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Analysis: Kotick's 'Raise The Price' Comment And AAA Game Value
by Kris Graft [PC, Console/PC, Mobile Console, Exclusive]
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August 11, 2009
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[Activision Blizzard CEO Bobby Kotick caught flak last week for a flip comment about how he would like to increase game prices. Gamasutra's Kris Graft looks at the outcry, and how it may reflect a deeper resentment toward publishers of premium-priced games.]
Talk about price sensitivity. As of this writing, Activision chief Robert Kotick was still being raked over the coals for exposing himself as an executive at a publicly traded company who wants to make a whole lot of money. Gamers are seething, and some of the more colorful news outlets have gone for the jugular.
If you didn’t hear, during Activision Blizzard's earnings call last week, when the Call of Duty, World of Warcraft, and Guitar Hero publisher said it beat quarterly expectations by posting $1.04 billion in revenues, Activision execs fielded the following question from Pipar Jaffray analyst Tony Gikas:
"[What’s] your comfort level regarding pricing of some of your new games that have some expensive controllers and any feedback that you had from retail as we move through the holidays?"
Activision Publishing head Michael Griffith replied, saying retailers “very strongly” support the price points for Activision games, such as the turntable-based DJ Hero and the skateboard controller-enhanced Tony Hawk Ride -- both of which are expected to sell for around $120.
Kotick interjected, “And Tony, you know if it was left to me, I would raise the prices even further.”
Cue mischievous giggling from Activision Blizzard execs. (I think I may have heard a rustling of Benjamins in the background too.)
Gaming press jumped on Kotick’s quote, either halfway defending him (“He’s a CEO, his job is to make money for investors”) or outright attacking him (“He’s the devil, but slightly more evil”). I’ll do neither here, but I’ll say that his comments are far from surprising, and while I’m not personally horrified by Kotick’s remark, I do understand why gamers have cried foul.
Let’s take a step back. Here’s the CEO of Activision Blizzard, who is reporting that his company just made over $1 billion in revenue during a single quarter. We’re in a recession, and the average $60 game is already difficult to afford (let alone the peripheral-based games that cost $80 to $200). Kotick made $15 million last year as Activision Blizzard’s CEO.
Now, here’s the big rich guy and his posse having a good guffaw in the presence of adoring analysts, saying, That’s not enough, I want more. And with the giggling, some saw that Activision execs, and maybe investors as well, are just having a jolly good laugh at the expense of the cash-strapped gamer.
They’re Saying “Boo-urns”
The media reports, both the even-handed and blatantly anti-Kotick stories, fanned the flames on internet message boards, blogs, and Twitter. “That is such bullshit,” said one poster on the popular gaming forum NeoGaf. “It's like Mr. Burns [from The Simpsons] is running a video game company.” Commenter bill0527 was straightforward when he wrote, “Congratulations Bobby Kotick, you're now the biggest douchebag in all of gaming.”
Are upset gamers and press being over-sensitive? Or is there legitimate reason to be upset at the mere suggestion of higher prices? Maybe it’s a little bit of both. There was a time early on in this console generation where execs and analysts were watching closely the sustainability of the $60 price point for next-generation video games. It remained to be seen whether or not this price hike would take.
We see now that gamers are willing to pay $60 for a worthy piece of software – 2008 US video game retail sales alone were $ $21.33 billion, up nearly 19 percent year-on-year. But in the last year-and-a-half, the economy has tanked, US game revenues have been down for the past four months, and for some, $60 today is quite a bit more than $60 was to them in 2007 or 2008.
Now, the US market is hoping to achieve flat sales in 2009, and at least one analyst is suggesting the lagging growth could be more than just tough comparisons to last year -- gamers may finally be feeling the recession pinch.
Proper Pricing A Tricky Matter
Perhaps this easily-prompted outcry in response to Kotick’s price comment is an audible manifestation that reflects just how carefully the $60 price tag rides the line drawn between guarded consumer acceptance and perceived price gouging by the games industry.
It wasn’t just Kotick in recent days who suggested raising the price of video games. Games industry stalwart and former Sony Computer Entertainment Europe head Chris Deering said premium triple-A games should cost customers £70, a 40 percent hike over the standard £50 in the UK. And I don't think he even cracked a smile when he said that.
Proper pricing for a video game is a tricky matter, and a subject that game developers have closely examined. There’s one camp – the Koticks and the Deerings – who seem to believe that game prices should be higher in order to compensate game makers for skyrocketing development costs. Then there are people like Valve Software boss Gabe Newell, whose company has put the lower price tag/higher revenues theory to the test.
