Rules for Value Modelling in Online Digital Distribution: the Video Game Industry

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1 Rules for Value Modelling in Online Digital Distribution: the Video Game Industry Marcello Ceci, Ph. D marcello.ceci@gmail.com Please note: this paper is a work in progress. A sample model of value ontology and reaction rules is going to be created, to allow a more complete discussion. 1 Introduction Online markets are probably the most dynamic markets in global economy. Despite their brief story, they grow continuously and now constitute the main marketplace for several categories of products and services. Among online markets we can distinguish markets selling physical products (or services) through online transactions, and markets where not only the transactions, but also the products (or services) themselves are software. The characteristics of these digital online markets (See De Prato and Simon 2011) led to strong product and process innovation: the delivery of the products or services requires much less logistics, and the online digital distribution brought to changes in the value chain through phenomena such as disintermediation and reintermediation, widely foreseen in literature as in (Smith et al. 1999). The video game industry constitutes an outpost among these markets: its big volumes of sales and the complexity of the market led to the sprawling of business models for the companies in the sector, providing a wide array of examples for possible solutions that may be of interest even outside pure digital online markets. The present paper departs from some considerations (section 2) on the different value chains present in online digital markets. Since value chains can be represented in the form of computational ontologies and arguing that digital online markets the price policy can be more abstract and arbitrary (see section 3) the paper aims to enrich the static model of value chain with a set of logic rules to manage price policy and to choose the most convenient value model (with examples provided in section 4) for given market characteristics. The idea is to build a tool which, once provided with information on the market (number of clients, Average Payment Per User, and so on), can compute the expected volumes of value exchange and thus suggest the business model that best fits market characteristics. 2 Online Digital Distribution The characteristics of digital products (and services) and of online markets led to important innovation in online digital distribution. Because of the low requirement for

2 transacting and delivery, the online digital distribution industry experienced the disintermediation and reintermediation phenomena. Disintermediation consists in the removal of the figure of distributors. In some cases (where the producer of products or services sells them directly through his website, thus extending its role through that of publisher up to that of retailer), disintermediation is still on its apex. Some digital online markets, however, already moved to a phase of reintermediation through ISPs (see De Prato and Simon 2011): internet portals providing a collection of products or services, selling and delivering them through online interactions, acquired more and more importance over the last years, constituting privileged (when not exclusive) channels for meeting of demand and offer. These portals, which started as retailers, now extend their coverage to the role of the publisher. This is true even outside pure digital markets: Amazon not only sells its own products and services, but also serves as a host for other shops that sell their products through the very same interface used by Amazon, thus appearing in search results and benefitting from the delivery and feedback system. This has become a privileged channel for selling certain categories of products to certain categories of consumers. In the video game industry, however, reintermediation has brought to more radical changes in the market structure, giving birth to more differentiated business models: instead of the retailers, in video games it is the developer who managed do cover the role of publisher for other developers. 3 The video game industry The videogame industry has rapidly grown in the last two decades, and already in 2009 became the biggest industry in the media entertainment industry (passing the movie industry). The structure of this industry developed in a peculiar way, probably due to the characteristics of the products being sold. It is in fact a complex industry where products, once embodied in an editorial work (boxed games sold at physical retailers or shipped directly to clients), have long since become digital (to be downloaded via the Internet from the distributor s server to the client). In the last years, the digital product has turned into something more similar to a service, where the user does not get a bundled software but instead gains access to a virtual world which includes updates, support and a set of additional services (either available free of charge or requiring additional payments). Features such as the persistent world and the item market, which were exclusive of MMOs (Massively Multiplayer Online games), in the last three years became a common feature in every AAA title (see Wi 2009). In 2013, producers even introduced the habit of selling additional software as part of the same video game (the so-called companion apps, where the user can use his/her smartphone to perform activities related to the main game). The transformation of the mere piece of software into a persistent and faceted net of services not even mentioning the social aspects of this new way of gaming induced a particular form of reintermediation, where the biggest part of the business model is not selling its own products, but rather acting as distributors and retailers for other developers. In Valve s Steam, users can access a catalogue of more than 2.000

3 video games and other software, where less than 20 are developed by Valve. Steam constitutes, however, the main channel of distribution for this software. Valve even acts (through its dedicated service called Greenlight) as producer for titles of small, independent developers, adopting the most popular projects when they are still at an early stage of development. In this way, video game developers directly took the role of the distributors and retailers for a whole segment of the industry (namely the PC non-casual segment). Following (Smith et al. 1999), the market segment can be analysed as follows: Price Levels: Prices have not really dropped in the passage to the online sale. AAA titles still sell for around 55 in western countries. The increasing number of video games sold has however created a lively market for quality video games which do not involve the production and advertising effort of AAA titles. These products sell for around 30, and this causes most of AAA titles to settle at that price few months after the release. Casual games sell for 10, in line with the markets precedent to online portals. Price Elasticity: There is an embarrassing price elasticity with AAA video games, as these are products whose value decreases enormously with time. Distributors maintain a high price just for few months, to recover for the high production and advertising costs, and video games which sell for 60 on (or prior to) the release date can drop to 10 after 10 months. Quality non-aaa titles have smaller elasticity (they drop by 50% in a year), and the same happens with casual games. Menu Costs: Being menu costs particularly low, temporary (8h to 48h long) discounts constitute the main instrument used by the distributors to maximise sales. Because these distributors often buy stocks of keys that they resell on their portals, in some cases the sales at low prices are not lucrative by themselves but aimed at increasing the community of clients that play that game on the portal itself. Additional, free services help loyalizing the community, therefore locking consumers in the distributor s online platform. Price Dispersion: In this sector, price dispersion depends on the pricing policy adopted. If there is a regional pricing policy (as with Steam), then there will be a price dispersion also within the single region, because of the phenomenon of resellers or keysellers 1. 4 Value and business models The scenario depicted in the precedent section cover just one of the arising phenomena in contemporary video games markets. When talking about business models, we can identify several models. As it happened in the late 80s in the software industry (where different and competing business models aroused: i.e. shareware, freeware, ad- 1 Keysellers are companies that buy game keys in regions where they are cheap and then resell in regions where the same software is more expensive, often using workarounds to avoid the portal s own countermeasures against this type of behaviour

