Valve Exec Explains How To Compete With Piracy
from the service,-value,-pricing dept
Last month, an exec at Valve Software noted that "Pirates are underserved customers" and said when someone realizes that, they also discover: "I can do some interesting things and make some interesting money off of it." It looks like the company is sharing some data to back that up now as well. A whole bunch of you have been sending in reports from Gabe Newell's keynote speech at DICE. Newell is the founder and managing director of Valve, and he provided plenty of reasons that show that "piracy" is not the issue at all: service, value and pricing can easily trump piracy.He started out by pointing out something that we've discussed in the past: digital content is best viewed as a service, not a product. As a service, you focus on providing continual value -- and people are paying for that future value (which is a scarce good prior to delivery), rather than an infinite good already created. There's value in paying for that future (scarce) service, and it trumps paying for an abundantly available good.
From there, he noted that the reason "piracy" is doing so well is that the "pirates are ahead not just on price, but on service." In fact, he noted that since DRM decreases the service value for customers, it also tends to increase piracy, rather than decrease it.
Then, he showed how that combination of service and smarter pricing allowed the company to run experiments and make a lot more money -- competing quite successfully against piracy. The most stunning example: last weekend, the company ran an experiment with the game Left 4 Dead. It heavily discounted the price, and sales shot up 3,000%. And this wasn't just a case of building off a small base. The sales over the weekend were more than when the game launched.
In fact, it looks like a big part of the problem facing the industry is that they charge way too much for their products. Here are the numbers Newell shared from Valve's experiments with "sale" pricing:
- 10% off = 35% increase in sales (real dollars, not units shipped)
- 25% off = 245% increase in sales
- 50% off = 320% increase in sales
- 75% off = 1470% increase in sales
Between all of this, it's pretty clear, yet again, that "piracy" is hardly the issue. If you provide a valuable ongoing service at a much more reasonable price, there's no problem at all. Once again proving that the issue is a business model issue, rather than a legal issue. It's too bad so few old school content providers are willing to recognize this, and quite troubling that some folks in our government are still missing this as well. It's going to lead to bad laws and even worse enforcement of the law.
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Filed Under: gabe newell, games, left 4 dead, pc games, piracy, pricing, service, software, video games
Companies: valve
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What's really interesting...
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Re: What's really interesting...
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Re: What's really interesting...
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Re: Re: What's really interesting...
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Re: What's really interesting...
For an 75% discount and 1470% increase in sales (so, 1570% x the old sales), this correlation is profit-per-unit-after-discount=3 x cost-per-unit / 11.7. If the PpU-AD is bigger, you get bigger profits, if is is smaller, than smaller profits.
So, in case of Valve, the profit which makes per unit at the discounted price is some 1% more than value of (3/11.7 x cost-per-unit).
Simple math from this standpoint.
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Re: What's really interesting...
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Yes!
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Re: Yes!
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Re: Re: Yes!
I personally think $30 is a good price for a new game, and about $10-$20 for games after the first year of being released (new condition). After that they should only offer it through downloads and so if you bought an actual copy from the store you are now holding a collectors item since no more will be pressed. They could even offer Ultra Limited Editions by only pressing so many and numbering them for true fans of a game, and offering a free download of it so you do not have to even open it up...for instance it could be double packed so you can access a registration number to download it without having to actually break the seal, or maybe get with the retailers to offer a registration code on the receipt.
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Sales != Profit
I do think $50 is a little steep for games, and it has to be really special to get me to shell out that much.
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Re: Sales != Profit
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Re: Sales != Profit
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Bandwidth, maintenance, etc
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Re: Bandwidth, maintenance, etc
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What has happened is that Valve is addressing the tragedy of pricing points. If the price the consumer is willing to pay for the goods is less than the production/distribution/marketing costs (the base cost), there's no sale and nothing is lost. The problem arises when the consumer is willing to pay an amount that is above the base cost, but not as much as the price tag. In tangible goods, the base price is reasonably ascertainable, and so that preserves per unit prices.
