Gamestop’s acquisition of Impulse and Spawn – my thoughts

A couple of days ago, Gamestop, the video game retailer, announced its acquisition of Impulse, the digital distribution (i.e. downloads) service, and Spawn, a streaming technology company. What are my thoughts? The usual disclaimers apply: my perspective is just that of a consumer, since I know little about the business end of the industry. With that out of the way…

 

The news did not surprise me at all, at least where Impulse was concerned.

 

From a financial perspective, Impulse is probably not that big a deal to begin with. Gamestop disclosed neither the expected revenue from Impulse nor the purchase price in its announcement, which makes me think it cannot have been that material.

 

From a strategic perspective, though, this makes perfect sense as a way to ward off threats to Gamestop’s traditional business by jumping into a new, and hopefully growing, market. One, we’ve all seen the rise of digital distribution services. But did you know that EA’s CEO, John Riccitello, expressed his belief in January that the digital business would overtake packaged goods by the end of this year?  Two, publishers are beginning to take real measures to stamp out used games (see the “day 1 DLC” included in the recent Bioware games) – and used games made up 26% of Gamestop’s revenue and 46% of gross profit for fiscal ’10. In each case, the potential danger is obvious. And from Gamestop’s actions, we can deduce where it believes the future of the industry is (or could be).

 

Possibly even more interesting is the Spawn acquisition. I am not personally familiar with Spawn’s services, whereas I have bought a number of games through Impulse. However, the Gamestop press release had this to say:

 

“Once the Spawn Labs integration and testing on a new consumer interface is complete, users will have immediate access to a wide selection of high-definition video games on demand on any Internet-enabled device.”

 

 

That sounds rather like OnLive, doesn’t it? For a more detailed discussion, I refer you to the Dallas Morning News, which filed two stories from Gamestop’s investor day presentations. The Morning News’ report describes Spawn’s capabilities, and what it could possibly do, in more vivid terms:

 

“I saw a live, real-time demo of Halo: Reach activated through a web browser on a PC.

 

But while the games can be played on basically any Internet-connected device at up to 720p resolution, each game actually connects to an individual Xbox 360 (or PS3, if it’s a PS3 game) console in Spawn Labs’ data center in Austin.

 

In other words, the browser is essentially a display for a console hundreds of miles away. It’s fast, seamless and the games look great.

 

But GameStop isn’t just enthused about the service itself. It’s also eager to make Spawn’s technology work on a myriad of mobile devices. While phones are a possibility, tablets and laptops are the real goal.

 

Imagine being able to play Halo on your iPad (or Android tablet or whatever kind of tablet) over the Wi-Fi connection in an airport departure lounge. Or at home in bed while the kids monopolize your living room TV.”

 

Doesn’t that sound fascinating?

 

Even as a consumer down in the trenches, I can see the new forces rippling through the industry: casual and social gaming, multipurpose devices, digital distribution, DLC, free-to-play. This struck me as a glimpse of how one incumbent is responding to those forces. And I will be very interested to see how the situation plays out in the future.

Pricing AI War and Tidalis: Chris Park of Arcen Games speaks

A few weeks ago, I wrote about the differing pricing strategies that Matrix Games, Shrapnel Games and Paradox Interactive use for their respective catalogues of niche strategy games. Matrix and Shrapnel keep prices high and discounts rare, while Paradox titles are discounted far more frequently and have a lower base price once they’ve been out for a while. But I was also curious about the pricing strategy followed by another company, Arcen Games. AI War, Arcen’s first title, is deep, intricate and indie, but it and its expansions also frequently sell at a discount, and AI War’s base price of US$20 is also much lower than the typical price for AAA retail releases. So I decided to ask Chris Park, the founder of Arcen, about how useful Arcen finds discounting. With his permission, his reply is quoted below:

 

“Hi Peter,

Good to hear from you. I think that a variety of models can work, as you yourself pointed out, but in the case of Arcen we’re pretty much dependent on the occasional discount sales in order to stay in business.  Not to put too fine a point on it. ;)

In an average month with no discounts, we tend to bring in anywhere from 33% to 90% of our operating costs, which at best means we’re still losing money.  In the months where we do a discount, we tend to bring in between 300% to 550% of our operating costs, which more than makes up for it.  We tend to do discounts every 2-3 months, as you may have noticed, which keeps us usually on a growth track and quite comfortable.  Last summer when we had some financial difficulties, it was partly because our summer discounts had fallen to about 200%, which was not what we needed.

In a broad sense, it’s definitely true that the discount sales help to keep ongoing visibility for our games, but I think that’s only possible when it’s also paired with the free-for-existing-customers updates.  That lets people feel like the game is something current that they are buying (which it is), rather than just a game from 2009 that we are wringing out the last drops of money from.  For us, this has meant that in terms of AI War revenue, our 2010 income was slightly more than 4x our 2009 AI War revenue.  So far, our 2011 revenue for AI War is already about 1.5x our 2009 numbers, so it’s growing even faster now.

