Sunday, September 03, 2006

A Permanent Revolution: Does the Games Market Need Reform?

I'm curious about something to do with the DS Lite, and it is this: It is an incredibly sexy piece of hardware, offers beautiful performance, battery life, fits in your pocket, innovative game design opportunities, the whole bit. In many ways, the DSL is the most significant games platform of the last five years, and the mark of a real generational change rather than this fake "HD" generation (which isn't a generation shift at all, just the same one with ever so slightly more for a very much larger price tag). So since the DSL is such an amazing piece of kit that also fulfils the 'sexy' tick box, why hasn't it caught on ipod-style?.

It's popular in gaming circles, of that there is no question, but it hasn't really passed into the public consciousness, and this is puzzling. You see the latest Motorola phone being bandied about and the latest ipods get flashed around. Why not the DSL? I can understand the original DS not catching on because it is one ugly thing. I can't understand why I'm not seeing the DSL everywhere because it is such an "everywhere" product.

And the answer hits me that maybe it's because of the cost. An ipod costs 200 pounds on average. A DSL costs only a hundred at most if you haven't gotten it on a deal. But an ipod's content, the music, costs 79p per song (at most), free for podcasts. DS Lite games cost 30 pounds in many cases, 20 pounds for Brain Training etc. Sure, Nintendo makes a profit off of this model, the same model that they have used since the mid-80s and the NES (and which the rest of the industry has followed).

Higher priced games tied to media in retail outlets means that fewer games are sold per console. This is known as an attach rate, and I've heard that over the course of the time period which a manufacturer keeps its "generation" sits at somewhere around 5 for the home consoles and 2 for the handhelds. Which is why the GBA, having eventually sold millions of units was still a graveyard for many developers and conspicuously hasn't made Nintendo a hundred billion dollar corporation.

So we can see that higher priced games makes for fewer games sold. So the DSL may be a super sexy piece of kit, but it's no ipod because the content is so expensive. It's the same story with the consoles. 100 million PS2s sold, but not nearly as many PS2 games sold per PS2 as DVDs per DVD player. Same story with the Xbox, the Revolution, the 360 and so on. With a regular turn-around of hardware and new media types, perpetuation of a hardware-focused media cycle and continuing loss-leading hardware pricing, a state of permanent revolution has developed.

The problem with permanent revolution is that it isn't really free, and this brings me back to the ipod example once again. One of the key reasons that the ipod is so successful is that it is free to use. The stability of the Itunes structure, the ability of people to create their own mp3s and sell them from wherever, the liberal attitude to podcasting and so on serve to propel the platform forward, and its imitators also. It is a healthy, free market.

DVD is also a healthy market, and one that even the HD-DVD/Blu-Ray attempt is unlikely to unseat. It is easy to use, easy to publish for and with a licensing fee attached to the product that makes it all but free. DVD is a healthy, free market.

By contrast, games are a command economy. The permanent revolution breeds a devastatingly wasteful silicon war, with two sides spending each other into the grave and games really considered only in the context of platform defining titles (and increasingly internalised) or shelf-bulkers that might do well (but which end up going through "concept approvals" and all sorts of other economic hoops to get to market) and preferential business arrangements wherein the companies that pay the most or whose titles are most important to the strategy of the platform are the ones that get fast-tracked for production. And this even applies to the likes of Live Arcade, which theoretically shouldn't even need such a restriction as chip and disc printing is really not an issue.

Now, call me an amateur economist (which, let's face it, I am) but in other industries where a few key competitors basically create a permanent revolution setup between them is generally called an oligopoly, and oligopolies are generally considered bad for capitalism. As I understand it, this is because they really only compete against each other, while at the same time creating market scenarios in which the possibility of true competition from below effectively dies. The supermarket sector in Britain is an oligopoly, for example.

Oligopolies have a tendency to persist unless one of two things happen. The first is a fundamental shift in the market which pulls the rug out from under the whole industry. For example, the effect of the internet on the RIAA music publishers. The other condition is when governments intervene and take steps to correct the market, such as the British government's push for a fully digital platform which has created space for hundreds of digital channels and which is currently forcing the original terrestrial channels to branch out and change their staid old way of doing things.

Some oligopolies are likely unavoidable for physical reasons - like train companies - but many are not and the games industry is certainly not one of them. It is an oligopoly because of industrial reasons, i.e. it perpetuates because the main competitors have too much to lose if they try and change things. What is needed is outside reform, yet this is not a question that many governments are addressing. The British government, to look at them again, quite happily take many measures to liberalise the television industry, to try and prevent print media from becoming oligopolistic, and a raft of other measures, but they do nothing about the games industry. Maybe they haven't realised that there may be a problem.

Permanent revolution always descends into intractable dictatorship. Either the oligopoly lives on, or it eventually descends into duopoly or monopoly. In the process, competition at the lower end is killed, market innovation dries up, customer service eventually drops, as do jobs, growth and all the rest of it. Is this what's happening in the games market? Clearly I think it is, but what do you think?

If it is, then we need reform and we need the governments (particularly the US government) to do it. It is bad economics to allow the industry to persist on its current course. It will stall at the very least if it is allowed to do that, and that's not healthy for the economy as a whole, and the sector most especially. As a command economy, the industry can continue in this vein, but it is unhealthy for it to do so. Market liberalisation must go on the agenda, including such possible steps as outlawing concept approvals, forcibly reducing the manufacturers' percentages, creating a real market for development kit (not a pretend one like the recently announced Live venture), liberalising the manufacturing process for media to allow anyone to print their own disks and boxes etc.

It's not unheard of for companies to do this by themselves, I might add. Nintendo maintain that they are all about disruptive business practises these days, so maybe it is possible that their conversion to the Apple mentality is about to appear with the Wii, fully fledged and raring to go. Maybe no government intervention is needed after all. Looking at the DS aisle, however, I have to say that there's no real evidence of such a shift yet.

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