer
