The Price of the Month. Success or Failure?

06/2010: Alan Wake Xbox 360 starting at 31,15 €

Posted in Pricing by Jouko Riihimäki on 30.6.2010

I became interested in the topic when Alan Wake, the new game from Remedy, the creator of the global hit Max Payne, began its efforts to conquer the world in Europe on May 14th. The publisher of the game is Microsoft. I decided to analyze Alan Wake in terms of pricing. According to my knowledge, the target launch price in retail moved mainly between 60 – 70 euro taking exchange rates and the local market situation into consideration.

What is Alan Wake?

Alan Wake is a third person shooting game developed by the Finnish Remedy Entertainment and launched by Microsoft Game Studios on Xbox 360 on May 14th 2010. The creators of the game have named Twin Peaks, Lost and the works of Stephen King as their inspiration.

The scene for Alan Wake is the fictional small town of Bright Falls in northwestern United States. The main character of the game, Alan Wake, is suffering from writer’s block when he arrives at the town for a vacation with his wife Alice. Once Alice goes missing, Wake is caught in the middle of nightmarish events based on a book he does not remember having written.

Gaming industry*

Throughout the 21st century, gaming industry has been the fastest growing branch of entertainment industry. In 2008, the global value of game sales in gaming industry was estimated at approximately 50 billion USD, while movies amounted to about 84 billion and recorded music about 30 billion. So, in terms of these numbers, the gaming industry has passed recorded music in sales and is catching up to movies few billion dollars a year.
The strong international growth of the gaming industry is based on at least three significant factors: 1. demographic change in consumer groups, 2. new game consoles, game contents and distribution channels, and 3. the strong generalization of playing and distributing games online.

Games are a phenomenon which is very hard to ignore in the media and culture. People use more and more time on games and playing; games and playing also have a cultural effect. The cultural significance of games has been controversial for a long time but the trend in Europe would seem to be that games have become acceptable or they are becoming an acceptable part of the recognized culture.

*Source: Neogames and Suomen Pelinkehittäjät ry, Suomen pelitoimialan strategia 2010-2015 (“The Strategy of the Finnish Gaming Industry 2010-2015”).

Managing the life cycle of the gaming product

The life cycle of products in gaming industry is exceptional in many ways. Thus, I will approach the pricing through the life cycle and value chain of the product.

1. The development stage is long and it requires a significant amount of capital. A product is considered a hit once they sell over million copies. The creator of the game is responsible for the development and it is partly financed by the publisher.

2. The launching stage (entering the markets) is short and the novelty value for games is quickly lost. Advance orders form a significant measure of success for sales. Pricing is quickly adapted to demand in the markets and there is heavy competition between different sales channels. In addition, price information is transparent to the consumer. The retailer determines the consumer price according to the target prices set together.

3. The stage of usage (presence in the markets) is mainly relatively short; secondhand markets for games are created quickly (Secondhand Markets and Pricing), impeding the sales of new products. Heavy discounts are introduced in the pricing of new games. Nevertheless, it needs to be taken into consideration that the sales time for a game may be several years (Long Tail Effect).

4. Updating the product may be done through versioning or add-ons, which continue to bind development resources.

5. The closing stage of a product begins by transferring development resources to other projects. The product may exit the markets by removing the products from the selections of the sales channels. Also, the development of technology platforms affects the decision to remove a product from the markets.

The value chain in the industry plays a major role in game pricing. The traditional model of operation and value chain for game development, based on physical distribution through retail, is presented below. This model was dominating the industry prior to the era of digital distribution; it still dominates the industry to some extent. In the traditional model, the publisher acts as the financier of development. As the financial risk is significant to the publisher, they usually claim full immaterial rights created during the development of the game and rights to the potential further usage when entering into an agreement.*

*Source: Neogames and Suomen Pelinkehittäjät ry, Suomen pelitoimialan strategia 2010-2015 (“The Strategy of the Finnish Gaming Industry 2010-2015”).

The life cycle and pricing of Alan Wake

Development stage

Alan Wake was being developed for almost six years, which is significantly longer than the average. The long development stage has presented financial challenges to Remedy Entertainment Oy. In 2008, the flow of revenue has stopped almost completely and the launch of Alan Wake has been delayed. The financial statements of Remedy for 2009 were not available. It can be said that the company has had to invest both their own money and the publisher’s (Microsoft) money in the development work. For their part, Remedy has financed the development work with the profits from previous financial years, i.e. through internal financing. As Remedy has established a good reputation thanks to Max Payne, the company is likely to receive revenue from product sales, thus not basing their flow of revenue solely on the development payments made by the publisher.

