This is an archive of the original TweakGuides website, with post-archival notes added in purple text. See here for more details.



PC Game Piracy Examined

[Page 7] Changing Business Models



One of the most oft-repeated statements you'll see in the piracy debate goes something like this: "These companies need to stop using old business models and adapt". This statement and variations of it are mindlessly parroted over and over again by those who want to imply that piracy is purely the fault of the "greedy corporations", and thus any problems stemming from it are solely their responsibility to resolve. Whenever I read this sort of thing, I remember the old adage: Be careful what you wish for, because it just might come true. Indeed what these people are wishing for is already coming true - companies big and small are adapting and changing their business models, in large part due to piracy, and have been for quite a while. Unfortunately however, it's not quite the way in which the armchair experts had hoped. In this section and the next we look at the kinds of practical changes in business models which are occurring in the games industry.



The Traditional Business Model


To make sure we're all on the same page, let's examine the traditional primary business model for games. There are usually three parties involved in creating the games we play:


  • The developer, which is comprised of the actual people who design and program the game;
  • The publisher, which is the company that invests in the game by paying the developer while it's being made and does the marketing and physical distribution of it to retailers when it's completed; and
  • The retailer, which is a physical store or chain of stores where a customer can purchase the game, or more recently, the game may sell through an online store such as Valve's Steam.

When a game is sold, portions of that sale price goes to the retailer, the publisher, and the developer. In practice since development can take up to several years before a game is ready for sale, the publisher may have already paid the developer a sum of money to cover their costs. The publisher also covers the marketing and distribution of the physical product, so it bears additional costs and risks, and thus typically gets the larger slice of the royalties. This is just the basic structure of the traditional model - in some cases publishers may have their own in-house development studios, some developers can arrange their own funding and thus aren't as reliant on the publisher, some companies like Valve can do development, publishing and distribution entirely in-house. So the delineation of work and revenue between the three levels of the games industry is not necessarily the same in each case.


The next time you prepare to give the standard piracy response of "The developers and publishers are making plenty of money, they're just being greedy!", consider for a moment how risky the business of investing in games actually is. Geoffrey Zatkin of Electronic Entertainment Design and Research is quoted in this article as saying:

Only 20% of games that begin production will ever finish. Of those 20% that are finished and released to the market, only 20% of them will ever realize a significant profit... that equals 4% of games that start production return a significant profit.

There are plenty of others who will validate just how risky the business can be. From this article by one developer: "...the fact that 90+% of all games lose money makes game developers a particularly risky business."; similarly, from this article by another developer:

...only 15% of all titles break even. That's not "make money," that's just "break even." So that's 85% of all titles that lose money. That 15% pays for the rest. If you're, say, working for a publisher and you're working on one of these titles that's losing money, you're not going to be getting as much for it, you're not going to be getting as much funding, because you haven't been succeeding. For independent devs, it's even more lethal. For [our game], we put our own money into the product. We put our own money there. As a result, we don't have that advance to run out against. Every single lost sale is money out of our pockets.

Mull these facts around in your head a little bit, and you'll see that being a developer or publisher in the games industry is not automatically a license to print money, and indeed anyone who finances the development of a game, whether developers themselves do it, or whether the publisher bears the costs, are facing the very real prospect of losing very large sums of money in many cases. Even if they strike it rich, the profits they make from a successful game will be offset to a degree from the inevitable losses of unsuccessful games. It provides a valuable insight into just how damaging piracy can be in what is already a very risky industry, and how much it can in fact punish the smaller, independent developers who are investing their own money in a game and stand to lose their entire savings and livelihoods should their game not sell well.


Games are also becoming increasingly more expensive to develop as consumers demand more detailed games in a highly competitive market. The PC exclusive Crysis cost $22 million to make, Halo 3 for XBox 360 cost $30 million, while at the top end of the spectrum, Grand Theft Auto IV for XBox 360 and PS3 cost $100 million to make. In this environment of tens of millions of dollars being needed to create a successful game, it's difficult to imagine then that rampant piracy does anything other than make investors extremely hesitant to put their money in anything but the safest of titles, which can stifle innovation and progress.


Notably, while the three games mentioned above all made a profit, Crytek reluctantly announced that it would no longer do any more PC exclusives due to the relatively disappointing sales results for Crysis, which they attributed in large part to piracy based on their internal data. Meanwhile the console exclusives Halo 3 and GTA IV comfortably made more than $300 million and $400 million respectively in their first week alone. Now 8 months after its release on console, GTA IV has eventually been ported rather badly over to PC to soak up any remaining profit potential, while Halo 3 still remains unscheduled for a PC release.


