Why Games Are So Expensive, and Staying That Way

The gaming industry is no longer recession proof. Sony's sales for the quarter are down 37% from the year before, Nintendo's sales are down 40%. Overall, game sales are down 41% compared to June of last year. "The impact of the economy is clearly reflected in the sales numbers," said NPD analyst Anita Frazier. But if game companies are having trouble selling the volume of titles they'd like, then why aren't they adjusting prices to increase sales? Lets take a look at the who, and why.

 PSP GoWho: Sony
What: Sony sold 1.6 million PSPs last quarter, compared to 3.7 million units during that quarter last year. This coming holiday season, Sony is set to release the new PSP Go for $250. That's far more expensive than the original PSP, which cost $170.
Why: So why is Sony releasing such an expensive product in such economic hard times? Despite the downturn, Sony is pricing its products for the long cycle. As Sony Computer Entertainment America's CEO Jack Tretton told me, "You have to look at things over a long-term period. It's extremely difficult to do in our industry, and even more difficult to do in this economy. ... It's a formula that is successful and is one that we shouldn't succumb to the pressure and deviate from."

Beatles: Rock Band DrumsWho: Music Game Publishers
What: Sony isn't the only one pricing high despite the downward sales trend. Activision has a slew of holiday music games: Guitar Hero 5 ($100 with guitar), Band Hero ($200 with full band, $100 with guitar), and DJ Hero ($130 with turntable controller). Electronic Arts and MTV have an almost-guaranteed hit on their hands with The Beatles: Rock Band, but it will cost a whopping $250 with controllers.
Why: Because they make far more money on the peripherals than on the games themselves. "Publishers like Activision look at the margins on things like the guitar controllers and are applying the same thinking to other (non-music) franchises," says John Davison, founder of gaming site WhatTheyPlay.com. "The new Tony Hawk game will ship with a skateboard controller." Tony Hawk Ride, with its faux board, will cost $120.

Who: Nintendo
What: Nintendo is also hitting up the public with plastic peripherals, pushing Wii Fit Plus ($90 with the Balance Board) and the Wii Motion Plus unit for more accurate controls in certain games--$20 each, which adds up with 4-player games.
Why: The mainstream public, not just gamers, have gone gaga over the Wii and its motion controls--and are willing to pay to keep that love affair going, migrating from the Wii, to Wii Fit, to now the Wii Motion Plus and the coming Wii Fit Plus. Wii Sports Resort, sequel to the original Wii Sports that was packed with the console, was recently released with a single Motion Plus unit included. This package sold over 500,000 copies in the first eight days of release.

Who: Microsoft
What: Gaming-news site Kotaku showed that the average price of Xbox Live Arcade Games had increased 31% since October 2006, from 550 points ($6.87) to 725 points ($9.06).
Why: As Shane Kim, the VP of Strategy for Microsoft's Interactive Entertainment division told me, "Subscriptions from Xbox Live are an important part of our business model. We are also driving a very significant volume of digital transactions." Since digital downloads do not have packaging or physical media, the cost from them is much less, thus increasing profit margins.

modern warfare 2 Who: Premium Package Publishers
What: Game companies aren't just increasing the cost of gaming with hardware and peripherals, there are also special editions of games.
Why: Wedbush Morgan analyst Michael Pachter said, "Expensive premium editions are intended for the hardcore guys. They bundle $5 of extra stuff and charge $10 to 20 more. It's a profit deal." How about $100 for a Batman: Arkham Asylum edition that comes with a book, a making-of DVD, and a 14-inch Batarang? Or NBA 2K10 Anniversary Edition, $100 for the game along with an anniversary DVD, Kobe Bryant figure, Kobe Bryant poster, and a miniature locker to hold games. And for $150 a player can get Modern Warfare 2 in a metal case and with the additions of an artbook, a code to download the original Call of Duty, and a pair of night-vision goggles. The more stuff a company can sell with it's game, the more profit they can wring from a single title.

And so, perhaps counter intuitively, game companies price high to help them survive the recession, and not to making the dilemma of spending less money on a choice of the many holiday games any easier for the gaming public. "Operating profits in this industry are very thin, with companies like EA eking out a 10% profit on sales. They simply cannot afford to discount drastically in order to drive sales higher, as their profit margin would evaporate," said Pachter. With unemployment expected to hit double digits by the end of the year, further encouraging frugality, we'll have to see if the game companies' use of high prices to offset depressed sales ultimately pays off.

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