Optimizing the commercialization process in the introduction of video games : a literature review

Optimizing the Commercialization Process in the

Introduction of Video Games

A Literature Review

Alexander Joseph Remmerswaal

Bachelor’s Economics and Business: Specialization Business

Administration

University of Amsterdam

Statement of Originality

This document is written by Student Alexander Remmerswaal who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Table of Contents

Abstract

Chapter 1: Introduction

Chapter 2: Literature Review

1. New product Introduction and Commercialization 6

2. The Video Game Industry 9

Method

Chapter 3: Findings and Results

1. Distribution 13

A) The Physical Era 13

B) Digital Distribution 14

C) The Future of Distribution 21

2. Pricing 24

A) Conventional Pricing 24

B) Subscription Pricing 26

C) Micro Transaction and Freemium Pricing 28

D) Episodic Pricing 33

3. Advertising 36

A) Trailers 36

2 C) Demos 42 D) Physical Advertisements 45 E) Word of Mouth 46

Chapter 4: Discussion

Chapter 5: Conclusion

2. Limitations of the Research 57

3. Recommendations for Future Research 58

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Abstract:

The video game industry is one of the largest industries in the entertainment sector and has some unique commercialization methods that can potentially be applied elsewhere. This paper focuses on identifying the most successful commercialization strategies in the video game industry. To accomplish this, an extensive literature review of the subject matter is conducted, reviewing the entire scope of the subject area. This research breaks commercialization into three main elements. These three elements are distribution, pricing, and advertising. The research aims to find the ideal distribution, pricing, and advertising strategies for different types of video games. Specifically, these types of video games include independent, mid-tier and triple-A video games. A further distinction made in the pricing section analyzes the different pricing strategies for single player and multiplayer gaming experiences. Upon finding these optimal strategies, the research makes recommendations based on each type of video game.

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Chapter 1: Introduction

The video game industry is not only one of the fastest growing entertainment industries, but has managed to surpass the film and music industry in terms of annual revenue making it second to only the publishing industry in the entertainment sector(Norgaard, 2015). The revenue figure is encroaching upon the $100 billion mark and is expected to surpass that by 2017(Campbell, 2015). Additionally, the video game “Grand Theft Auto V” generated $800 million on the day of its release, making it the largest single product in entertainment history (Makuch, 2013). Despite this, there is still a major lack of academic research on the product development and introduction side of the industry, with almost all the research currently focused on education and the psychological aspects of video games themselves. As a result, the academic world has yet to formulate any overarching consensus concerning the primary factors that dictate a video game’s commercial success. For an industry so large and with such interesting prospects, the acknowledgment from the academic world is severely understated.

Despite this lack of academic formalization, video games in general are receiving increasing amounts of attention from consumers and companies worldwide. Society as a whole is consuming video games with people adopting the hobby at both younger and older ages; newer generations are being brought up with video games as part of their early development. This is in part facilitated by the constant increase in accessibility due to the rapid development of other technological industries with which the success of the industry is inherently contingent upon. Video games are no longer restricted to those who invest in products solely designed to run them. This is to the extent that anyone with a mobile phone or computer can easily play a large host of free games without any further expenditure.

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Some of the more innovative techniques used for commercialization in the video game industry may have some interesting and beneficial applications for other industries that operate in a similar way. The video game industry was regarded as fairly trivial in the past, but has risen to great prominence due to the relative growth of the industry. With an ever increasing budget in the video game industry and the trend towards investing in more complete experiences. The focus on cinematic elements, improved writing and sound direction results in bridging the gap between the other entertainment industries and requires more interdisciplinary understanding in order to create the most successful games. With this, the importance of commercialization becomes apparent.

The purpose of this paper is to create a comprehensive set of practices identifying the key aspects perpetuating within a successful video game commercial and marketing strategy. The goal also includes answering the following question: What commercialization strategies augment the success rate in the video game industry? Upon identifying the factors that constitute commercialization, this research will analyze the strategies that create the most successful video games based on different contingencies and how these can potentially develop in the future.

The research will begin with a literature review of the new product introduction process and key success factors. Ensuing this, an analysis of the video game industry using the Porter’s Five Forces Model will be conducted. Succeeding this, the research will analyze the benefits and downsides of each strategy and conclude with recommendations for the video game industry.

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Chapter 2: Literature Review

1. New Product Introduction and Commercialization

The most successful new product launches are well planned and involve the utilization of superior skills in a broad variety of contexts. This extends to one particular aspect of new product launching, commercialization.

In order to research commercialization and determine how to optimize it for the video game industry, one must begin by understanding what the foundations to commercialization are. In this thesis, the approach of the new product launching section of the stage-gate process will help delineate the essential aspects of analyzing video game commercialization.

Understanding the stage-gate process, specifically the final stage, is crucial in order to identify how to best measure and define commercialization. The stage-gate process in and of itself embodies so much of the new product development and launching process. It aids in sequentially breaking down an otherwise convoluted and complicated process by splitting new product development into six more manageable stages that are separated by gates (“Stage Gate”, n.d.).

Between each stage lies a gate, a checkpoint designed to help with making decisions. Each gate consists of three elements: deliverables, criteria and outputs. Through their combined effort they primarily serve the purpose of making sure all the necessary parameters set in the stages are met and that investments are not made without proper consideration. The stage-gate process acts similarly to a funnel, where the initial stages mirror a broad idea or general direction and as a firm moves along each stage passing through every gate, the firm approaches a goal resembling a final product. Furthermore, as a firm progresses through the process, uncertainty and risk go down but conversely financial expense goes up incrementally (Cooper, 2008).

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The six stages in the process are discovery, scoping, building a business case, development, testing/validation and launching.

Discovery involves simply developing new ideas and envisioning different opportunities with the goal of generating a new product.

Scoping is a basic rundown of the technical aspects of the product and analyzing the potential for success. It remains a fairly inexpensive stage as it focuses on contacting key users and establishing the basic elements of the product (Cooper 2008).

