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The Game Effect Editorial

The Used Game Conflict Pt. 2 - From Creation To Gamer

In Part Two We Take A Look At Game Distribution and Online Connectivity

By Nick Schneider on 2/19/2012
From overbearing DRM implementations to unbeatable bosses, anti-piracy measures have been in place since nearly the dawn of video games; initially starting out as paper wheels that gamers used to answer a random question and eventually evolving into the Digital Rights Management that we see today. As a sort of bridge between DRM and the promotion of new game sales, many developers are emphasizing the Online Pass, which grants new game purchasers exclusive content. While some will argue that the online pass is blocking content that should be on the disc, most consumers are unaware of what they purchase when they buy any software, game or program alike. Also of issue is that many see these measures as a quick source to make up for lacking sales on new titles, and while a retail distribution model does allow publishers to make money off units shipped, this money can only come in if retail outlets order more product. In part two of our Used Game Conflict series, we will examine these issues, as well as Internet availability and connectivity of the video game consumer.

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When we left off at part one, we were discussing the process through which games get made and the costs to develop a AAA title. Once a game is developed, the publisher has to distribute hundreds of thousands, if not millions, of copies to retailers to ensure sales. During this process retailers will purchase a new copy of the game from the distributor based on how they feel their clientele will receive and purchase a game. During this time the retail outlet is physically purchasing a copy of the game from the publisher, and selling it at the price that they have set for consumers to pay. As part of this negotiation Gamestop, Best Buy, and any other retailer discuss the pricing from the publisher on how much they will pay per copy they purchase.
In a presentation to Columbia University students, OnLive founder Steve Berman breaks down how the retail market profits the publishers, the distributors, console manufacturers, and ultimately the retail outlets. For those unaware of OnLive, the service provides gamers instant access to streaming video games over their television or computer, and at $9.99/mth grants additional discounts on various games and accessories. Berman establishes that the sixty dollar cost of a new retail game breaks down in the following ways:
  • $15 goes to retailers
  • $7 Goes to Returns/PP/MDF returns are money paid out to retailers for returns of product, while PP stands for price protection and gives money back to retailers if the developer or publisher drop the sale price. MDF are the Marketing development funds which publishers use to provide in store advertisements and other promotional materials to retailers.
  • $4 is for distribution and product creation, ie. the physical cost of moving product and putting the game on a disc.
  • $7 is put into place for platform royalty fees, in some cases each game published on a platform provides financial gain to Microsoft, Sony, or Nintendo for the use of the platform
  • $27 is the net gain for the publisher. This money is broken down from publisher to developer based on agreement reached at the time of the publisher funding the project.

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In this model, Rockstar would have had to sell four million copies of GTA IV to recover the $100 million budget to produce the game. With budgets now pushing an average of 25 to 30 million dollars, this means that games made today must sell nearly one million copies to reach profitable status. For consideration take into account the following sales figures from vgchartz for some popular new releases:
  •  Final Fantasy XIII-2 has sold 1.8 million copies of the game since it's full release on January 31, 2012
  •  Kingdoms of Amalur, which cost $60 million dollars to produce has at this point sold a little more than half a million copies in its first week.  
  •  Call of Duty Modern Warfare 3 has sold nearly 15 million copies since its November release.
  •  Skyrim also released in November and has sold 10 million copies.
  •  Deus Ex: Human Revolution has sold 2.3 million copies since its release in August.
Retailers are given access to these games and to the prices that they wish to sell them for under a law entitled the first sale doctrine. Under the first sale doctrine and further explained in the 1908 Bobbs-Merrill Co. Vs. Straus Supreme Court Case, retailers are capable of displaying and disposing of copyrighted works that they have purchased first hand from the copyright holder. These rights extend solely to the content available on that particular product, in this case video games, and this right is not granted in cases where those purchasing the product are becoming licensees.

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Take for example the case of Vernor v. Autodesk from the U.S Court of Appeals in 2010; in this particular case the plaintiff, Vernor, had purchased copies of Auto CAD Release 14 from an office garage sale, and went and sold them on eBay for considerable gain. The Court of Appeals found that since Autodesk had implemented an SLA (Software License Agreement) in which they clearly explained that the original licensee had agreed to not redistribute and effectively destroy their copies of Release 14, Vernor could not resell these legally and had violated the copyright on the program. When applied to the used game market, the same copyright protection is granted under the Online Pass system. While players are not purchasing a license directly for each copy of a game they buy, extra online content is subject to licensing from the consumer.

