Behind the profitability of the video-game industry

Behind the profitability of the video-game industry

Even from a young age, I’ve loved playing video games. I remember the excitement I drew as I savagely ripped into the packaging of my brand-new Game-Boy Colour, wasting no time as I inserted the cartridge for Pokemon Silver into the Gameboy’s empty slot and started playing. Since that memorable day, I’ve ventured into the depths of many different genres of gaming, and my passion for video games only escalated as I grew attached to specific series, the characters inside them, and the story that they told. At the risk of sounding like a total geek, I decided to ‘give back’ to the gaming industry what I could at the tender age of 14, writing full-length walkthroughs for popular games which I felt could benefit the most from a little extra input. My awesomeness for accomplishing this feat aside, this contribution would amount to less than a single drop in a vast, endless ocean, for the video-game industry in 2006 was already worth in excess of US $30 billion [1]. Since then, the global market for video-games has doubled to approximately $67 billion by the end of 2012, and the growth doesn’t appear to be slowing any time soon. [2]

The revolutionary development in technology during the early years of the new century fuelled the aforementioned growth, as developers and publishers were able to cater their games to a wider range of audiences. In the beginning, games would normally be developed by single programmer or by a small team of programmers and artists.[3] Utilising what little technology was available at the time, classics such as Megaman, Ninja Gaiden and Final Fantasy were notorious for their level of difficulty, but were widely successful in generating profit nonetheless. This stemmed from the fact that the development costs associated with these earlier games were minimal, with games only taking a few months to develop. Furthermore, these games targeted a specific audience, namely the old-school or ‘hardcore’ gamers, who relished the challenge these games offered and who could be relied upon to become loyal customers. However, as technology improved, the size of development teams increased to meet the demands of greater graphical and programming complexities, with budgets reaching millions of dollars and taking years, not months, to develop new games. Developers soon realised that to survive in the cut-throat gaming industry, they needed to branch their audience out from the ‘hardcore’ to the ‘casual’ gamers, those who simply picked up a controller and played when they had nothing else better to do. Thus, developers capitalised on the advent of technology by creating platforms and games designed to attract as many consumers as possible – the Wii being a shining example. Nowadays, most games are created to be easier and less complex than their counterparts a decade ago, concentrating on special-effects rather than gameplay, all to attract as many players as possible. Ultimately, while the ‘dumbing-down’ of video-games has no doubt upset many of the old ‘hardcore’ gamers, it certainly has had an enormous impact upon the video-game industry.

Let’s now consider the impact which game publishers and retailers have made in recent years towards adding value to the gaming industry. We’ll assume that an average game that’s just been released sells for $70. Publishers are never keen to raise the price on their video games, as this would lead to a drop in quantity of units sold. However, publishers realise that by setting a uniform price of $70 means they lose out on the profits from consumers willing to pay more than that amount. Consequently, what once was a foreign concept suddenly became mainstream as ‘special-edition’ or ‘limited-edition’ versions of the same game imbedded themselves onto the shelves of retailers and online distribution stores. The extras incorporated into the special-edition versions almost never warrant the hefty $10-20 increase in price tag. Let’s take an example: at the time of writing, the standard PC version of The Elder Scrolls: Skyrim game on EB Games cost $48. [4] The sales price for a ‘premium-edition’ on the other hand costs $68, which on top of the main game, includes a world map, t-shirt, an elder-scrolls novel, six exclusive concept art postcards and a disk including trailers, developer documentaries etc. [5] The high-willingness-to-pay consumers are incentivised to purchase the premium edition, while publishers do not lose their sales from the lower-price customers. The economic framework behind this reasoning is the idea of price discrimination, how sales of essentially identical goods are transacted at different prices by the same provider. Through price discrimination, game publishers have been able to charge higher prices to some people while still keeping the profit gained from the average customer.

The reasons I’ve addressed thus far are only the tip of the iceberg into explaining the staggering growth of the market for video-games, and I implore any interested individuals to investigate further. For now, I’ll leave behind an interesting forecast from DFC intelligence, who predicts that the market for video games is expected to grow from $67 billion to over $82 billion by 2017. [6] The release of the eighth-generation of gaming consoles; the Wii U, Playstation 4 and Xbox Infinity is sure to have a hand in that forecast, and I for one am excited to usher in a new era of gaming.