Building the business case is the final frontier prior to actual product development and requires a rigorous rundown of all the elements including financial feasibility and design specifications. It is split into three parts namely product and project definition, product justification, and project plan. Building the business case is considered a vitally important stage in determining the success of a project. Knowledge of legal requirements, costs and manufacturing processes need to be completely mapped out or else the possibility of squandering time and resources becomes too high (Cooper 2008).

Once all the parameters of the business case have been set, a firm can move onto the development stage: the actual tangible creation of the product design. During the development stage the business case starts to become operationalized. The company must begin employing some preliminary marketing strategies and rectify any outstanding legal or financial issues.

Following the creation of a prototype, the testing and validation stage begins to look at the economics of the project including its potential market success and consumer reception. It also looks at optimizing the process for the product creation itself and involves lead users testing the products and gauging their market viability. This finally leads to the launching stage where all the work from the five preceding stages culminates into full production and commercialization (Cooper 2008). This is an example of a Stage - Gate process, not the only version existing. Why did he choose this one?

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This paper aims to analyze the latter part of the stage-gate process. In this paper, stage six or the launching and commercialization stage will be trichotomized into three main sections: distribution, pricing, and advertising. These three elements have been chosen for the purpose of a holistic analysis and while they may not cover every aspect of successful commercialization, they represent the primary components necessary for successful commercial launching. Furthermore, these elements, if well implemented, are some of the key success factors for a new product launch (Benedetto, 1999).

Each of the three sections will begin by briefly describing the different methods of distribution, pricing, or advertising. From this basis, an analysis of the advantages and disadvantages of each method will be conducted. These claims will be reinforced by using real examples seen in the existing video game industry. Following this, a dissection of the prerequisite contingencies that allow the methods to operate will be stated. After discussing each different method, a conclusive remark will be made that will describe the nature of the findings and applicability of each.

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2. The Video Game Industry

For there to be a comprehensive analysis of commercialization in the video game industry to be conducted, understanding some of the basic elements that pervade the video game industry are necessary.

One of the core elements pervading the industry are the distinction between publisher and developer. In some cases these two groups are the same as the publishing team can also act as the development team. In other cases however, these two are separate, where the publishing team is in charge of the marketing and funding of the game while the development team only focuses on the creation of the game itself. In this paper, the two will be used interchangeably for the most part unless distinguishing them proves to be significant.

In this paper, three types of video games or developers will be discussed, namely independent games, mid-tier developers, and triple-A games. Triple-A games are games that have the highest budget and production value and as a result are usually developed by the largest development teams and publishers. Mid-tier developers are developers who either create multiple smaller budget video games or create a triple-Aesque title infrequently. Independent games are usually made by one person or small teams that create video games independently without much funding (Steinberg, 2007).

In addition to the types of video games the pricing section will add an additional distinction, namely single player and multiplayer as they are more related to the pricing models used. Single player games involve one person and multiplayer games involve two or more people in the game’s world or objectives.

Prior to analyzing the three core aspects of commercialization in detail, the Porter’s Five Forces model will be used as a framework to analyze the industry factors. This is to clarify some

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basic aspects permeating the industry as a means to achieve a better understanding of the analysis that will follow. It may also help with the understanding of the subsequent analytical sections. The Porter’s Five Forces model is comprised of the following elements: threat of new entrants, bargaining power of buyers and suppliers, threat from substitutes, and competitive rivalry.

When video games first came into existence, they were difficult to produce and required a very specific set of knowledge that was restricted to a fairly small number of people. Whilst the actual cost of privately programming a game was relatively low, the cost of commercialization was comparatively high ("Video game costs", 2016). Commercialization required a large capital investment and due to the costs of mass production and distribution, it was restricted to a small number of large companies (Fool, 2014). With the diffusion of the required knowledge to program a video game continuously increasing and certain market factors reducing the costs of commercialization, the threat of new entrants is gradually increasing to the point that it is high especially for independent games (Fool, 2014).

Similarly to the threat of new entrants, the power of buyers is also increasing. As the industry encroaches upon a more mature stage, the need to satisfy the demands of buyers similarly increases. The time to create new video games is decreasing and acts in conjunction with the increasing frequency of new video games produced up to the point that multiple hundred new low-budget video games are made on a daily basis (Graft, 2015). Increasing player bases with decreasing video game lifespan makes the power of buyers even higher. Due to the vast selection of games available, video games that do not provide a quality experience at an expected price to length ratio cannot expect to receive consumers (Fool, 2014).

The power of suppliers is complicated to gauge as it is dependent on the specific firm in question. For larger game development companies, the primary suppliers are the actual programmers themselves. In this case the threats are intermediate because while there are high

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quality programmers, there are also an increasing number of them. In terms of the general change in the industry, the power of suppliers is decreasing (Fool, 2014).

The threat of substitutes can be interpreted in different ways for the video game industry. One could argue that any other form of entertainment such as a book or film can act as a substitute. Alternatively, it can also be argued that substitutes are restricted to other video games in the same genre or budget range only. Identifying substitutes for each game can be a fairly convoluted and subjective process, but regardless of where the boundary parameters are set, the threat of substitutes is increasing. As a result of growing demands and increased production, the sheer number of substitute products is rising (Graft, 2015). This is also compounded by the ease at which people who choose not to invest in the hobby, have access to video games through both online browser games and mobile phones (Meola, 2016). With more technological advances and fewer geographical restrictions to certain hobbies and activities, the threat of substitutes will rise

(Fool, 2014).

As the size of the industry is so large, naturally domestic competition is high. With certain aspects of globalization making video games made all around the globe accessible to everybody, the competition is also rising as a result. North American video game developers are not only concerned with competitors in their own nation, but have to realize the increasing competition that arises from Asia or Europe (Fool, 2014).

Is that the case? There is a shortage for talented programmers, the VG industry competes with other industries …

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Method

The research is a literature review that combines literature from mostly articles about the video game industry and some academic journals. Due to the small amount of academic literature, this research begins by amalgamating a large volume of articles about distribution, pricing and advertising in the video game industry. From this large body of literature, the most pertinent aspects relating to these theories are analyzed. The theories that contribute most to the success or failure of the commercial element in question are noted down and further researched. Upon finding a sufficient amount of content for each element, real examples are found to reinforce the points being made. After completing this, a synthesis of all elements will be combined and recommendations for the different types of video games will be made.