Development of the turnover and profits of Remedy Entertainment Oy in 2005 – 2008 (official financial statements):

On these bases, it may be supposed, at least to some extent, that the internal pressures for pricing have been high for the parties due to the delay and the costs. This means that, internally, the price is set on the upper end of the price scale in terms of comparable products. On the other hand, the pressure for pricing was increased by the implementation of the worldwide launch, the selection of strong sales channels (such as Amazon.com) and limiting the game to the Xbox 360 console, the global market share of which is less than 25 % according to the recent estimate of the Strategy Analytics company. Below, you can see a picture with price examples on the bestseller games in Amazon.com online store (comparable products).

Launching stage

The launching stage for Alan Wake can be divided into beginning taking advance orders and into beginning the deliveries/sales of games. Game reviews and successful advance orders are especially important to the launching stage, as well as the price erosion occurring during the first few weeks (variation in prices).
According to Wikipedia, Alan Wake has received positive feedback from critics. The mean value of the 83 reviews chosen by Metacritic is 83 % (max 100 %) and the mean value for the 54 reviews chosen by GameRanking is 84.07 % (max. 100 %). Tapio Salminen from Pelit magazine complimented the game for its atmosphere, rhythm and milieu but criticized it for its occasional technical stiffness. He also considered the narrator inside Alan Wake’s head unnecessary. Miikka Lehtinen from Pelaaja magazine stated that the game was “more than the sum of its parts”, and he especially considered the story to be compelling. The editor-in-chief Thomas Puha, who gave a second review, criticized the animations for being dull and the action for being monotonous. Nevertheless, he considered the universe of Alan Wake to be unique and intriguing; he concluded the review by stating that “the absolute strength of the game lies in the fact that it cannot be compared to any other game.”

In terms of advance sales, Alan Wake was a success at least in Amazon.com. Introducing a quote from Punchjump news site on May 17th 2010: Advanced sales for Alan Wake for Microsoft Corp.’s Xbox 360 ranked in the top five at retailer Amazon.com on strong demand for the action thriller title.

In addition to this, I examined the development of prices in five different countries; the prices of June 10th 2010 were used for the comparison. Based on these comparisons, I analyzed the prices between different sales channels and different countries. Price erosion turned out to be surprisingly high. Based on prices and price development, it can be assumed that the game has not sold as much in England as it has in Canada. In the UK, the price was lowered by almost 50 % within a few weeks (see the table below).

Stage of Usage and Updating the product

As the story of Alan Wake is still at the very beginning, I will examine the pricing from two perspectives: 1. the prices for secondhand games and 2. the pricing of add-ons.

According to the CEO of Remedy, the effects of secondhand gaming markets are devastating to the entire industry. Here is a quote from the 10 Questions from the Academy interview with the CEO: What’s the biggest challenge you see facing the industry? The current model of used game sales and rentals are poison for the creatives in our ecosystem. Secondhand gaming markets are born and they affect the sales of new games quickly. I took the prices of four separate secondhand game stores in Finland and the United States on June 28th 2010. It was slightly surprising to find that the prices of used games were not significantly lower than those of new games. Clearly, the bigger challenge lies in the lowering of the prices of new games than in the prices of used games. This may refer to the pricing of Alan Wake having been too high at the launching stage and to the game sales being lower than expected in the higher price level. In conclusion, discounts have been introduced very early in the stage of usage.

Remedy announced early on that add-ons would be available later either for free or at a low price. In my opinion, this indicates a good pricing view and it prolongs the life of the game. Here is a quote from gamereactor.fi: Remedy has confirmed to MTV that the story of Alan Wake does not end with the two add-ons already published. The Signal, which is to be published in July, and The Writer following it will be accompanied by at least one add-on during the on-going year. The Signal, which will be free to those buying the game new, will set Alan against a threat “you have never seen before” but at the same time “intimately close”.

Conclusion

Forming an estimate on the price proved to be challenging. Even though the game reviews and publicity have been mostly positive, I would not rank Alan Wake very high in terms of launch pricing. I think the launch price, which was set keeping price skimming in mind, was too high and its effect is not diminished by the well thought-out add-on policy and pricing. Lower price level in the gaming industry is supported by the fact that, according to marginal costs thinking, each game sold covers the high fixed costs, and additional sales does not cause any significant variable, volume-bound costs. However, it needs to be taken into consideration that Remedy does not determine consumer prices; it simply implements the game contents. Focusing on the Xbox 360 platform will also diminish the potential markets of the game. This is understandable as the resources of Remedy are limited and they were primarily financed by Microsoft. I believe that with a launch price of 39.90 – 49.90 (EUR/USD) the game could have been a true hit. Now, the high initial “fever” may cool down quickly due to the high launch price of the product, which will not be remedied by the quick adaptation of prices to consumer demand. Interest would have been transferred on to other products by then.

Pricing Stars (1-5):

Jouko Riihimäki, M.Sc, CPP Certified Pricing Professional

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