Digital Distribution

Comments have been made recently regarding the future of digital distribution, specifically that people like to have tangible product.  We like to be able to touch, to possess things.  Digital products are not possessions, they are simply bits of data on a computer somewhere that we pay to interact with – if we’re lucky.

Digital distribution in our society began in earnest with the jpg.  In its infancy, the internet was essentially text.  Data transfer rates made it undesirable to relay anything with high graphic fidelity.  But once suitable communication and compression technologies were in play, pictures were easy.  Scanners suddenly became as popular as printers.  Photo processing labs sent back scans on cds with your holiday prints, or allowed you to access them through their website.  Digital cameras replaced film for armchair photographers.  Now, cameras are built into our phones, and instead of printing pictures, we transfer the files to digital picture frames.  We’re way beyond Kodachrome now.

Compression technology again created the potential for the next medium to be embraced by digital distribution – music.  The music industry had a good thing going for itself.  And it saw itself as the indomitable goliath that it was.  But a little sling stone called the mp3, and a generation raised on dubbed cassette tapes who viewed the mp3 as analogous, would bring the giant to its knees, before it regained its senses enough to avoid getting decapitated.  While records still exist, and music stores are full of cds, those same stores have download stations for mp3s that even my car’s factory stereo can play.  Artists can deliver music directly to their fans, and games like Rock Band are changing the way people experience music.

Print media was the next to fall.  Despite the warning sobs of print’s younger cousin, music, the print industry refused to consider that reality could exist without a paperboy breaking garage windows and grade-schoolers selling magazine subscriptions to fund blacktop for the playground basketball courts.  Why would anyone want to read amateur ‘web-logs’ instead of the Times?  Why, indeed.  The body count of publications and print houses not fleet enough to adapt the internets is still growing.  Similar to Apple’s acknowledgement of the mp3 as a viable format with the iPod, the ereaders legitimize the ebook format.  And the publishing industry is still trying to figure out what to do with that.

Once pictures and music could be successfully digitized and transferred with minimal effort through the ether, it was only a matter of time before television and movies would get the treatment.  One can now watch primetime network television shows, Akira Kurosawa’s epic films, or Michael Bay’s popcorn fests during lunch on the computer.  Dvds exist, but only for archive or as a last resort when something isn’t yet available for streaming on Netflix.

Why do we think that for video games it should be any different?

There is a box in a closet in my house that has all of the boxes for all of my Super Nintendo games, most in (what I would consider) mint condition.  I enjoy the books lined up on the shelves prominently located in our living room.  I appreciate the living timbre of a vinyl recording.  But I like Amazon.  I love not needing to go to a store to try to find the thing I want to purchase.  I like being able to access media with a click and a brief pause while it downloads and I make a cup of tea.  I enjoy letting my clutter exist in the cloud and not in my house.

Valve’s Steam is the first successful digital distribution platform for video games.  Steam’s public beta began in 2002, the same year Microsoft launched Xbox Live.  But Live wouldn’t mature as a distribution platform for another three years when Live Marketplace would be introduced on the 360.  Nintendo would follow in 2006 with the Wii Shop Channel’s Virtual Console titles, republishing games from antiquity.  Sony offers a similar storefront on the PS3.  Digital distribution appears to be established.

All of that finally brings me to my point of interest.  Digital distribution destroys traditional economic theory.  Assuming high-speed internet as the standard communication vehicle, and cloud networking to overcome storage and processing barriers, supply becomes infinite, from a product perspective.  Pricing then becomes almost arbitrary.  After accounting for overhead, demand factors only inasmuch as what the general consumer’s perception is of the product’s value.  And once that arbitrary price is normalized in the perception of the consumer – $1/mp3, $5/NES game, $8/ebook, $20/Xbox game – that price persists.  Tennis on the Virtual Console is still $5 today as it was when it was first released.  As a distributor, prices don’t need to depreciate to move stock to match demand.  Profit is generated by averaging overhead across all sales on the service, not on a per-product basis.  Of course the developers still have to earn out their production costs.

Print On Demand services, such as Lulu, make their money by taking a percentage based on the profit the author chooses to make on a sale of the work.  The price of the work is the sum of the printing costs, the author’s profit, and the POD’s profit.  For an electronic copy, there are no printing costs.  Therefore, the price is the author’s profit plus the POD’s profit.  For the digital distribution platform, it doesn’t matter whether they sell 1000 of one product or one of 1000 products.

In general, the consumer wants digital distribution because it should cost less.  They will still purchase tangibles when it is important to them (and it will need to be important, because tangibles will become expensive), but stroking the shiny tech required to utilize the digital assets is usually enough to satiate that part of the brain.  Distributors who can emplace the technical network for such a supply system should be wetting themselves in anticipation of full implementation.  Risk is low, profit margins should be high.  Perfect scenario.  Any hesitation, then, would seem to come from the publisher, who would stand to lose the power they now hold uncontested – if they aren’t also the distributor.  The same struggle the other media giants have been wrestling with.  Developers are still tasked with creating exceptional content that people want to pay to experience.

Aside from creating a different middle man, and a net loss of jobs on the publication side, and knowing that you are going to be paying higher percentages of profit for a game the older it gets (granted, you will technically be paying less for it as inflation creeps up), what’s not to love?  Perhaps digital distribution won’t be legitimized until used digital resellers open up.  Digi-Gamestop better have their lawyers digesting those EULAs…

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