Due to the limited amount of published studies concerning the video game industry, there are certain journals referenced from other industries that pertain to similar aspects. In the case of the non-academic articles, they constitute primarily of a combination of opinion pieces from experts in the industry and statements from actual game developers. News articles are also frequently cited in order to indicate changes or developments in the industry. Furthermore, there are certain statistical figures used to reinforce the claims being made throughout. A vast majority of the articles used in this literature review are cross-sectional in nature and seek to discuss an issue at one point in time. Some of the articles analyzing the change in subscription numbers for example, are longitudinal as they look at the change in subscription numbers and revenue.

The articles chosen in this literature review were carefully considered regarding their connection to video game commercialization. In the majority of cases, both sides of an argument are analyzed and evidence for any particular side will be presented upon discovery.

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Chapter 3: Findings and Results

1. Distribution

Distribution in the video game industry has changed drastically in the last decades. Choosing the correct distribution method for whichever type of video game is going to be launched is instrumental to the success of the title. There are two primary methods of distribution in the video game industry, namely physical and digital distribution. Physical distribution is the traditional method of distribution and involves physical retailers or stores being an intermediary between developers and consumers. The retailers are responsible for the acquisition of the video games from the developers in one location and consequently selling and distributing to consumers in another. Digital distribution implies that the distribution methods are not dealt with on a physical or material level, but instead through an online interface. This means that the entire process, beginning from purchase to consumption, happens digitally either from the developer directly or from a digital intermediary. The following section will detail the different distribution strategies in the video game industry.

A) The Physical Era

The oldest console video games were produced on cartridges. After the mid-90s, the inception and popularity of using CD-ROMS developed to the point that cartridges were met with complete obsolescence by 2004. Their popularity rose for a multitude of reasons: it made logistical sense; CD-ROMS were significantly more compact than cartridges and were also able to store more memory at a low cost. Furthermore the cost of reproducing CD-ROMS was significantly lower than was the case for cartridges. At the same time, physical storage space efficiency and high production speeds allowed for significantly more economies of scale (Ribeiro, 2015).

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Some complaints were levered concerning the switch to the CD-ROM. One of these includes the issue with disc skipping, where if a CD-ROM was somewhat scratched or damaged it would causes parts of the content to become inaccessible or difficult to run. Due to these recurring problems, some game developers have argued that cartridges are more reliable and durable. Another downside of the CD-ROM was that load times increased significantly due to cartridges having the added benefit of flash memory, allowing for downtime during the actual gaming experience to be noticeably lower. Whilst these issues permeated the video game industry for a while, the desire for low production costs was too great to pass up (Ribeiro, 2015).

Fast forwarding to the early 2010s, the consideration to move back to video game cartridges has been brought up but with the increase in popularity of digital distribution, incentives are too low despite unit costs for cartridges having drastically decreased and the previous storage issues having been mostly rectified. One notable example of a company still employing the use of video game cartridges is Nintendo with their 3DS ("Nintendo 3DS", 2016).

B) Digital Distribution

The general shift from cartridge to CD-ROM is far from the last or even main transition pervading the industry. The currently prevailing form of video game distribution is quickly moving away from consumers physically owning a copy of the game, and moving towards them owning a digital version (Kern, 2009). The concept of digital distribution is not exclusively dedicated to video games. In fact, the music, film, and press industry has already implemented a multitude of efforts towards digitization. Almost every US television show is available in some format for online consumption and with audiences spending more and more of their lives connected to the internet, the necessity for traditional mediums to adapt has risen to great prominence. Furthermore as digital distribution becomes more of an expected norm, it forces

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content providers to conform or else risk losing a large amount of current and potential customers.

Digital distribution rises in tandem with the demise of physical retailers for video games. The convenience and speed at which digital distribution can deliver is unparalleled by its physical counterpart. Similarly to the shift of other entertainment industries switching to the digital format, the video game industry is also becoming increasingly digital. Video games for the personal computer (PC) have become easily available for online download. This shift was allowed to take place by an ever increasing amount of internet connection bandwidth available for digital downloads, despite file sizes growing exponentially. Now a concern of the past, hard drives previously struggled with storing all game data in one place due to the sheer size of the content, resulting in video games requiring multiple CD-ROMs to run. With the advent of cheaper and larger hard drives, the hardware has managed to match up to the software necessities. However, unlike PC games, console games were not able to utilize digital distribution as an option. This is largely in part due to the hardware on console devices being inferior to that of most video game oriented PCs. Video game consoles have always been marketed with the primary purpose of playing video games and with that, have also been marketed at a significantly lower price point than PCs built with the express intention of playing video games. For this very reason consoles, despite being designed to primarily run video games, have also lacked the required hardware to outperform let alone stand up to par with the speeds and fidelity at which higher tier gaming PCs can function. As a result, hard drive space for storing video games was never truly high enough until the eighth generation of consoles, namely the PlayStation 4 (O'Brien, 2013), Xbox One (Hryb, 2013), and Wii U, all of which were released late 2013 or 2012 in the case of the Wii U (Ashcraft, 2012).

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Upon technology managing to reach the point where digital distribution is truly a viable option where both consumers and producers perceive digital distribution as mutually beneficial, digital distribution has seen eminent growth. Since 2008 till 2014, digital releases for console games alone have seen an increase from 56% to 97%, with exclusively digitally released games from 40% to 66%. This means that physical-only versions of games have reduced to an all-time low of 3%. From these numbers, it is critical to keep in mind that that account for consoles exclusively, where digital releases are even less prominent than for PC. With this growth, there has also been a surge in the number of publishers releasing video games in the digital-only domain moving from just over 80 publishers to well over 140 (Bernbeck, 2015). Due to the increase of digital distribution, the identity of video game developers has also changed and with it, the dynamic of the market. The video games that are released for physical sales at brick and mortar stores are now primarily triple-A games, whereas the digital space is becoming more dominated by many different independent developers and publishers. The data suggests that there is significantly more diversity in the industry (Bernbeck, 2015).

