Two-Player Mode: The Death Of Retail?

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Welcome to the second Two-Player Mode debate, where I lock horns with Screen Play editor and veteran games writer Jason Hill to assess, analyse and argue a burning industry issue.
This time we turn our attention to digital distribution in the wake of the announcement of OnLive. We ask what are the potential consequences for the rest of the industry, for the PC as a platform and the three console makers? And could it spell the death of the traditional retail model?
Hit the jump for the full exchange.

From: David Wildgoose To: Jason Hill Subject: The Death of Retail?

I know neither of us attended the recent Game Developers Conference, but I feel confident that you monitored the event's news as keenly as I did. One announcement that attracted considerable attention was the unveiling of OnLive, an on-demand service that purports to stream console and PC games to your home PC from a remote server.

With major publishers including EA, Ubisoft, Take 2, Atari and THQ all revealed as partners, and the prospect of "cloud computing" drifting tantalisingly towards us from beyond the horizon, tech journalists, games writers and average consumers were quick to declare the service the future of gaming.

Sure, from a techno-fetish perspective, OnLive sounds thrilling. Indeed, much of the conversation the followed the unveiling consisted of little more than wide-eyed awe at the possibilities. Unable to distinguish between science and magic, our mouths are left agape: "How the hell is this going to work?"

Some commentators claim that it "can't possibly work". But really, it's beside the point. The industry fervour around the OnLive announcement is, to my mind, indicative of the collective desire to cut the traditional retail sector out of the equation. OnLive is digital distribution taken to its ultimate conclusion.

Games companies hate the traditional retail model for several reasons. They hate the large slice of the pie a retailer takes for acting as a middle-man in the transaction between game maker and game player. They hate the used game business that sees retailers re-selling second-hand games for just shy of full-price and keeping all that money for themselves. They hate the cost involved in manufacturing and shipping all those millions of discs and cases.

PlayStation Network, Xbox Live Marketplace, the Wii Shopping Channel, Steam, Impulse, etc are the first steps towards eliminating traditional retail channels and securing revenue streams otherwise - so the argument goes - lost to the industry.

I'm curious to know your reaction to the OnLive announcement. Why do you think there was so much excitement around it from all corners of the industry? And also, how do you think gamers feel about this desire to kill off traditional retail?

From: Jason Hill To: David Wildgoose Subject: RE: The Death of Retail?

I wasn't surprised at the hubbub surrounding OnLive, but I will be surprised if it works. I can't get my head around the fact that the vast majority of the world still has pretty slow broadband, and the system would seem to require major computing power at both ends to perform the necessary compression, so it doesn't seem viable or cheap. I smell another Phantom, but good luck to them. At the end of the day I can see why publishers who are looking for an alternative to the piracy-stricken PC format would be interested, but not consumers who are already very well served by current consoles. The only significant advantage of OnLive to the consumer is price, but how much cheaper than current consoles could it really be? Surely most people think the current machines are actually pretty good value. Rampant sales over the past few years suggest so, even for the "premium" priced PS3.

I adore digital distribution, and I'm sure a lot of our readers feel the same way. Clearly, we have already seen that digital distribution services encourage innovation and risk-taking from developers and publishers, enabling a greater diversity of software and price points. Publishers love it because it reduces the impact of piracy, reduces the second-hand business, there are no retail margins or manufacturing expenses, and much lower distribution costs. It's hard to imagine the likes of Braid, Flower, Lost Winds, World of Goo, Peggle, Everyday Shooter, Bookworm Adventures and Pixel Junk Monsters would ever have found their way onto retail store shelves.

But those pronouncing the death of retail are in for a rude reality check if they look at Screen Digest figures for 2008, which suggest that only one per cent of the worldwide console software market was downloads. It is very early days for digital distribution. PC internet connections might be ubiquitous, and over half of all next-gen consoles are now connected to online networks, but the vast majority of software purchased today is on discs, and that is how most consumers like it.

