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Consoleation: Ledesma-gate odds and ends

Peter Skerritt's picture

Consoleation: Ledesma-gate odds and ends

First off, a big thank you goes to GameCritics.com for picking up my reaction piece on Ledesma-gate. I see that my viewpoint has incurred about equal amounts of commenters for and against my viewpoint, and I guess that batting .500 isn't too shabby. I see that at least one commenter works in the industry, and naturally his comments were the most harsh. Being on the opposite side of where he stands, as I am a consumer of his goods, I guess that disagreement is natural. He wants to make money, and I want to be able to afford his goods. We're both right, and we're both wrong.

What's unfortunate in all of this is that Ledesma's comments have not only damaged relations between the industry and its consumers who read Ledesma's views… but they've also succeeded in widening a rift between the haves and have-nots when it comes to this form of entertainment that we all enjoy. Charges of entitlement are flying back and forth and the argument that video games are a luxury—or even a service—makes what was once touted to be "fun for everyone" into a select group of individuals who are financially fortunate enough to take part.

It's a disaster waiting to happen.

We all know what the easy solution is: Get members of prominent game publishers and prominent resale retailers together and hammer out some sort of financial agreement. That solution, however, isn't going to happen as long as you or I are not in charge. Both sides have obligations to their respective investors. If resellers agree, their profits dwindle and shareholders will find another venture that may be more lucrative. As long as the agreement doesn't occur, the industry will continue to wage this war on resale and there won't be a winner when it's all over. In fact, if the industry was actually successful in the removal of resold product and decided not to adjust their pricing scheme, it's highly likely that the financial state of the console gaming industry would be far worse than it is now.

Consoleation: Ledesma-gate odds and ends

If recession-like economic conditions continue, which is likely for at least the next couple of years, eliminating cheaper alternatives than new $60 games will erode the consumer base. That's not a prediction; it's a fact. We'd be looking at a firm IF/THEN argument; IF you don't have $60, THEN you won't be buying these games. Sure, there may be sales now and again, but with several periods each year when there are more than a handful of new releases for each platform, many games are going to be ignored and left on store shelves. This will lead to retailers not being as bullish on console games as a viable revenue stream as the industry will have lost popularity and the depth of its consumer base. That leads to smaller amounts of retailer purchases of games from publishers, which then will lead to more closures and consolidations. Over a decade's worth of growth will be lost in a short time, and other—cheaper—sources of entertainment will be sought.

Why are used games so bad? It's not a black and white scenario. Many consumers sell or trade games to be able to afford new releases. I'll admit that I've done it for years. In fact, I sold my entire NES collection and other games back in 1999 to FuncoLand and gained enough store credit to buy $700 worth of new Dreamcast hardware and games. Note the bolded word there: NEW. A fair amount of that $700 went right back to the industry, with FuncoLand receiving a small profit on the sale. They got their profit from me when I willingly traded in my games for less than they were worth. The industry won, the retailer won, and I won. I do the same now. It makes me a second-class citizen in the eyes of the Industry Defense Force, but everyone really does win. It's the same scenario: I trade in games for less than I paid for them (reseller profit) to afford to buy new ones (publisher / developer profit) that I can enjoy (my own gain). Where's the loser here? Is it because the publisher doesn't make any more money from me or the resale retailer if the game finds a new owner? That's a shame, but the industry is already making money from the reseller to begin with.

And this incessant ranting about GameStop killing the industry? No. GameStop's #1 revenue driver is sales of new software.

Let me say it again, with emphasis: Gamestop's #1 revenue driver is sales of new software.


Consoleation: Ledesma-gate odds and ends

As with any business, there are certainly some GameStop business policies that can be debated. Gutting of new games. Questionable trade-in values. Occasionally over-emphatic employees begging for subscriptions and preorders. GameStop isn't anywhere near perfect, but they're also doing business well enough that they're still here and making money in a time period that's seen Game Crazy go by the boards and Blockbuster's Game Rush experiment fail. There are lots of myths out there about how GameStop does business, and a lot of online embellishments of in-store experiences that become gross generalizations. Despite what you may or may not agree with about GameStop's policies, the company isn't worse for the industry's financial well-being than GameFly, Goozex, yard sales, or Goodwill.

How about those who buy used games? People have been doing it for years without having to be harangued or made to feel like a second-class citizen or criminal. It used to be called "getting a good deal". Now it's some sort of moral dilemma. Again, there's no black and white here; if you buy used, you're a (legal) pirate. It doesn't matter if you've bought once or plenty of times. Think of the developers… think of the publishers. If you want better games, buy the "right way". You know, outside of this bubble called the internet, consumers honestly don't care about the developer, the publisher, or even what some no-name blogger has to say. He or she has a budget and sticks by it. If he or she wants a game, that person is oftentimes going to buy cheaper if possible. Impulse shopping has been a revenue driver for video games for a long time; if a game is cheap enough, some people will drop the money on it. It's not about putting money away each week like Wal-Mart layaway and rejoicing when you finally have been able to stash enough away that you can afford this luxury. Maybe for the hardcore gamer, budgeting and savings are a way of life… but for everyone else, it's a snap decision: Buy now as cheaply as possible, or table it and see if money becomes available in the future. I see this ALL THE TIME. Sometimes they come back, sometimes they'll buy it used, and I've even seen cases where the consumer has flatly said that games are too expensive and that he's going to "sell the damned thing."

