Bad Ideas: Instituting Artificial Scarcity To Annoy Fans Into Buying Now
from the economics-of-destroying-value dept
The more you look at the economics of abundance, you realize how ridiculous it is to ever artificially create scarcity. It only serves to shrink a market and leave open huge opportunities for competitors to wipe you out. Most of the time, though, we're talking about things like copyrights and patents -- which many people (who haven't considered the matter thoroughly) don't think of as artificial scarcity. However, it's quite rare to see someone be totally open in defending artificial scarcity as a smart business model option. Reader Mart writes in to point to just such an editorial, over at Gamasutra, where Matt Matthews tries to make the case for why video game makers should create artificial scarcity in an attempt to have more control over their markets.Specifically, he suggests that games should only be released and available for limited times before being pulled, with the idea being that this artificial scarcity would cause people to rush to buy now. This is part of the common misconception about artificial scarcity. It assumes a somewhat static market, where all the scarcity does is make the same number of people want to buy in a smaller window. That's simply untrue, and plenty of economic research in the space has shown that to be false. It's not difficult to understand why either. A purchase decision involves a variety of different factors, and if one of those factors is that the company selling the product is toying with you by putting extremely annoying limitations on the product, that's going to turn a lot of people off. It also opens up much wider opportunities for competing companies who don't toy with their customers and offers a product to whoever wants -- embracing the wider opportunities of the long tail, rather than shutting them off. The whole point of the long tail is that it expands your market -- whereas Matthews seems to want to destroy that expanded market in favor of additional control over a smaller market.
What seems to really get Matthews are two things, which he notes as being the core of the problem: "An infinitely long tail gluts the market, confounds the consumer, and commoditizes developers." As for "gluts" the market -- that's not a problem that you solve by artificial scarcity (limiting choice), it's a problem you solve by having better filters and better recommendation systems. As for commodtizing developers, that's shorthand for "I don't want to compete." But, of course, the second you do something so silly as limiting the timeframe in which your fans can buy your games, the faster you hurt your own business by letting your competitor get their business. That seems a lot worse than having to actually compete.
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Filed Under: business models, markets, scarcity, video games
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I Don't Want to Compete
Oh, yeah, it doesn't.
A better example of the benefits of "artificial scarcity" would be this. Say music piracy was wiped out tomorrow. Because what you claim to promote is a business model, the argument would be that record companies and musician would still benefit from giving away their music for free online, thus expanding the market. I would say this works to a degree, but would counter that the most profitable model would involve giving away some of songs from an album for free, but not all. Then the free songs would still work to expand the market, but you could make money off downloads by selling the songs you didn't give away for the entire album.
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Re: I Don't Want to Compete
As for the limited release date, OK we only had our product on the shelves for 6 months and sold 1mill. If I left it on the shelves I may have sold 1mill in twice that time but over 3 years I could sell 3mill. Just long term thinking vs. short.
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Re: I Don't Want to Compete
The only problem with your hypothetical situation is that your stated business model is in complete contradiction to the solution.
Music piracy was (well, will be) wiped out specifically by everyone giving away their music (and/or other infinite resources) for free. Saying you will piracy and then trying to keep around the main reason that piracy exists is unworkable.
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Re: I Don't Want to Compete
Business models don't exist in a vacuum. If there were no cars, the buggy whip industry would probably still be a decent place for a young person to work in. However, they do, and so it isn't.
Same with music (and other industries, of course). High bandwidth and easy filesharing change the shape of the marketplace such that giving things away for free is a good idea (if you don't, it's going to happen anyway). If you eliminate this, you basically just rewind the industry 15 years or so, when CDs were still the best bet.
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Re: Re: I Don't Want to Compete
If you want another example, fine. Look at the publishing industry. There are many, many successful books that either ebooks don't exist for, or not many people have the ebooks, making it unlikely that you'll find many pirated copies or find them on pirate bay, etc. Still, Mike wants publishers to give away all ebooks for free, and argues that in every case it'll lead to bigger profits for the publisher. When publishers do what I think it's actually probably the best model for them - have the free ebook available on their site, but you can't download it so you have to visit the site to read it, Mike complains and says that's not good enough - it's better for them if it's free with no limitations - even though you can still share the link with friends, which will drive up traffic to their site so users see advertisements for their other books when going to whatever book you're searching for. So, if Mike takes these views in an industry whose products haven't been pirated nearly as much as music - why, in my hypothetical, would Mike still not advocate giving away music for free.
