Dematerialisation, a vector for renewal in the video game industry

Article  by  Vincent SARRAZIN  •  Published 04.09.2013  •  Updated 04.09.2013
Dematerialisation, selling video games on line without any physical means of storage, enables publishers to do without traditional distribution channels. This is a boon for both large publishers and for independent developers.


Are the traditional distribution channels for video games on their way to becoming obsolete? The physical distribution service that they provide does however appear to be increasingly left behind by dematerialised online sales, especially when it comes to PC video games. Dematerialisation is based on the games’ being paid for and downloaded on line, without a physical medium being provided. There is no games box or CD, just the transfer of data from the server to the user’s computer.
But if the success of switching totally to digital means seems to have prevailed in recent years (since we noticed in 2010 an increase of 30% in the dematerialised market, which overtook physical distribution for PCs) in terms of the number of sales, the technology has been lagging behind, leaving many years of failure in its wake. After the Playocable console by Intellivision in 1981, many manufacturers attempted online distribution at the start of the 1990s, with the main manufacturers of the time taking the lead: Sega and Nintendo. The innovation they showed was certainly ambitious, but Internet connections were far from sufficient for comfortable downloading. We had to wait until the 2000s to see dematerialised sales becoming more widespread, backed by the emergence of new digital phenomena, such as games using flash technology, which showed that it was possible to play a game directly without having to go via a distributor to buy the products. It was, however, the precedent left by the music industry that opened up the way for dematerialised games.

Dematerialised services as an answer to direct demand by the public

In the fashion of online music sales platforms (pioneered by iTunes by Apple), the video games industry adapted via these new distribution channels to the demand which had been expressed in the first instance through pirate networks. “Piracy is almost always a service issue, and not one of price.”[+] NoteGabe Newell, founder of the company Valve Corporation and dematerialised games platform called Steam.X [1]. The fact that illegally downloaded products are free is indeed not the only factor to explain the phenomenon of piracy: the ease with which they can be downloaded, and especially the possibility of having the product straight away at home without having to go to the shop are other important motivations for resorting to pirate networks.
It is by meeting this demand that the video game industry, just like the music industry, managed to win back part of its public. A survey carried out in 2011 of over 500 PC games players, by the e-business consultancy firm Elastic Path, showed that the main factor behind buying dematerialised (downloaded) games instead of games on a physical storage device (boxed) was the ability to install and play the game straight away (58 % of the replies recorded). This factor was deemed more important than not having a storage device such as a CD (41 %) that can be damaged, or the price (28 %). It was therefore the ability to download the games immediately which was to a great extent behind the players’ attraction to dematerialised games. We have to make a distinction between the different types of products on offer when looking at the price: while the price of games sold in a totally dematerialised form (no physical production) can be freely set, games that are sold boxed as well as in a digital format are subject to more restrictions. In the same way, the console games market is more sensitive than the market for PC games as regards the notion of total dematerialisation, because they are subjected to the balance of power between the publishers and the distributors.

The factors behind the purchase of downloaded games according to the study Elastic Path 2011.
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A console market dependent on physical distributors

Dematerialised products, since they bypass the manufacturing process, thereby reducing distributor margins, bring about considerable savings for games publishers; these savings however are not (or only to slight extent) reflected in the price of the games when they come out[+] NoteThe price of downloaded PC games tends to be slightly cheaper than that charged by distributors who sell boxed games in order to fight piracy, which tends to be much more prevalent for PC games than for their console equivalents.X [2]. It may be in the interests of the publishers to reduce the price in order to sell more units, but the policies applied in the dematerialised distribution market are affected by their dependent relationships with distributors of physical products (whether it be specialist distribution chains or cultural supermarkets). Lowering the price of downloaded products may exert pressure on the distributors of boxed products; and given the current state of the market, the majority of large publishers cannot afford to sidestep traditional distribution channels: some niche products may be able to do without a physical presence in shops[+] NoteThe Czech publisher Bohemia Interactive, specialised in military simulation games for PC, declared in July 2011 that it made 90% of its turnover from download salesX , but this solution cannot become widespread. For example, for casual games that aim at the general public, buying in a shop is still the norm. This type of game constitutes the largest share of the turnover of large publishers, and it is understandable that the latter shy away from offending the boxed product distributors which sell their leading products.
The resistance of shops to the download market increased when the PSP Go by Sony came out in 2009. This Japanese console maker made this machine a console for downloadable games only (it had no disk drive and worked on the basis of games paid for and downloaded on line only), and provoked the wrath of the distributors: since the margins in shops were far higher for the sale of games than for machines, many shops balked at selling the PSP Go because they knew they would not be able to sell the games for this device. The Dutch video game retailer Nedgame even called for the console to be boycotted, and refused to sell it in its shops. In the end, this action was not greatly pursued, but the Sony console lacked visibility and achieved very disappointing sales figures. So, the maker stopped producing this portable console in April 2010, just a year and a half after its going on the market.
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Extending the life-cycle of products by offering them for download