“One thing that really annoys me is the inefficiency of pricing we have in our industry,” he said at the DICE Summit in February this year. There, Newell explained now Valve performed a bit of a pricing experiment through its Steam digital distribution platform. As part of a weekend sale, Valve slashed the price of the popular first-person co-op shooter Left 4 Dead from $50 to $25. At half of the normal price, revenues from the game exploded with a rise of 3,000 percent. It raked in more revenues during that sale than when Valve originally launched the product in November 2008, Newell said.
Valve has similarly seen revenues of third-party games rise as a result of discounts. A little over a week ago, a weekend Steam sale cut the price of Relic Entertainment and THQ’s real-time PC strategy game Dawn of War II in half to $25. After not appearing in the service’s top 10-selling games for months since its February 2009 release, the weekend sale drove it to the top of the Steam charts, which are ordered by revenue, not unit sales. The sale ended after a few days, and the game soon disappeared from the top 10.
While Steam can offer interesting ideas about pricing, it deals in digital distribution, which is different in important ways from physical retail (e.g. digital needn’t worry about shelf space, digital customers have different buying habits than the average Joe who buys games at GameStop, physical distribution requires physical logistics).
But Valve’s observations in game pricing in particular certainly make one consider that we have little understanding of game pricing (even Valve referred to their sales as “experiments”), and while pricing decisions are mainly based on hard numbers, there’s a gut instinct that plays a role in picking the elusive magic price point.
To see just how difficult pricing a video game can be, you just have to look as far as the fledgling iPhone video game app market, a microcosm of the games industry where many developers have expressed frustration and confusion when trying to price their games attractively. Some succeed, many don’t, despite releasing a quality product.
It’s All About Value
Game makers are wrestling with the question, “How expensive should games be?” But that’s not the question that they should be asking. In the end, it’s about a game’s value in the eyes of the consumer. When the Wii launched, people didn’t buy a Wii – they spent $250-plus for Wii Sports. Guitar Hero and Rock Band bundles cost more because of their special controller pack-ins. But people were willing to buy those games because there is value. “Value” can mean different things to different people, but the most obvious value signifiers for a game are, in general, a game’s perceived quality, longevity, and above all, its fun factor.
Activision recently said it would be pricing Infinity Ward’s surefire-hit Call of Duty: Modern Warfare 2 at £55 in the UK, a £5 premium over the typical current generation game. Again, a bit of an internet uproar ensued, but Kotick and crew are apparently confident that the title holds a lot of value with gamers -- value that has carried over from the original Modern Warfare.
Most of the people complaining about the price of this game will probably buy it at that higher price, even though they won’t be happy about it. The same goes for Activision Blizzard’s decision to sell StarCraft II in three parts, a brilliant move by analysts’ estimations, but one that met heavy criticism from gamers when first announced.
With the upcoming launch of Activision’s peripheral-based games DJ Hero and Tony Hawk Ride, Activision’s pricing instincts will be put to the test.
Value is also all about perception. For instance, Left 4 Dead may have seen a 3,000 percent increase when Valve put the game on a 50 percent sale, but all that experiment showed was that a big discount can hike up a game’s sales for a few days. It does little to provide insight into what a game’s price "should" be at launch.
To the people who bought Left 4 Dead during that sale, much of the value they saw in that purchase may have been because they knew the game was normally twice as much. And the sense of urgency of a weekend sale also led many gamers to pull the trigger. Would Left 4 Dead’s launch revenues have been higher if Valve released it initially for $25 instead of $50? Until more game companies start sticking their necks out there and launching full-blown “triple-A” premium games at half the cost, it’ll be hard telling.
What stinks for game developers is their perception of a game's value is sometimes way off the mark in relation to a consumer's, and disappointment ensues. It's really hard to convince gamers that they should pay over what they think is a fair price. So you have outlets like GameStop, rent-by-mail companies like GameFly, and free-to-play online game publishers who can satisfy the demand for lower pricing.
The Punchline
So was a laughing Kotick simply joking about wanting to “raise prices even further”? No, the guy’s dead serious -- he wants to make sure he can turn a profit, and price-hiking may be one way to do it. Not to over-analyze a chuckle, but maybe it’s the general situation that the video game industry is in that’s rather humorous.