I would think that, rather than locking features, cutting content for future DLC, and basically trying to nickel and dime what's left of its consumer base, the console gaming industry would instead think about how to not get back to gaining more consumers… but also try to use incentives instead of what's viewed as punitive actions to maintain the consumers that it's been trying to build for years.

We've all said things this week that probably should have been held in check. What we need to do now is find real solutions and enact them before it's too late.

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I wish the rest of the world worked on the same inflation scheme as video games. They've only gone up $10 in the last 20 years.

Yeah. $10. That's it. Books have increased over 100% in the last 20 years, and you'd better believe it doesn't cost $30 million to write a book. It DOES cost that to make a video game. Games have to sell 2 million copies to break even, not even make a profit.

You sound like you're really upset that there's a moral question involved in your purchasing. There is. There always is. You're just unhappy that it's been brought to light, that you actually have to think about your purchase, that you're not just getting patted on the back for being a good consumer. That's tough cookies. That's life. We're adults, we have to take responsibility for our actions, where our money goes. I don't buy Nintendo products anymore once I saw where my money was going -- the the Foxconn employes (or lack of money going to them, really, but a company continuing to employ shady business practices). Does that suck? Yeah. But it's more important to me to have a say in where my money goes and how it influences the world, than to have those specific games. It may not be as important to you, and that's fine too, but you can't pretend that your opinion is the only valid one.

We have to make adult decisions about things all the time -- do I buy from Wal-Mart because it's close and cheaper, knowing how they treat their employees and suppliers? Or do I shop somewhere else but it's a bit more expensive, but I won't feel like a terrible person if I do? Do I pay more for the free-range chicken? Do I buy this Made In China or do I find one made someplace that takes care of their workers?

Our actions have meanings, and some people care, and some don't. If they don't matter to you, that's fine -- but people are still going to judge you based on it (welcome to the internet). Game companies are still going to do what they have to do to. But they're not going to drop prices just because you don't want to pay that much -- not unless you're willing to go back to Pong. Or Farmville, I hear Farmville only cost a quarter million to develop, we could just play that from now on, right?

If only wage increases

If only wage increases matched inflation... but, in reality, wages really haven't moved that much in the last decade, either.

My opinion certainly isn't the only valid one out there. Believe me. I have a lot of passion about my stance on the topic, but I also believe multiple opinions fine. What I take issue with-- and the whole reason for my string of discussion on the topic recently-- was how Cory Ledesma made the mistake of saying out loud and on record what we all know the industry has been thinking since the industry started to decline. That's his opinion, and when it came out on record, it opened the doors for dissent and anger.

I personally believe that escalating budgets are the result of equal amounts of fiscal irresponsibility on the industry's part and consumers initially biting on such increases before the Great Recession wiped out most of what disposable income that consumers had. There's got to be some adaptation. The industry needs to rethink its extravagant development budgets in order to tread water long enough to stay relevant and not price out the mass market in a time of economic uncertainty. Nintendo has done it, and has consequently led the way in hardware sales while staying close in software sales by offering more attractive price points.

Lastly, your morality argument is certainly valid. Indeed, many buying decisions can have moral consequences... although I believe that the general consumer is most interested right now in buying affordable goods and services and casting the morality decision out the window.

We may disagree, but thanks for raising the points you did and doing so in a strong manner.

Game companies can charge

Game companies can charge anything they want for their games.
No one is saying they shouldn't be allowed to operate their business, as they see fit.

But I am also free, to only buy what I feel is worth the money.

joe wrote: Game companies

joe wrote:

Game companies can charge anything they want for their games.
No one is saying they shouldn't be allowed to operate their business, as they see fit.

But I am also free, to only buy what I feel is worth the money.

Exactly. The games companies arn't doing anything illegal by setting new releases at such a high price. We, as consumers, are not doing anything illegal buying secondhand games. There's a moral decision if you want there to be, certainly- but to be honest, I don't give a fuck if my money ends up in the hands of a greedy high street games company, or the greedy games company who actually distributes the games in the first place. So, to me personally, there is no moral decision. I buy games new, full price, if I really want them, I buy them secondhand if I don't.

I normally buy my secondhand games from individuals online who have simply gotten bored of the game they are selling. I'd rather my money go to a fellow gamer than a faceless company. I await the backlash to that last point.

As I see it, both consumers

As I see it, both consumers and developers are victims of the system. I guess this is how things really went: some big suit in the upper floors suddenly discovers he has to have 1 day less of vacations this year, because of the economic recession.
So he has to make up a story to gain back the extra money he needs for his rightful vacation day, and voilà here's the used games dilemma.
Let's face it guys: gamers and developers are both poor chumps. The thing is we got so used to be like this, that we accept this condition as natural, without even recognizing it.
Even the author of the article points out that an agreement between gamestop and publishers isn't viable because Mr. Investor wouldn't get his hefty check. What the...?
Let's stop fighting between ourselves. Developers and gamers should be if not brothers, at least cousins.

