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THQ: Console Makers Must 'Adjust Business Models' For New Consumer Experiences
THQ: Console Makers Must 'Adjust Business Models' For New Consumer Experiences
February 17, 2011 | By Kris Graft

February 17, 2011 | By Kris Graft
More: Console/PC

THQ is in the midst of a turnaround, working on increasing revenues, slimming losses and pumping up a product pipeline with triple-A titles.

But like most major publishers, much of THQ's continued success relies on the decisions made by platform holders Microsoft, Sony and Nintendo.

At the Goldman Sachs Technology and Internet Conference this week, THQ CEO Brian Farrell said the console makers must take the lead and start thinking about new strategies that accommodate emerging business models, and go beyond the $60 retail packaged game.

"What we really need, and we've been talking to them about it, is for Microsoft, Sony and Nintendo, if they really want to stay at the cutting edge of the games business, they need to adjust their business models to allow for these new consumer experiences. Consumers are going to demand it, in our view," he said.

"We're platform agnostic," Farrell added. "If someone else comes with some sort of a cloud system or ... a competitive platform takes off that allows consumers to consume the way they want, that's going to be the winner at the end of the day, and that's where we'll migrate our content."

THQ is preparing to release MX vs. ATV Alive this year for $39.99, instead of the standard $60. THQ says it will be a full game, but the publisher will also release a wide variety of free and paid downloadable content that lets gamers customize their in-game experiences.

"The concept is to get the [average revenue per user] up and in a higher margin way," he said. "I think we're cutting edge here, it may or may not be successful but we think that's the way consumers are going to consume entertainment over time."

One of THQ's biggest upcoming releases is the MMO Warhammer 40,000 Dark Millennium Online, a game Farrell expects to build on 6 million units shipped of THQ's Warhammer 40,000 PC strategy games.

"What's transformative about an MMO is if you get it right, you could have a three, five, seven, 10 year run if you really get aggressive, [and have] multiple years of revenue and cash flow from the subscriptions." he said.

"So it could really be transformative, especially for a company like ours going into fiscal '13 and beyond," Farrell added. The MMO is in development at THQ-owned Vigil Games.

The executive also commented on recent remarks from Electronic Arts CEO John Riccitiello regarding the upcoming launch of the highly-anticipated BioWare Austin-developed Star Wars: The Old Republic.

"I loved our competitor's comment that with ... half a million ... subscribers, they're going to make great money, and then with 1 million subscribers, they're printing money, something to that effect. That's true about the MMO business, but the caveat is that you have to get the creative right."

Last year in an earnings call, Farrell said THQ's Warhammer 40,000 MMO doesn't have to reach 1 million subscribers to be successful.

He said at the time, "You can imagine that given the fact that we have a lower initial investment than some of our competitors talk about... we don't need the kind of subscriber levels that people throw around, like a million subscribers, to make a lot of money on this title. If we get anywhere near that level, we'll be making a lot of money."

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Nathaniel Smith
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"...if they really want to stay at the cutting edge of the games business, they need to adjust their business models to allow for these new consumer experiences"

not that I disagree with his point, but why when they don't have to??

Joe McGinn
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Sooner rather than later Apple or Google is going to release a smart-TV kind of box that plays "good enough" games, and it's going to have an open-app and pricing model like the App store and the Android store.

The $60-retail product model is history. My prediction is that Sony and MS will both go down with the ship before changing business models. There's nothing that dies harder in a large corporation than a business model - just look at the music industry for the historical analogy. Every one of the old players chose death over changing their thinking about how to make money.

Robert Bevill
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I actually like this idea a lot. A $60 game is expensive, and there are a lot of good games that are easy to miss out on. A cheaper game with optional add-ons is much more attractive. A good example of this in action is my justification for not getting Marvel vs. Capcom 3 on launch day. If I wait several months before buying, then the game will gradually drop in price, and the various characters available for DLC will be available. I'll be getting the version I want for a much smaller cost.