Apart from the obvious problem with our crappy broadband speeds and the size of most games, people love physical media because of the sense of ownership. I've seen on your site that you regularly run pictures of people's gaming collections, and what's obvious is that a lot of people take a lot of pride in their collection. They also appreciate that if they don't want to keep a game, that it still has value and can be resold. The second-hand games market is obviously huge. That pride and value people see in ownership of physical media is never going to change and means that there will always be a big component of the market that is packaged goods. I think it is telling that PopCap, who don't get a lot of kudos among the hardcore but are really one of the masters of digital distribution alongside the likes of Valve, recently started selling boxed product. They know there is a big market out there that they are never going to reach if they remain online only. I can't see that changing for a long time, if ever. But as a supplemental market given the many advantages, digital distribution is revolutionary and here to stay.

Sony recently trademarked "PS Cloud". What do you think is the likelihood that the next generation of consoles (if any get released...) will do away with physical media? And I've noticed you regularly scout for the best indie games around the world, do you reckon digital distribution is a blessing to the best indie developers out there, or something of a poisoned chalice because of the huge amount of crap that ends up getting thrown out into the marketplace. The iPhone app store is a good example of that phenomenon: there are currently over 6000 games on the service, all released in just a few months, and most of them are rubbish.

From: David Wildgoose To: Jason Hill Subject: The Death of Retail?

Judging by the Screen Digest research you cite, the transition to digital distribution will take some time. And surely this only emphasises the bleakness of OnLive's prospects. (Bear in mind, this is also the same analyst firm that still claims the PS3 will finish first this generation.)

Your observation of the value we attach to boxed products is astute. It's interesting to see a service like Good Old Games add a virtual games shelf to its interface so you can see the boxart of the games you've purchased. But how long ago was it that commentators were saying the same things about the music industry and consumer desire to hold that vinyl 12-inch or CD in their hands? Apple (or was it file sharing?) changed all that.

I'm not sure we'll see a similar seismic shift in consumer habits in the video game industry - and if we do, it won't be as sudden. One disadvantage games have is their higher price. iTunes and other music download services work because individual tracks are at impulse purchase price points. The relatively small file size, too, complements the immediacy of the transaction.

However, an advantage download services such as Steam or XBLA hold over the streaming technology of an OnLive is that the consumer still owns the game. You may not be taking a physical product home from the store, but that game is available on your preferred storage device to be played whenever you like. With OnLive, what happens when your favourite game gets too old or unpopular and they decide to turn the servers off? How viable are niche or indie titles in this kind of environment?

While there have been some notable indie success stories on the iPhone already, let's wait and see how many more there are once the app store hits 60,000 or 600,000 games. Niche and indie titles have been well served by Sony or Valve adopting a quality over quantity policy; they've wisely chosen to encourage small-time developers, not let them run wild. The ill-fortune of Microsoft's Community Games Channel can be attributed by the lack of moderation and quality control.

I think the next generation of consoles will be more heavily focused on digital delivery of content, but physical media will still be commonplace. With an eye on sales lost to piracy and used games, what publishers might do is continue to push increasing amounts of DLC. What if, for example, Halo 4 shipped to retail with just a single-player campaign and all the multiplayer features were available as DLC over the months and years following release? The consumer is encouraged to not only buy the game rather than pirate it, but then hang onto that disc rather than trading it in.

So what are your predictions for the next round of consoles? Where do you see the balance between retail, digital downloads and streaming? And what other methods can you foresee publishers adopting to counter piracy and the used games market?

Finally, I'm heartened to see you're a fan of our Show Us Yours posts. Perhaps I can take this opportunity to encourage you to send in your own collection?

From: Jason Hill To: David Wildgoose Subject: RE: The Death of Retail?

I'll show you mine if you show me yours.

I just found some statistics that paint a rosier picture for online distribution, and perhaps put more fear into traditional retailer. They're from the PC Gaming Alliance and are for 2007. They show the worldwide revenue from PC games at retail was US$3.2 billion - not too shabby. But the total PC gaming market was US$10.7 billion, so retail is no longer the dominance force in PC gaming market. Micro transactions and subscriptions to online games were worth US$4.7 billion, games sold direct via digital services like Steam and Direct2Drive were worth $1.9 billion, and advertising revenue was US$0.8 billion. So while we know it is early days for console digital distribution, the PC market has already been significantly transformed.