You spend $10-$20 million developing a game, additional millions on marketing, release it out to the retail wild, and in many cases, have virtually no idea whether or not the game’s sales will recoup the expenditure.
Absolutely hilarious, isn't it?
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In turn, each game's publisher has a monopoly on their games. No one but Acti-Blizz can sell you StarCraft II. There is no price competition among producers or sellers of StarCraft II.
Pooling games together and suggesting that consumers have a "games budget" from which they will buy the games that offer the most value for their money is a bit problematic because product differentiation in games is very significant. However, this may only apply to "hardcore gamers." There may very well be another market of gamer that simply goes to the store to buy "a" game, looks at what's available, and picks one, much the way one might shop for a substitute good, such as bread.
So, it depends on your point of view: do gamers treat games as substitute goods or not? Or, perhaps, are there two separate markets, and you have to sell your games to one or the other? If you are going to target the "hardcore gamer" audience who won't substitute your game with any other, then you most certainly do want to raise the price as high as possible.
http://files.shareholder.com/downloads/ACTI/699717652x0x219409/95c866fa-e1c7-46e
9-841d-aa4ece0c4794/Activision_08_AR_full.pdf
Is it bad for the market? Maybe. If he can sustain the development of high budget, high quality games it is in a way a good thing for the industry.
It would be nice to see another publisher counter with a low cost (to the consumer), high budget title to demonstrate, as Valve has in the PC space, that prices don't need to be as high to sustain the development of high quality titles.
But we've seen this in many other industries...especially the clothing industry. A clothing line builds its brand and is then able to sell their products at sky-high prices. They will remain to do so until consumers decide that they aren't willing to pay for it. There are cheaper alternatives out there but rarely do these cheaper alternatives put pressure on the big name brands as they will always have their own audience.
Kris Graft hit the nail on the head, it is all about perceived value. As Simon alludes to, competing products may not affect perceived value. StarCraft II is a great example. Games like CoD4:MW and Guitar Hero:WT are games that people put hundreds of hours into. To those people a £5 increase isn't a whole lot.
For me "a" game is like going to the movies or art. I spend countless hours sifting through tons and tons of crap looking for the good stuff and at times you just have to make a best guess and hope you're not left with a bitter after-taste.
That said, I have no problem with investors getting a return on their money and making a profit. The problem I have is how their spokesperson goes about obtaining it.
To all the Kotick's out there, welcome to the world and how to make a living. It's about time we started to see the games industry having to face the same as every movie maker or theatre production house. Do you homework, make an entertaining product and we the consumers may just buy it. If you beat the price up thinking you're going to be on a finacial winner is follie and glad you're the one in the sights of those investors and just glad I'm not one of them associated with you.
To those out there actually making compelling stories, being creative, and putting the entertainment back into my gaming experience, here's me $$
Sorry Mr Kotick, but you need to come up with a bigger sob story like supporting the "Orphaned children of parents who play too much WoW" or "Hey, we want to give our overworked superstars who make these games a nice raise so they can feel better about all the physical and emotional pain they go through to produce this stuff and maybe take more time off to recover and not burn out and quit the industry with nothing to show for it"
Even though games have been constantly evolving and growing substantially in content and number of hours allotted for the gamer, the price has remained the same.
If my memory serves me right going to my halcyon days in High School, I was paying less than I am today for most everything else. My coffee in the morning. Gas for my car. An ultimate cheeseburger and a side of medium curly fries at Jack In The Box. But I distinctly remember that over the years, the amount of money I shell over for a game hasn't changed, even though the amount of content developers pack into it has certainly augmented.
This is, of course, from an American viewpoint. I know that it isn't the story in many other places around the world. Europe in particular. I believe that Kotick's sentiments are identical to the thoughts of many executives in the upper tiers of publicly traded entertainment companies, be it movies, books, sports, toys, etc.
That said, I think I am the minority. I know plenty of people that only play Call of Duty, and will inevitably pay more money to get their latest fix. I'm sure the same thing applies to Starcraft fans.
For those who've been reading this site for very long, does this headline sound familiar: "Revenues up but profits down." Yes, This headline has been popping up for tons of companies over the past year. In fact, it's been a clear trend throughout most of the industry. That indicates that companies need to either find a way to make games cheaper or find a way to make more money on their games.
There has been a fair bit of price-raising over the last few years, most often seen in MMOs (both subscription and Micro-transaction models often result in an individual paying over $100 on a game), but when the entire cost is up front, it's difficult to get consumers to accept a price hike. If everybody was just happy playing MMO's, that would work for the industry, but since most of us still like more traditional games, other options need to be considered.
