Strategies against PC Piracy!

So … if Piracy is such a huge problem, then why are there still publishers that are PC only or heavily dependent on the success of PC games? Wouldn’t these publishers be crawling to stay alive just like the recording industry?

For the most part, Yes, some publishers are having a huge amount of trouble with pirated games. Even though various technologies have been introduce to prevent pirating, for the most part these strategies are failures.

Then what is a successful strategy against pirates?

Here is where the real post begins. There is no successful strategy against pirates, unless the revenue comes from a service. Video games are essentially a manufactured product. Once the game has been created, it is copied to various discs and sold in retail stores/online. Because it is a product, it can be pirated. But the industry is transforming itself into a service, a service of connecting people. Something that is extremely difficult to pirate.

Over the past several year, the industry has been quite successful in transforming itself from a “product” to a “service”. With the advent of the internet, the change was inevitable. People want to enjoy and play games with other people. Instead of providing game aka product for people to play, the industry started to provide a interactive environment aka service where people interact with others. This transformation for the most was difficult to notice because most games are still bought upfront. People generally don’t consider something a service unless there is a recurring cost or direct interaction with other people. But in reality, video games had transformed into a service with an upfront fee of $50. The best example is StarCraft. Once the game has been bought, customers can go online and play against a variety of opponents for “free”.

This flat fee, unlimited play for the same game model is currently the most prevalent business model within the industry. But this is also slowly changing, to one where it is video games become a continuously evolving world with a subscription aka World of WarCraft.

This is one way of combating piracy, by providing a service instead of a product.

PC Gaming Piracy = $13.66 Billion dollars?

I recently read an interview IGN had with Cevat Yerli, CEO of Crytek, the creators of Crysis (Link).  Interestingly enough, within a few minutes into the interview, the topic of piracy appeared.  The stats given by Cevat Yerli was for every 1 PC Game sold, 15-20 copies of the same game is pirated.  This is an ugly statistic.  To put it in a bit more perspective, if there was absolutely no piracy, how much money would the PC Gaming market have been worth in 2007?

According to NPD, the Retail PC Gaming market in 2007 for the US was worth approximately $910.7 Million, a little under a billion (Link).  If we assume Cevat Yerli is correct about the 1:15 ratio of sales:priated games, then approximately $13.66 BILLION ($910.7 Million * 15) worth of PC games were pirated in the US alone.  That is a pretty remarkable figure.  Of course, this is the way the RIAA and MPAA performs their music and movie pirating analysis and eveyone knows HOW ACCURATE or even remotely accurate their numbers are.

In actuality, this number is very inflated and I would be surprised if the $13.66 BILLION can actually be translated to even $1 Billion worth of sales.  Here are a number of reasons why:

1.  The price of a pirated game is about $0-$5.  The price of a new PC Game on retail shelves is $50, and an older catalog PC Game usually runs on average $20.  The $13.66 Billion figure relating to piracy loss was calculated with the assumption all users who pirated the game would have purchased the same game if a pirated copy was not available.  I would disagree, the basic law of supply and demand does not support this assumption.  As price goes up for a good, demand falls.  Therefore, if there was no “pirated” AKA free copy available, then most “Pirates” would not have purchased the game in the first place.

2.  Another key assumption is PC games that have been pirated are new games or games freely available on the retail market.  I would disagree, most older PC Games are just not sold anymore within standard retail channels.  If the game was not incredibly popular (i.e Starcraft), only online locations such as ebay or craigslist would have a copy, and even then its not a guarantee.  Yes, purchasing from ebay and craigslists are options, but even those are filled with obstacles.  Can the good be trusted?  Would I received the product in working order?  Has the CD-Key been shared with the world, thereby preventing me from enjoying the game?  These are common questions most customers will ask.  In almost all cases, the pirated version of an old game is the easiest one to obtain and to test without having to put significant time, effort, and risk to searching for an older game.  One of the reasons PC Games are “Pirated” is due to the lack of avaliablity within the retail channels.  These games should not be counted as a pirated game, as the no sale would have occured in the first place since there was no product to purchase.

3.  When a Game is installed, some general/specific information about the computer where it is installed on, is communicated back to the “Mothership” aka home server.  Everytime the Game is run, it phones home for verification.  If verification fails, the game fails to load.  In the event a game is resold, traded or given away as a gift (after being played) and installed on a new machine, the information communicated back to the Mothership changes.  In some cases, the game can still be played.  In other cases, protection kicks in and disables the copy.  Even though the method of obtaining the game was completely legitimate, the game was prevented from being run because the specifications of the newer machine did not match the specifications on file with the home server.  These instances can be any scenario where a change in hardware occured, such as the game installed on a new machine or the machine received an upgrade (i.e. new graphics card) and as such resulted in new information being sent to the home server.

