Gaming’s Virtual Marketplace

Digital delivery of video game content has been touted as the future of the
industry since the late 1990's, but is only now beginning to take a foothold in the
marketplace. According to the NPD group, of all PC games sold in the United
States in 2008, roughly 17 percent were through digital channels rather than
physical retailers.1 By the fourth quarter of 2011, digital sales jumped to $3.33
billion (43%) while physical retail sales dropped to $4.5 billion (57%). 5
Accounting for much of those sales is the Steam distribution software, created by
Valve Corporation and initially released in 2004, which reaches over 20 million
PC gamers worldwide, and supports over 700 games.2 Steam allows gamers to
securely purchase and download digital copies of popular games onto multiple
PCs. Its popularity has turned it into a thriving social community. Console gamers
are increasingly getting in on the act as well: 18% and 10%, respectively, of
Microsoft's Xbox Live service and Sony's Playstation Network have regularly
purchased content.3

The future of the market looks to be geared even more towards online
distribution, like the OnLive digital gaming service that redefines not only how
gamers purchase their games, but on what platforms they play them on. OnLive
allows subscribers to play any game, regardless of technical requirements, on
any PC or television set (through a set top box). The heavy processing of the
games graphics are performed on OnLive's own servers, while the images are
streamed to the user, whose control commands are then streamed back to the
server. A game as technologically sophisticated as Crysis can then be played on
hardware as basic as a netbook or even a smartphone.

While digital distribution looks to be a boon to the consumer, the brick-and-

mortar retailers are not looking forward to its eventual dominance over the
gaming market. Some believe that the trend will actually harm the industry as a
whole. According to Gamestop CEO Dan Dematteo, "Nothing that has been
digitally distributed retains the same value as a retail version; it's always less." 1
Whether this is valid in the video game space remains to be seen, but the battle
between the two retail options has already spilled over into the price of many
popular games. Video game retailers such as Wal-Mart, Gamestop, and Best
Buy have long dictated the length of time that a game retains its initial price. But
the low cost to digital distributors such as Steam has allowed them to undercut
their physical rivals by as much as 75%, either during weekend sales (a popular
practice with Steam) or as permanent price points. GameStop seems to be at
least somewhat willing to evolve with the industry, as they have recently relented
to sell Steam point cards alongside similar cards for console digital markets.

In the realm of free to play (“freemium”) games, a rapidly growing segment of

the video game market, NPD reported that up to 40% of players end up spending
money on digital in-game upgrades and accessories. 4 In the cut throat genre of
MMORPG’s, this method of generating revenue is increasingly popular. The
recently released Diablo III includes an auction house that allows real world
money transactions of in game items, and the upcoming Guild Wars 2, like its
predecessor, will steer clear of a monthly subscription in favor of paying once for
the game and expansions as well as paying for vanity items in game that have no
effect on your character’s skill in combat.

The economic, technical, and social aspects of gaming will be increasingly

driven by the innovations of digital distribution. It is conceivable that consoles will
one day become obsolete, and video game prices will primarily be a reflection of
how long it will be supported through digital content updates rather than through
the constraints of physical distribution.

Sources:
1
John Guadiosi - Digital downloads spell end for videogame stores?
http://www.reuters.com/article/technologyNews/idUSTRE5596CX20090611?
feedType=RSS&feedName=technologyNews&pageNumber=1&virtualBrandChan
nel=0
2
http://store.steampowered.com/stats/
3
Luke Plunkett - So How Many People Actually Buy Stuff Over XBLA or the
PSN? http://www.kotaku.com.au/2009/06/so-how-many-people-actually-buy-
stuff-over-xbla-or-the-psn/
4
Mike Rose -
http://www.gamasutra.com/view/news/169040/NPD_40_of_freemium_players_pa
y_for_ingame_upgrades.php
5
Mark Raby - http://www.slashgear.com/npd-calculates-3-3-billion-in-digital-
game-sales-in-us-and-europe-in-q4-2011-22219701/