The transition to digital distribution would not be occurring if not for the notable benefits that it can provide. Digital distribution has benefits for both manufacturers and consumers and many of these benefits will in some way hearken back to costs. From the manufacturer side, digital distribution has the ability to significantly reduce costs. By removing the necessity to create additional physical copies of the video games means not having to expend resources on the actual direct materials that go into putting together a video game CD-ROM or cartridge. Additionally, it will reduce costs when it comes to the actual delivery of the product (Kain, 2013). Video games no longer require a physical distribution process and the meaning of shipping video games completely changed from physically sending boxes of CD-ROMs in their respective cases, to an automatic approval system that allows the download of a game on an

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online interface after the purchase has been made. Although it may not directly concern most video game developers, the necessity to also provide a physical storage space for video game copies at the retail distribution area also dissipates. This means that the amount of retail space for video games will drastically reduce. Furthermore, when it comes to the cost of reproducing digital games, there are essentially none as each additional unit can be copied infinitesimally and is stored on a server (Kain, 2013). Considering this, the concept of reproducing digital media and its interaction with piracy is an interesting one. Developers are not necessarily incurred extra costs upon further consumption, but at the same time are not necessarily compensated for the initial work and resources that went into developing the game, which in turn, causes debates about the ideal cost structure. This issue will be analyzed in greater detail upon discussing digital distribution and piracy and the pricing section.

Another major advantage for digital distribution is the fact that it allows programmers and video game developers to express their creative desires to a greater extent. Digital distribution has in some way removed the amount of bureaucratic steps that go into publishing a video game. Historically, production of a video game could begin and end right at certain publishing gatekeepers. This entails that a video game developer can envision and desire to create a certain video game, but because of the risk associated with a creating a potentially unpopular game, they will choose to forgo that opportunity as to avoid wasting a considerable amount of assets (Walker, 2007). While this was somewhat alleviated by CD-ROMs replacing cartridges, digital distribution has contributed significantly more to furthering this cause. Gabe Newell, co-founder and managing director of Valve, one of the world’s largest video game developer and online distributors, described his woes with how in the past, developers needed to be conservative and had to actively avoid taking risks. He also expressed how he feels that digital distribution allows for considerably more creative freedom and what he calls “interesting risks”. Due to the

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perceivably unlimited expanse of an online interface, there are no physical boundaries such as shelf space that can interfere with the distribution of more niche titles (Walker, 2007). This creative freedom is backed up with an increased flux of independently developed video games. The lower barrier to entry due to reduced costs and lower bureaucracy allows for low-budget and small development teams to create highly successful video games, for example Mojang’s Minecraft. When it comes to the mobile video game industry, the only popularized method of distributing video games has been facilitated by digitization. Digital distribution is essentially responsible for almost the entire mobile gaming industry and without it, gaming apps on mobile devices might never have achieved the popularity they have today.

Digital distribution has a vast array of benefits for both consumers and manufacturers, but at the same time, does not come with flaws. First of all, digital distribution has been criticized for enabling more piracy in the video game industry. Looking at piracy as a whole, it has been responsible for causing a decrease in the amount of CD-ROM sales in the music industry (Peitz & Waelbroeck). This was also mirrored in the movie industry where an increase in the amount of piracy also resulted in lower ticket sales (Danaher & Waldfogel 2012). For both these examples, however, piracy was shown to impact physical sales with no actual evidence or conclusive research to relate the piracy with increasing digital distribution. Despite this, it has been postulated that digital distribution may encourage piracy due to an increased ease of access to online data and the fact that there are little to no difference in terms of final product between the pirated and paid versions. This means that consumers may not feel incentivized enough to pay for the content they consume as they feel that there is no tangible difference.

This is a flawed argument for two reasons. The first of which is that the content that would have been stored on a CD-ROM is also identical in terms of data and is valued the same as a purely digital version. The disc itself is worth very little in comparison. Additionally, prior to

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the mass popularity of digital distribution, piracy was already an issue as the media was still digital and only the means of legal purchase were physical, so actual distribution of digital media was solely bound by technological restrictions such as internet speeds. As previously mentioned, there are still no conclusive studies that point towards digital distribution and its contribution to piracy. On the other side of the argument, digital distribution has also been purported to potentially reduce piracy. It is perceived by some that piracy is not a pricing problem, but a service problem. This means that due to the distribution process being overly complicated in certain parts of the world or for certain games, players will resort to piracy as it becomes more valuable than the required effort it takes to obtain the video games legally ("Causes of Piracy : UNESCO-CULTURE", 2007). Difficulty in acquisition is cited as one of the reasons for increased piracy and digital distribution has been proposed as a solution to that problem by making the process easier and quicker. Offering a simpler and legal alternative has proven to be a successful method at reducing piracy (Moody, 2013). Evidence was found that upon providing a digital distribution method for a TV-show and then later removing that option, did result in an increase in piracy. In this example, the change in distribution method and therein increased difficulty of acquisition associated with that change, resulted in an increase in piracy (Danaher, Dhanasobhon, Smith and Telang 2008).

Another frequently cited problem about digital distribution is that it doesn’t facilitate the used video games market. This is one of the main barriers to achieving full digital distribution as consumers want to have the ability to sell their games on a later date upon completing the game, and buy older used games at a lower price. Reselling used video games has not been implemented at all on the digital interface. While this is beneficial for videogame developers and publishers, consumers end up losing out when the possibility to both sell their used games and purchase used games disappears. When a brick and mortar store purchases used video games from a customer,

Source?

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the customer will receive a small sum of the money they initially paid for the video game, meaning that their net spending on each game is reduced in the long run. Furthermore, if a customer were to purchase a used game from a physical retailer, they would pay significantly lower than the standard retail price due to the game no longer being new and also having been used (Browne, 2012). As a means to counteract this, digitally distributed games are sold at a reduced price (Kain, 2013). This is not always the case however, as many triple-A titles are priced identically whether purchased digitally or at a retailer. An additional method in which digital distributors try to encourage the purchasing of games digitally is by implementing frequent seasonal discounts.

