Author: Derrick Cui, Graphics: Nina Tagliabue
The BRB Bottomline
Video game prices have stayed relatively constant over the past half-century. How, then, are video game studios able to keep bringing in profits even as prices stagnate?
The Price Isn’t Right
From a standard economic perspective, the pricing mechanism of video games makes no sense. Generally, inflation causes prices to increase. Yet in both nominal and real terms, video game prices have remained stable and have even gone down over the past half-century. For example, the cost of a game developed by a Triple-A (top-tier) studio at launch has been consistent at around $60 for the past half-century. The prices of indie games have historically sold for around $20, yet many are now falling below this level. Some popular titles like Fortnite, Valorant, and Warzone are now completely free. How, then, are video game studios able to keep bringing in profits even as prices stagnate?
Table 1: A list of launch and inflation-adjusted prices of my favourite games
Video games prices are the result of a few critical developments. The introduction of personal gaming consoles (like the Magnavox Odyssey, Nintendo Entertainment System (NES), PS2, Nintendo Switch) have created a discrete pricing structure. In the early years of consoles, games ranged anywhere from $20 to $70. However, as some game titles proved popular, spawning gaming franchises (like Mario, Sonic, Zelda, Call of Duty, Halo), games were separated into franchisable or standalone products. The franchise games, most of which were produced by Triple-A studios, were priced at around $60. Indie studios, by contrast, focused on standalone games that were generally priced under $30. Yet these price points are arbitrary.
The Triple-A prices have become a symbolic representation of a game’s quality. At first, this was driven by game producers as a way to create consumer expectation (i.e, $60 equals a good game). Yet, over time, the “$60 game” has become a cultural phenomenon within the gaming community to indicate that a game is good quality. As greater competition simultaneously entered the game production market, game studios have stuck with this price and relied on higher volume to increase profits even as profit-per-unit has fallen. With so many games released at $60, any release above this price could see a sharp decline in units sold.
There has been quite an uproar from the recent announcement that the much anticipated game “NBA 2K21” will be sold at $70 instead of the traditional $60. Yet this uptick in prices is long overdue. Even though revenue for video games as a whole is at an all-time high, only 20% of games that make it to store shelves are profitable, while only 4% of games that enter production are profitable. On top of that, for a $60 game sold in-stores, only around $27 goes to publishers, while around $15 goes to retailers (Gamestop, etc), and the rest to distribution and returns. Independent studios that list their games on intermediaries take a similar cut to revenues, like how Steam (a popular PC game distributor) takes a 30% cut out of game sales. Many games have therefore looked to form new revenue streams.
For example, Game studios have introduced payment options like microtransactions. These are optional payments for in-game features that range from avatar customization to loot boxes to skins to new content. These have helped studios both big and small rake in huge amounts of revenue. Game studio Activision Blizzard reported earning $1.2B of its $1.95B revenue from 3rd quarter of 2020 from microtransactions alone. New games that are hugely popular and are entirely free often depend on microtransactions.
Some games also rely on in-game ads, purchasable downloadable content, and sponsors (think Doritos sponsoring Call of Duty) as a means to stay profitable. As free-to-play games have exploded in popularity, game developers have been forced to exploit these intrusive methods of microtransaction. For free games, developers are competing for time and attention with the hope that, as people play a game for a long time, they will spend money to improve their experience.
Quality vs. Hype
Up to now, I have equated Triple-A studios with producing good games. That is only sometimes true. Sometimes an indie studio will create a genre-defining game (think Celeste or Minecraft) and sometimes a Triple-A studio will produce an unfinished disaster. In fact, Triple-A studios like Ubisoft, Activision, Bethesda, EA, 2K very rarely produce genre-changing work nowadays, with some notable exceptions including Nintendo and Naughty Dog. So why would anyone buy a game like Cyberpunk 2077 (a terrible Triple-A game) for $60 when they could play Among Us for free or Stardew Valley for $15 (both hugely successful Indie games)? This brings up my final point: hype.
Typically, games drop in value fast. Uncharted 4, an amazing Triple-A game released in 2016 for $60, is now $10. So why would anyone buy the new Triple-A game for $60 when they haven’t played any of the classic games that are dirt-cheap? Or better yet, why not wait six months for the price of a game to drop in half? One word: hype. For the same reason that people watch a new mediocre movie at the box office when they could be rewatching the Lord of the Rings online, people splurge on new games and don’t bother with has-been games.
Both video game producers and video game consumers exhibit irrational behaviors and face market constraints unique to the gaming industry. Producers chose the $60 price point arbitrarily and stuck with it because the price itself began defining consumer expectations. To compensate for such a low price, some game developers have included new unpopular revenue streams like microtransactions. On the other hand, consumers buy games because they are new instead of buying based on quality. Consumer expectations have destroyed the traditional mechanism of competition that typically determines the price of a product in spite of how competitive the market is.
- Video game prices have not changed in nominal terms over the past 50 years, caused by higher competition and an arbitrary unofficial consensus on pricing games.
- Game Prices are often symbolic, with $60 representing a top of the line Triple-A game and anything under $40 representing an Indie game.
- Games earn much of their revenue through microtransactions and other revenue streams.
- Hype drives much of the industry’s new game revenue streams.
Derrick is a freshman at UC Berkeley intending to major in Economics and Computer Science. Derrick has interests in public policy, empirical economic data analysis, and emerging technology/innovation. In his free time, Derrick reads up on international news, plays Overwatch, and explores a wide range of music.