The November 2005 launch of the Xbox 360 marked not only the beginning of a new cycle of video game hardware, it also launched a new era in video game pricing.
Titles, which before had been firmly locked at a $50 price point, jumped to $60. And despite some initial grumbling by consumers, they sold faster than ever. Publishers were thrilled – and their investors were even happier.
Fast-forward four years: The effects of the recession continue to be felt and sales have been trending negatively for the past six months. And some industry observers are beginning to wonder if the time has come to rethink software pricing.
The hardware is already getting cheaper. Microsoft , Sony and Nintendo all reduced the prices of their game machines this year in hopes of spurring demand. The strategy has worked, with sales of the Xbox 360, PS3 and Wii all picking up – but game sales haven’t picked up to the same degree.
“Maybe it’s not just the recession or just a lack of interesting content to consumers – maybe it’s that prices are just too high,” says Colin Sebastian, an analyst with Lazard Capital Markets. “Maybe the cost-benefit analysis [of a price cut] should be done and maybe be retailers already have a better read of that.”
Several U.S. retailers have shaved software prices somewhat. But they’re constrained by the publishers on how much they can reduce the cost of a new game.
While publishers do not technically have pricing authority with U.S. retailers, they are legally allowed to punish those who price a title too low. This is typically done by withholding future titles or refusing to restock copies of a hot game. It happens infrequently, notes Sebastian, but the open threat of such action generally keeps retailers in line with pricing practices.
In Europe, though, publishers are unable to enforce a game’s recommended price – giving retailers a lot more leeway. And the decision by some stores, particularly in the U.K., to lower the price of EA’s “FIFA 10” played a role in the title becoming the fastest-selling sports game in the industry’s history.
“Discounting in the U.K. is not unusual, but when you’re faced with a situation where a lot of games are not reaching expectations and you see a game like FIFA outperform in the U.K., that’s got to get people thinking,” says Sebastian.
The problem with price cuts is that the market (and the competition) perceives them as a sign of weakness. Because even mid-tier titles, which are the most likely to see a price cut, cost $30 million or more to make, even the talk of such a move makes investors nervous. That’s ironic, since publishers would likely make up any lost profit lost in volume – and find new fans of their franchises.
It’s because of this perception that publishers refuse to publicly acknowledge pricing adjustments are being internally considered.
While the industry is almost certain to maintain pricing on top-tier titles, such as Activision’s “Modern Warfare 2” (which will almost certainly be the year’s best selling game) or next year’s “Halo: Reach,” titles that are less event-driven are more likely to have wiggle room.
“If you look at THQ, they’ve actually priced their games to be more competitive during the holiday season,” says Eric Handler, Senior Equity Analyst for MKM Partners. “They’ve got a number of games that aren’t going out at the $59.95 PS3 or Xbox 360 price point. They’re being more selective with their core audience.”
THQ’s the exception. Most publishers will have to be dragged kicking and screaming to a price cut. But if the industry is unable to steadily turn its retail performance around during the holiday and early part of next year, they may not have a choice.
“I think companies will look at this on a game by game basis,” says Handler. “I think they’re trying to hang on to the current price as long as they can. If there’s a potential sign that consumer’s pocketbooks are opening a bit more, then they’ll hold their price. If consumers continue to rein in their spending, then I think they will re-evaluate their pricing strategy.”