On the other hand, the used market for video games has always been harmful for video game developers themselves. When the games are exchanged from customer to physical retailer and vice versa, the developers receive no profits. Developers receive no compensation despite more consumers using their product except for the exposure. There is currently no way of circumventing this transaction, unless the developer uses digital distribution as its only method of distribution. The issue of used games primarily circulates single player video games that are often more story driven and have lower levels of replayability as a result. From this, it is purported that diversity in the video game industry is also shrinking because of publishers only wanting to invest in games that will sell many individual units that will not fall victim to being circulated excessively. Furthermore, mid-tier developers will continue to recede as the amount of used games sold increase meaning that only the largest developers can produce video games for a reasonable profit (Browne, 2012). Although specific video game developers have urged to move away from permitting the reselling of games, consumers do not accept the prospect of its prohibition.

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This was the case when prior to release of the Xbox One, Microsoft announced that all video games would require a constant internet connection to play as a means to reach greater digitization. This would also mean that used games would no longer exist as they would no longer be compatible with the new system. Due to the public outcry concerning the lack of used games that ensued, Microsoft decided to revert the decision and released the Xbox One without this requirement and thus fulfilling the desires of the consumers ("Your Feedback Matters – Update on Xbox One", 2013). There is essentially a mismatch between the desires of the developer and the consumer, which due to the power of buyers, results in the developers yielding to the wishes of the consumers.

C) The Future of Distribution

The future of video game distribution is moving towards further use of the internet and increased amounts of digital distribution. With the amount of growth in the digital distribution method it is inevitable that it will overtake physical retailers for console gamers. Furthermore, while the rental market for video games never really came to fruition compared to say the movie rental market, the possibility of cloud streaming technology where consumers will play video games streamed to them from external hardware and can instead pay a subscription fee to rent video games. The amount of success that programs like Spotify and Netflix in the other entertainment industries had will likely result in a similar version being made for video games. There are two primary benefits to cloud streaming, the first of which being that consumers do not have to purchase every game they play. In theory, this means a player can save a large amount of money by subscribing to such a program. The latter benefit is that by streaming the video games, it eliminates the necessity for consumers to own the hardware to run the video games, essentially cutting the upfront amount of capital needed to invest to play these games. SOURCE?

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While there are certain cloud streaming services available, none have really impacted the gaming industry in the way it has for television and music. For example, Nvidia has released its Geforce Now and Sony has its PlayStation Now which both supports streaming video games to separate screens, without requiring the consumer to own the prerequisite high-level hardware to run a game. However in the case for both of these there are notable problems for consumers which are partially responsible for the lack of popularity. In the case for both of these, there is an extreme lack of video games to begin with which limits consumers drastically. Furthermore, the GeForce Now is incapable of running any multiplayer components and thus an additional portion of each game is removed. GeForce Now is only operable on an NVidia Shield which is an additional piece of gaming hardware, meaning that someone who owns it is also likely to either own a gaming PC or console which further curtails the practicality it could provide (Newman, 2015). In the case of PlayStation Now, consumers are also required to own some specific hardware from Sony which again narrows down the potential customer base by a large margin. PlayStation Now is also perceived to be too expensive for what it provides due to the lack of a large video game library (Paul, 2014). These problems are even really only an issue if the consumer has a fairly fast internet connection and certain technological requirements are met which only further hamper widespread usage. The first company to attempt cloud streaming video games was OnLive, but went bankrupt as the necessary cost to implement server infrastructure was underestimated and the popularity of the service had not reached the expectations (DesMarais, 2012).

While cloud streaming may seem like the future for video game distribution, it seems currently unobtainable as there are both formidable capital investments and many technological issues relating to internet connections required for a potentially nonexistent customer base. The same could have been said about digital distribution at the start of the millennium, but as can be

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seen with the advent of breakthrough technology, these new methods of distribution can come to fruition.

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2. Pricing

Appropriate pricing for video games may seem like a very straightforward endeavor, simply price every game at the same predetermined price regardless of any factors that impact the gaming experience. This would be a fairly similar system to that of the film or music industry, where most movies or albums are priced at a relatively similar price. The difference in ticket price between the latest blockbuster film and a locally produced independent film at the movie theater will often be low to nonexistent. While this method could conceivably be applied to video games, it is not the case as the differences in the overall gaming experience and therein consumption can vary greatly between titles. This makes video games fairly unique in the entertainment industry; pricing is by no means an unequivocal venture. For video games, there are four primary pricing methods: conventional pricing, subscription, micro transaction/freemium and finally episodic pricing. Even within these different pricing methods, there are a variety of ways in which they can be implemented and later regulated. It is also crucial to note that choosing between these methods is not done purely arbitrarily and is dependent on both the type of game and the period in time the video game is produced.

A) Conventional Pricing

Conventional pricing in the video game industry has remained by far the most consistent method employed in video game history. In this model, if a consumer wishes to play a video game, they must pay a predetermined retail price for the game. Especially for console games, the price of video games whilst accounting for inflation has seen some fluctuation over the course of the last thirty years but when comparing the oldest to newest titles, price has seen little overall change. For example, a racing game titled “Activision Grand Prix” released in 1982 was priced at $67.46 and is fairly comparable to that of a more contemporary title “Gran Turismo 5” coming in at

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$64.19. Another example but in the fighter/brawler game genre is “Karate Kid” from 1988 priced at $68.93 compared to “WWE Smackdown vs Raw 2011” from the year 2010 priced at a similar $64.19 ("Game prices over time", 2013). It is important to note that despite the price change being relatively small between these two polarized dates, these two prices are difficult to actually compare due to a fairly large underlying contingency.