Judging by financial trends over the past few years, companies NEED to raise their profit per game. Whether or not raising the price up front is the solution remains to be seen, but gamers really need to get out of their "I deserve more for less" mentality. In truth, companies like Valve may actually succeed by giving more for less, but don't be too angry at people trying to solve the problem that's seriously damaging the industry. If they don't make a profit, you won't get your games at any price.
Good comments from David Delanty, too. If games were adjusted for inflation like everything else, we would be paying a lot more.
Yet, I have to agree with him. I don't want to, let me rephrase, I *really* don't want to. But David is right, inflation does happen and the $60 we're all used to paying isn't the same $60 that we were paying 10 years ago. The real trick comes with getting other publishers all on board at the same time, which I doubt will happen until the next generation. Like it or not, we're going to end up paying more eventually.
60 USD is hell expensive to 3/4 of the population of the world, just consider the "BRIC" as people call, Brazil, Russia, India and China, they have a huge population, and this huge population love games, and yet they have a bizarrely rampant piracy, they have piracy everywhere...
Why? Why people there buy so much games pirated? Why on Brazil PS2 has 90% of the console market share, and less than 5% of the PS2 owners have a non-pirated game? It is because games are hell expensive...
Seriously, 60 USD is what half of the population of those 4 countries has to eat an entire month...
No wonder Steam sell like nuts when the games get cheaper... I am Brazillian myself, and I do own LOTS of pirated games (altough none of them are much new, it is a long time since I don't buy one... yes, BUY, on these 4 countries internet is not that good, so we BUY pirated stuff, downloading is mostly unreliable and expensive but with few exceptions). And when Steam made that end year promo with lots of games priced decently (they were not priced low, they were priced "correctly"), I had my friends, me and several people that I know race to buy them, some people even don't had steam, they only went to a friend computer, made a account and bought lots of games, so they could download them later on their machine, when internet is avaible (happily steam has a download system that rock... reliable, fast, can resume stopped downloads... perfect for dial-up users or 256kbit broadband users, that is the most common broadband here, altough still less common than dial-up).
It sort of strikes home for me, too: our company IUGO released on the iPhone App Store the strategy game Star Hogs originally at $5, and when we dropped the price (first to $3, then to $1), interesting climbing of the chart was made (I believe at $1 it peaked at around 30 in the top 100). However, even at $1, the game didn't have staying power and eventually slipped down to about spot 90 after about a month. When we released our new 2D platformer game at $1, Spy Bot Chronicles, the Star Hogs plummeted off of the charts, and Spy Bot raised to a peak of about 50. Now, about a week after it's launch, it seems to be slipping, but it's hard to tell if it will have more staying power than Star Hogs (and it'll be hard to compare, since SBC seems to have ended up eating some of Star Hogs' sales).
Would we have done better with Spy Bot Chronicles if it was released at a higher pricepoint (like our previous platformer in the same IP, Toy Bot Diaries), then dropped the price? Would we have climbed higher, or perhaps made more profits even if we hadn't sold as many copies as the former scenario? It's hard to say, 'cause life doesn't have save points, but the whole "on sale" bug has hit the App Store hard, and it makes it hard to tell if starting with a lower price really does help you in the long run. Perceived value is hard to ignore.
Altough mind you, the APP store is a totally diffrent stuff... It has 15k games, most of them free or 1 USD... Also the people that buy games there are diffrent, as the scope of the games, and whatnot...
I had to giggle that so many gamers are getting all royally-po'ed that an exec of a major video game company said he'd raise the price if he could. Look at whatever job you have; would you even think twice if you figured you could ask you boss for a $4/hour raise...and get it? What about $5? How about $10? Or would you think..."well, I *could*...but that'd be a lot of money for my boss and his company...so I think I'll stick with what I'm making now"?
C'mon. Equating "video games" to food is about as dumb as equating "movie watching" to breathing. If you don't want to pay $60 for a video game...DON'T! It really is that simple. Don't bitch and moan about the price of an entertainment you enjoy...if it gets to expensive for you, go do something you enjoy that is less expensive. Go to the park, go fishing, go for a hike, a bike ride, or hell, just go for a quiet walk in the morning.
As for me...he could raise the price all he wants. Eventually people will stop buying (well, the smart ones anyway). I *still* haven't bought Oblivion becuse it's still close to $50 Canadian. When it drops to about $30, I'm there. Until then, I can still play City of Heroes or DOOM (1 or 2...maybe 3, but I like 2 the most).