Jamie Mann
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This is a tricky one: there's been a number of notable DLC successes in the casual/handheld space, but it generally hasn't worked as well in more traditional genres.

The issue is that people tend to pick and choose; if you release ten DLC items at $1 apiece, then the average consumer may buy three of them, earning you $3 revenue. However, if you bundle all ten in with the original game and charge an extra $5, then you've earned $5 in revenue - $2 more per consumer, for the same amount of effort.

This is the problem which has haunted Rock Band: twenty individual songs do not sell as well as a single compilation of twenty tracks (e.g. Song Pack 1). And it's the same issue as the music industry has faced with online stores such as iTunes, as people cherry-pick individual tracks rather than buying the entire album...

As such, I wish THQ luck with their DLC experiments, but I doubt it's going to be profitable.

Tadhg Kelly
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They kind of do and they kind of don't (need to adjust that is).

The console business's future seems to be in premium products to me. Toward that end, they are each vertically integrated from development of hardware through to software and publishing, and even as commerce provider in the digital sense. There is a case to be made that they are slowly not needing third party publishing any more.

Third party has the problem that it is entirely reliant on software catalogues, and furthermore its software is inherently less profitable than first party because they have to pay the platform holders their due. In that world, assuming nothing radically changes, third party will look increasingly unable to compete because the platform holders will simply be able to spend even more on their own titles (as they'll still be profitable at that point) and quietly edge the third parties out through competition or acquisition

I think the smart third parties have sensed this, and they have been diversifying into platforms themselves. Activision with WoW and EA with Playfish are examples of that kind of thing, and it's conceivable that those kinds of activity will actually be the primary business of those publishers in 24-36 months.

Joe McGinn
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Interesting points ... if true, that will surely hasten the death of traditional consoles, no? I don't think, for example, that even with 3rd parties today there are enough working console game dev teams to make the next launch of any console a viable thing. None of these consoles - not even Nintendo - can survive on 1st-party alone.

Current console game industry is so much like the old music industry is scares me. One way of making money, one mindset about how games are budgeted, produced, and sold, and no willingness to consider any fundamental alternatives to those things.

William Norman
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When I bought Force Unleashed on launch day, and finished it in 5 hours, I subsequently took it back to the store and traded it in. I was angry. I'm sure some people loved it, but the value was simply not present in my eyes, and I felt I had been duped once again. I did by the way buy ET as a youngster.

I think we have reached a critical point in games where enough gamers are becoming disappointed by lackluster games with lots of hype, and this set price point system, that a change will be forced on said system whether they like it or not. Now that I can demo a console game, I can decide ahead of time if I believe it to be worth the price and only buy new when I feel I will get value. Many times I wait anyway simply because I want to read some seriously good reviews before I trust developers with my money.

If instead of charging $59.98 or higher for every game that comes down the pipe, they really need to start deciding when games simply shouldn't be valued as high as others. How many "lesser" games may have made big runs of it had they been lower priced than the expected mega hits at release I wonder? I for one would have bought quite a few more games new off the shelf had they been at a price point I found to be more of a value for what I would be getting.

I hear a lot of complaints about people buying used games, and I have to say, I simply wont pay full price for something that is not worth it.

Sylvester O'Connor
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I agree with you William. For me, I couldn't tell you the last time that I bought a new game. Firstly, because I do notice a bad trend in reviews, I stick to aggregate sites like MetaCritic or GameRankings just to get a good idea of what is said about a game first before I actually decide whether to purchase it. Then, because games are getting shorter and shorter, I have to choose whether or not it is something that I would play over again for the enjoyment of it.

I think the pricing is something that is going to become an issue over the next 2 years as these systems go into their 5th and 6th years. I only buy used. And because Gamestop has to compete with online prices, I notice that their prices usually drop faster over the course of 6 months. And, that is 6 months worth of patchings and bugs that get updated so that I get what I pay for.