This prominent contingency involves a significant change previously mentioned in the distribution section. The switch from cartridges to CD-ROM significantly impacted the general prices of video games in the favor of consumers. As production costs decreased, the required premium consumers had to pay to compensate for said production costs reduced soon thereafter. Prior to this actual switch, the necessity for larger cartridges grew to the point that unit costs became significantly more expensive and the price of late generation cartridge console games were at an all-time high. The timeline depicts costs rising beginning from 1982, up until 1993 where the inflated average price reached an all-time high, followed by a predominantly downwards sloping price with a slight bump in 1997. This downward slope continued all till today where modern triple-A titles are released for $59.99 ("Game prices over time", 2013).

Another interesting aspect of video game pricing is that for modern triple-A releases, prices are almost entirely homogenized across almost every genre. This is different from releases in earlier years especially for games developed on cartridges where even as recent as the year 2000, prices for games at the upper echelon could range with a difference of over $40 ("Game

prices over time", 2013). Although there is significantly more variation in price when it comes to modern independently developed games, modern triple-A titles are more homogenized than in previous years.

Dictating conventional pricing is not particularly complicated and the designated budget or expected length and quality of the game often coincide with the retail price. The larger the

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budget and the bigger game often results in the game being released at the highest standard retail price of $59.99. Furthermore, prices are not very different based on geographical location. There are some currency conversion issues so certain countries’ inhabitants receive worse deals due to poor conversion. Games using the conventional pricing model also receive regular seasonal discounts in order to encourage spending during the holidays.

B) Subscription Pricing

An alternative to conventional pricing is the subscription based model. World of Warcraft may be the most prominent example that comes to mind of a game that utilizes a subscription model. World of Warcraft however, also implements a conventional pricing model for its games as an initial pay gate, forcing people who want to begin playing the game to buy a digital copy of the game. The subscription model works in the way that a consumer pays a subscription fee to have access to the video game. One of the underlying contingencies for this model is that the video game has to be an online multiplayer experience. This was a fairly popular model for many MMORPGS or massively multiplayer online role playing games, but in recent years this method is becoming slowly ushered out for more consumer friendly alternatives. Many video game developers tried to emulate the success of Activision Blizzard’s cash cow “World of Warcraft”, but never quite managed. World of Warcraft’s yearly revenues rival that of all other subscription based MMORPGS combined ("Leading subscription-based MMO games by revenue 2013 | Statistic", 2013). Statistically speaking, the amount of pay-to-play revenue from MMOs as a whole is expected to shrink from $2.8 billion from 2013 down to $1.7 billion. Due to frequency of other MMOs emulating “World of Warcraft”, fans and gamers alike imagined that the demise of World of Warcraft was imminent, but as no other MMO managed to captivate an audience, WoW never faced a truly relevant competitor.

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With many of the competitor MMOs moving towards different payment models and finding relative success as a result, one can only speculate that the traditional subscription model is perceived as antiquated by consumers. For example, the highly anticipated release of the MMORPG “Star Wars: The Old Republic” managed to garner 1.7 million subscribers but within only six months dipped to below 1 million; a disappointing outcome for the record breaking budget at the time (Corriea, 2012). Furthermore, it was speculated that “The Old Republic” experienced not only declining revenues, but an accelerating rate of decline. This pushed publisher of “The Old Republic” to move to a different pricing model, free-to-play with the option of subscribing for additional benefits such as priority login and increased mission variety

("An Analysis of Star Wars: The Old Republic from EA’s Financial Reports", 2015). “The Old Republic” was a signal to the industry that the traditional subscription model was no longer a viable strategy for newly developed video games and changes needed to be made to remain competitive.

This does not mean that the subscription model is gone; simply the most traditional method that involves barring access to those who do not pay a periodical sum is being replaced

(Orland, 2004). In favor traditional subscriptions, optional subscriptions that allow free-to-play players to play the basic game to a large extent are becoming increasingly more common. The more contemporary subscription model allows for most players to begin playing the game for free with the intention of attracting players to subscribe later on, after having been given time to assess the game. Instead of restricting access, newer subscription models involve restricting certain optional aspects of the game or content that will be uncovered far later than in the initial hours of playtime. The optional subscription models are similar to one of the ways of monetizing free-to-play games, micro transactions.

28 C) Micro transaction and Freemium Pricing

It is important to focus on the most controversial pricing strategy for video games: free to play games. Albeit ironic that pricing would concern free-to-play games, free-to-play games need some method for monetization in order to sustain profits. One of these is simply through in-game advertising. This technique is mostly notably used in mobile games and online flash games, where advertisements are placed at intervals throughout the games, reminiscent to that of a commercial break on network television. Additionally, there are banner advertisements that either covers the webpage or the sides of the screen while the game is running (Falcon, 2016). The alternative monetization strategy for free-to-play video games involves micro transactions and is called the freemium model.

Freemium models have become increasingly popular in more contemporary video games, as it allows video game developers to monetize their game while keeping entry prices for consumers significantly lower or even free. With the barrier to entry for each video game being either very low or nonexistent from a price perspective, more people would be willing to give try the game. For many games, it is feasible for the entry requirement to begin playing to be completely free as means to reach out to as many potential consumers as possible. In attracting the most number of players possible, the probability of creating a multiplayer community increases. By increasing the multiplayer community, it heightens the likelihood that people will continue to play the game as the necessity for a community, in an inherently community-driven experience, is vital to the longevity of the game (Salovaara, Johnson, Toiskallio, Tiitta, & Turpeinen, 2005).

While micro transaction models can be both highly profitable and consumer-friendly, there are certain practices that exist in the freemium market which give reason to their infamy. Micro transaction models can be applied to many different aspects of the game ranging from

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simple cosmetic changes to the game all the way to upgrading certain capabilities that massively impact the dynamic of the game world. Whilst originally developing most popularity in the mobile video game market, micro transactions as have transitioned into both the console, and even more so the PC market.

