Electron Dance
31Jul/15Off

Discussion: The House of Zero

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  1. I don’t think this newsletter lends itself to debate as much as last month’s but I thought I’d turn the “newsletter discussion” post into a regular thing. You can bring anything up here – complaints about the newsletter appearance on your phone, anything :)

  2. I’m looking forward to reading more from you on the subject, what with your big ol’ economics brain. The Romer stuff sounds interesting but I don’t think I have it in me to read and understand a 25-page paper written (I presume) with academics and those trained in economics in mind. Appreciated the other links, though!

    I’ve not looked into Alphabear’s monetisation approach too much but I don’t believe that the way Spry Fox has monetised any of their games (Steam Birds, Triple Town, Road Not Taken, Alphabear) is representative of the free to play space. I think they are however an interesting developer with a lot of great ideas, and I love that they seem to walk a line between commercial viability and pursuing experimentation and the pushing of boundaries. There was an interview in Soren Johnson’s Designer Notes podcast with someone from Spry Fox that is worth a listen if you’ve not heard it already!

  3. Hey Shaun. That paper is effectively the middle part of a trilogy that focus on “endogenous technological growth” but I’ve decided not to read every one! If you look at the PDF I linked you’ll see why – it is full of mathematics from economics that I am completely unfamiliar with. I’m just trying to set out my stall and don’t would hope not to disappear down a black hole of economics. But the Romer’s theory and the Hershey’s Kiss experiment are fundamental starting points. You can’t talk about price collapse without them.

    I haven’t listened to the podcast you mentioned – maybe I need to :) Perhaps I shouldn’t read too much into the Spry Fox’s F2P implementation as being representative of F2P practices… but that doesn’t mean I do not have problems with it.

  4. Holy crap, that podcast is over 2 hours long???

  5. Haha, yes, Designer Notes is not a brief ‘cast. Some of the other interviews in the series are split over multiple podcasts and probably clock in at around 5 hours. They are however infrequent, so I listen to them in chunks walking to and from work. :)

    “Perhaps I shouldn’t read too much into the Spry Fox’s F2P implementation as being representative of F2P practices… but that doesn’t mean I do not have problems with it.”

    Goodness. I was trying to imply that I regard them as being at a very soft, friendly, less exploitative edge of the F2P market, so this response is interesting. Well… as I said I don’t know too much about their monetisation strategy for this specific game as I’ve not played enough of it, so I guess I’ll play more and read your article before getting stuck in! I look forward to it very much.

  6. I’ll have to check out the Romer paper, but it seems like that’s hardly the last word on the topic. For a long time, the economics field of industrial organization (not to be confused with the IO field in psychology) was basically all about how and when firms generate positive profits in the presence of competition. So I’m pretty sure that patents aren’t the only game in town for long run enduring profitability in an industry.

    I would love to talk about this topic more (and maybe even try to get you some time with a favorite professor who writes about the economics of art (and everything else)) if you’re interested in hearing from a prone-to-rambly-philosophising economist (me, not the professor). Off the top of my head, there are several models one might very reasonably use to think about zero price in games. But those don’t get typed up on my phone without explicit interest, so we’ll settle for several observations and/or discussion questions.

    Is Steam the Uber of videogames? (Is time a flat circle?)

    Most industries have a fairly fixed pool of potential consumer dollars to compete for. If wedding photographers get particularly good, maybe couples allocate a higher percentage of wedding budgets to photography, but there are definitely not infinite dollars to chase. Ditto with home construction, car manufacture, and I think every other industry. Moving towards an equilibrium where supply and demand are roughly equal is where you get a lot of industry-specific booms (and busts, if you radically overshoot consumer demand). Modern games have two consumer resources to chase: dollars and hours (for ads). The total pie of consumer budget has increased dramatically, but is also surely finite-ish (barring dystopian sci-fi like that Kinect commercial/black mirror episode). So is there something special or weird about having two giant pies to compete for? Are there heretofore unseen interactions caused here? Do ad-driven game designers get grumpy at Witcher3 for sucking up all that gamer time that could have gone to monetizing ads?

    When it comes to pricing and market structure, how are videogames similar to or different from sports, music performance, art, composition, fashion, writing, film, photography, etc? Some of these markets seem healthier than others, but all of them have changed radically with mass media and the internet. Which is the closest model for games? They all have a “fun problem” where it seems like there are too many competitors just because a lot of people want to be doing the activity who would see getting paid as an awesome bonus, not a requirement for entry.

    Curious if any of that resonates.