4 ware ), and after the wrong turn of DRMs, the peculiar characteristics of digital products are once again generating new ways of managing the value chain, with a particular attention to efficiency of distribution. Some of these models even combine with the publisher-producer phenomenon presented above, generating many different solutions. In general, it can be said that these models are all moving away from the customer centric models, where customer profiling and targeted offers play a central role. The new models focus on the idea of building a community, engaging the consumer in a wide range of activities, where special offers are targeted at the whole community instead of single consumer. Following, there is a list of some of the most used business models for video game industry: Microtransactions: The most interesting among the new business models, it involves the consumer in an online framework of services where each can be bought for a small sum. Specific sub-models are: Virtual Items, where the developer sells in-game items for real money (these microtransactions are often worth less than 5). Dual Currency, where players can change real money for in-game money. Normally, this in-game money cannot be acquired through normal gaming, and this requires the game or at least its net of services to include more than one currency. Subscription, where the consumer has to pay a monthly fee in order to access the game. Data 2 seems to show that this model tends to be less profitable than the microtransactions model. Free-to-play (F2P), where the game is available for download free of charge. This model can be combined with microtransactions, subscription (so-called freemium games), advertising, and so on. Crowdfunding, already a popular business model outside of the video games market; DRMs, which, although generally considered as inefficient, still constitute the choice for major developers and publishers; Early Access, where a game is available for sale when still under development. The product is usually sold at a reduced price (because the game is not polished, still prone to numerous bugs, missing features) but this helps financing the projects, testing the game and also grants feedback from the community. 5 Combining Value Ontologies and Rules These business models give rise to different value models such as that depicted in figure 1, based on the e3-value software (presented in Gordijn et al. 2001), and different business ontologies could be built to represent them. Are these value ontologies enough to help the developer in choosing the best solution for selling its product? 2 See the Microtransaction Model available at

5 Probably, defeasible rules could help the developer in sorting those models and ranking them in the light of the expected results, once relevant data are provided. The reaction rules constituting the Prova system (see Kozlenkov and Schroeder 2004) should be adequate to properly represent the aspects where different characteristics of the product Fig. 1. The Greenlight Model to be sold could lead to a different profitability for some models. Such a rulebase could import knowledge from ontologies representing the various value chains of business models, and rely on a set of economic data added by the user. It is an opinion of the author that a similar rulebase may be already in use in internet portals such as Steam to assist the pricing policy. In those services, in fact, pricing is extremely arbitrary and special sales are conceived in such a way as to build communities around specific products and, more generally, around the internet portal. Those prices, as already noticed, are not bound to fixed costs (with the exception of the transaction cost) and it is therefore possible to manage them with extreme versatility. The nice aspect of all these characteristics is that, at least in this small segment of the market (and not a very productive one, in a wide sense), the absence of physical product and the dynamicity of the market allow for a semi-automatic management of prices which fulfils three goals: Maximizes the revenue from the business process; Optimizes the number of paying users without using extremely inefficient measures such as DRMs;

6 Grants access to digital entertainment to all types of consumers, simply rearranging (through models such as virtual currency, free-to-play, special sales) the modalities with which each type is likely to get access to the product. Apart from the first goal, which has ever been the guiding light of business modelling, the second and third goal are fundamental assets for companies willing to exist in such a dynamic and complex market for more than a few years. 6 References 1. De Prato, Giuditta, and Jean Paul Simon. "Paving the way to e-services: Innovation through online games." (2011). 2. Gordijn, Jaap, Hans Akkermans, and J. Van Vliet. "Designing and evaluating e-business models." IEEE intelligent Systems 16.4 (2001): Kozlenkov, Alexander, and Michael Schroeder. "PROVA: Rule-based Java-scripting for a bioinformatics semantic web." Data Integration in the Life Sciences. Springer Berlin Heidelberg, Smith, Michael D., Joseph Bailey, and Erik Brynjolfsson. Understanding digital markets: review and assessment. MIT press, Teipen Christina (2008), Work and Employment in Creative Industries: The Video Games Industry in Germany, Sweden and Poland, Economic and Industrial Democracy, vol. 29, nr. 3, pp , Sage Publications 6. Wi, Jong H. (2009), Innovation and Strategy of Online Games, Imperial College Press.