A fairly large criticism of the micro transaction model revolves around the concept of “pay-to-win”. “Pay-to-win” is denoted as players being able to purchase power in the game, making their characters or powers stronger than that of non-paying consumers whilst still playing in the same ruleset or area (Onyett, 2012). This is especially detrimental to games that emphasize an important or even competitive multiplayer component, where paying consumers have a clear advantage to gain over their non-paying counterparts. This results in a less balanced experience for all and a generally unpleasant one for those who have yet to commit to paying (Smith, 2015). For many players, an even playing field is an important characteristic in a game to have. Otherwise it removes a certain element of competition and can result in frustration if the gap is too large. This situation mandates players interested in competing at the highest level to pay or quit the game. This level of “pay-to-win” is often approached with extreme criticism from many gamers (Bray, 2014).

For the average consumer in the United States or in Europe, what is the expectation for freemium games and what are the most appropriate ways for companies to implement them? In short, the general consensus is that “pay-to-win” is not friendly to the consumer and should be avoided at every possible avenue. For these video game developers, it is important that paying for power in the game is kept to a minimum in games that have a competitive multiplayer element. For the sake of sustaining an active and growing player-base, multiplayer games on the PC need to remain as competitive as possible, where the highest skilled players are rewarded for simply being better. There seems to be an exception to this rule however, where games on mobile

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devices are able to sustain large player bases and maintain increasing profits despite harboring “pay-to-win” elements. For example, one of the most popular mobile multiplayer games is titled Clash Royale and is generally considered by most gaming communities to have implemented an extreme level of “pay-to-win”. This is to the extent that free-to-play players are unable to compete at all with paying opponents.

However there are certain micro transaction oriented practices that are considered tolerable and that consumers deem to be conducive to both a fun and competitive environment. Using a micro transaction system only to purchase in-game cosmetic changes and digital-reskins of already existing characters or maps is considered the most upstanding level of a freemium game (Bray, 2014). This is well received as it has no actual impact on the balance of the game, players who are either playing for free or who choose to spend all their disposable income on the game are competing on the entirely same level. The next stage of freemium games involves paying for a head start in the game. This is often executed in one of two ways, the first of which being that players are given a bonus at which they can generate a certain in-game resource. This resource can later be used to purchase powerful upgrades. The other method involves being able to purchasing the upgrades to the character. While the latter would be “pay-to-win” if the items were totally inaccessible to free-to-play players, the tolerable level of micro transaction oriented games choose to allow free-to-play players to access at a simply slower rate (Bray, 2014). This essentially means that by paying for resources in the game, players are able to economize their time and reach the desired competitive level at which the game can be played instead of having to spend more hours playing the game. While certain players criticize this method, it is generally accepted by the community. This is because competition can still develop despite the paying players receiving a time advantage. The perceived worst cases of “pay-to-win” are when games release relevant content for a competitive game that is completely blocked off by a pay wall.

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What can cause more issues is when developers realize the influence they have over the players who develop a “need” to purchase more power and continuously exploit that by constantly creating new and increasingly expensive content making the micro transaction model significantly more expensive than any other model in the long run.

The issue of overzealous spending on freemium games is not exclusive to that in multiplayer games. In fact, one of the major reasons that micro transaction oriented models have developed such infamy, stems from many examples of players spending exorbitant amounts of money on single player mobile games. For example, a man in Japan spent $6065 dollars in a single day in order to obtain a rare item that he had a chance to acquire upon purchasing an in-game item (Hansen, 2016). This has been compared to gambling, both in the sense that there is luck associated with acquiring the desired object or result and that there is an almost inexorably addictive cycle associated to the acquisition itself. Another example involves that of a seven year old child charging his father’s credit card for $6000 in a mobile game called “Jurassic World”. In this case the Apple Company, perhaps due to the nature of the circumstances, refunded the money (Gordon, 2016). Because of the issue itself, a significant amount of controversy has arisen over certain aspects of morality in the freemium gaming industry and who should be held accountable for any of these questionable decisions (Gordon, 2016). Furthermore it has been established that for the future of the video gaming industry, exploitative measures to maximize short-term profit may be highly lucrative, but potentially harmful in the long-run as consumers will lose trust for the game and even the developer.

These mentalities are not necessary perceived equally around the world. In Asian cultures such as in China, the concept of “pay-to-win” is significantly more ambiguous. The entire video game development and pricing philosophy is different, despite them also striving to both create the most profit whilst maintaining the largest possible player base. However, due to different

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societal expectations, what Western video game developers and gamers alike would consider “pay-to-win”, the Asian gaming community deem otherwise. Certain developers who have had success in the Asian market discussed their mentality concerning the freemium model describing a situation where balancing the monetization strategy is very complex. They emphasize the dynamic of appropriately monetizing the game where there is only a small section of a large continuum at which players will either pay for items in the game, or pay for nothing. Swaying in either direction too much can either result in the company developing a bad reputation as overly greedy or by not making enough money resulting in bankruptcy. Upon discussing competitive games, they do not necessarily believe that the balance has to be completely equal as long as there is a substantial amount of the game’s outcome being dictated by skill. They only feel this is an issue if unskilled but paying players are able to easily win over highly skilled free-to-play players (Onyett, 2012).

While both the terms free to play and pay to win carry a generally negative association for many gamers, the amount of success that many games have achieved using the micro transaction cannot be overlooked (Valadares, 2011). When implementing freemium models, understanding where on the spectrum of payable items a company wants to use is very important. If a game developer implements it so that the items are not desired enough by the player base due to non-existent incentives, they will have created a game which generates no profits as every player will simply play the game for free. On the other hand if a developer overly incentivizes spending money on the game, the game can certainly face issues of sustainability with free-to-play players feeling inadequate or compromise practicing good ethical practices and thusly engage in propagating a bad reputation. Furthermore, games that are released initially as free-to-play games have resulted in significantly more success than games that began as pay-to-play and later chose to adopt the freemium or free-to-play model (Jacobs, 2015). Freemium gaming has also helped

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alleviate certain aspects of piracy as the purchasable content is saved on the cloud storage of the game (Nickinson, 2012). The profits of freemium games are undeniable and with highly popular and highly competitive video games like “League of Legends” earning annual revenues exceeding one billion dollars, the freemium model is assuredly successful. “League of Legends” utilizes the freemium model by allowing cosmetic items and boosters to in-game progression to be purchased (Madhavan, 2015). It is the most played video game in the world with 27 million daily players and has the most well established eSports scene. Of the 27 million unique daily players, there are certain players who even choose to spend thousands of dollars on completely optional in-game cosmetic changes (Jacobs, 2015).