A lot of that comes from our expansions, or our ongoing updates, or our ongoing periodic discounts that let us get floods of new players that are excited about the game.  For our company specifically, I don’t think this would work without all three of those factors, honestly.  That puts us… in a really unusual situation as a game developer, anyway.  Normally sales start way higher and then trend off after a month or two, but ours is backwards and spread out over two years so far.”

 

This made me wonder whether there was any difference between AI War and Arcen’s other title, the casual/puzzle game Tidalis, when it came to the effectiveness of discounting. Surely, going by the Matrix/Shrapnel logic, discounts would be more effective for the “mass market” title than for the deep strategy game? But the answer to my follow-up question came as a surprise:

 

“My pleasure, and I’m glad the info was useful. Bear in mind that not nearly every indie game developer is in this sort of situation.  We are one of but dozens of successful business models I’ve seen, and I can’t claim that one is really better than another.  Instead, I think it’s a matter of each indie finding what works for their specific titles and their development style.

And that can even vary by title, too.  Case in point: the effectiveness of discounts has indeed been quite lower with Tidalis compared to AI War.  Being casual-on-the-surface and having a price point of $9.99, which people already associate with being low, are I think the two key things that make that not work as well.

Or another way to look at it, I suppose, is that it’s simply not that big a hit with the “Steam crowd” or the other hardcore distribution sites.  So putting it on discount makes a lot less difference there since that audience that is so discount-reactive is less interested in the game to begin with.  The depth is there, but it’s masked by a surface that is off-putting to many hardcore gamers, we found.

I don’t mind if you quote the whole thing, that’s just fine — just bear in mind that I don’t speak for all indies, and a lot of them that I know use business models that are utterly at odds with mine.  Indies are a very non-homogeneous part of the industry in practically every way, heh!”

 

Now, as Chris points out, Arcen is just one data point, taking my total to four (including the original three of Matrix, Shrapnel and Paradox). But it’s a fascinating data point, and I found it a real eye-opener as to the factors that can influence both the choice and the effectiveness of pricing strategies.

 

(Incidentally, I own both AI War+its expansions and Tidalis, some of which I bought at a discount and others of which I bought at nearly full price. I haven’t yet played AI War beyond its tutorials, but Tidalis has been love at first sight from what I’ve played so far, and I think it would be a shame for hardcore gamers to overlook it without even a glance. I hope to write more about Arcen’s titles as I play further.)

 

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Pricing Niche Strategy Games: Matrix, Shrapnel and Paradox

For some time, I’ve kept my eye on a space-opera 4X game by the name of Distant Worlds, developed by Code Force and published by Matrix Games. This game (based on what I’ve read) could best be described as Master of Orion III done right. As is typical for the genre, Distant Worlds casts you as an aspiring galactic emperor, out to subjugate the galaxy through the efforts of your colonists, scientists, businesspeople, and when all else fails, your soldiers. Less typically, the game expects you to delegate much of your authority to a computer-controlled viceroy, which apparently allows it to aim for an especially epic scale. It apparently even does a good job with little touches such as minor species that can be swept up into the larger empires, and with establishing backstory through in-game events. But for all my interest, I’ve never bought Distant Worlds. Why? Because it usually goes for its full price of $40, on top of which there’s also a $20 expansion pack. And that money would buy me a whole lot of other games or books instead*.

 

Admittedly, Distant Worlds is a new game; it only came out in March 2010. What about older titles? Here, we can consider Dominions 3, developed by Illwinter and published by Shrapnel Games, which sells for $55 despite being released back in 2006. Now, I love Dominions 3. It’s one of my all-time favourites, and well worth the money I paid for it. But $55 is still a fair bit of money, comparable to the price of a brand-new AAA game.

 

Whenever I see this topic come up, the standard response is that the Matrices and Shrapnels of this world charge the prices they do because their customers are a small, but price-insensitive, niche. In other words, if I am so hardcore a strategy player that I’ll buy Dominions 3 in the first place, then I’m so hardcore that I’ll pay $55 for it; on the other hand, if I wouldn’t play that kind of game at all, then no discount would help. And this is a reasonable point. While, say, Recettear managed to sell over 100,000 copies with the aid of heavy discounting, (A) Recettear is far more mainstream than Dominions 3, and (B) many of those cut-price sales brought in very little money. (If you’re interested in the maths behind price, units sold and revenue, I have a brief writeup in an appendix at the bottom of this post.)