Ultimately, because of the high costs and severe risks in games development, developers and publishers are constantly examining different approaches to conducting business to ensure continued success. In the previous section we've already examined one major change that's hit the industry in no uncertain terms: the move towards focusing on console-centric development, necessitated by the major differential between PC and console game sales. There are however other paths for PC developers to also go down, either in combination with the move to console, or instead of it. We examine the major ones below.



Online and Subscriber-Based Business Models


Whenever someone mentions how successful the PC gaming industry is, such as the PC Gaming Alliance (PCGA) in their press releases for example, they are in effect touting the success of online-only games, because they're one of the major reasons why the PC gaming industry as a whole continues to grow despite its problems. For example the PCGA reported that PC gaming was a $10.7 billion USD industry in 2007, yet they neglected to highlight the fact that around one fifth of that entire figure can be attributed to a single game: World of Warcraft (WoW); it and its expansions regularly take out the top spots on the PC game sales charts by a very wide margin.


Update: Similarly, the PC Gaming Alliance reports that in 2009, PC gaming grew by 3% to be a $13.1 billion USD industry. However once again, it notes that this growth is being fuelled by the Asia-Pacific region (MMOs and micropayment-based models), as well as purchase of virtual items and games on social networking sites in western markets - all online-based.



World of Warcraft logo

World of Warcraft is a Massively Multiplayer Online Role Playing Game (MMORPG) developed and published by Blizzard Entertainment, originally released in late 2004. The game itself only costs $19.99 to purchase, however there's also a monthly subscription fee of $15. With 11 million subscribers at present and growing, a quick bit of calculation shows that from WoW subscriptions alone Blizzard can potentially earn up to a staggering $1.98 billion a year. And World of Warcraft is not the only MMO-type game to reap the rewards of this business model. In Asia MMOs are one of the most popular gaming genres. For example one of China's biggest online gaming companies Shanda recently reported a massive 47% jump in MMORPG-derived net revenue over the past year to $101 million. So it's no surprise that in deliberately vague marketing-speak, the PCGA says: "Overall, the study found that growth [in PC gaming] was driven by online revenue from Asia, which accounted for almost half of the total worldwide sales." In plain English: MMOs and online games are driving the PC gaming market.


It's a mistake to assume that the wild success of MMOs is simply derived from the fact that they're somehow better than other PC games. The key to their financial success comes in the form of a potent combination of two specific factors: online-only gameplay combined with monthly subscription payments. Both are equally important - online-only provides robust protection against piracy due to automatic online verification, and a lack of any real offline gameplay provides significant incentive for those who have pirated the game copy to eventually get a subscription to play it online with the majority of other players. The monthly subscription method ensures a steady revenue stream, allowing the developers to continually keep investing back into the game, providing new and interesting features, content and support, which in turn only helps keep customers happy and draw in more subscriptions.


All game publishers and developers are keenly aware of the massive success of World of Warcraft. However even without implementing regular subscription payments, the first component of an MMO's success formula is already being implemented more and more frequently, namely online-only gameplay. While Epic's original Unreal Tournament and id's Quake III games kicked off the online-focused gaming phenomenon back in 1999, Electronic Arts' Battlefield series is the real commercial success story, selling 17 million copies to date. As a result, even single-player games now usually have a multiplayer component tacked on in the hopes of building an online following and thus providing further incentive for more people to actually buy the game rather than pirate it. This is because all major online games verify a unique serial number used during installation of the game. While an invalid serial number can be generated and used during installation, if the serial number doesn't match the database of known serial keys distributed with the game the player can't play on official servers. This doesn't stop some people playing pirated copies of an online game on private unofficial servers, but it does serve as a major disincentive to pirate the game because private unofficial servers are not as easy to find and are less populated.


Online verification in one form or another is the key benefit to developers of any online gaming business model. It's no coincidence that more and more online-focused games are being released, and single player games are steadily incorporating an online verification component of some kind, such as the SecuROM online activation in GTA IV, Mass Effect and BioShock; or via the Steam client; or through Games for Windows Live online account logins required for updates or to obtain Downloadable Content. See the Copy Protection & DRM section for more details.


In any case UbiSoft's recent acquisition of Massive Entertainment, makers of the World in Conflict games, and Atari's recent acquisition of Cryptic Studios - both for the purposes of developing MMOs - demonstrates without a doubt that there are serious moves afoot to focus a substantial portion of PC games development towards this model due to the advantages outlined above.