But with digital units, the base cost is virtually nil. So lets say the producer has a digital version and a tangible version, and the consumer is willing to pay $6 to watch the movie (or play the game, etc). If the tangible version costs even $5 base, the producer and retailers may have no interest selling to that consumer because the profit / time is probably lower than 5% (a typical return on a government bond). But the digital version might cost $.20 base, so when the producers/retailers demand $20 per copy, denying that $6 sale, $5.80 is lost. What digital does is makes it so the producer can exploit much more of the demand curve (everything above that $.20 base, or whatever the number happens to be). The old economics of price ~ demand / supply just doesn't apply to digital. Gather up some applied mathematicians (or economists with a strong math background) and generate the new formula -- test it on the market and profit. It seems that Valve is getting closer.
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Re:
Didn't you just explain how it does apply? Or do you mean it doesn't apply because supply is infinite?
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I sit. Astonished.
And here I thought I was alone with this statement.
I think I'm about to cry.
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Seems to me there are two ways to go about increasing profits. You screw around with the pricing to determine the elasticity (and this has nothing to do with production cost, it has to do with what price point generates the greatest profit) and/or you try to slow down or combat piracy. A smart business will do both ensuring that their fight against piracy doesn't slow down their legitimate sales (and profits)
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I played with the numbers
Manufacturing/Handling cost per unit $11.80
Full price of game = $50.00
Number sold at full price = 1000
Sales = $50,000
Costs = $11,800
Profit = $38,200
Price after 75% discount = $12.50
Number sold at discount = 62,800
Sales = $785,000
Costs = $741,040
Profit = $43,960
So you can sale the sales in real dollars is (785000-50000)/50000 = 1470% higher. Yet at the same time claim that the profit (43960-38200)/38200 = 15% higher.
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Re: I played with the numbers
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Re: I played with the numbers
In any case, even if the profit did not increase significantly at all, it's should still be regarded as a win-win situation: there are 61,800 additional happy gamers!
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Re: Re: I played with the numbers
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Re: Re: Re: I played with the numbers
There's no reason why a company can't use P2P (or 3rd party mirrors) for content delivery to reduce bandwidth costs to close to zero. I'd also be willing to bet that the majority of users only download content once even if the option is there to redownload.
"There may also be technology licensing deals that require a payment to another company for every sale."
Again, that's a decision on the part of the company. It's not a necessary part of the process.
The basic marginal cost of a digital good is *always* close to zero, unless it's artificially inflated by decisions such as the above.
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Convenience and Value Win...
With that said, the combination of lower priced games (and movies for that matter) combined with non-DRM'd versions that you can get from legit sources is a winning combination.
Right now, illegal downloads win - no cost, no DRM, etc. However, a game sold via a legit channel would win over a lot of the pirates - easier to download than torrent, etc., no worries about hidden code, no worries about getting dragged into a lawsuit net, and if you don't include DRM it is a pretty easy choice for most folks.
I also am really happy to see that someone in the industry final gets that DRM causes piracy. Anybody knows the best way to get someone to do something is tell them they can't.
Freedom
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Re: Convenience and Value Win...
Something else to consider is the affect of a too-high price on subsequent purchases. It used to be the case that when I headed to the store to pick up a new game I was interested in, I would look around and pick up another that I was interested in but didn't purchase earlier. Sometimes it was because the older game was discounted a bit, sometimes because the two together still didn't add up to enough to dissuade me in my buying mood. Some of this had to do with psychological barriers - some years ago it was possible to leave the store with 2 new(ish) games for around $60US, still a comfortable distance from the $100 mark). Now, 2 games will put me near or over that mark rather easily, so rarely do I buy 2 games during a single store visit. In fact, the effect of a single large purchase decreasing the likelihood of a second seems to be tied to my mental tally of the monthly credit card balance, so 2 or more games are less likely to be purchased in a given month, let along a single store visit.
Given all that, I can easily see how Valve's pricing experiments could give the results they have, because I could very easily see myself buying more games on impulse when the sweet-spot is reached. 2 thumbs up for Valve, who seems to have a clue.
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Re: Convenience and Value Win...