I still don't see how we

I still don't see how we customers should be upset by Ledesmas initial comment.
He essentially said that used game buyers now get an actually used game. (and the new buyers the complete product) It will not be as used as in the past, i.e. new, flawless, which means it will have some "malfunctions", "scratches", a real pre used condition, like every other physical product, with the exception that you can repair it to be again "brand new".

We're in recession? And they not? They also have to look where they get money. Big budget games may be canceled in a row when success might be not certain enough. The System will automatically change if the monetary condition stays as it is in America and the southern countries of Europe. Certainly. We and they have to accept that.

I really hate it when developers have to be reduced by some comments to the suits in upper offices. Those suits employ the game makers. We need them to get the AAA-games, because those game makers don't want to work as indies, and we don't want to get only indie-games.

Excellent Discussion

Excellent discussion, I'd just like to add my tuppence worth.

From an economics 101, social welfare perspective the developers (who are people too!) are just rationally trying to maximise profits in a monopolistically competitive market where profits are driven downwards by games that are highly substitutable for one another.

Profits are important because without developers there are no games, and there has to be an economic incentive for skilled workers to become developers. Low profits are the reason why game developers are paid so poorly relative to say bankers.

At this point, I would like to make a suggestion that bulk of the wholesale price of computer games is derived from the development and marketing costs, and the marginal cost of an extra online player is in fact extremely low and has little significance in the profit maximisation behaviour of the developer. Most of the online support costs are fixed (initial server setup and bandwidth allocation) and are thus incorporated in either the price of the product off the shelf, or the online subscription fee(s).

The decision to make multiplayer only available if the game is bought new can thus be seen either as an attempt to incorporate the cost of supporting multiplayer into the price of the product itself, whereupon we would expect an equivalent drop in the subscription fees. Or more likely, it can be seen as an attempt to increase profits through price discrimination where the 'quality' of a product is more aligned with consumers' willingness to pay.

Much like in the automotive industry where extras may have to paid for satnav, sunroof, bose audio etc, profits are increased as you capture the marginal consumer who would be better off with a car, but whose budget constraint would not otherwise allow for the car + satnav.

Thus a tiered pricing strategy captures the marginal consumer, and consumers are therefore better off AS A GROUP (although there will be individual winners and losers). Moreover, because the market is now larger, providing the price is still equal to or above the marginal cost of production, the developers' profits increase.

Ultimately therefore, it causes less social waste as more consumers get to play games (drive cars), and developers (manufacturers) increase profits from a larger market (providing there are economies of scale).

The problem is of course that such a tiered pricing strategy is dependent on the assumption of what economists call 'well behaved preferences'. We expect that the singleplayer is preferred to multiplayer and that implicitly those wishing for multiplayer must also wish for singleplayer, BUT NOT VICE-VERSA. While this may well apply for the older gamers like myself who grew up on a diet of single-player games, this does not necessarily apply for the younger generation and can indeed be the reverse.

This points to a need for the gaming industry to consider the possibility of selling games on a singleplayer-only basis, multiplayer-only basis, or both.

Crucially however, I expect that consumers with the highest spending power still prefer singleplayer to multiplayer, hence regarding multiplayer as an additional expenditure upon the singleplayer version is still, overall, the socially (consumers AND DEVELOPERS) preferred pricing strategy.

With regards to the used game market, the problem with resale from the developers perspective is that they lose control of the above pricing strategy. If a user can get a singleplayer game for less than retail price, part of what economists call 'economic surplus' that would otherwise belong to the developer (under no resale) is transferred to the consumer.

Moreover, specific to the gaming industry, if the resale includes content such as multiplayer and extra weapons etc that is covered in the full retail price, the developer may no longer be able to cover production costs. Note there is a difference to the used-car industry here, firstly as the quality of a car is perceived to decrease immediately upon sale where this is not necessarily the case for games, and secondly as the car manufacturers themselves are a significant resale market makers which games developers aren't.

In the short run at least this is obviously great from a consumer's perspective, but there is clearly no net gain in social welfare as what the developers lose, the consumers gain. In the long run however, the fall in profits for developers may affect the long-run quality of games hampering the growth of benefit to consumers.

Adding publishers who control pricing into the mix, and the picture becomes somewhat more complicated as pricing strategies may not necessarily be to the benefit to developers. However, if you make a rational assumption that the 'middle-men' are simply economic actors that provide distribution/marketing/sales services that simply increase the marginal retail price, the fundamental message is still the same. A tiered pricing strategy is a good thing for overall social welfare (consumers AND DEVELOPERS), but resale transfers developers' profits to consumers in the form of economic utility. This may be good for consumers in the short run, but in the long run the lower profits to developers, who are already squeezed by publishers, may actually be a negative influence on the industry.

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