  7. Is Uber the Steam of taxis?

    Hi Daniel. I do have a few more papers to read up (e.g. I have one around here titled something like “what kind of economic good is software”) but I have 155 references in my Evernote research library now and it grows every week.

    he reason I never found Romer’s work is because it’s tucked away under the “economy of ideas” and there was a big buzz around how growth theory was going to deliver prosperity – but these days that whole approach is pretty derided. (I think Krugman even had a pop at endogenous growth theory at one point.)

    I think I should clarify what Romer’s paper is about a market model that can account for commercial R & D, because it has a strong positive externality and is something we all benefit from. But it’s an externality – it’s difficult to monetize that! A quasi-rent of some kind is required which usually means a patent. Without a patent, you do get a head start of sales, being the only company selling Quantum Burgers until your competitors reverse engineer your awesome burger design.

    A couple of short points:

    * At the end of the book, I branch out into other fields such as music, writing, photography and also pornography. I am discussing similarities but not in a theoretical way, not for “which is the closest model”.

    * In terms of theory, I’m trying to build that as a foundation at the start of the book and the rest is about practical consequences. Anything that helps shore up that foundation would be helpful.

    * Your so-called fun problem is an important point that I lay out in the first chapter. Is there official terminology for that? Wait, is “fun problem” that the official term???

    I’d be more than happy to see more economic rambles and alternative models! I’m still filling in gaps here.

  8. Okay, so today I learned there is a newsletter and I have not read it.

    But – given my lack of knowledge – there are two points here that I find interesting and want to respond to.

    First, the idea that market dollars are fixed. I don’t think this is true at all. Stuff that exists purely for enjoyment is a perfect example of this – blank walls function just as well as art covered walls, so the fact that I have anything on that wall at all shows that the artist has convinced me to spend more money than necessary on art. I do not typically price compare paintings, I simply decide if I can afford this one painting I like or not.

    But this is not limited to art. I need to eat food, for example. If the price of all food went up some (due to inflation, say) I would spend more on food. If the price of some food went up more than others, I may cut back on that food, but even that is questionable. I like to eat steak from time to time, for example, and the difference between a 20 dollar steak and a 30 dollar steak is kind of moot for me, I will still only eat about one every two months.

    I think the problem is that these kind of buying decisions do depend on the competition, so changes in price are determined buy the competitors as a group, not just one company. I feel like the issue is similar to this PBS Idea channel (which discusses law, but I am now applying the point to economics instead).
    https://www.youtube.com/watch?v=uEe5xL4G3Y8

    The idea is that we as a society decide how much video games are valuable, which in turn sets their price. But because consumers are able to compare prices and products, changes in the market must be made on a market scale. A single individual selling their indie game at a weird price point isn’t going to upset the video game market at large.

    Which makes the Steam and Uber comparison valid, in my mind. I have taken Uber rides when I would have normally taken a taxi (which shows that Uber can and does take money from the taxi market). However, because it is cheaper, I have taken Uber at times where I would *not* have taken a taxi (I could have walked instead). So Uber has changed the market – opening new opportunities to make money, while also moving into money making opportunities that always existed.

    Steam is definitely similar – they sell big games, but the open and unified nature of the steam store has allowed different games to come to the forefront. Because the steam store is primarily sales driven, rather than marketing driven, small studios that can sell a lot over a weekend are now able to make a similar amount of money as big studios that can push large ad campaigns. Combined with their push to sell games at a lower price point, this has expanded the market in a similar manner to what Uber did.

    But I don’t think these markets are determined independent of the broader culture nor of the decisions of the service creators. Steam did not have to push deep sales so much, for example. Before internet sales, stuff like 20 percent off in the same year was huge. And Steam has never really had the best value sales, so I don’t think their current success is due simply to undercutting in price. In a sense, current sales culture was determined largely by what Steam executives thought was appropriate.

    I think the same is true in other industries. The clothing industry works at very slim margins, for example. But clothing is a tiny, tiny fraction of my budget. If all the clothing giants decided tomorrow to double the price of clothing, I would pay it, and the margins would be much higher. But most clothing is sold by large outlets that compete by undercutting in price, so driving to the lowest margins is the result. Its not just the outlet’s fault either, because consumer side spending also looks for the lowest prices. It is a collective cultural effect that is outside the reach of any one individual to change, though we might be able to change it as a group if we all agreed to.

    Sorry for the long post. I am not an economist, so I would love some other thoughts on why I am probably wrong.

  9. Sandy, I don’t think you’re wrong at all! I just left a lot of things unsaid and assumed.

    I said/meant that the total spending (in a given period) was “fairly fixed,” even though better games or lower prices can cause people to substitute spending/time away from other consumption into gaming, because there’s some sort of limit to how big the market can be. Eventually the better, cheaper games stop causing you to substitute from other things, either because you’re sated or because you’re out of time and money.