The price/profit curve is likely going to be somewhat bell-shaped, and the ideal price is right where profit peaks. So if your price is ahead of that, hence below the profit peak... yes, your product is too expensive.
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I usually play Team Fortress 2 now, and one thing I loved about the Keynotes was the mention of TF2 Comics to be released by the same group that worked on the game. To quote from The Feed:
"Gabe brings up an excellent point that successful entertainment companies will realize that fans of properties like the property, not the specific product. They are Harry Potter fans, not just fans of the books. The team that's making the TF2 character videos (which are awesome!) are going to be working on comics."
That one time payment for a game can me hundred fold in returns from an excited and eager fanbase. Even someone that pirated the game (and enjoyed it) can be turned into a consumer.
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Re:
There - fixed that for you.
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Interesting but not going to work.
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Re: Interesting but not going to work.
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Re: Interesting but not going to work.
The problem is that the people funding these huge money endeavors don't want to fund anything with low margins. It's uh.. "not fun" or something.
The entire entertainment industry focuses narrowly on widening its margins. NOT increasing its profits.
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Re: Re: Interesting but not going to work.
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Re: Re: Re: Interesting but not going to work.
First and formost, Valve is NOT a non/not for profit organization. They are in business to make money.
This, in of itself, is not a bad thing.
The issue is actually one of the most often misquoted verses of the Judeo-Christian bible.
"Money is the root of all evil" is incorrect.
The actual phrase translates better as "The LUST for money is the root of all evil"
If you consider this, you will see how this affects most, if not all, of early 21st century human interactions
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Re: Interesting but not going to work.
Its not just a flat discount that makes it work.
First, its time-limited for weekends so people rush in to buy it before the price goes back up.
Second, Valve are very big on supporting communities (integrating chat programmes and event organisers into steam). The resulting peer pressure from a bunch of people buying a game will often mean extra sales from those who want to join in the fun.
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Re: Interesting but not going to work.
It's like boiling frogs. Do it slowly, a little at at a time and the frogs don't notice they're being cooked. Blast the heat all the way up and they will jump right out.
It's a lot easier for most people to spend money in small increments. It makes "impulse" buying a lot easier. A cheaper product becomes something that the consumer has to think less about.
Casually buying a $20 game is pretty easy. A $50 game is probably something you will want to put more thought into.
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Re: Interesting but not going to work.
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Finally Someone that Gets It
Or other games that ship for $60 and have content to download at a pay-for level on day one. This is disgusting. Add to that most companies failing to ship stable products from the factory and you've got all around a giant mess that leads to more piracy.
Valve wins again, Scout update next week; holla!
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Re: Finally Someone that Gets It
It'd be interesting to see if that announcement (which was over a week ago) had an effect on sales as well, independent of the sale (even noting that an actual release date of the DLC hasn't been specified). Perhaps that's part of their experiment as well?
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It worked for me.
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Re: It worked for me.
I wound up buying my friend and myself a copy during the 50% off sale. The only reason that I didn't buy L4D is because I didn't have anyone to play it with. Valve wound up getting two sales instead of zero as a result of that deal.
I'm sure I'm not the only person who did this, either.
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Will they commit to this?
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Its all about Steam
"Newell then says when they decrease the price by 75%, they are making 15% more than when they were charging at full price -- though, I'm not sure how that math works out from what's stated above (I've been playing around with the numbers, and something is missing"
It's because they deliver the game via their Steam service. Its not a box you buy in a store. It's a digital copy that's close to (if not) infinite, save bandwidth and hosting costs. They have insane deals if you buy via Steam.
I'll admit, I'm addicted to Left 4 Dead. I bought it via Steam, and I paid full price...
Off to kill some zombies!
DS
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Good strategy
I know for a fact that my, and two other of my friends purchase of L4D is a direct result of the this "Weekend deal only" hyping strategy.
L4D is designed for co-op game play, and only really shines when you are playing it with 1, 2 or 3 buddies. The "Weekend deal only" offer made us all buy it, but more importantly it made us buy it at same time.
