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PokerFlat

Distribution: brick-and-mortar vs. digital

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I'll start off with how I understand things to work: (high-level) Digital: D1) Contracts/licenses get settled between involved parties D2) Digital game is provided to publisher electronically D3) Publisher has an online store front D4) Customer downloads the game D5) Customer plays Brick-and-mortar: B1) Contracts/licenses get settled between involved parties B2) Digital game is provided to publisher B3) Publisher contracts to have the physical media created (including manual, game cover, disc art) B4) Physical media shipped, via truck, train, plane, boat, station wagon to stores and warehouses. B5) Customers walk, drive, bus, subway to buy games from brick-and-mortar, or order from amazon, etc. -- if bought online the order is fulfilled, boxed and shipped *again*. B6) Customer plays Comparing D to B it seems that B is at least an order of magnitude more complex and expensive. I have over simplified B. There is often more shipping involved that I didn't include. Retailers may accept shipments to a central warehouse then ship again to stores. And for D if the developer is also publishing then the D-B gap is even larger. I just don't see how B is sustaining itself against D. Part of B, I know, is people like hard-copies, they like the physical "thing". You can sell it again, you can lend it to friends. It won't get deleted accidentally. But it can get damaged, stolen (D could too), lost (D too). There are many things at play here, I know, but what will be the tipping point for the decline in B? Fiber to every home? I don't think that's it. If I had to download a Blu-Ray disc it would take a while as I have the cheap broadband plan but I don't care if it takes hours. But Wii and Xbox games are smaller, actually I don't think PS3 games are using the full blu-ray, much, if at all. My questions are: Q1) When will digital become defacto? Q2) What happens to the first sale doctrine? Q3) Does digital kill the used game market? Q4) The advantages to D seem obvious. At least for everyone but the consumer. Q5) What happens to the supply-chain for B? That's a lot of commerce that will dry up (I suppose the music business might be a good comparison) Q6) Will prices drop? They didn't drop for digital music and in fact they went up. Q7) Is convenience the only benefit to the consumer? Q8) What are our options as consumers? Q9) What are our options as publishers, developers, distributors? Q10) Who's taking all the money in D? Q11) Would the death of the used game market really be good for the game industry? (Be careful what you wish for) Q12) Can I return a D bought game if I don't like it? (I've never return a B bought game, do retailers take them back?) Q13) The consumer isn't seeing cheaper prices from D. So who is taking that extra profit? Q14) Who's sucking up the huge expense of B? Seems to me that the consumer loses out with D and unless there are some changes to D I would guess that the game industry will suffer for D.

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q1) when industries are willing to move away from archaic business models and feel secure enough in digital distribution to move to that model wholesale. Or until their current contracts with artists/developers/distributors runs out (all of which provide for brick and mortar sales as well as digital). In other words, no one knows.

q2) Very tricky question. It's something I've actually written about quite a bit, since those who move to a digital model are arguably providing access to product as opposed to the physical copies themselves-- thus the licensing/EULA model you currently experience when you purchase digital copies. Neither case law nor statute has adequately addressed the first sale doctrine in light of digital sales, and it is all to likely that considering the current climate that doctrine will become obsolete with regard to digital sales. This is particularly true if courts and congress/WIPO all follow the "access" model as opposed to the current physical "sale" model that is necessary under the first sale doctrine.

q3-q11) used game market: depends on who you ask. Publishers, for obvious reasons, dislike the used game market. It's questionable as to how much the used game market benefits consumers. I've heard unverified rumors that GameStop is known for understocking new titles to get customers to buy the used copies, which are purchased as a loss from return customers. So the only business that likely benefits from the used game market is the retailers. It's unlikely that overall customers benefit-- if anything the loss to the publisher will be passed on to the retailer, which will subsequently be passed on to the consumer. In all models the consumer is the inevitable loser.

There's also the possibility major publishers will maintain the current status quo of valuation for titles regardless of distribution costs. Once consumers associate a value to something publishers are loathe to drop that price, because it implies to the customer that the product is worth less.

As for the music business, market research shows that purchases under a certain amount are generally considered impulse buys-- in other words, people will consider the amount inconsequential/not worth "value shopping" for. Since the price-per-song for music stays below that amount, it does the music industry no harm to to charge that amount per song.

who benefits from digital sales? Publishers. To the best of my knowledge developer contracts aren't getting any fairer, although the market for independent titles certainly has benefited from the digital marketplace (look at XBLA and the PSMarketplace, not to mention Steam). There are far fewer barriers to entry in the digital marketplace, so hopefully that will benefit independent developers and consumers alike-- since smaller developers and publishers can maintain product at a lower cost with regard to manufacture and distribution, they, at least, are able to pass those savings on to consumers, as well as product they wouldn't have been able to provide consumers otherwise.