    In some periods we saw the game market growing by leaps and bounds; double digit growth each year! But now we’re in a period of much slower growth/stability, as most people who have the money and predilection for gaming already do it. So in the short term, I don’t expect better games or lower prices to increase the size of the market by much.

    Joel, I’m thinking about what you wrote and yearning for having my computer on Friday.

  10. I actually don’t think questions about the money pool, whether it is now exhausted or can grow, is perhaps the real problem because, frankly, I think supply will/has overrun whatever capacity for payment exists out there. Whether your success is coming from another developer’s pocket or from a player’s long-term savings account, the developers problem is still the same, they’re going to have to fight tooth and nail for it. The finite commodity that everyone is really fighting over is not money. The battleground is attention and this is part (JUST PART!!) of the reason why AAA can maintain high prices.

    I do see Uber and Steam as being as being kindred spirits and they can both look like the “official face” of their new industry: peer-to-peer taxi service and digital game distribution so will draw attention for now filling that role. But Steam locks in its users for “life” – the games are tied there, plus you build up a profile in Steam in terms community/achievements and so on. You can give up Uber any day and be no poorer for it. That means Uber has more of a problem with competition that Steam ever will. This is a vital difference.

    If you’re worried about people being turned into cheap, interchangeable cogs for a digital service, you need to take a look at Amazon Mechanical Turk.

  11. I’m not sure that Uber is all that different – their catch is just one the provider side, not the customer side. I’m pretty sure you can only work for one taxi service at a time. And if any one service gets a lead in drivers, it seems like it would be hard for another service to overcome it.

    But in the case of digital game stores many games are sold through a number of retailers. Plus the smaller stores have been able to get around Steam-monopolising by offering Steam keys with purchases.

    Either way it seems like an interesting world in which companies are competing more based on their systems (interface, support, payment model) than on their deliverables.

  12. I checked out on Twitter whether Valve charges for those Steam keys. It doesn’t, they are provided gratis. But the only reason smaller stores “get around” Steam is by giving out keys which… Valve kindly permits. This still means the game are tied to Steam – few consumers download the DRM-free versions if they’ve got a Steam key – and once if that small portal goes belly up, the DRM-free version is lost. And it means Steam is wired through all the smaller stores which, most likely, are beholden to Steam keeping up their end of the bargain. Steam continues to rise as The Definitive Portal for PC games – if, one day, they decide no longer to give out free Steam keys? It’s an extinction-level event.

    Companies competing on their systems is how they should be judged – but in truth they are compared on available content, even though they didn’t make that content. Do I go with Netflix or Amazon Prime? I have to look at what programmes they offer, not which service is less shitty. It’s worse than it sounds though, because when you have a dominant platform, the sitaution is turned around: people don’t buy content unless it’s on their favoured platform. How many times have you heard no Steam, no purchase?

    This is entirely separate from any positive intentions on the part of Valve.

    (Some thoughts here how a service like Uber could be replaced.)

  13. “This still means the game are tied to Steam – few consumers download the DRM-free versions if they’ve got a Steam key – and once if that small portal goes belly up, the DRM-free version is lost.”

    This seems a bit circular to me. The people who are only buying through the smaller portals because they can also get Steam keys, and who aren’t even bothering to download the DRM-free versions of the games because they’re just going to play them on Steam anyway–those people are already completely captured by Steam. It’s not the game that’s tied to Steam, it’s the consumer.

    Now the fact that the consumers are tied to Steam means that the other stores/developers/etc. still need to dance to Steam’s tune, and that means that Valve could sink people by charging for keys or through some other way.

    (Note: I am not on Steam at all–I do have a lot of keys I don’t need because of bundles, and once accidentally bought a key-only game that I’m not playing, but I stick exclusively to DRM-free stuff or stuff that’s activated through the developer.—Though my key for Eets Munchies didn’t work off Steam, which is annoying mostly because it keeps bringing up the Updater when I start the game up.)

  14. My phrasing is off, Matt, but that’s essentially what I meant. For all intents and purposes it’s still a Steam world and the presence of other portals feeding Steam keys does nothing to undermine its growing monopsony (more accurate in terms of problems than a monopoly, I think).

    Also I get upset when developers stop updating their non Steam versions, which means as a non DRM advocate you get forced into it. (mentioning no names Kairo)

  15. Joel, I don’t really disagree with much of anything that you’ve written on this, but I wanted to pull at the threads of a few things, because I think there are some distinct things going on that are easy to bundle together. Specifically: I think it’s good to make sure you separate Steam’s status as a monolith/monopoly/gatekeeper vs. Steam’s role in bringing about the zero-price era.