With the advent of the internet, flash game portals, GameStop, Steam, the iPod, free to play, cheap MMOs, and independent game houses I haven't spend more than $20 in a quarter on games. I have Fallout, was a gift, and love it but would have waited till I could have picked it up second hand for $20 or less.
Those who feel that price is the solution to revitalizing the game market should think twice. I firmly believe that game companies need to start taking inspriation from Chris Anderson (The Long Tail & FREE) [http://www.thelongtail.com/about.html] to take it to the next level.
It amazes me that an industry that pays so little in salaries and makes BILLIONS each year can be in such dire straights. Perhaps we're beginning to see the end of the mega publishing houses and game companies will go back to marketing their own games. Perhaps I'm so far away from the inner workings of the industry that I just don't get it.
As for Kotick's statement, I think it's pretty clear that many game companies are not doing well right now and that the current price point of games is unsustainable given current business practices. But here's a thought - instead of changing the price, why not change the business practices? The success of games like Braid and World of Goo have shown that it's entirely possible to turn a profit on games with lower budgets.
EA seems to be addressing this in a much more reasonable manner. Instead of keeping up the same problematic business practices and raising prices to compensate, they're trying to find different ways of funding development, like the free-to-play model (Battlefield Heroes, Battleforge) and their announcement of their new 8 Lb. Gorilla development company to make smaller budget games for the iPhone.
Publishers seem to be convinced that mega-budget games are the only way to make money, but that's ridiculous. What are the sales of the Wii and the DS vs the 360 and PS3? The gamers who are constantly demanding high end graphics might be the loudest group, but they're not even close to the largest. It seems like the real problem is out-of-control budgets, not the already high price point at which most "AAA" games are sold.
The reason we should upset is Bobby makes 15 million a year, net worth is probably 75 million. He can pay more for games with that bank balance. I am luck because I have the income to spend around 1k per year on games. However, many of target audience cannot do this and flock to used games...which hurts the revenue model more since Gamestop sucks up that gravy.
Games that should ideally be priced cheap are new intellectual properties (IP). Gamers are not familiar with such games... they don't know what the experience will be from playing them. Because of this, gamers may be extremely hesistant to spend a considerable amount of money on them. However, if the games are really cheap, then they may gladly spare a few bucks to check them out. It's best to price games from new IPs low, and sequels of top selling game series high.
Absolutely hilarious, isn't it?"
This is Activision we're talking about. Publisher and dev of CoD4 / 5, WoW, Guitar Hero(s).
Their games are almost guaranteed to sell.
I am aghast "$120 for a game plus specialized controller!?! Not a chance in hell!" even as I contemplate shelling out $250 for Champions Online plus lifetime supscription
Dude, pirating is... you know... your idea...
Awesome \o/
Totally awesome \o/
Altough I will not do that, I dislike most activision games anyway...
How long will CoD, GH, and Tony Hawk (assuming the board thingy sells well) sustain continual profit growth? Note that I said "profit" and not "revenue"...
While you may mention the entity of Activision's that continues to print money, Blizzard, consider this. Blizzard is to Activision as sports franchises are to EA. Blizzard is guaranteed revenue that will never fade, much like EA's sports franchises. This isn't to put down Blizzard, either. Their standards for game quality is second-to-none and their high revenues are very much well-deserved.
But think about it... How much of Activision's actual PROFIT growth has to do with Blizzard? At some point, Blizzard can only do so much because they have a limited amount of titles that they can produce/maintain in any given year. So where's the growth then? Activision can't grow by depending on franchises alone. And if they don't figure this out soon, where else can they go but down?
And finally, since when has hubris served anyone? While there's truth in his desire to make more money by raising game prices, how does it serve him and his board by mentioning it during a press interview? While it might endear Kotick and his fellow executives and board members to their investors, it obviously hasn't won Activision any favors with most everyone else. Bottom line, hubris serves nobody. Just ask EA.
As for Kotick, he makes some good points, he makes some bad ones. But he's just way too arrogant. And attitude counts for a lot.
First part of my comment was taken from the article itself (or were you arguing against the editor?).
:P
I'm looking forward to the Nintendo Cii (cerebral interactive imagery) where people can use their minds to control the video game, no joystick, no mic, no nun chuck, no baton! Once this happens there will be no barrier to playing video games at all.