So what are my predictions for the next round of consoles? You don't mind palming off the hard questions, do you? OK, I'll have a stab. My first guess is that we won't see them for a very long time, except for a high-definition Wii with more storage and MotionPlus built into the Remote. I can't see Microsoft or Sony being in any hurry, they need to start making some decent money on this generation first.

If Microsoft releases another console (and I don't think it's guaranteed that they will) I reckon it will be closer to what we might dub a network entertainment device than a pure console. I'd expect it to be small, cheap, quiet and look more like traditional audio visual equipment. It will be fully compatible with all existing Xbox 360 games and Xbox Live Arcade titles, and marketed as much for its movie and television download service as its games. It might not be any more powerful than a 360 at all, but have heaps of storage. Blockbuster games will still be released on disc (hello Blu-ray!) but there will be plenty of online-only releases, and if the Primetime channel on 360 works as well as it should, then something similar will have a big focus on any subsequent device.

Sony is harder to predict given the current status of PlayStation 3. It's easy to think that Sony (and their investors) wouldn't have the stomach for the massive investment in another high-end machine. But things change, and if PS3 does have the long tail that many analysts still predict, I could see them sticking with the strategy of being the high-end premium product, and having an equal focus on disc-based product and downloadable titles.

As for the publishers, I think there's little doubt more and more will try to use that marketing-driven wank-speak of offering an ongoing "service" rather than a "product" in order to combat the evils of piracy and second-hand sales. Of course, that's easier said than done. Everyone would like their game to have a subscription model like World of Warcraft or an ongoing downloadable revenue model like SingStar, Rock Band and Guitar Hero. But it's hard to see customers tolerating the Halo 4 situation you describe when we now expect certain components on the disc from Day 1. The online models will work better for some games than others - sports and racing games will work well with subscription model that updates rosters, and adventures delivered in episodes also suits an online model. And maybe many will be prepared to pay small monthly fees to play in multiplayer leagues and tournaments for their favourite shooter. But the key will be using DLC to add value to an existing disc-based product (purchased at retail) to make people hold onto their games, avoid piracy and increase the potential revenue from each product sold. The disc isn't going anywhere soon, and EB Games isn't going to have to close its doors.

Two-Player Mode is a regular column across Kotaku and Screen Play. Join in the discussion on both sites and let us know if you have an idea for a future discussion topic.


Comments

    What's wrong with trading in old games? I'm sick of these mega rich companies telling me I can't resell something I own.

    David makes a great point about the advantage of owning physical media meaning you can play your games whenever you want. I worry about this move to having everything online. I own a PS3 and even I'm worried about the PSN games I've bought. How do I know I'll still be able to play Warhawk in 5 or 10 years, just like I can pull out my old NES and dust off those old cartridges whenever I want.

    I don't buy this argument that second hand games means money lost to the industry. I trade in games all the time but I use that credit to buy brand new games. I don't buy second hand games at all. If I didn't trade my old games there's no way I could afford to buy as many new games as I do. Games are too expensive! That's the problem. Not second hand games.

    Steam is awesome. I HATE dealing with dickheads at EB. The sooner retail dies the better I reckon!!!

    @Red13 - How can you say second-hand games aren't draining the industry? It's ridiculous when EB give you 30 or 40 bucks for a trade-in and then put that same game back on the shelf for nearly full price. I can see why publishers aren't pleased with that!

    @Jason Hill

    "I'll show you mine if you show me yours."

    Bit of unresolved sexual tension there, guys? LOL!

    This idea about Halo 4 having just the campaign on the disc and the multiplayer as DLC is interesting. I can see it working if the disc is cheaper than normal, maybe $50 or something. Didn't Epic suggest something like that where you buy the disc but if you wanna finish you have to use a code to unlock the rest of the game? I think the idea was that the code could only be used once so you couldn't trade it in afterwards.

    i dont give a shit im a PC gamer and u cant trade in PC games anyways so Steam, ftw and retail must die!

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