    For the latter, I think that digital distribution/the internet and the fun problem (no, sadly, that’s not a proper academic name for anything I’m aware of) made this zero price era pretty much inevitable. You mention production costs in your newsletter, but I think that’s only part of it: first the magic of the internet makes marginal production/distribution cost ~= zero. Then, Steam, flash game portals, the app store, and the myriad self-publishing alternatives took the cost of entry to essentially zero. You also have the rise of game ad networks making it really easy to use ads (remember how horrible and risible big publishers’ early in-game advertisement was? Mountain dew!) and the whole IAP/DLC tech as a way to directly convert attention into money with all the viral network effect dynamics. I think that last bit is how you “bid down” game prices below where you’d expect given the costs of actually developing the games.

    I assume this is mostly what that first chapter is all about explaining. But I think it’s easy to make steam seem like a bigger part of all that, just because it’s a giant. But generally, we think of giants in a market as keeping prices higher. It seems hard to argue that Steam does that. But it also seems hard to argue that Steam is somehow keeping prices artificially low (the best comparison I can think of there would be Amazon with ebooks. But I think that falls apart if you imagine what would happen to prices in their markets if Steam or Amazon disappeared tomorrow: I would guess that game prices would stay low and ebook prices would go up).

    You did just mention monopsony. I think that’s accurate, but probably not that important for keeping prices at/near zero. I think that the way steam exercises its monopsony position is by keeping more of the revenue from their sales, not by forcing developers to keep prices low per se. If steam and apple weren’t such big portals, they probably couldn’t take such a big cut (30% for both, right?). But what do you think would happen if that cut was halved? Reduced to 1%? I can’t imagine that changing the game ecosystem in a way that made prevailing prices higher. If anything, I think it would make it possible for a few marginal producers to eke out enough profit to stick with games (heightening the competition and lowering the prices).

    I don’t think that changes the moral (or any other) calculus on Steam’s market position, but I was/am interested in teasing out all the different things going on. I think Steam really led the way to our glorious digital future (pretty sure that one’s gotta be a real academic term) by being ahead of the curve on digital distribution and the sales (recognizing how much attention scarcity matters). But it’s tough to see how they create or maintain the conditions that keep prices so low.

    Sort of unrelated:
    http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.386.6231&rep=rep1&type=pdf
    I went to a presentation by the second author on this paper (and the third author is super famous), and it seems pretty solid. Experiments! It’s pretty interesting to think about these findings in the context of F2P games. (The abstract about covers what you’d need to know from it unless you want to know more about how they try to prove what they’re claiming.)

    Way unrelated:
    I’m slowly working through some ideas in my head for what I want to write to you about side by side I don’t quite have all the phrasing figured out, but the short spoiler is that it may not be an exaggeration to say that you and Gregg were some of the most important people (caveat: that weren’t present) at my wedding earlier this month.

  16. Right I only came back from Japan yesterday, so my head may still be in the wrong time zone, but let’s do this. Daniel, I think you’ll be happy about this reply…

    1) I deliberately avoid talking much about Steam in the first chapter for precisely this reason. Steam is one of several “enablers” of zero pricing and discounting, but you can’t hang them out to dry as the cause of zero pricing which many are apt to do so. If it wasn’t Steam, it would be someone else. Digital distribution is the root “cause” although Nicholas Lovell would argue that economics is the real root cause. I am much more concerned about Steam as dictatorship and that’s for much, much later in the book. Steam is the destination, not the starting point.

    2) Some of my assumptions may be wrong, so I’m busy trying to verify every assumption I can identify. This has proved very useful and is why I changed my focus from polemic to storybuilding. The book plan is try to connect up all the dots, instead of chatting about phenomena in isolation, and by god there are a lot of bloody dots. That’s why the book is so painful, because when I move stuff around it drags everything else around too. But the first chapter is getting there…

    3) I also don’t think the size of Steam’s cut would have any effect on pricing, unless it was a fixed cost rather than percentage. (It should have been obvious but I only recently learnt that commission is also charged on IAP through Steam.)

    4) To address your point about attention scarcity: the second chapter goes into marketing.

    5) Oh I cite that paper in the first chapter! Nicholas Lovell’s The Curve uses it as a linchpin (as do many F2P enthusiasts) and it becomes one of the major pillars of the first chapter.

    6) The jetlagged part of my brain started to wonder if you showed episodes of Side by Side at your wedding. YES THE HUBRIS. Then I realised it might be about what you played at the wedding…? Intrigued! And belated congratulations on getting married!


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