The sale of downloadable games is not yet the norm for games consoles; buying the physical product in a shop remains the dominant method because the second-hand market is still strong. Second-hand sales may extend the product life cycle for users and distributors, but there is no gain for the publishers because all the profits go back to the shops reselling the games. This is why the stance of the large publishers is starting to look increasingly like an open battle against second-hand selling, while the use of DRM (Digital Rights Management) is becoming more widespread[+] NoteTools to control the use that is made of digital products.X [3]. By imposing restrictions on the games (such as the number of different machines they can be played on), the use of DRM software ensures that a game that has been purchased can only be used by a limited number of people. This is a very unpopular measure with distributors and users, and which is behind the complaint (for the time being there has been no follow-up despite the support of the shop chain Game Cash) lodged in November 2011 by the French consumer organisation Que Choisir against video game publishers.
The fight against the sale of second-hand games is however not the only way that publishers are attempting to extend the life cycle of their products. DLC (downloadable content) has represented a boon since the middle of the 2000s for publishers, and is an effective means of extending the life of their products. The aim is to provide downloadable add-ons to the game (such as additional levels or characters for example). They are usually sold for no more than €10, and retain the users’ interest in the game, and ensure profitability for the publishers. Extending the life of recent games is now possible thanks to DLC, but what happens in the case of products at the end of their life cycle?
Publishers used to rid themselves of their stocks by selling old games at discount prices, or as a bundle with other unsold games. But thanks to downloading, the business model for old products has been renewed: it is now possible to offer them for sale as downloads at highly discounted prices, without having to recommence production of a game whose sales figures are difficult to predict. This is where the specific features of the digital economy come into their own: by virtue of what analysts call the “long tail”[+] NoteObserved by Chris Anderson, writer for the magazine Wired, the longue trail stems from an observational study on products sold by Amazon and Netflix. It revealed the model of many Internet re-sellers, for whom the sum of sales of low-demand products exceeds the sum of high-demand products. X [4] diversifying the supply is always beneficial for Internet distributors. Distribution of downloaded products makes it possible to sell, in theory, all games made over past decades because everything on offer has a demand somewhere, even if it is very low. The sale of old games[+] NoteThe term used to describe selling “old stuff”, whether it goes back to the 2000s or the 1970s, depending on the generation concerned, is retro-gaming. X [5] is a godsend to which companies are not indifferent. Some publishers have chosen to offer their old games themselves on their official websites, while the Polish distributor Good Old Games specialised in the sector: it signs agreements with the rights holders of these previously sold games, which are then sold at discounted prices on the company’s website. This is profitable business: indeed the company is preparing to extend its offer to include a catalogue of more recent games with the agreement of a number of large publishers.

 DLC (downloadable content) for PC and console was made popular in 2006 by the game The elder scrolls IV: Oblivion gave the player the opportunity for $2.50 to kit out his horse with armour. The price, considered to be improper, helped give a bad reputation to DLC practices, but this did not stop it from becoming well-established with publishers.
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Diversification of products and prices serves independent creators