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Re: Re: Re: I Don't Want to Compete
,i>So, if Mike takes these views in an industry whose products haven't been pirated nearly as much as music - why, in my hypothetical, would Mike still not advocate giving away music for free.
I'm not sure what you're asking here. It's worded in a confusing way.
That aside, though, you're right: Mike doesn't advocate using free the way he does because there's piracy, he advocates it because (1) it's what people want and (2) it leads to a better market for content producers.
Comparing ebooks to regular books is not the same as comparing free mp3s to 99c mp3s. Rather, ebooks:books::mp3s:CDs. Both a real book and a CD are actually-scarce items that can't be pirated. Mp3s and ebooks are infinite goods that can be used to promote these and other actually-scarce goods. The main problem with CDs is simply that they don't have enough value these days to make people want to buy them. If you can find a way to change that, you can sell CDs again.
Piracy doesn't exist 'because' -- piracy exists because pirates can offer a product that's more useful than what you can buy. A pirated mp3 is better than a 99c mp3 because it's free, and it's better than an iTunes track because it'll play wherever you want. No one WANTS pirated books because most people don't sit at their computer reading. Most people don't like staring at a screen that long, and a real book has no cables to tether it, no need fior an internet connection, etc. Real books are still very useful in and of themselves, in a way that ebooks -- free or otherwise -- can't capture.
An ebook shouldn't be "non-downloadable" because... well because that's dumb. I mean, what do you gain by not letting people do what they want with the ebook? Why don't you want them downloading it? Why don't you want them printing it off and reading it in their favorite chair? If the idea is to give the content away and benefit from the exposure it gives you, why attach strings?
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Re: Re: Re: Re: I Don't Want to Compete
That's our fundamental disagreement. I think you can gain be attaching strings because you get the exposure while attracting potential customers to your website. Also, you can still sell the downloadable ebook. As an example, when I write a book, I also write articles related to the subject, and some of them are on websites where anyone can read them. Now I would think the article will get passed around much quicker then the book simply because it's a much quicker read. Add to this that my publisher has the first three or four chapters available in pdf format for free, but also still makes money off selling the ebook. Now, honestly, I can't imagine giving away the rest of the book for free would increase sales that drastically. If someone got through the first three chapters and is still not interested in buying the book, they probably never will be.
All my point ever was that this is not as black and white as Mike wants us to believe, and that sometimes giving away some infinite good, yet charging for others, is the most profitable business model. There's no one size fits all model - it's going to change from industry to industry and product to product.
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Re: Re: Re: Re: Re: I Don't Want to Compete
The real test of this theory would taking to sample groups of say 500 bands, one group of bands that give away everything for free, and one group who only give away a limited number of songs for free, but charge for others, and compare the average profit margin of each group over say a year.
If Techdirt really wanted to research this, they would commission such a study from an independent and impartial comapny. But I guess it's easier to just point to a few select examples and say "see, it worked for them so it's best for everybody."
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I thought that's what "upgrades" were for.
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all that would do is promote piracy
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Re: all that would do is promote piracy
In a different note, I DO believe it worked well for the Wii. I don't believe they really WERE having trouble with production, they just wanted people to drool over it for a while before making them available. Now that the craze is dying down, you can walk into almost any store and pick one up. Up until this spring, it was impossible, even though it was almost 18 months old.
Software, though, is a different story. Much like music, you can reproduce it to a physical medium as many times as you like. Unless there's a sudden unforeseen demand for plastic in which case we could switch to digital distribution. Restricting such equates to restricting information and knowledge...which doesn't fly with me.
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Re: Re: all that would do is promote piracy
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I waited
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Re: I waited
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Re: Re: I waited
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Re: Re: I waited
I have a friend who knows several game developers (mostly coders, but at least one 3d model guy) and has some idea what they make off any given game. One of his friends works at Epic (the 3d model guy) and he doesn't get paid on any kind of "per-sale" basis, but instead gets a normal salary (about $50k or so). However, he asked him and he says that after the release of UT 2004, Epic made $24 off each and every copy sold. It didn't matter if the storefronts sold the game for $49 or $10, Epic got $24, plain and simple. In this way, the retailers were the ones setting the price point, and they decided how much money they made (or lost). Epic figured the price point based on one simple thing: the total cost of the game from start to shipping, including everything from the salary for everyone involved to the cost of the plastic disc itself, plus 20% profit, for everyone who pre-ordered the game. This would mean they would clear 20% profit even if ONLY those who pre-ordered the game bought it.