I am fairly certain the majority of such issues are resolved quickly and most customers are able to freely play their game after contacting customer service.  But is this how most publisher gather statistics on pirated games?  Based on installation attempts for different machines?  The validity of the 1:15 ratio is what I am calling into question.  Publishers and other companies within the industry have an incentive to inflat the real numbers surrounding the problem to help further cause in bring it down.  Most numbers reported should be taken with a grain of salt.

4.  The pirated PC Game is a superior product in terms of value.  This is a fact.  A pirated game is free and can be installed on any machine without restrictions.  It can be backed up multiple times and stored for future use.  In addition, it respects the computer as a personal device and as such does not send out “information” to the Mothership.  A fully legimated copy purchased in stores can only be installed on 2-5 computers, cannot be backed up and stored for future uses, and does not respect the privacy of the personal machine.  For all of those additional restrictions, a customer is being asked to pay $50.  Anyone who is given a choice AND has the funds to purchase a game will still pick the pirated copy over the legitmate one.  If the customer does not have the funds … refer to reason #1.

Those are just but a few of the reasons why PC Game piracy is NOT a $13.66 Billion.  There are of course lots of additional factors, i.e. without piracy, would the game have even sold copies to begin with, since piracy is a form of marketing, etc.  I would estimate the total loss of sales to the industry to be about $500 Million – $1 Billion.  Even if my estimate is underestimates the impact, I believe it is a much more reasonable estimate thnn the $13.66 Billion dollars that was implied.

On a side note, I agree PC Piracy is a problem, since for aspiring developers it literally breaks their ability to continue as independent game makers.  But fighting against something that is driven by market forces is never a good strategy.  Rather to win, a new value proposition has to be introduced, something pirate games cannot copy, but this will be a post for another day.

Video Games: The RAVENOUS Market

Before I expand on the focus of this post, I would like to comment on something a close friend of mine mentioned after reading the post about how Video Games provides a channel of escape. During the great depression, baseball was one of the favorite past times most people enjoyed. The method of “escape” chosen is very specific per person, but it generally involves some form of entertainment. In the end, what my friend was suggesting, is a better way to structure my argument. The previous argument should have showed how entertainment (movies, sports, games, etc) is the method by which the mass attempts to escape everyday problems. Video games being one such form of entertainment.

For the main meat of this article, the focus will be centralized on Video Games as a “RAVENOUS MARKET”.

Gamers = A person familiar with video games

Users = People who are unfamiliar with video games or do not play them on some consistent basis as measured by the market. (i.e. this means playing solitare, minesweeper, freecell, etc does not count).

The main reason for why the industry is in such a strong growth pattern is simply because the video game industry is currently in an “RAVENOUS MARKET”. A market where there is so much pent up demand, once released consumes almost all that is avaliable. This pent up demand for easily playable, enjoyable, and short video games has been building and building every since the introduction of computers. Users were introduced to digital entertainment from Solitare, Freecell and Tetris (the amazing tetris). Online flash games such as Zuma and Bejeweled pulled in even more users. But users wanted more, but not games like Final Fantasy, or CounterStrike, or WarCraft III. Users wanted something easy to learn, to enjoy, and to share with others. But how does someone make a game easy enough for simple users to enjoy and share.

The answer lies in the interface, the gamepad, the controller. Simple PC games (i.e. Solitare, FreeCell, Zuma, etc) easily succeeded because the “controller” was just a mouse. Users just point and clicked to play the game, it could not have been any easier. Once a game moves past the mouse and incorporate additional input keys, it became too difficult for most users to understand or enjoy. Even racing games that utilized only a spacebar and arrow keys saw limited success. But this concept was not easily understood and not fully played upon till the Nintendo DS.

Nintendo DS came out as a smash hit. It was very easy to learn because it operated almost like a mouse. You move and “click” (touch) to get a response. Users quickly picked up the gameplay because it made sense to them. They didnt have to hit A to open the door or B to cancel or hit Left + A to do something special. You touched certain places of the screen such as “exit” to cancel, the door to enter a room, or the head of the dog to pet it. This made sense for the users and it was what they wanted. Something easy to learn, something easy to enjoy, something easy to play.

This trend has continued with the Wii. A controller that looks like a remote and uses motion sensing. Users swing the remote like a baseball bat to hit a ball or like a tennis racket to hit tennis ball. Again, same formula, an easy interface with enjoyable gameplay.

How did Wall Street react? They called the Nintendo DS a disaster when introduced. They believed it would fail against the PSP. The Wii was a gimmick and the next generation console wars will be fought between XBox 360 and the PS3.

