Welcome to the first edition of The Imperial March. This new weekly column is going to take a wide-angle perspective on gaming industry issues. Note that these opinions reflect only those of the Emperor himself, and are not those of his Majesty’s kind hosts at Vagary.tv.
Recession. Economic collapse. Market panic. Depression. The video game industry, from its press, to its developers and publishers, is a vocation largely of youth. That’s why Cliff Bleszinsky is a rock star: young, hip, at the top of his field and the fore of his company (the hot girlfriend, charm, and good looks probably help, too… Cliffy is so dreamy….). Terms like recession don’t mean a whole lot to people who weren’t around for the oil crisis of the 1970s. More recent economic downturns were simply reversed by financial markets which seemed, inevitably, to always turn a profit, no matter the situation. Quarters of slow growth or even losses seemed to be minor blips on the radar, temporary, even unimportant conditions that would soon be converted from red to black because we’d finally figured this whole economy thing out.
Yes, this is the world the gaming industry was brought up in, and that explains a lot of the reaction to the economic collapse of 2008. Ignoring the fact that our world economic model is severely flawed, that Bear Stearns had broken the dollar, that the credit default swap market caused a ripple effect which literally sucked money out of the economy, industry leaders were unworried (if you did not understand any of that, read it as REALLY BAD MONEY STUFF). We offer entertainment at a bargain price, they said, and the NPD went as far to declare the industry recession proof in November 2008. This followed another month of record sales. It seemed that the profits really never would end, and given that games could be played for many hours at a price much cheaper than, say, a weekend getaway or a trip to a fancy restaurant, they were well-positioned to survive when money was tight. At the time, even the great Napoleon himself was swayed by what seemed to be ironclad argument.
For a little while, game sales maintained their momentum. But then, in April 2009, a funny thing happened: monthly sales dropped below $1 billion, for the first time in 23 consecutive months. In May, sales dropped again. Year over year sales were down nearly 25%, and the optimism of publishers that their product would do fine even as the economy sputtered turned to pessimism that they were mired in what would be a lost year. Sales retreated faster than teenagers at a frat party when the police are at the front door. 3D Realms, Bottle Rocket, Grin, Factor 5 and Midway all suffered cash flow issues and closed their doors. Publishers that were able, pushed their games’ releases out of the 2009 calendar year, hoping that better days were ahead. Alarming news was everywhere. Take Two and Electronic Arts posted huge losses. Even Activision, in the quarter that saw the release of Modern Warfare 2 (which was, at the time, the greatest selling entertainment opening ever in terms of raw dollars), posted in the red.
It was against this backdrop, as nearly every game company posted a loss or went under, that another company was curiously going in the other direction. Retailer Gamestop posted a 3.1% increase in profits over the previous year. The company had over $9 billion worth of sales, nearly 25% of which was in sales of used games and consoles. The used sales were massively profitable, accounting for nearly half of the company’s profit margin. And year over year, used game sales had increased over half a billion dollars. As the industry floundered, Gamestop was raking in cash, and it was doing it selling games publishers had made, but whose sale they did not earn a penny on. The predictions had been right: people had continued to purchase games, even in a recession. What had not been factored in was that people would seek out used games. People are cheap and easy (or, in the case of Paris Hilton, um, not cheap), and with less money to spend, they have found a way to get the same number of games.
Used games sales were not exactly a new issue for the industry. Gamestop and other similar retailers had long been cashing in on the buying and selling of used games. But 2009 was the first time it became a serious threat to the cash flow of the industry. The numbers were clear, and it did not take a mind as brilliant as the Emperor’s to recognize that the economy was still in shambles. Without a clear path out of the economic mire, the path was obvious. To continue to make money creating video games, the used game issue had to be confronted. And one solution, among others, was a one-time use code for access to online content.
EA was the first publisher out of the boat, to be followed by Warner Bros., Ubisoft, Sony and others (it was a large boat… more of a ship, really). The idea itself was a pretty simple one: people can still buy the game used, if they want. But access to any kind of online content (be it the Cerberus Network in Mass Effect 2, the free map packs with Battlefield: Bad Company 2, or the online multiplayer in Mortal Kombat) would require the use of an online pass. If you bought the game new, you received a code (for one user) for free. However, were you to loan the game to someone else, or purchase it used, you’d have to get your own code for the low price of $10. It made sense to publishers, as well. Since they either provide or finance the networks on which you play, they should receive something out of the arrangement?
The online pass has proved to be an elegant solution (at least for retailers and publishers). Used games are still out there and are still sold cheaply. But now, with each used sale, EA and others have the potential of making something out of that sale. The existence of the online pass also adds value for customers buying products brand new. But, for customers used to buying their games used, or sharing games with their friends, there was a significant backlash. Paying more for features which people deemed inherent was not something that many were prepared to do. But save for the occasional moral zealot (“I cannot believe EA is doing this and will never buy another EA product again!”), online passes by and large have not driven away customers. If you were not buying EA’s products new, they were not making a dime off of you anyway. Any notion that you had some sort of “right” to a full product dissolves against the simple fact that you did not get your copy of Madden or Medal of Honor from EA if you bought it used (not that anyone should have bought Medal of Honor… ever). They did not provide it to you in any way shape or form. Harness your rage and apply it to the company selling you an incomplete product and not making it eminently clear: Gamestop (or Amazon, or more recently, Best Buy). It is the retailer who sells you a game that does not include the features advertised on the box.
Online passes were a natural reaction by gaming publishers to economics which were by all accounts putting them out of business. Continuing to allow these sales to go on without attempting to gain any revenue would have been foolhardy, especially in with the economy still floating upside down in the fish tank. EA may have been the first publisher out of the gate, but they’ve been followed by some other heavy hitters (and Capcom, coming up with solutions that are much, much worse). Publishers have to attempt to combat used sales, as the pre-owned market has clearly been demonstrated to cut into sales of new products. They cannot eliminate the used game retailers, so why not use them to their advantage? The Emperor is in favor of exploiting his enemies, whenever possible, especially when that maneuver keeps his game publishers in the black. Bankrupt companies do not make very good games. Or, any, for that matter.