Now, in the realm of music and movies, it doesn't work this way, and indeed, some video game firms don't take this approach either. In the music realm, it is well known that artists and everyone else in the process is paid a certain, basic flat fee, which is calculated through a combination of record contracts (for the artists) and salaries (for everyone else, like the editors, etc). Then, if or when the record starts making more profit than the total cost to get it to the shelves, the artist ends up getting a very, very small part - often just 50 cents for even very famous artists - from every $20 CD sold. This can be a lot of money if the record goes gold or platinum but it is still considered by many to be badly disproportionate towards the record labels rather than those who do the actual work, the artists, and hence the common counterpoint to the RIAA's old line "support the artists". Most people have noted that buying a T-Shirt from a concert gives the artist almost 20 times as much money as buying their CD. Even buying their CD at a concert. The concert ticket alone is often worth 50 CD sales to the artists.
The difference between the two industries that many people miss is that, in movies and music, there are two kinds of people to support: cast and crew. Cast make money based upon how well the movie sells, while Crew are paid a flat wage. This means that whether the movie or album bombs or sells well makes no difference to the Crew, while for the Cast it can be the difference between buying a new car (or jet) or selling their house. In the video game industry, however, everyone is Crew. There is no Cast, and nobody gets paid or doesn't based on the amount of the product that gets sold. Games are pegged at a certain price point that takes into account what the game must sell for to turn a profit, and after a very short period of even sluggish sales it hits that point and everyone can feed their families. If it sells well, they can buy a new house, but if it sells any at all, they can still keep on living the way they have been. In Hollywood, the fans make or break the business, but in Silicon Valley, the business makes the fans or else it's not a business, period. Until the creation of Wikipedia, nobody needed an online encyclopedia, yet now many of us netizens can't live without it. The idea of an RTS game isn't something many people would think of in a world where the most strategy that we've seen is trying to find a clear path to the dots for Pac-Man, yet the Command & Conquer series, along with Warcraft and others has become one of the largest segments of the video game industry. The products actually created fans.
In the music industry, this does not happen. Not everyone likes pop, and not everyone who likes pop likes Madonna, and not everyone who likes Madonna 20 years ago likes her now. To Warner Brothers or Sony or BMG or whoever Madonna is signed with, this could mean that Madonna's next record will not break even and they will lose money. Now, everyone expects the record company to explain this, and faced with that choice, which explanation would you use: the product is not any good anymore, OR someone is pirating the product and if they had bought the product you would have made a profit? The reason that this tactic - creating a scarce amount of an infinite resource so you can drive up the price - might work for the record industry is that there are hundreds upon hundreds upon millions of songs and there simply is no way to turn a profit on them all, but by limiting the sale of these songs to, say, 10,000 copies, and therefore limiting the amount they are expected to sell, nobody has to explain that the music in question sucks. There will always be a very small, finite number of people with very, very poor musical taste and very large amount of disposable income. The problem is that the number of people required to sell a gold record is much higher than the number of rich idiots and therefore only the good singers or actors (or at least the ones who put on a good show and have nice breasts) really make money. The creation of scarcity in an industry like the record or movie industry is actually not a bad idea from a financial point of view, and is a viable alternative to making products of a higher quality.
However, in the video game industry, this simply does not apply. Everyone gets paid a flat fee and any halfway decent video game firm plans ahead for how much to spend on a game and how much to charge for that game to break even and profit. There are no real variable costs except maybe how much Chinese takeout is needed to bribe the developers out of a few extra hours if the game runs past release date. Seldom if never has any video game failed to turn a profit. For example, Supreme Commander by Gas Powered Games will not run on almost any modern sound card and on very, very few video cards. It's an RTS with no especially unique features and looks a lot like what Command & Conquer: Tiberian Sun did in 1998, 10 years ago, except zoomed out a lot farther and with slightly better weapon effects. Yet even GPG, with an incompatible, resource hogging, graphically outdated game like that as its sole product manages to turn millions of dollars of profit. The reason is simple: if you have the hardware to run the game, you've already spend $2,000+ so a game that's anything cheaper than $100 is within your budget. With music or movies, this is not the case. Just because you can afford a $29 bargin bin CD player doesn't mean you can afford 50 CDs at $19 each. Just because you can buy a $79 DVD player doesn't mean you can afford 50 DVDs at $29 each. However, if you can afford $2,000+ for a good gaming desktop (or $4k for a laptop) then it's reasonable for anyone to expect you to shell out $39 each for 20 video games. This is why scarcity does not work in video games even though it would work (if they would freaking try it, or anything else that's new) for movies and music.