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In the case of the online pass the content that is accessed through these systems is providing the user with a license for that content. There are various ways to provide the content, and what exactly is included with that pass. In 2010 EA would become the first publisher to introduce an online pass on home consoles. In what they called "Project Ten Dollar" EA began to include content in games that could only be accessed via a one time use code. The first game that EA launched with this project was Mass Effect 2, where the pass granted access to the Cerberus Network, an in-game store that could provide players with various weapons and armor to outfit Shepherd and the rest of Normandy's crew. The project has seemingly lead to mild success for EA and in 2010 the company made between 10 and 15 million dollars from the online pass alone. At the time CFO Eric Brown had the following to say regarding the program:

"The revenues we derive from that haven't been dramatic. I'd say they're in the $10-$15 million range since we initiated the program." Brown noted that revenue was all "found revenue" since the customers that purchased the online pass had previously been using bandwidth for free. The one variable here is the word "online" in online pass. The pass may help companies combat the forces of used games, but when a customer can't connect to that content because they have no established Internet connectivity, where does the responsibility of the developer lie to provide content to the consumer.

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In 2010 a survey was conducted by the Diffusion Group to ascertain how many consoles owned in the united states were connected to the Internet, and the numbers aren't necessarily surprising given the current state of Internet connectivity in the United States overall. While most who are reading this article are probably connected in some way to a high speed broadband connection, there still exists pockets in the United States where a high speed connection isn't even available. These factors are often decided based on aservice providers ability or desire to reach consumers who live either off the grid or in an area that doesn't provide enough income to establish a consistent connection.

While those factors may come into play for some owners, they are comparable to the 31% of Americans that didn't have or weren't connected to the Internet in 2010 around the same time as the Diffusion Group survey. In the gaming landscape around 22% of Playstation 3 users have not connected their system to Internet, and 27% of Xbox 360 users also have not connected. When it comes to the argument of being unfair to unconnected users, this argument holds on the content front, but not from a business model perspective. When more than two thirds of consumers are capable of connecting online, publishers also have to consider that the same percentage of people are capable of purchasing the content involved.
Consumers not connected to the Internet are also not able to purchase standard DLC. The advantage lies in their favor, as without proper Internet access these players will not be making use of online modes, nor will they be making purchases in locked online stores. This gives them the ability to purchase used games at the discounted price, and make use of the savings therein. However for publishers this also means that those consumers are not making up a portion of post release support, which can be critical to maintaining servers and consumer support for a title. These factors all go into the economic model that Steve Berman discussed in his OnLive presentation.

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Used games are not going to destroy the gaming market; the problem lies in the increases to game budgets. As these budgets increase, whether through marketing or the natural progression of the industry, publishers and developers need a method to cut into the 2 billion dollars that Gamestop has made on used products. With most passes coming into a price point of ten dollars when purchasing a traded-in game, the questions that remain to be asked include content provided, and how to implement an online pass without leaving the consumer with the feeling that they're missing out on core game content.

In part 3 of this series we will take a look at several online pass offerings from companies such as THQ, EA, and even Activision which has recently announced an online pass for their upcoming title Prototype 2. As well, we will discuss the benefits of the used game market, and how developers can make use of these sales.
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USER COMMENTS
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MrGame on February 22, 2012
Money is very important for the PSN and Xbox Live. Just let us play, do not have a strong like we are smuggled products in a monitoring station. And if they continue with these "codes needed" at least bow their price
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sunsedrengen on February 22, 2012
impressive... most impressive
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Haikouzen on February 20, 2012
Some devs use the online pass in some fcked up ways. Like Volition...how you gonna sell me a season pass and then tell me I only get a discount for the dlc ..or sell me a grenade launcher that you can easily aquire in the game except only difference its gold plated......GTFO here srsly...or sell me a game that I paid 65.39 for but then sell me 20 dollars extra to play multiplayer...srsly thats fcked up.Or even worse sell different dlc from different stores..you gonna make us choose u sonsof bISHES
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OSMenace on February 23, 2012
You know, I don't think TGE has a comment system that blocks profanity, and since this is a smaller site, they're going to see it anyways.
Thus, if you feel inclined to use expletives, you might as well use them properly.

I think profanity is an uneducated attempt to communicate, and that those who are socially adept don't have to resort to such vile methods of expression.
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Haikouzen on February 23, 2012
Well, you know. I was trying to avoid getting my post deleted which is why I misspelled it on purpose. Those who assume ideas about people from a paragraph are equally uneducated because you think with yours eyes. Have a good day.
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rainous on February 20, 2012
i buy almost exclusively used games. why? because its the only way i can afford to get good games. $60 could get me 1 new game or 3-6 used ones do the math
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