For big name artists (in music) or developers (in games), there's greater leverage, which means a higher probability of increasing their royalty rate in those markets.

who's picking up the cost for B? Depends. In music there's traditionally a standard "breakage/return" rate that's applied to the artist's royalty, so in that case the artist is usually the one who suffers the most. Similarly there's usually a reserve rate withheld from developer royalty rates, although in most cases I'm given to understand that developers rarely see much past their milestone payments regardless.



....

The swine flu really has made me this bored... :(

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Quote:
Original post by madelelaw
q1) when industries are willing to move away from archaic business models and feel secure enough in digital distribution to move to that model wholesale. Or until their current contracts with artists/developers/distributors runs out (all of which provide for brick and mortar sales as well as digital). In other words, no one knows.



Right, no one knows, plus most consumers realize that they lose out with D. So there's not a big consumer demand. Also as new consumers "forget" the advantages of B then D will be more accepted.

Quote:
Original post by madelelaw
q2) Very tricky question. It's something I've actually written about quite a bit, since those who move to a digital model are arguably providing access to product as opposed to the physical copies themselves-- thus the licensing/EULA model you currently experience when you purchase digital copies. Neither case law nor statute has adequately addressed the first sale doctrine in light of digital sales, and it is all to likely that considering the current climate that doctrine will become obsolete with regard to digital sales. This is particularly true if courts and congress/WIPO all follow the "access" model as opposed to the current physical "sale" model that is necessary under the first sale doctrine.



Ok, I had read that the argument was the software was akin to a lease, will have to look into the "access" model to see if it differs in anything more than name.


Quote:
Original post by madelelaw
q3-q11) used game market: depends on who you ask. Publishers, for obvious reasons, dislike the used game market. It's questionable as to how much the used game market benefits consumers. I've heard unverified rumors that GameStop is known for understocking new titles to get customers to buy the used copies, which are purchased as a loss from return customers. So the only business that likely benefits from the used game market is the retailers. It's unlikely that overall customers benefit-- if anything the loss to the publisher will be passed on to the retailer, which will subsequently be passed on to the consumer. In all models the consumer is the inevitable loser.



Gamestop's used games aren't much cheaper than retail, so it's not the best example. Take gamefly or blockbuster. A consumer can save a lot of money by waiting and buying a used game. Removing that choice seems bad for the consumer but I think that the game industry loses out as playing games just becomes too expensive for many. Retailers are stuck with over priced products that aren't moving. So game rentals take off. Pubs, distributors, developers lose out again, even gamestop loses out. Consumer can afford to play again.


Quote:
Original post by madelelaw
There's also the possibility major publishers will maintain the current status quo of valuation for titles regardless of distribution costs. Once consumers associate a value to something publishers are loathe to drop that price, because it implies to the customer that the product is worth less.



Loathe to drop the price due to greed also. D by developers (as you mention below)
might break the log jam.


Quote:
Original post by madelelaw
As for the music business, market research shows that purchases under a certain amount are generally considered impulse buys-- in other words, people will consider the amount inconsequential/not worth "value shopping" for. Since the price-per-song for music stays below that amount, it does the music industry no harm to to charge that amount per song.


I'm sure the same holds for casual games. But big budget games require a certain return or the cash-flow-plug gets pulled.


Quote:
Original post by madelelaw
who benefits from digital sales? Publishers. To the best of my knowledge developer contracts aren't getting any fairer, although the market for independent titles certainly has benefited from the digital marketplace (look at XBLA and the PSMarketplace, not to mention Steam). There are far fewer barriers to entry in the digital marketplace, so hopefully that will benefit independent developers and consumers alike-- since smaller developers and publishers can maintain product at a lower cost with regard to manufacture and distribution, they, at least, are able to pass those savings on to consumers, as well as product they wouldn't have been able to provide consumers otherwise.



Hopefully we get to this point.


Quote:
Original post by madelelaw
For big name artists (in music) or developers (in games), there's greater leverage, which means a higher probability of increasing their royalty rate in those markets.



Plus for music artists you have the organized-law of BMI and ASCAP for leverage. Not sure if the game industry has that analog.



Quote:
Original post by madelelaw
who's picking up the cost for B? Depends. In music there's traditionally a standard "breakage/return" rate that's applied to the artist's royalty, so in that case the artist is usually the one who suffers the most. Similarly there's usually a reserve rate withheld from developer royalty rates, although in most cases I'm given to understand that developers rarely see much past their milestone payments regardless.


For music B seems very close to death. I'm thinking that games are a closer model to books, but books are a wider demographic.

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