Digital Distribution and Ownership of Video Games
In this post we will talk about how adoption and evolution of the internet transformed digital distribution and ownership of games.
Downloadable Content (DLC)
Players who loved a particular game wanted more of it. They craved more content, were willing to pay for it and did not want to wait till the next version of the game came out a few years after. The game studios saw the demand and realized the opportunity by releasing Downloadable Content (DLCs). DLCs are a digital bundle of content such as new levels, maps, game modes, guns, vehicles, characters, achievements etc.. which give players hours of additional content. Most DLCs were released as paid DLCs and helped game studios get some post sale revenue which helped subsidize the next game’s development. Unlike the ownership of physical game discs which was tracked via posessing the disc, the ownership of DLCs was tracked as an entry (called entitlement) in a private ledger of the platform provider, which entitled them to be able to play the content in the DLC.
The industry soon realized that they did not really need to ship the physical discs at all, if people could just buy the game online, download it and play it. When one bought the physical disc, they got something tangible in their hands that was theirs to own, sell and transfer ownership of as they please. With digital purchase, the game similar to a DLC was just an entitlement in the private ledger of the platform provider. You could not trade it in or transfer the ownership of the game to another person (Unless the platform allowed for it, which almost all do not allow).
The platform providers such as Microsoft, Sony, Steam, Origin etc.. all created their online store fronts where players could buy these games. They took a 30% cut of the retail price and 70% went back to the game publisher. For the game publishers, this 70% cut from digital distribution was a big step up from the 45% they got from physical distribution channels. The players however did not see a reduction in the price of video games, the $60 game in retail store still costed $60 via digital distribution channels.
The advantage for game developers and platform providers was that they no longer solely had to rely on the physical supply chain, worry about inventory management and physical returns. It expanded the addressable market to any place there is internet and the platform provider supported payment instruments.
For players it was convenient that they did not have to deal with physical discs and worry about them getting scratched up. The portability and accessibility of the game was also easier. They could play the game anywhere just by logging in and downloading the game on a console. This also made the games much more accessible as you did not have to wait for the game to be released in your country and for the discs to be shipped, games were globally available at the same time with no limit on the number of copies available.
Value of the Platform Provider
The online store fronts created by platform providers gave players a easy way to purchase their games. They also provided game publishers with an easy way to schedule and run their promotions. The store fronts also integrated with the various payment providers in the different countries, paid the credit card fees, dealt with customer support etc.
The platform providers created the entitlement service to allow digital games to check if the player playing the game actually owned the game before letting them play the game.
With physical discs you actually needed to be in possession of the game disc to play, thereby limiting the gameplay for a single purchase to a single point of presence. But with digital distribution one could download the game on any number of devices through an entitlement check. To ensure that a single copy of a purchased game can be only played on one device at a time, the platforms platform providers such as Xbox, PlayStation etc.. created a presence service and enforced a single point of presence for the games.
They also provided social capabilities to allow players to stay engaged. These capabilities included Player Profiles, Achievements, Friend Lists, Groups, Game Invites, Party Invite, Text & Voice Chat etc. Using these services it was easy for players to make new friends, communicate with them and jump in and play the games together.
In order to drive adoption of their platform and hardware, Console providers such as Microsoft sold the Xbox at a subsidized rate which was below the cost price and hoped to make up for the subsidy through the 30% cut and other mechanisms.
The story behind the 30%
Why is the platform provider cut 30% and not 20% or even 40%. There is an interesting story behind this as shared by Matthew Ball in this post in the Metaverse primer.
In 1983, arcade manufacturer Namco approached Nintendo about publishing versions of its titles, such as Pacman, on its NES console which, at the time, was closed and thus not a platform. Eventually, Namco agreed to pay Nintendo a 10% licensing fee on all of its titles (which Nintendo would have approval rights over), plus 20% in exchange for Nintendo manufacturing Namco’s game cartridges. This 30% fee ultimately became an industry standard, replicated by the likes of Atari, Sega, and PlayStation, and endured.
Above is how 30% became the standard for Video Game Platforms, but as mobile store fronts came to prominence they adopted the same 30% cut.
While the console providers provided services such as Friends List, Player Presence and other social capabilities the mobile platforms, do not provide such features. These phone manufacturers also do not generally subsidize their hardware, nor are they used exclusively for gaming. They rake in a 30% cut from all payments processed on their platform and usually do not allow for other payment processors to be used in the apps or games. This is the core of the case between Epic Games (the creators of Fortnite) and Apple. But I digress, let us get back to focusing on digital distribution and ownership.
