Game prices — in Australia it's the ultimate taboo subject, but we managed to get hold of Ed Fong, Managing Director of Ubisoft and Paul Yardley, Managing Director of GAME, to talk game prices in Australia. Can we go lower? And how can the local industry compete with the rapid growth of online shopping?
"The exchange rate is the exchange rate," says Ed Fong, with a shrug. "18 months ago it was a very different story. Should we peg our pricing to exchange rates? That gets messy.
"I think that if the exchange rate stays where it is, there’ll be a price correction."
This is Ed Fong, Managing Director of Ubisoft in Australia. He's talking about game pricing, in a refreshingly frank manner.
For years we've attempted to convince local publishers and retailers to discuss the issue of game prices in this country. It's been a debate punctuated with off the record mumblings and long, awkward silences.
We've been asking the questions - but no-one has bothered answering.
The Sea Change
We're talking to Ed Fong at Game-Tech. Just under an hour ago Ed was on stage presenting, informing a group comprised of his peers and partners that retail was the greatest challenge facing the games industry today.
With the rapid growth of online shopping, and the dramatic shift in competition that comes with it, both publishers and retailers are starting to take notice. Previously publishers would point blank refuse to discuss pricing; now it's a subject for discussion.
Previously retailers were keen to shift the blame on to distributors, but now outlets like GAME want to take responsibility.
"I think there are challenges that retail in this country has to deal with," claims Paul Yardley, Managing Director of GAME. "One of them is a structurally higher market. Rents are high, the cost of employing people is high - running a business here is a cost high enterprise to begin with. That's fine, we can deal with that but that's partly why Australians pay slightly higher prices for a wide range of things."
Of the specialist retailers in Australia, GAME has been one of the most open about the issues facing the Australian games industry today. Games are too expensive, consumers shop online, a lack of competition has left local retailers struggling to adapt. In short: things have to change - and fast.
"Gaming in Australia is priced much higher than it is anywhere else in the world," continues Paul. "And that's a real challenge for retailers here, because consumers - they want a cheap deal, and they'll go and find one. We're seeing a growing proportion of our customers - the very price sensitive end - going overseas.
"As I've said to you before, the industry has a lot to do in order to provide a price point that is really compelling. Retailers and distributors and suppliers all need to hold up their part of the bargain.
If local industry is to adapt to an increasingly savvy consumer base, publishers and retailers are going to have to work together.
The Price Is Wrong
"Most people are talking about pricing, which is a very contentious issue," claims Michael Ephraim, Managing Director of SCEA, "but it’s not something we can control locally because we live in a country at least three-quarters the size of America with a tenth of the population – so the cost of the business is high.”
This has been the stock standard response to most enquiries regarding Australian game prices, but does that answer hold water when consumers can easily import games from Europe at dramatically lower prices than we pay locally? And how long can the local market sustain the pressure of this competition?
"Ultimately the consumer is going to tell us what they want to pay for a product," says Ed Fong, "because if we’re priced out of the market, we’ll see more people going online - the consumers will let us know. And consumers are as vocal as they have ever been, they have communication channels and we’ll hear what they have to say."
It's a frank admission, and testament to the power of the consumer. If we refuse to cough up for exorbitant local prices, publishers will have no choice but to reduce prices - adapt or die. Many retailers have claimed that they are already selling at just above cost price - are local publishers making more than they let on?
"Not being privy to the financials of distributors," begins Paul Yardley of GAME, "I don't know.
"I can only see what we make here locally compared to the UK and other territories and I can say - and I suppose I would say this - we are not the ones taking the cream."
The Black Hole
So where is this extra money going?
"The only thing I can think of is that there is duty on importing games into Australia," he continues, "and there is GST. But 15% doesn't explain the huge mark-ups. I'm not sure I have the solution other than to say that we all have a case to answer for. I'd be keen to put the case to the publishers to hear what they have to say.
