Dabe Alan

How Valve “devalued” video games, and why that’s great news for developers and players

How Valve “devalued” video games, and why that’s great news for developers and players

Creating a video game takes significant investments of time, money, and passion; it’s hard to look at the result of those sacrifices and place a monetary value on your game, only to hear that players will wait for a sale or an indie bundle. The numerous yearly Steam sales have become events, with people posting threads in their favorite forum and discussion how much money they’re will to pay for each game. Sometimes they marvel at the low prices for games they’ve been excited to play.

Is this hurting how we assign value to the games we play? 

“Selling games at too high a discount–one often sees discounts above 80 percent off here and there–sends a message to gamers: this game, simply put, isn’t worth very much,” Guillaume Rambourg, the managing director of competing digital distributor GoG.com, told Rock Paper Shotgun in a recent interview. “Of course you make thousands and thousands of sales of a game when it’s that cheap, but you’re damaging the long-term value of your brand because people will just wait for the next insane sale. Slashing the price of your game is easy. Improving the content of your offer when you release your game, that’s more ambitious.”

Those seem to be wise words, and gamers are increasingly sensitive to the price of the games they play, but when you look at the data you see that Valve has done something magical: The company has found a way to charge less, and earn more. This isn’t a purely selfish move, as developers also praise the pricing structure of these sales. The issue of game pricing is much more complex, and mysterious, than most are willing to admit.

Slash the price, reap the rewards

Dejobaan founder Ichiro Lambe told the Penny Arcade Report that this subject came up in a discussion at Business in Gaming recently. “Someone lamented that gamers weren’t willing to pay enough to support us game developers, and my response was, ‘So what? That’s not their job,’” he said. “Steam’s not unique in offering games at these price points—you see Apple selling these wonderful little experiences for under the price of a latte.”

Dejobaan recently released Aaaaa! F=ma for iOS devices, and a customer complained about feeling buyer’s remorse after purchasing the game. Lambe pointed me towards the Wikipedia entry for the term “buyer’s remorse,” which stated that the feeling “is frequently associated with the purchase of an expensive item such as a car or house. It may stem from fear of making the wrong choice, guilt over extravagance, or a suspicion of having been overly influenced by the seller.” The game was sold for $2.99.

“The market doesn’t care what I think any more than it cared what buggy whip salesmen thought when the automobile came around,” Lambe explained. “Bottom line: I can rail against lower prices, or I can adapt to how people are willing to pay for what I create. I’d rather do the latter.”

Mike Ambrogi is one third of Final Form Games, the developer that created the wonderful 2D shooter Jamestown, and he also shared strong words about the sale pricing of indie games. “The bulk of our revenue to date has come from sales,” he explained. “On the first day of the Steam summer sale, we earned more money than Jamestown’s entire earnings up to that point times three.  The importance of those events to our company’s surivival can’t be overstated, and because we are poor, our survival is predicated on that kind of short-term thinking.”

“The bulk of our revenue to date has come from sales,” he explained. “On the first day of the Steam summer sale, we earned more money than Jamestown’s  entire earnings up to that point times three.

Dejobaan’s Lambe also stated that the company makes more money during sales. “Yes, we do make more money by an order of magnitude,” he said. It’s also helpful to have fun with the sales to help get the word out to players. “And it’s often great for gamers, because we’ll toss in a new achievement or something amusing.”

Ambrogi does worry about games becoming devalued as well, but the problem isn’t just the cost of games, it’s the number of games being released. Reviewers can’t promote all the good games on the market, and when a new game is released customers balance the cost of the game with the number of games they already own that they haven’t finished. Saying they’ll wait for a sale helps them two ways: It saves a game they’re interested in for a rainy day, and they’ll pay less for it.

“Our suspicion is that if all indie developers suddenly ceased participating in heavy discounts, we would see less money coming into the indie games economy, and far fewer indie studios breaking even on their investments,” he said. “That is, we don’t believe sales are driving prices down; extant downward price pressure caused by a market surplus results in these sales becoming an optimal strategy.”

Developers would love to sell more copies of their game at a higher price, but the choices offered to gamers across XBLA, PSN, Steam, and other services have never been more extensive.  “Everyone has a queue in their head and a queue on their hard drive, and for most games, sales aren’t even a way to make sure your game gets played; they’re a way to move your game from a gamer’s mental queue to their hard drive queue,” Ambrogi said “It could still, without hyperbole, be years before that person actually downloads/installs/plays your game.”

The economics of Steam sales

While it’s easy to take a swipe at Valve for “devaluing” games with frequent sales, the truth is Valve is carefully experimenting with elastic price points. If you launch a game at $20, and the price goes down to $5, you need to sell four times as many games to make the same money, right? Surprisingly, developers see sales an order of magnitude higher than they expected after severely cutting the price of the game after launch. They don’t just sell four times as many games, they may sell 20 times as many, or more.

Valve’s Gabe Newell once spoke about a series of pricing experiments on Steam, and stated that a price reduction of 75 percent should mean gross revenue remains constant, based on their prior experience. “Instead what we saw was our gross revenue increased by a factor of 40,” he said. “Not 40 percent, but a factor of 40. Which is completely not predicted by our previous experience with silent price variation.”

Steam has another large advantage over its competitors, and it’s an advantage that’s leveraged with sales: Steam isn’t just a way to buy games, it’s a fully functional social networking tool. People see what their friends are playing, allowing game sales to spread virally. Each game that is sold in large numbers during a sale becomes a popular game, and that’s powerful. Raise your hand if a friend has ever messaged you to ask about the game you’re playing. “Essentially, your audience, the people who bought the game, were more effective than traditional promotional tools,” Newell said.

This can be seen with indie games, but you need to see an incredible push from the sales: Jamestown was featured in Steam’s 2011 seasonal sale as well as a Christmas Eve daily deal, it was included in a Steam indie bundle, and was also one of the five headline games in the largest Humble Indie Bundle to date. “So it would seem that for a niche game like ours, dramatically and multiplicatively growing our number of users via something like a Humble Bundle is the most important factor in increasing our organic sales rate,” Final Form’s Ambrogi stated. “It feels like some sort of threshold was crossed as we entered 2012, where our userbase reached the point where it could drive organic sales in a noticeable and sustainable way.” People began to tell their friends, or Jamestown popped up in the list of games they’re playing often enough for the game to see a sustained, organic sales boost.

It’s not good business for a competitor like GoG.com to admit how powerful and mutually beneficial the deep discounts that Steam promotes can be to both Valve and developers, but the issue is much more complicated than claiming low prices “devalue games.” Valve has created an ecosystem where companies can charge much less for their games, make much more, and the customer gets to buy and enjoy more games.