D) Episodic Pricing

The final pricing method discussed will be that of the episodic pricing method. The episodic pricing method is only viable if the game in question is an episodic video game. An episodic video game is one that instead of having one complete installment of a video game, is separated by several installments. This is somewhat comparable to expansion packs, additional content developed an existing video game with the express intention of expanding upon the original game. Expansion packs for video games are for the most part fairly large content updates and usually require the consumer to own a copy of the original game, or else it classifies as a standalone expansion. The main difference between expansion packs and episodic games is the size and frequency of content updates (Sanchez, 2006). While not always the case, episodic installments are generally smaller and produced more frequently with the intention of directly progressing through the previous installment similarly to a television series (Matulef, 2016). Episodic video games have recently developed more popularity with one particular video game developer Telltale Games. Telltale games has been releasing very story driven episodic video games often based on other existing intellectual property such as The Walking Dead television

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show and Game of Thrones. They have found an unexpected amount of success utilizing both this development and pricing model.

There are certain advantages to developing a game focused on producing episodic content. A major advantage is that developers actively reduce the amount of upfront capital to fund the project. As episodes are produced individually and each episode's release is staggered, developers can work on each separate part of the game and sell them prior to completing the entire series (Matulef, 2016). With this come additional benefits such as developers being able to receive feedback from their communities in order to expand upon initial episodes and create superior content for consumers. Furthermore, the time between each episode is lower for developers than between each full title release which can help consumers develop positive associations with the company (Kraft & Kwak, 2006). For both consumers and developers the amount of risk associated for the game is also lower. Due to episodes being sold individually and being significantly shorter than full game releases, both consumers and developers can choose to end consumption or production where either the product becomes no longer engaging or unprofitable.

Episodic gaming also shares certain issues and is not suitable for every type of game. For example, when the news was released that the Hitman series of games was going to become episodic, fans of the series were notably disappointed. Complaints were brought up arguing that the episodic style was not suitable for the franchise as fans felt that the pacing of game was flawed. Furthermore, consumers felt that the game was not designed with the episodic method in early production and was merely an afterthought by the development company as opposed to being an episodic game from the ground up (Matulef, 2016). It is perceived that episodic content needs to equate to more than the sum of its parts and that normal games being dissected into separate parts can detract from the overall experience.

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Another issue on the side of consumers is that the cost episodic gaming content usually aggregates to being higher than that of traditional conventional pricing models despite not actually having any more content. Certain games such as “Sin Episodes” were also released with the promise of being episodic but because of not enough consumer interest, the developers could only recoup the development costs and not create further episodes disappointing those who expected future content ("Going Small - How the MumboJumbo Merger Will Affect Ritual", 2007). Distribution of episodic titles can also present some complications as the cost of physically distributing each episode on different dates of twelve installments becomes much more costly. In order to circumvent this, episodic gaming has remained fairly reliant on digital distribution and the popularity of the method has been increasing alongside digital distribution

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3. Advertising

Advertising is significantly harder to analyze on a holistic level in comparison to pricing or distribution. Both pricing and distribution have a fairly defined and thoroughly discussed set of methods involving their respective areas. Also, there are clear trends in those areas with micro transactions and digital distribution being the most prominent developments respectively. With advertising however, there are a plethora of practices that are unique to specific companies or even specific games. Advertising also has the highest variance as far as methods are concerned as they are heavily contingent on the audiences they are directed to. Furthermore with the development of higher budget video games, the interaction in which video games intertwine with the other entertainment industries increases. In this section, a dedicated and specific analysis of the most successful advertising campaigns will be conducted as well as an in-depth look at the more common practices prevailing advertising practices. From a developer’s standpoint, this area of commercialization allows for the greatest amount of creativity and innovation. Unlike pricing and distribution require many companies to congregate and set a standard in order for costs and revenues to be as low and high respectively as possible, advertising is almost entirely in the hands of the publishers and developers. Advertising budgets can range from essentially none to as much as the companies can muster.

A) Trailers

In order to understand the best methods to advertise games it is important to understand the general points of parity, the essential marketing and advertising tools used by developers and publishers alike. One of the most common methods to build hype around a newly released or releasing title is by creating a gameplay trailer. Upon looking at low budget independent developers and the largest triple-A games, producing a gameplay trailer is one of the most

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consistent elements of the commercialization process. A gameplay trailer is similar to that of a trailer for a conventional motion picture, but depicts snippets of the actual in-game footage. This is in contrast to cinematic trailers for video games which will be analyzed later. Gameplay trailers give potential customers an impression of the gameplay mechanics and allow players to see what actions they will actually perform in the game. Upon consumers seeing what they will do during the game, they can duly assess whether the gameplay experience will actually derive them sufficient enjoyment to purchase the game. Gameplay trailers have become a staple in the industry to the point that consumers may have an aversion to purchasing games that do not clearly depict in the in-game action.

Furthermore, gameplay trailers have the opportunity to show the actual aesthetic and graphical fidelity of the game, giving viewers an idea of what to expect visually from the game. Consumers are also able to discern the performance of the game, which in layman’s terms means how well the game runs. The perceived technical performance of the game is vital and directly influences the satisfaction of the overall gaming experience. The expected level of performance however, changes dependent on the platform. In the case of PC games, video games are generally expected to be optimized to the point that they run more smoothly than console games.

Although similar to gameplay trailers, cinematic trailers offer a different perspective to generating interest in a video game. Cinematic trailers do not advertise the gameplay of the game, instead they are trailers depicting cut scenes and CGI. For many games, they will also include some voice acting and original soundtrack. Cinematic trailers are generally made to generate hype and are usually fairly high budget productions. There are many different approaches to take for a successful cinematic trailer. There are essentially no boundaries to what a cinematic trailer can choose to depict. Some trailers choose the approach of hyper-realism or others choose a more