"It's more than just a retail problem."
We put it to Ed Fong of Ubisoft - is there a giant black hole sucking up the profits made by local publishers and retailers?
His answer is uncharacteristically frank.
"No no!" He laughs. "I wish! I wish I had the key to that black hole!
"If you’re talking about consoles, well, the console price is driven by the first parties, because the first party royalty structures are set up in a way that we buy goods from them. That’s the starting point. The only thing that really differs is whether a business is US based or European based. We’re primarily a European company so our price structure is done via head office. We generally find that European pricing - France, Germany, Spain - is more expensive than the US. That's where our pricing is derived from.
"There’s no black hole – the retailers make their margin, obviously, but our business is absolutely focused on cutting all the other costs out. We have very efficient distribution, we have very efficient warehousing systems to make sure there is no extra cost in the market. That’s a real challenge for Australian distributors, because it is a huge country."
Once again, it seems, we're at an impasse.
The Odd Couple
According to GAME's Paul Yardley, game prices are everyone's responsibility - and if everyone played a part, we could be paying less.
"The industry needs to adapt." Claims Paul. "The third parties have to look at their cost structures and their ability to adapt to that changing environment with overseas pricing. First parties have to look at royalties and their agreements with the thirds to make sure their business model is viable as well."
Part of the problem is that, while tech savvy consumers are often happy to make purchases online, the vast majority feel more secure shopping in-store (at a premium) for a number of different reasons.
"Overseas websites won’t be able to get the product to consumers day one," says Ed Fong. "That’s our number one advantage. There are a small percentage of consumers that are quite comfortable buying something online, but there’s still a bit of a risk with a $100 transaction. Unless you know what you’re doing, you’re going to think twice about it. Whether it's a digital download or a physical product that’s going to take a week to get here – there’s still a risk.
"The whole PlayStation outage put a question mark towards that. For the consumer it’s an absolute deal breaker. If you don’t trust the online environment, you won’t go there. You might do your research online but you won’t buy online. We’re talking today about mass market consumers. Mass market consumers aren’t as tech savvy as those I would call ‘gamers’."
Online shoppers are in the minority. With the vast majority of consumers still willing to pay more, publishers have no real incentive to reduce prices. Yet.
For retailers, however, who are at the forefront of increasingly brutal price wars, the situation is a little different.
"As retailers, when it comes to pricing," begins Paul Yardley, "we're at the sharp end of the stick. We have to take some of the pressure from our customers about pricing. And quite rightly so - we wear that."
We Fade To Gray
We ask Paul - as a primarily UK-based retailer, GAME are in the perfect position to simply import games from the UK, at a reduced cost - why not simply move the business to grey imports exclusively?
"We could do it tomorrow if we wanted," claims Paul, confidently. "And that's not a threat - it's just a fact.
"But our position is that we support a local, thriving gaming industry and that, to me, has to involve local publishers because they have a key part to play in promoting product here in Australia.
"If we were to import all of our Sony products, for example, there would be no Sony presence in this country, because there's no reason for them to exist here without distribution. If we broke the banks everyone would follow - therefore Sony wouldn't market any of its products here.
"So actually we might shrink the market if we sold grey imports."
The publisher/retailer relationship is a strange beast - and when you combine that relationship with the increasingly volatile gaming consumer, there's potential for chaos. With the online shopping boom retailers have essentially gone from zero competition to more competition than they can handle - in the space of just a few years.
And both retailers and publishers are going to have to adapt. Eventually.
"If Australian customers spend their money overseas," says Ed Fong, "we don’t have a business in Australia. Absolutely that is something we need to look at."
Paul Yardley concurs.
"We have a bit of time, I think, but it doesn't mean the pressures are not there," says Paul Yardley. "I think it's a case of people having to wake up and realise that margins are going to be lower; we're all going to have to make less money.
"And that's a pretty bitter pill to swallow. It's hard for all of us."