The long tail and video games, Part II

Before I go on, I really want to encourage everyone to read the Long Tail article. My summary doesn’t do it justice.

Once the extent and power of the long tail becomes clear, entertainment companies’ current business models begin to look even worse than they did before.

Record labels justify charging so much for CDs and downloads because, they claim, they spend so much trying to find the next big hit. For one thing, they forget to mention all the repackaged, remastered, and rereleased music they sell for pure profit (I discuss this more here, in a review/essay of Who’s Next: Deluxe Edition, the third CD version of the classic album). But for another, uh — just don’t spend so much! If the long tail shows you can make money even if you don’t go platinum, then stop trying so hard to go platinum. Instead of spending a ton on a relatively small number of groups, charging a ton for the music, and ending up disappointed, why not spend a lot less for a much larger number of groups, charge a fairer amount for the music, and end up making money on both the lucky hits and the long tail (which will ultimately be much bigger because of the expanded artist rosters)?

Movie studios complain about the shrinking release window and shrinking attendance, but movie budgets keep going up — an average of $35 million just for advertising — and ticket prices follow. If the long tail shows you can make money on just about everything, then stop trying to outspend, out-CGI, and out-advertise the next blockbuster to try to attract your money audience. For theater owners, try out some variable ticket pricing beyond charging $6 for a “discount” matinee performance — that’s a big part of why DVDs are so successful. (As James Surowiecki wrote in the New Yorker, “Who wouldn’t find ‘The Bachelor’ more alluring at four dollars than at nine? I know I did.”) Try bringing the long tail model to the physical world: If I were a struggling theater owner, I’d set aside a screen or two every night or a couple times a week and show an 80s classic, or a fan favorite, or a good popcorn movie, or whatever; charge a buck for a ticket; and market the hell out of it. After all, theaters make most of their money off concessions anyway, and you wouldn’t have to share box office take with the studios.

As GameTap, Microsoft, Valve and others are discovering, the long tail applies to video games as well. But so far, game companies’ decisions have violated two of Chris Anderson’s three rules of the long tail: Make everything available, and Cut the price in half; now lower it. What we’ve seen so far from the video game long tail are limited plug-and-play nostalgia games; GameTap’s still limited service; and Microsoft’s young, very limited Xbox Live Arcade. It’s not clear yet that these companies get it: plug and play games offer just five or six titles each, including a couple crappy ones, for $15-$20, and while Microsoft is making a big deal out of selling Street Fighter II on Xbox Live, they haven’t announced a price (though the 1up article says it will be $5, which is fair).

Old-school video games are a great potential revenue stream, but they’re like greatest hits CDs: pure profit. Game companies have to recognize this and start charging accordingly, or they wont’ be able to take advantage of the long tail. GameTap’s service is a start, but the selection is still too limited and the resolution too poor (you can only play at 800×600, so everything’s pixelated and no better than an emulator) to make it worthwhile at $15 a month, and you should be able to buy games for a buck or two apiece. Nintendo’s upcoming service to play old NES, SNES and Nintendo 64 games will fill in a lot of GameTap’s holes, but nostalgia for Castlevania III and Super Metroid will only go so far. If Nintendo tries to charge $15 for a download of an SNES game, the long tail effects won’t kick in. Even if Nintendo chooses some kind of variable pricing system based on demand, I don’t think you can justify charging more than $5 for games that came out more than a decade ago.

This kind of variable (low-)pricing model can be successful. Say you have 500,000 people paying $10 a month for a subscription service ($60 million a year); another 500,000 downloading at least five games for $1 each in a year ($2.5 million); 100,000 people who buy 5 games for $5, 5 games for $2, and 5 games for $1 each in a year ($4 million); and 50,000 people who buy virtually the entire downloadable catalog — say, 25 premium titles at $5 each, 50 $2 games and 100 $1 games ($16.25 million a year). That’s $83 million a year. It may not seem like a ton, but you’re only paying for logistics and whatever cut third-party companies get. And that’s just rough estimates of just over a million customers. The Revolution — and Xbox 360, if they really took Xbox Arcade Live seriously for long tail purposes — will quickly have a bigger installed base than that. The point is that game companies are realizing the trove they have — but to get the long tail effects working, they need to do this right.

New video game releases don’t really fall under the long tail, but they will as digital distribution takes hold for new as well as old games. Then, as with music, unused inventory and scarce shelf space won’t matter and you can play with pricing accordingly. But the long tail’s effects go beyond that. Once you start thinking in terms of the long tail’s economics, you have to start reconsidering the current pricing system and business model. Should Half-Life 2 cost the same when you download it from Valve’s Steam service as it does when you buy it in the store — that is, when you’re paying for pure data rather than a physical object? Is that price fair in the first place? Does it make sense for EA to offer only the whole $50 or $60 package of a retread sports title when some people who wouldn’t pay for the full game might spring $5 for a roster update or $15 for new rosters and new fantasy modes?

These are the kinds of questions we need to be asking now that digital distribution is upon us. Online delivery and the long tail are going to change video games and the industry’s models just like they’ll change other entertainment. Once we accept that, we can start making sure the changes are for the best.

— January 31, 2006

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