The Latest Video Game Controversy

Video games have evolved greatly since I was a kid back in the 1980s. But even more noteworthy is the evolution of the business model around video games, and that is what’s recently led to one of the biggest video game controversies of all time.

The original model

The obvious way to make money from a video game is to sell it, and that’s how it worked for decades. The company would create a video game, put it in a box, and ship it to electronics stores. The consumer would come in, buy the video game for, say $50, install it on their computer, and play the game as much as they wanted.

This is the typical software model, and compared to other businesses, this is a fantastic way to make money because the marginal cost of an additional sale is negligible. You’ve put a bunch of effort into creating the game, but once you’ve created software, the cost of manufacturing the box and the CD for delivering the game is almost zero. So, if you have a big hit, your video game company ends up with super-high margins.

The problem with this model—if you’re a video game manufacturer—is that you aren’t making enough money and you have no recurring income. If you want to make more money, you have to create a new game, and attempt to sell it to consumers all over again. You have to find new customers for every sale.

Strategies to avoid this problem

There are a several of ways to avoid this problem. One is to sell the same game with slight differences year after year. Electronic Arts (Nasdaq: EA) is the master of this strategy with its sports franchise, creating a new version of its game every year. What’s more, since many of these games are multiplayer, old versions of the game are rendered obsolete as the player base migrates to the latest version. Thus, though the game play evolves slowly, customers still have significant incentive to upgrade every year.

The second way to avoid this problem is to not sell the game, but rather sell monthly subscriptions to the game. This method is popular with massively multiplayer online (MMO) games like World of Warcraft. In such games, a massive world fantasy world is created, and, for a monthly subscription fee, players can adventure in that world with their online friends for as long as they want. Thus, the software provider gets an ongoing revenue stream from the monthly subscriptions.

The third strategy to avoid this problem is to not sell games or subscriptions, but rather sell virtual goods within the game. The software provider gives their software away for free, but charges for skins (different character appearances), weapons, abilities, or characters in the game. Essentially, the software developer is selling nothing physical, but deliberately engineering a “rarity” into the game, and then charging its users if they want access to that “rare” item.

And I use rare in quotations, because it’s not really rare. These are all virtual goods. The software company can create as many items as they want out of thin air. It’s only rare because the software company chooses to only give those items to people who pay.

If the items that can be purchased are extremely good relative to other items in the game, then the game becomes know as “pay to win”. Essentially, you can’t become a top player without spending large amounts of money. For instance, in a first-person shooter game game, maybe the company sells an automatic machine gun for $100 when everyone else only has revolvers, and the machine gun does fifteen times the damage of any other weapon. Realistically, you can’t be competitive in the game without owning a machine gun.

The seeds of a customer revolt

The interesting thing about these “virtual goods” games is that they often make huge amounts of money, particularly in the mobile universe. If you look at the top ten games that earn the most on both Android and iOS, most use this “virtual goods” model.

One of the most popular games right now, another Electronics Arts game, is called Star Wars Galaxy of Heroes (SWGOH). In SWGOH, you do battles with a team of Star Wars characters, and as a reward, receive “shards” of other Star Wars characters. When you have enough shards, you can unlock a character and use him or her in your future battles. Of course, if you’re an impatient type, you can also spend money to buy shards, essentially buying characters.

To further improve the economics of the business model, SWGOH has special events that unlock super-powerful characters. These events only come along a few times a year, and require certain prerequisite characters to participate. So, while it might take months to unlock a character, Electronic Arts will give perhaps a week’s notice of a special event that requires certain prerequisites. So, people who want the super-powerful character will have no option except to spend large amounts of money to obtain the prerequisite characters before the event vanishes for months.

This model has proven very lucrative for SWGOH to the extent that Electronic Arts isn’t really even trying to sell to the people who are willing to spend less than $100 on virtual goods in the game. Instead, they’re targeting people who will spend thousands. Based on the math of how much characters cost and how quickly they appear in the game, it’s very clear that some people are spending over ten thousand dollars to get virtual characters in the game. I suspect there may be people who have dropped over a hundred thousand dollars on the game.

Electronic Arts’ mistake

Electronic Arts has another Star Wars game that mostly uses the old “sell the software and play as much as you want” sales model, a first-person shooter called Star Wars Battlefront. I imagine Electronic Arts looked at the in-game purchases an SWGOH, and decided that they wanted some of those sweet in-game purchases in Battlefront II.

So, while charging $80 upfront for the game, they decided to lock the iconic characters such as Darth Vader and Luke Skywalker. To unlock anything other than the most generic of characters, you needed to either play the game for a long time—I’ve seen estimates of 4,500 hours to unlock all the characters—or pay about $2,100 to EA.

Thus, EA wants their customers to pay $80 for a game, but then not actually deliver the game they promised with all the cool Star Wars characters. Instead, they want to force their customers to pay large sums to actually unlock the key content.

This decision led to an uprising among gamers. When EA attempted to defend its decision, it claimed that it wanted players to have a sense of pride and accomplishment when they unlocked the top characters. That comment has received the most downvotes of any comment on Reddit.

Players know why EA crippled their own game, and it wasn’t to create a sense of pride and accomplishment. If EA truly thought the sense of pride and accomplishment coming from unlocking characters was important, they certainly wouldn’t allow people to unlock character simply by spending money. Where’s the pride and accomplishment in that?

The comment was so widely derided that now the phrase “feel as sense of pride and accomplishment” has become a euphemism for gaming companies deciding to screw over their customers to get money. “Pride and accomplishment” now means “pull out your wallet”.

The short term consequences

Amid the uproar and pre-order cancellations, Electronic Arts finally took a small step backward, deciding to eliminate in-game purchases temporarily. But, it’s pretty clear in their blog entry about the change that while they are desperately looking for a way to appease their customers in the short term (because if people don’t pony up the $80 for the game, EA won’t make anything from it), they have every intention of bringing back in-game purchases when things have calmed down.

After all, to Electronic Arts, it’s not about ethics or honesty. It’s about money.

My bottom line

To me, this evolution is good and bad. I like games that are free-to-play because I’m cheap. I won’t spend money on a game if I don’t need to, and, if the game can’t be enjoyable without spending money, I just won’t play it.

On the other hand, I’m not a fan of the idea of charging people for a game, giving them broken content, and then forcing them to pay even more to get the game they were promised in the first place. To me, that is fraud.

Though I suspect that Electronic Arts will never see a problem with the business model, I still find the occasional reason for optimism. One gaming company has recently abandoned the free to play model because they have ethical concerns about it. I find their rational behind that decision fascinating.