How did the market react? SImply put, this level of pent up demand, built up over a few DECADES, cannot be satisifed in a matter of months. The DS has sold out continuously for the past 5 holiday seasons since its release. The Nintendo Wii cannot be produced fast enough and has an average shelf life of 1 hour.

This is because the market/consumers/users have waited patiently (or impatiently) for something to satisifed their needs. Once a product, proven to meet the basic needs of these users, was introduced, the market responded. It absorbed everything. The interface was almost perfect for users who could only watch afar a few years back. Will this level of demand continue … probably not, as more and more companies tries to jump on board. But for now the market is still absorbing every DS produced and ever Wii built.

On a side note, it is worth mentioning that Wall Street is not completely wrong. The XBox 360 and the Sony PS3 is competing against each other … for 2nd place.

The Death of PC Gaming?!?!

So this is not a direct continuation of my ideas over the general video game industry, but I still feel its is extremely important, and as such decided to write it now then later:

All over the internet … and blogs … and this … and that … the same message seems to be resonating. PC Gaming is dying, consoles are the new wave of the future. Sadly, I was one of those very same people whom were openly bashing the lack of success for PC Games in the past few years. But some time back, I decided to take a deeper look and try to really figure out why PC Gaming was dying. (OK the reason for this is because, I got tired of always defending PC Gaming … even today)

So my research began with the usual … NPD charts, graphs, and data. The conclusion, well simply put, “PC Gaming” has seen a plateau in sales for the past few years, ~$1 Billion worth of sales and unchanging. So only $1 Billion in sales for each of the previous years, and console sales are growing at double digits? It seems obvious to anyone who looked at this same data set, “PC Gaming” is dying.

I decided to look deeper into the numbers to figure out what part of the PC Gaming market is dying and what part is expanding. Thats when the light struck. NPD only reports on retail PC sales, because those are the only sales that are “trackable”. The following items are excluded from NPD sales reports:
1. Digital Downloads (Steam)
2. Micro Transactions (The Sims)
3. Advertising (Yahoo Games and other Flash Games)
4. MMO & Subscription based gaming (World of Warcraft)

PC Gaming is far from dying, it is thriving and growing, just in ways the market was unable to measure.

• Digital Downloads are set to surpass retail sales numbers for games sold (link).
• MMO & other subscription based gaming have become extremely profitable and still growing in leaps and bounds. World of Warcraft is leading this charge. Q1 2008 revenue alone was above $250 Million (link). (Note: Blizzard’s main revenue source 80-90% is World of Warcraft).
• Advertising is becoming the business model for many small flash game websites. According to this older website (link), there were over 217 Million unique users. That number should have grown by now.
• Micro Transactions are booming. The Sims and other games require small incremental purchases of items or other things to continue.

This is what the PC Gaming industry has evolved into. It has expanded into several new markets of advertising, downloads, micro transactions and subscriptions. But industry market research and metrics do not fully account for these new revenue streams. But these new streams of revenue cannot be ignored, Digital Downloads, Subscription based gaming, and advertising have proven to be multi-billion industries. Once the older retail sales are finally eclipsed, then the true nature of the industry will come to the forefront.

A Further Look …

In the previous post … I discussed about value proposition in terms of $$$ a video game provides to a consumer. Now we look at other factors that also contribute to this resilience against macro-economic problems.

Video games have become a main form of entertainment. Besides the incredible $$$ value proposition, it provides something else. Something quite important in times where everything that could go wrong has gone wrong and more. An escape … most games allows users to escape from their current world. World of Warcraft, Grand Theft Auto IV, etc. are examples of such games that allow a user to become engross and forget about their current problems.

During the great depression, one of the few industries that thrived was the movie industry. People wanted to get away from the bleak world, from the problems, from this and from that. It was entertainment that helped them move on. From all of the Disney movies, (based on true stories ones) you see dying towns where people rush to football games to escape their bleak situation.

Video games having migrated from the outskirts are now one of the main players in the entertainment industry. The entertainment industry has always shown resilience during hard times, now is not an exception.

As Lehman Brothers has kindly shown us recently … the problems continue to persist within the economy … then what industry is one that should weather the storm nicely? You got that right Video Games.

*Of course the problem here is one would have to find a good company to invest. A rising tide lifts all ships … but some are just so full of holes they are drowning themselves. After a few more posts on macro econ and its effects on the industry I will jump into a detailed analysis of the Big players … Sony, Microsoft, Nintendo, Take 2, THQ, Activision, Electronic Arts, and Ubisoft … and some of the smaller players that I would deem relevant.