We know that the large publishers are not totally free to set the prices they would like for downloadable games. However, this leaves enormous potential for smaller creators. The video game industry has in the past suffered from pricing policies that were too rigid: the norm was that new games were sold for around €50. This pricing model did not suit low budget games because they were unable to compete with the large production companies in terms of content. This is how, because of the uniformity of a market in which they were no longer competitive, the most fragile video game companies suffered a significant decline at the end of the 1990s; the French video game industry was particularly affected by this slump, because in France publishers were unable to compete with the large American and Japanese publishers.
It was the dematerialisation techniques introduced from the mid 2000s which gave a new lease of life to medium-sized video game companies. The advent of new online games platforms provided visibility for new games that were different from those that the games industry usually offered, while at the same time, the lack of physical restrictions prompted the creation of new small-budget, profitable projects. Dematerialisation techniques mean that it is now possible to make very low cost distribution channels available to modest-sized studios (with higher margins, because the publisher receives 70% of the income generated by its game, as opposed to 30% for physical distribution, and they are therefore able to sell a game without the funds of the larger publishers. This is how the rigid pricing policy that prevailed in the industry has given way to a significant diversification in the range of products.
AAA games (or frontline, large-budget productions) may have kept to a unified price structure of between €50 and €70, but the publishers that cannot compete in terms of content are now offering different launch prices: a few Euros for mobile games, from €10 to €30 for small-budget PC games. Free-to-play games have developed, becoming the dominant model for online games: the basic game costs nothing, but a large quantity of optional downloadable content can be bought. It is then up to each publisher to build the architecture of the game to get the players to spend as much as possible.
This price diversification gave rise from the end of the 2000s to an independent video game sector thanks to individual creators and modest-sized studios. The success of Minecraft, the final version of which came out in November 2011, considerably helped draw attention to this emerging market. This game, which was originally developed as a stand-alone product by Markus “Notch” Persson from Sweden, gave its publisher a good return on investment as well as producing a video-game phenomenon – with almost 10 million copies sold, the game made €23 million for its programmer. There are more and more creators who want to surf on the wave of this independent games market through promoting new methods of financing such as crowdfunding[+] NoteCrowdfunding means obtaining finance for a project through a large number of individual financial investments.X [6]. The website kickstarter, which gives web-users the opportunity to finance projects of their choosing, is still being talked about because of the amazing speed with which donations were made: the Double Fine Adventure project managed to gather $1,7 million of individual investments in under 24 hours, although the studio had initially planned to bring in 400 000. Other projects followed in the footsteps of the Double Fine studio, with comparable success (the upcoming Wastelands 2 and Shadowrun Returns managed to totally achieve their funding goals within a day). 
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Hegemonic markets for distribution

The takeoff of low-budget productions within the dematerialised distribution market does turn these new networks into marketing spaces where just any projects can be published. All distributors choose which games to make available on their platform, and the disparities once more become visible between the practices of console and PC distributors. The spaces for dematerialised distribution (download) for games consoles are more restrictive, in particular because of the material restrictions inherent in this type of device: the maximum size imposed for games and the quality requirements of manufacturers make it difficult for the smallest developers because of the high costs involved (including the cost of updating their games through costly patches). There are also restrictions in terms of game content, for both consoles and PCs: it is at the discretion of the distributors whether they publish a game or not, resulting in some developers fleeing to other platforms for independent games only (like the American website Show me the games created by the Cliff Harris, formerly of the studio Lionhead).
The distribution market for downloaded games follows a monopolistic model for games consoles (the sales portals are run by the manufacturers), but has seen competition becoming tighter for PCs. The arrival in 2011 of the giant Electronic Arts on the market, with its proprietary platform Origin, fully intended to create a sensation; and the games publisher doesn’t hold back from expressing its wish to become the leader in the sector. The exclusive catalogue of games by Electronic Arts may be a way of standing up to the medium sized players in the download market (including the American company Gamefly and the Polish company Good Old Games), although it would have its work cut out ousting the platform Steam which held 70% of the market in 2011. The website was put on line by Valve corporation in 2003 as a community platform for games (with many spinoffs such as Counter Strike), and then changed, turning into the main space for the sale of downloadable PC games. The competition between the giant Steam, and its rival, Origin, doesn’t appear to be weakening, but distributors are going to have to watch out for the common threat from cloud gaming, which is a direct technological consequence of the dematerialisation of the market. Thanks to streaming techniques that have been made possible following broadband’s becoming widespread, pioneers in the sector such as OnLive and GaiKai (which appeared recently on Facebook) are highly likely, in coming years, to represent a serious threat to the Eldorado of the dematerialised distribution market.
Translated from the French by Peter Moss
Photo credits:
- Logo steam by Dekuwa Elven armour / Flickr
- TRIPtych / Flickr
- Pc gaming digital distribution research paper, figure 14, Elastic Path Software Inc
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  • 1. Gabe Newell, founder of the company Valve Corporation and dematerialised games platform called Steam.
  • 2. The price of downloaded PC games tends to be slightly cheaper than that charged by distributors who sell boxed games in order to fight piracy, which tends to be much more prevalent for PC games than for their console equivalents.
  • 3. Tools to control the use that is made of digital products.
  • 4. Observed by Chris Anderson, writer for the magazine Wired, the longue trail stems from an observational study on products sold by Amazon and Netflix. It revealed the model of many Internet re-sellers, for whom the sum of sales of low-demand products exceeds the sum of high-demand products.
  • 5. The term used to describe selling “old stuff”, whether it goes back to the 2000s or the 1970s, depending on the generation concerned, is retro-gaming.
  • 6. Crowdfunding means obtaining finance for a project through a large number of individual financial investments.
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