 

But a third company, Paradox Interactive, would seem to disprove the “our game will only appeal to a few people, so we need to charge a premium price” approach. Paradox’s games are also very deep, very dense, and very niche, yet Paradox takes a very different approach to pricing and discounting. Paradox’s latest title, Victoria 2 (2010), also currently has an official price of $40 – but one site offers it (in download form) at a temporarily discounted price of $20, and another offers it (as a boxed copy) for a regular price of A$19.50. And Victoria 2 is by no means unique. I regularly see Paradox-published games (both internally and externally developed) go on sale with hefty discounts, often but not always to coincide with the launch of a new game. Paradox’s older games also have much lower base prices (Europa Universalis III Complete goes for $20, though it’s missing the latest two expansion packs.) So the Paradox brass certainly seems to believe that it makes more money this way.

 

Why might Paradox’s approach be so different from that of Matrix and Shrapnel? I can think of several explanations.

 

  • One, as I understand it, both Matrix and Shrapnel are primarily wargame publishers, but from what I can tell, wargames are generally also pretty expensive. (I’m not a wargamer, but this is based on my looking at the prices of wargames and hearing periodic complaints on the subject.) Perhaps Matrix and Shrapnel are accustomed to pricing for that market, and just apply the same principles to other strategy games? Perhaps their usual audience is accustomed to paying higher prices even for non-wargames? Perhaps it’s both?

 

  • Two is the nature of Paradox’s product offering compared to the other two. Shrapnel doesn’t publish that many games in the Dominions series (in addition to 3 itself, there’s just Dominions 2, which seems to be no longer available), and Distant Worlds is its developer’s only game. In contrast, Paradox has plenty of games in its historical series, which complement rather than replace each other, and it constantly releases new titles and expansion packs. So by discounting, say, the Renaissance/Age of Discovery/Enlightenment game Europa Universalis III, Paradox is building brand awareness for its medieval game, its Roman game, its Victorian-era game and its World War 2 game. To some extent, this is supported by my observation that games that Paradox publishes, but doesn’t develop, don’t seem to go on sale as often as Paradox’s own titles. Given that, say, there are only two titles in the externally developed Mount & Blade series (plus a third one in the works) and the first game was made obsolete by the second, and that there’s only one Sword of the Stars game (plus an upcoming sequel), there’s less need to promote these by discounting. (That said, their base prices are also cheap – Sword of the Stars Complete goes for just $20.)

 

  • The other remaining alternative, of course, is that one business or another is mistaken: either Paradox is leaving money on the table with its lower-priced back catalogue and frequent, large discounts, or Matrix and Shrapnel are losing business with their high prices and infrequent, small discounts.

 

I have my own suspicions as to the answer: I’ve bought a bunch of cheap or heavily discounted titles from Paradox that I would not have bought for full price, so Paradox has forgone little or no revenue from me. In contrast, as mentioned above, Distant Worlds’ price tag is what has kept me from buying it. And my instinct tells me that pricing games in the belief they’ll only appeal to a tiny niche may end up being a self-fulfilling prophecy. But I’m just one customer; I’m biased (cheap games benefit me!); and most importantly, I don’t have any hard data (for the Matrix/Shrapnel/Paradox end of the gaming spectrum) to verify my guess. So at this stage, I think, the jury is still out.

 

If anyone reading this is from one of the abovenamed publishers, or has experience with pricing niche video games, please leave a comment! I’d love to hear your thoughts.

 

* To be fair to Matrix, I just discovered that the game had gone on sale (down to $27) over Christmas 2010.

 

** If the data’s available, there are plenty more examples of niche games I’d like to hear about. How has, say, Arcen Games done with its frequent sales on AI War?

 

 

Appendix: Product pricing, sales revenue, and profit


How much should we charge to maximise profit? (This isn’t the same as maximising revenue, as we’ll see.)

 

At the revenue line, revenue = price * number of units sold. So I should be indifferent between selling 5 items for $20 each or 2 items for $50 each, a ratio of 2.5:1.

 

At the profit line, it becomes a little trickier because now I have to deduct the incremental cost of selling each additional unit***: Profit = (Price – Variable Cost) * number of units sold. If each item I sell costs me an incremental $10, now I have to sell 8 copies for $20 each (making a $10 profit on each) to make the same profit as I would from two $50 sales (which would give me a $40 profit on each, for $80 total), a far less favourable ratio of 4:1.

 

However, when it comes to games distributed in download form, I think it’s reasonable to assume that, other than the retailers’ (Steam, Impulse, etc) fee, there is a minimal cost to sell additional units. (And in any case, my understanding is the retailers’ fee is typically a variable amount – say, 40% of the item’s price – rather than a fixed sum.) So for present purposes, we can probably treat revenue maximisation as the sensible policy to pursue.

 

*** Strictly speaking, when I talk about “profit” in this section, I’m referring to “contribution margin” – that is, revenue minus variable cost.

