malvasia bianca

There was a fair amount of discussion of “free to play” at this year’s GDC; most of it negative (at least in the discussions I was part of), often extremely so, and often linked with the concept of “whales”. There’s some amount of that discussion that I agree with, but more of that discussion (and the moral judgments that come with that discussion) that I’m uncomfortable with, so here’s an attempt to tease out what I think.

One basic point of uncertainty I have is what people mean by the term “free to play”. For example, at some point I was talking with Jorge about The Walking Dead; you can play the first episode of each season for free, so does that make it free to play? On a straightforward reading of the term, I would argue that it does, but within the cultural context of the discussion of GDC, I think it doesn’t. Or at least that’s not the type of game that the GDC zeitgeist wants you to envision when you bring up the term: it wants you instead to think of games like Candy Crush. (Or League of Legends, which the zeitgeist likes rather more than Candy Crush.) Is there a way of thinking about the concept that illuminates those differences?

The term “free to play” strongly suggests that we should talk about pricing models in general. So, in hopes that that sheds some light on what the term might mean, here are some possible models you can use to think about how to set “the right” price for something:

1. Price based on cost: set the price based on the costs that go into developing / maintaining the game, plus enough of a profit margin to get by.
2. Price based on value: set the price based on how much value the purchaser of the game will get out of it.
3. Price based on marginal cost: set the price based on the cost it takes to produce / maintain one extra copy of the game.
4. Price based on misdirection: get as much money as you can from players, without concern for the players or the long-term health of your relationship with the players.

It seems to me that a lot of the discussion presumes that free-to-play games always fall into the fourth model: the assumption is that providing games for free is inevitably the first step in a misdirection play. It also seems to me that the third model is a fairly major player in the discussion; and it’s an even larger player in the (somewhat related) discussion around game cloning, because cloning is closely tied to decreasing the marginal cost for producing a game. And pricing based on marginal cost combined with a digital environment is really scary for GDC attendees: these are people whose livelihood depends on making games, so their jobs will vanish if price = marginal cost = $0.

 

The thing about that third model is: in a lot of contexts, it’s the most natural way to price products. If a product is a commodity, then multiple companies offer functionally equivalent versions of that product. And so people looking to buy that product will pick the one that is cheapest; so companies will struggle to offer that cheapest price, which gives them an incentive to push the price down as low as possible while it still being worthwhile to sell the product at all. In a physical goods context, what this frequently means is trying to lower your cost of production, leading to a pursuit of economies of scale and other production efficiencies; that’s brutal enough, but it’s even more brutal in a world of electronic distribution, where the marginal cost is a fraction of a penny.

But, as much as it sucks to be a game developer in that position, there’s nothing inherently immoral about that situation. As a consumer, I am very glad that most of the items that I purchase are commodities: that when I walk into a grocery store, I don’t have to worry about the exact value to me of a can of tomatoes or the exact cost of production for that item. Instead, I get a lot of benefit from the fact that there are a bunch of companies out there trying to win the commodity sales war, by finding more and more efficient ways to produce tomatoes to sell them to me for cheaper and cheaper amounts of money.

Don’t get me wrong: I realize that this commodity war has real human costs as well. So in particular, I support measures like minimum wage laws and environmental protections that lower those human costs (especially if they make them explicit to encourage competition in lowering them, e.g. carbon taxes), even though those measures may have the effect of increasing the marginal costs for all the producers of the goods and hence to me. But I’m also really glad that I live in a world where most of what I need for my daily life is a commodity: it raises standards of living enormously.

 

This doesn’t mean that I support cloning in general: I suspect that that is one of those areas where artificially putting a floor on marginal costs is useful. For example, I’m not the biggest fan of copyright laws in the world, but if pressed I’ll admit that giving protection from copying an entire piece of software for a handful of years is as good an idea as I can think of. And I would never argue against anybody who has enough pride in their craft to be unwilling to clone. But I also think that some amount of cloning is extremely healthy: there are a lot of first-person shooters out there, there are a lot of match three games out there, and while those all look like clones from a distance, I’m glad that there’s enough room in the design space to allow Bejeweled, 10000000, Puzzle Quest, and Triple Town to all coexist.

So for me, the best solution to cloning is: find ways not to be a commodity. Which I realize is trite, even insultingly flippant, but I don’t have any other suggestions to offer that work with economics as I understand it. And this solution works in non-electronic contexts, too: sometimes, I just want a random can of tomatoes, but sometimes I want something that will taste noticeably better or work better in some particularly culinary context, which sets up the possibility of getting out of the commodity space. Or at least sets up the possibility of market differentiation: there’s still going to be some amount of commoditization within each market segment, but if you can find a small enough segment to work in, commodity effects will noticeably decrease.