Episodic Content Business Models


One of the problems with subscription payment models, while highly desirable and very lucrative for developers and publishers, is that they can be difficult to sell to gamers. PC gamers are still firmly used to paying for their games up front and 'owning' the game, and hence the right to play it whenever they like, as often as they like, without paying anything further. MMOs aside, many gamers will balk at any attempts to charge them more money for the same game. That's precisely why Episodic Content was invented as a way to get around this particular problem.



Half-Life 2: Episode 1 logo

With episodic content, games can be delivered in 'episodes' - a single game split into multiple distinct parts, each portion sold as a separate game, often at a reduced price. This concept also includes Expansion Packs, which may add to the story and/or provide additional items in the game. The idea of episodic content has been around for quite some time, the best-known instance being Valve's Half Life series which after Half Life 2 (HL2) was released in 2004 converted to the episodic format: HL2: Episode 1 was released in mid 2006; HL2: Episode 2 was released in late 2007; and HL2: Episode 3 is still not officially scheduled for release. Another example of episodic content is the Crysis series. Originally considered to be a single game, Crytek announced shortly after its release that their plan was to release Crysis in three parts, the first part released in late 2007. Furthermore, what is essentially a cross between a parallel episode and an expansion pack to Crysis, Crysis Warhead was released in mid 2008. Finally, even the recently released STALKER: Clear Sky can be considered an episodic release of sorts - in an obvious effort to significantly cut costs it uses much of the same engine, assets and even identical locations as the original STALKER: Shadow of Chernobyl, and while retailing as a discounted new game, is more of an expansion pack or episode at best due to its short length.


The benefits of the episodic content model to developers are numerous:


  • They can take an existing storyline and stretch it out over multiple games, often using the same game engine and much of the same assets, sometimes even the same locations, to significantly cut costs.
  • Providing games in shorter episodes can speed up release times compared to the time taken to complete a full game, meaning developers and publishers receive a more consistent revenue stream to sustain continued development and confidence in the project.
  • They can charge more in total for what is effectively a single game split into shorter episodes or expansion packs. For example Half Life 2 Episodes 1 - 3, at an average price of $19.95 each at their respective times of release, results in a total price of $59.85. Yet each episode provides an estimated 4-6 hours of gameplay, so for 12-18 hours of gameplay in total the developer gets more income than if they created a single game that long and sold it for $49.99.
  • They can generate marketing hype more regularly for their game property by releasing it in portions, rather than a game which may wind up being forgotten in the two or three year wait between sequels.

In other words developers get far more bang for the buck out of episodic content. The benefit to consumers however is somewhat less obvious:


  • Episodes can sometimes take as long as full games to release. For example the roughly year-and-a-half or more wait between each Half Life 2 episode.
  • The annoyance factor is similar to watching a movie or TV show which ends with 'To be continued...', and thus leaves many people feeling unsatisfied, especially when combined with the potentially long waits between episodes.
  • While each episode/expansion is usually lower than full retail price, the total cost of purchasing all episodes can be higher than a single game of the same length.
  • Many expansion packs include content that should really be have been released as a free patch to the original. For example Crysis Wars is simply an improved version of the multiplayer component in the original Crysis.

Of interest is the fact that as this opinion and this opinion from two people in the games industry note, episodic content is also seen as a tool in reducing piracy. It does this in two ways, the first being a reduction in game price, which on the surface addresses one commonly cited reason for piracy: "games cost too much!". The second way it does this is described in the latter article:

Even nicer is that you can use [episodic content] as an anti piracy tool. You can make each download so it only works with a genuine, paid for game. More than that you can bury additional anti piracy into each episode. We did this with Operation Flashpoint and experienced a sales spike after each new episode was released as people with conterfeit copies were forced to go out and buy the legitimate product. We are talking about many tens of thousands of extra sales gained this way.

It seems piracy has at least played some part in making this model even more attractive to the games industry. However when examined in detail, while the cost-cutting, anti-piracy and sales boosting benefits of episodic games are quite clear for developers and publishers, the ultimate benefit to consumers is somewhat dubious. Sure, the price of each episode or expansion is much lower, but total cost of ownership can be higher, and the length of gameplay and the level of satisfaction can often be lower as well.



Advertising & Micropayment Based Business Models


Developers and publishers are now turning more frequently towards in-game advertising as a means of supplementing customer-derived revenue. Games such as Battlefield 2142, Enemy Territory: Quake Wars, the EA Sports and the Need for Speed series boast various in-game ads as described here (https://support.ea.com/cgi-bin/ea.cfg/php/enduser/std_adp.php?p_faqid=14211 - dead link) and here for example. Massive Inc., a Microsoft subsidiary and one of the major providers of these types of ads, recently released survey results which show that gamers apparently have a "consistently positive opinion of the ads", and that it works in raising the profile of advertisers' products. The issue of course is that unfortunately while in-game ads are becoming more prominent, and in practice don't necessarily seem appropriate in some cases (e.g. 'Ghost Rider' DVD ads in a post-apocalyptic futuristic Battlefield 2142 setting), they haven't resulted in any reduction in the price of games, or indeed any indication of better support for these games. BF2142 for example experienced many confirmed bugs, some of which were never resolved even after multiple patches, despite initial promises from EA that advertising income would be used to help address game bugs.