Joe McGinn
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As a game player one of the most disappointing trends is the marketing-driven trend that everything must have multilayer. There's no reason on God's green earth that Bioshock needed multilayer ... yet T2 marketing decided it did, and the result was a lackluster, unfocused, too-short single-player game.

It's the biggest red flag to me, when a formerly single player game comes with a version, "Now with multiplayer!" Because I'm a developer I can read between the lines, what I see is, "Less than 40% of development resources spent on single player!"

Eric Geer
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The problem with this business model is that of charging cheaper prices then adding additional paid/free DLC is that not all gamers are idiots as he is suggesting.

If the price is $40 for a "full game" that then adds DLC for $5/$10/$15, as well as free DLC...well in my mind..this is not a complete game because they obviously had more to offer prior to release of the game...also they are ringing you in for what--maybe 3 to 5 DLCs so that could be a range of $15 to $45 additional dollars on top of the original $40 price now instead of a $60 one time cost you are paying between $55+ and $85+ depending on the cost and the number of DLCs--

And depending on who is looking at this "full game" is a very suggestive, and subjective term.

Sylvester O'Connor
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I do believe that selling a game at a lower price and then allowing for both free and paid upgrades is an intricate but different type of model. There are always pros and cons withe everything though. You could purchase the game and some may find it incredibly awesome to be able to customize their playing experience. Others might find it trifiling and think that they should get the whole game with purchase.

Then you also have those that like to wait before purchasing so that they get the most for their money. Perfect example would be Oblivion's GOTY edition which included both Knights of the Nine and the Shivereing Isles all on one disc. Or the Fallout 3 GOTY that included all 5 DLC's despite those that were prone to bugs and glitches.

But I do think that the price is going to be very attractive to those looking for cheaper games. And for those casual gamers that don't follow the industry, they might feel cheated. Another thing that THQ has to take into account is that they have to make sure that they provide enough diversity in their content to keep their audience. You can't just give decals away for free but if people want to play on different tracks then they have to pay. They have to give some for free and pay for others and that is going to be a very interesting balance to find. Do you offer weather effects and 2 new tracks for purchase and then just some new cars for free? Do you offer updated cars year by year like a sports game updates your roster? Would that be for free or would they start to charge an annual fee? Questions.

Lo Pan
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Interesting, you can enjoy a AAA game in a very cost effective and simple way:

- buy at Amazon (no tax and discounted) for $55

- play game for X days until finished

- sell back to Amazon (shipping is paid) for $33

You just enjoyed a AAA game for $22.

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Agree with Lo, I shop off Amazon.

While I do believe that $60 games won't (and shouldn't) last, they're not going anywhere anytime soon. With players buying up games such as CoD: Black Ops in gangbusters, they don't really have to change.

Kamruz Moslemi
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The only way that console manufacturers can open the trap door under their own long held business model is to put out another generation of progressively more expensive to develop for hardware.

Even this generation the average cost of premium console development is on the dangerous side of the tipping line, but as the platforms mature costs will come down to manageable levels. People who think that just because Apple has managed to make a new business model work will mean that all the other ones are suddenly obsolete are demonstrating a very narrow perspective.

Let us not forget who it was that supported expensive console games for so many years, the core gamer, and there are enough of them to support moderately budgeted 60$ console games, even if Apple or any other newcomer makes cheaper games available. This for the simple reason that the sort of experiences these new type of games provide do not satisfy the much more evolved needs of the core gamer.

Some number of casual gamers might migrate to these new venues, but the core gamers want what they want and and that hasn't changed in over 30 years. They want the best such as only luxury titles can provide. If developers take time to identify their core audience, then they can accurately identify the profit potential of their titles and help keep development costs within reason.

If Platinum games can survive on their critically acclaimed core titles that while not being multi million sellers were still premium quality 60$ console games and profitable to boot then others can as well.