If it was a permanent price reduction then at least one of us would think "Well, I can always buy it, and I don't _really_ need it right now", which would make the rest of us think twice about it because we would not be able to play together at the same time.
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Call Microsoft!
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Bad Laws
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And then there's the halo effect...
I bought it not just because it's cheap though. I bought it because it was from Valve, and Valve rock. Steam is a great content delivery platform (ugh! corporate-ese!).
The halo effect I allude to is that I bought Left 4 Dead and then bought a completely unrelated Crazy Machines bundle pack at the same time. I spent 50 quid on Sunday, but that 50 quid bought me four games and two expansion packs, as far as I recall.
The complete Crazy Machines pack included version 1, two packs of additional levels for version 1, Version 1.5 and Version 2. (I think. Something like that, anyway.) And it was about 35 quid - which I thought was fair given the many hours of tinkering it'll give me.
But I'd not have bought it if not for that Left 4 Dead deal. Much as I love Steam, I tend not to go into the shop - I already have 61 games from them, and I've become quite picky about what other games I might want given how many I already have to play!
I wonder how may other games were sold that weekend because of the Left 4 Dead deal - games which might not have been bought otherwise, and which pull people further into the Steam community and systems.
And I suspect that's also why Valve do these sales. They're not just good for one game...
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And furthermore...
They've managed to convince many companies to do bundle packs. Of the 61+ games I have, just over half came from one purchase - a pack of every game iD ever did. Every version of DOOM, Quake, and goodies like Wolfenstien 3D.
It probably cost iD very little in terms of modifications to get them running in Steam. Yet - and this is the kicker - they and Valve had a $99 sale to me. *Despite me owning some of the games already*.
Steam's convenient, and I was prepared to pay $99 for the supreme convenience of just downloading all those old classics, rather than rooting through boxes in the loft looking for install media and CD keys. (Or worse - floppies! Ugh!)
To install the various versions of Quake I had, it'd take me about a day of CD shuffling and poking and prodding. Or I could let Steam take the strain out of it.
To be honest, the bundle was a bargain even though I knew I was paying a second time for many of the games.
I've bought games outside of bundles, but I've noticed that bundling a game with lots of others seems to make them more attractive to me. Valve have nurtured a great catalogue of games available on Steam, and then made it easy for publishers to make them even more inviting by bundling.
They're a canny lot, this Valve crew. I'd just like to be the first to say that I for one welcome our new Game Publisher Overlords...
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Valve and Piracy
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This is not crime at high seas
I love your articles, but please put 'scare quote' around "piracy". You reinforce propaganda vocabulary of the RIAA/MPAA.
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That's a lot of money
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15%... or 15x?
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Wo0t
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steam
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Because I or maybe many others would choose to buy a game at a reasonable price rather than download pirated copies...
Original game win on everything (service, multiplayer,etc) except price, that said if Valve could come out with price that both reasonable and profitable at the same time (and the games are good course), I believe piracy will be supressed to the point where its no longer a big issue..
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Sometimes there is a fixed cost.
Fixed cost 2: Distribution to Internet have-nots. Rural customers will still need discs because their home ISPs cap data transfer at less than a dual layer DVD per month.
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Pirates will always be pirates
This doesn't necessarily combat piracy. The people that pirate things will always pirate things. Even if the price drops from $50 to $5 they will still see it as $5 more than they need to pay. There is no enforcement for piracy. No threat, and no reason not to. So they will keep doing it so long as there is no consequence to compare to. I mean live consequence, like their friend going to jail for a few years for piracy. Nobody knows anyone that's ever been busted for piracy. So why quit?
I used to make video games. One of our titles was pirated and up on some site the day before launch! Sad part: the pirates FIXED an install bug the game was shipped with! The pirated version was more stable. Someone in the comments mentioned something about crappy products being shipped and I couldn't agree more.
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Not enough data
Without this a decrease in piracy is only implied and assumed.
What we can see is that decreasing cost results in enough sales to surpass that of the higher cost.
It could just as easily be that Valve subscribers who just sit on the sidelines and neither pirate or buy decide to buy when prices drop.
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