Also, before I leave the topic of pricing based on marginal cost, I want to link it to the fourth pricing model: because pricing based on marginal cost often turns out to mean having the perceived price be based on the marginal cost, when the actual cost can be higher. In the electronic goods situation, this means that something is labeled as free but has hidden costs in terms of time, in terms of advertising, in terms of monitoring. Whereas for physical goods, two cans of tomatoes may have the same sticker price on the shelf, but one of them may have higher costs in terms of damage to the environment when producing it, damage to workers’ livelihoods while producing it, damage to your physical health from consuming it. So yes, pricing based on marginal costs can be linked to pricing based on misdirection; of course, any of the other pricing models can also be linked with pricing based on misdirection, but if we’re talking about free to play, it’s hard to imagine how a producer motivated by profit (as opposed to, say, one motivated by sharing) will function effectively in a zero-marginal-cost commodity context without some amount of misdirection in pricing.

 

At lot of the people I see advocating against free to play are advocating for the first model: they want a world where buyers pay thirty or sixty or whatever bucks for a game, where sales of quality games within a genre aren’t crazy to predict, and where you can staff dev teams accordingly. And I can certainly see why most of the people at GDC would like that first model: they know they’re not likely to get rich off of a game, but they want to make a decent living off of their work.

There are two problems with this model, though. For one thing, speaking as a person who plays games: why should I pay $60 for a game if I don’t know if I’m going to like it? I’ll even ask why I should pay any money for a game if I don’t know if I’m going to like it, but if it’s cheap enough, I can’t say that I shouldn’t pay a few bucks out of curiosity; but I’m a lot more dubious at, say, traditional console game prices.

But, more importantly: according to my admittedly naive understanding of economics, this model simply doesn’t fit the real world. There’s no reason why the amount that people are willing to spend on an item should be directly tied to the cost of the item: if your competitor is willing to sell a comparable item for less than your cost to make it, then tough. Fortunately, that can cut both ways: if you can either increase the item’s value in a unique way or decrease your production costs in a unique way, then your profit selling the item can increase out of proportion to its costs! But, either way, it’s not an accurate way to think about the world.

And it is my feeling that this model also comes with a fair amount of misdirection. In a world of fixed non-trivial priced games, players need ways to decide whether to buy a game without playing it. This leads to large amounts of advertising, it leads to a games “press” that’s almost entirely about getting players excited about upcoming games to the benefit of publishers, it leads to attempts to constrain the number of games that are being talked about / actively played in a given time period (that’s part of fighting against commoditization), it leads to games that wear out their welcome so players are encouraged to move on to buying something else, it leads to design based on marketing bullet points rather than lasting value.

 

And speaking of lasting value, let’s talk about the second model: pricing based on value. This is my favorite model: when I’m buying a product, I’m happy to spend money if I feel that I’m getting something for that money (at least if my budget is doing well!); if I’m selling a product, I feel great if I’m getting rewarded for making the product more valuable. And, unlike the first model, this model actually does work: as long as the product you’re selling isn’t a commodity, then you absolutely can price it for significantly more than the marginal cost if your target market thinks it’s worth it. (Witness Apple’s success in keeping huge margins for its products, or Nintendo’s ability to create a single version of Mario Kart for a given console and sell it at a relatively high price for years.)

I mentioned The Walking Dead above; in my mind, it’s a great example of this model. Before you’ve started playing the game, it hasn’t proven its value, so they let you play the first episode for free. If you’re still not sure, then you can buy the episodes one at a time, dropping off whenever you decide the game isn’t worth it. If the first episode convinces you that the whole season is valuable enough to pay for, then the developers let you show your appreciation of its value by paying for the rest of the season sight unseen at a slight discount.

Android: Netrunner, my current obsession, is another example. It is admittedly not free to play, so it requires a leap of faith from the player at the start. But once you’ve decided to play that, the developers will continue to attempt to provide value by producing expansion packs, and it’s up to players to decide whether those are valuable enough to purchase. I basically think of the game as one with a $15/month subscription fee; and in my mind, it’s absolutely worth it. I don’t play League of Legends, but my understanding is that it’s got a similar dynamic, albeit one more tilted toward the player: you can play a huge amount for free, but once you get sucked in, there are many ways to pay money, to let you get more value out of the game (by letting you focus on a champion you like, to get a skin that you enjoy looking at or feel represents yourself better). Or, for that matter, to pay money just because it feels right to give money to a company that has given you hundreds of hours of value: whenever a game sets up that dynamic, it’s really doing things right.

 

I’m already a couple thousand words in, so I think I’ll defer my discussion of whales to another post. I guess my conclusion so far is:

• Pricing based on value can work, and when it works, it’s great for both players and developers, creating games that are worth playing for years.
• Pricing based on misdirection sucks: try to avoid doing that. (It’s the one aspect of my work at Playdom that I actively felt bad about: I felt that a lot of our pricing was just fine, but we had this concept called “crates” that’s based around people’s brains not being wired to understand probability.)
• I don’t see how high fixed pricing works in a digital world without strict gatekeepers: otherwise, it gets swamped by commoditization forces.
• Commoditization forces are scary for developers, and they even scare me somewhat as a player.