More recently, PC Gaming Alliance President Randy Stude stated excitedly that advertising could be used as both a piracy deterrent and an additional revenue source from pirated copies:

Let's monetize every one of those pirates, and let's advertise the hell out of them. Don't throw [pirates] off [of the server], but show an ad every time a new level loads. The [paying customer] gets a billboard, a passive, less-aggressive ad than [pirates] are going to get.

Initially this sounds like a good idea, however this type of statement demonstrates the deliberate ignorance on piracy that Stude and the PCGA typically demonstrate in their push to mindlessly market and hype PC gaming. It would take very little effort for pirates to come up with a client-side patch or hack to remove such advertising from games, something which has already been done in the past to block in-game ads in games such as BF2142 as demonstrated here. Indeed if you look around, you can find plenty of people perfectly willing to 'fight' this model, such as this Remove In-Game Ads group on Steam.



Battlefield Heroes promo

However there is one potentially viable way in which advertising can be used to both combat piracy and ensure greater popularity for a game - by making the game completely free. A free game can't be undermined by piracy, and is far more attractive to users who want to try it out. One of the most significant forays into this new model is Electronic Arts' upcoming Battlefield Heroes game. As this article notes, the model behind this game is to drastically cut development time and costs and release a very basic and casual-orientated game. In effect it's Team Fortress 2 on a severe budget, with an even lower specification requirement and less skilled target audience as noted in this article. The game will be funded in large part by advertisements. However it will supplement this income by encouraging users to purchase non-essential items via relatively small 'micropayments'. This model is already reasonably successful in non-western markets such as Korea, but it's unclear how it will do globally. At the moment Battlefield Heroes has been delayed because EA says it is focusing more on the social networking features.


In effect Battlefield Heroes crosses several business models and is trying to pluck the best aspects of all of them: it's an online-only game which attempts to emulate MMOs by creating a large online community and then receive regular payments from a portion of them. It's free due to advertising revenue, so piracy is not a concern. And it unashamedly targets the broadest possible market by making the game as simple as possible, and reducing the hardware requirements necessary to play the game. Already id Software are talking about a similar type of game in their Quake Live project, a free online version of Quake III Arena which is completely ad supported. It remains to be seen whether this model will be successful or not and what impact it will have PC gaming in general.



Desirable or Undesirable Changes?


Hopefully what the analysis above has shown is that contrary to popular opinion, the games industry is changing the way it does business in the face of the challenges presented by PC piracy, trying out a range of different models for creating and delivering games and shoring up revenue streams in a highly risky environment. What's more, it's been going on for years, and isn't just a recent knee-jerk reaction. But here's the part PC gamers really need to consider: are these changes going to make PC gaming better or worse? Is the move towards more MMOs, shorter episodic games, and ad-supported mainstream-targeted games really the way we want PC gaming to go?


It's one thing for consumers to constantly demand that the PC games industry create better quality games which are not only cheaper and run well on lower spec hardware, but also have no copy protection; it's another thing altogether for companies to somehow find a practical way to turn this fantastic and often unrealistic request into a business model that works. Pulling a sufficient income stream out of thin air is not an easy thing to do, especially as games becoming increasingly more expensive to develop in a competitive market. Coming up with a business model that can compete against piracy, which is effectively like having a competitor that provides an identical product for $0, is actually pretty damn hard. As the above models show, in each case there are certain quality tradeoffs necessary to make the model viable, and the common theme in all of the models is that it's likely that certain types of games, possibly entire genres, will be relegated to niche status, or in extreme cases die off altogether as adventure gaming did. This is discussed in more detail in the Conclusion.



The best way to demonstrate the direct causal link between piracy and the shifting of business models is to examine the increasing presence of online activation/verification in successful games. Without piracy there'd be absolutely no need for online verification, indeed it costs additional money to set up online verification servers and maintain them, and it also potentially loses customers who don't have regular internet access, however piracy has made it pretty much a necessity in virtually every successful business model. In the next section we start our look at the controversial subject of Copy Protection and Digital Rights Management.







 




Valid XHTML 1.0 Strict Valid CSS! Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.