 

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Carpe Fulgur’s next game is Chantelise; Recettear sells 100,000 copies

Carpe Fulgur’s next release will be Chantelise, a 2006 hack-and-slash game from EasyGameStation (more details on Chantelise here). I have to wonder whether it’ll enjoy the same success as Recettear, given that Recettear had a unique premise to hook RPG players who otherwise may not have taken notice of “an indie game from Japan”. Still, worth keeping an eye on. Chantelise is just one of the titles Carpe Fulgur has planned for 2011, so maybe we’ll also see an English release of Territoire? (According to Google’s translation, the Territoire demo is already available in Japanese – check out the EasyGameStation website here, click Download and then the first link.)

 

Meanwhile, Recettear has now sold over 100,000 copies! Granted, most of those sales were heavily discounted – for example, during the Thanksgiving Steam sale, Recettear was effectively being sold for $1 ($5 spread over five games in a bundle pack), but 100,000 people playing a niche indie game is still pretty impressive.

 

What does this mean in dollar terms? A while back,  I estimated Carpe Fulgur would have seen a little under ~US$500,000 in revenue (based on 26,000 units sold, half at $18 and half at $20), so if I update my numbers to assume 13,000 pre-orders @ $18, 17,000 sold for the full price of $20, 60,000 @ $1, and 10,000 @ $10 (the current Steam sale price – it was $5 on a daily sale, but let’s keep things simple), this gives us total ex-Japan revenue for Recettear of $700,000. Carpe Fulgur also mentions that its share of Recettear sales proceeds – in other words, its gross profit margin – is slightly under 25% (vs my earlier guesstimate of 33%), with the bulk of the money going to EasyGameStation. If we assume, say, 22.5%, then multiplying by $700,000 leaves $157,500 to pay salaries, tax and any other bills. Assuming minimal expenses, that equates to $52,500 for each of Carpe Fulgur’s three members. This isn’t that far from my earlier estimate of ~$55,000 from 26,000 copies, because the higher number of (mostly discounted) sales netted out against my too-high gross margin, and is still a respectable figure.Of course, the most important thing is how it affects the viability of the business, and there, Carpe Fulgur sounds pleased as punch.

How much would it cost to start a game development company?

I’ve previously guesstimated the amount of sales revenue Carpe Fulgur would have received from Recettear, and discussed the finances of Arcen Games, the developer of AI War. Today, I found a series of posts estimating how much it would cost to set up a game development company with a six-person team (everything from salaries to legal costs to rent), and how many units you would need to sell in order to break even. It’s an interesting read if you ever wondered how easy (or hard) it would be for an indy studio to keep its head above water.

Arcen Games: a sobering reminder of the expenses involved in indie game development

Last week I wrote about Recettear’s sales figures, which, on my assumptions, would have pulled in revenue of ~US$500,000. However, expenses would be pure guesswork. Today’s post serves as a sober counterpoint. According to this PC Gamer article, “AI War and the Hidden Cost of Indie Games”, Arcen Games, developer of RTS AI War and puzzler Tidalis, is having difficulty bringing in enough to pay the bills. Here are some highlights, extracted from Chris Park of Arcen’s email to PC Gamer:

 

2010-thru-April

Total income for Arcen during this period was $101,401.38

Total expense for Arcen during this period was $91,314.76, including paying staff and myself, acquiring new licenses and technologies (Unity 3D, and some sound software, etc), legal fees for contract negotiation, payroll taxes, health insurance, site hosting, all that stuff…

  • May $19,085.06 income, $12,684.28 expense
  • June $17,233.70 income, $26,434.89 expense (a fair chunk of this was taxes)
  • July $6,956.48 income, $18,243.52 expense
  • August $13,847.02 income, $18,682.68 expense
  • September $13,395.42 income, (not full data yet, but expenses looks to be about the same but a little lower than August)

 

Note the apparent rebound in August is not, in fact, like-for-like: Arcen’s second game, Tidalis, launched in that time, while sales for its first, AI War, softened in July.

 

However, there is one question lingering in my mind. From the sound of the article, Arcen’s labour costs are highly variable: it pays the staff in royalties rather than wages. So what are the other costs? Arcen mentions a few:

 

  • Taxes;
  • Licence fees (“Unity 3D, and sound software”);
  • Health insurance;
  • Site hosting;
  • Legal costs involved in striking publisher deals;
  • MacOS machines for development;

 

I wonder how much these various costs ran to, and what the implications for other indie game developers are. (As a localiser rather than a developer, my first impression is that Carpe Fulgur must have a lower cost base than Arcen, but I could well be wrong.)

 

In any case, I am downloading the demos for AI War and Tidalis as I write this. Check out the demos if they sound interesting to you!