The console platform providers were not just making money from the 30% cut. They also started selling subscriptions to players. Xbox live first started selling Xbox Live Gold, which allowed players to play multiplayer games online. This used to cost approximately $5 per month, and they often bundled one week free Xbox Live Gold codes with physical discs to allow people to play the games they purchased online. Over time Xbox live added more value and started the Games With Gold program, which allowed players to download and play some back catalog games for free* (You already paid for them via the subscription). The Games With Gold program allowed game developers to earn some more money and also gave them an opportunity to market and generate hype for their next game in the franchise.
EA then launched EA Access with Microsoft (and has since expanded to other platforms) and it costed $5 per month or $30 per year and you would play any game in EA’s vault (back catalog) for as long as you had the subscription. Having the subscription also gave you a 10% discount on all digital purchases. EA Access also gave you up to 10 hours of limited early access to new games, which was essentially a try before you buy deal. I personally think it is a sweet deal because you could try the new games, play older games, get 10% discount on games, DLCs and in game purchases. Example: If you got EA Access for only one month, played the anticipated game early for 10 hours and ended up buying the $60 game, you had fun early and still saved $1.
Microsoft also had their own subscription called Game Pass which had some slightly older games in it similar to EA Access. Since then Microsoft has released Game Pass Ultimate and for a price of $15 per month, you can play any game in the catalog on Xbox and PC. It also includes xCloud which is the Cloud Gaming service where the game is run in the cloud, but the gameplay is streamed to your device and your inputs are streamed over to the cloud. What more all new games released from Xbox Game Studios are included in the subscription Day 1. During my time at Microsoft I worked on Halo and am a huge Halo fan and am eagerly waiting to play Halo Infinite as part of Xbox Game Pass Ultimate without having to pay extra for the game.
All the games in the subscription could be downloaded through digital distribution. But the thing with subscription is that you never own the game itself, you only get access to them for as long as you are a subscriber. This is very similar to Netflix, Amazon Prime, Disney+ and any other subscription service.
How game teams make money by being a part of say Xbox’s subscription is a little fuzzy to me. But I assume it is similar to how content owners make money for having their content on say Netflix. I assume the contract is for a fixed time and the payout includes a fixed base component and a variable component based on the number of downloads or minutes played.
The video streaming industry has allowed for more experimentation in content, as people are not paying for an individual piece of content but for access to the entire catalog. So if a studio takes a risk and fails, no harm done. But if a studio takes a risk and comes out with a series such as Squid Games there is huge upside. Squid Games was passed on for years because it did not follow the standard hit driven model for TV shows. Taking this content risk has allowed for some really innovative series from India to be launched on these video streaming platforms.
The video game industry can benefit from the same, as more studios can try truly innovative ideas and take those bigger content risks while being bundled in a subscription.
Free to Play
Another business model, the internet has enabled is Free to Play games. As the name suggests these games are free to download and start playing. When these games first came onto the scene, I was like wow things cannot get any better. You can play the games that you want for free. The distribution is digital and from an ownership perspective everyone can own the game for free, so there is no reason to trade it in or transfer ownership as they cost zero in the first place.
Mobile games were also the pioneers here as they had a big distribution channel as smartphones became pervasive in late 2000s and early 2010s. People could download these game and spend a few minutes here and there playing these games. Some mobile games were subsidized by Ads (I absolutely hate these ads), some others had a paid upgrade to get rid of the Ads (I like this model, because if I like the game I am willing to pay to get rid of the Ads), a lot of the games had in game economies, timers and progressions and you could buy things to expedite progression. We will cover in game economies along with Live Services in the next post.
Free to play games were not just limited to mobile, but also made their way into the AAA community.
There was a lot of skepticism in the AAA game industry when free to play games came out though. Look at the below image from Matthew Ball’s post on the average cost of building a AAA game. The costs of building these games has gone up drastically over the years and currently is anywhere between 10s to 100s of millions of dollars. Given the revenue share discussions we had before a game studio would have to sell a lot of games just to break even.
Despite this, games such as Fortnite, Roblox, Apex Legends etc.. have been huge runaway successes while being free to play. Removing the barrier to entry has significantly increased the target audience size and has made these games into a cultural phenomenon. Fortnite has produced experiences with the NFL and FIFA, Disney’s Marvel Comics, Star Wars and Alien, Warner Bros.’ DC Comics, Legendary’s John Wick, Microsoft’s Halo, Sony’s God of War and Horizon Zero Dawn, Capcom’s Street Fighter, Hasbro’s G.I. Joe, Nike and Michael Jordan, Travis Scott, and more. Roblox has had Lil Nas X concerts and this is just the beginning.
We will discuss live services and how the free to play games make money, in the next post in the series.