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Re: Re: I waited
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Re: I waited
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back in the vault
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How about ransomware?
Just hold the software for ransom until the public cough enough money for you to release it. Once that happen, you don't worry about anything else, not even "piracy".
These softwares, once ransomware now served as samples or demand drivers for new ransomware.
No need for crippled software or DRM technologies. Either you don't release it or you do. Whether people modified it afterward to do cool things is of no concern to you.
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Re: How about ransomware?
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Individual Value
Artificial scarcity will effectively eliminate customers that don't value the product as high as the publisher, yet would still be willing to buy it at a different price point.
Not to mention the popularity of retro gaming. Would this eliminate that whole market?
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I boycott Disney.
Since then, I've sired a child, and Disney forces me to feel as though I'm depriving my by-then-weeping child of their timeless classics should I not immediately flock to the boutique. By the time they're re-released, he'll be an adolescent who hates me irregardless, so my resolve is still clear; crystal clear. Great article.
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DRM for the discs
I bought it so I don't see what the big deal is to the game publisher that I put the plastic disc in my machine every single time I want to play.
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The ONLY upside I can see of artificial scarcity would be to boost sales right when a product is released to hopefully jumpstart funds for the next big projects. Unfortunately, with the shrinking market effect, you'd get a smaller amount of "impulse purchase" and immediate purchase revenue from things like reservations, and absolutely no long-term revenue... Which defeats the whole purpose of making games to make money!
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this was an issue when physical formats were relevant
i remembered a couple of weeks ago, after discussing old games with a friend, that i never beat the third installment of monkey island, and so, with some help from scummVM i was able to play it and finish it.
one interesting point, as it pertains to games, is raised by tycho, from penny arcade:
http://www.penny-arcade.com/2008/06/02/subject-tables/
he talks about how video games are impermanent now that they are becoming a service and that changes the way we value them.
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Orwell Would Be Proud!
Only a moron or Democrat (same diff) would espouse such a counterintuitive and authoritarian concept. Instead of trying to meet customers' desires, he wants the customer to live and spend at the seller's discretion. "You will rush to purchase NOW or cope with the fear of missing out! I don't care if you don't have the time or money or interest - DO IT!!!! I COMMAND YOU!!!!" Uh, pass.
Fallout 3 is coming soon. Under this mook's dumb idea you won't be able to play the first two classic games because you didn't jump on your last opportunity to buy. In a time when the ability to have just about every game ever made available to purchase via digital distribution without having to spend anything pressing and shipping boxes - all you need is some server space and bandwidth - the idea of going back to a Model T-era model (i.e. You can have whatever you want as long as it's what we want to sell you and when) is a sign of mental deficit.
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Re: Orwell Would Be Proud!
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Actually, you can. After they sell the Fallout 3 version for a couple months, they'll release the "gold" version with all three, and in order to get Fallout and Fallout 2, you have to re-purchase Fallout 3. Lucky you.
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Re: Orwell Would Be Proud!
There are just as many money-grubbing Republicans as Democrats, and if you're a typical Rep, then just as many morons too.
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Re: Orwell Would Be Proud!
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Another great idea
Do these people think through what they are writing? At least Hank Williams seems like he's musing but, this guy sounds like he actually thought it through and still thought it was a good idea. I've always been of the mind that Disney's model works (if it does, how many people own pirated Disney films?) because there are always new groups of kids being born. Every Disney movie that is released out of "the vault" is bought by new mothers and fathers who remember watching the movie. Take the amount of people that would buy these movies if they were available all the time and compare that to the amount of movies sold when they are out of the vault and see if Disney's model still works. I venture that Disney would sell more movies if they made them readily available than if they stick to their current model.
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Thank you, Milton Friedman
False scarcity, indeed.
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JC
http://www.Ultimate-Anonymity.com
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