Today, gaming website Kotaku published an article by a "free-to-play design consultant," defending his job and, more generally, the spread of free-to-play across the games market. This gives me an excuse to write about something I've wanted to write about for a while, which is how free-to-play is strangling the gaming market.
Okay, not everyone who reads this blog plays video games--I'd hazard to say that most don't--so first, a quick explanation of what "free-to-play" means. Also commonly abbreviated F2P, these are games, always multiplayer, which are provided free. But players can make purchases within the game, unlocking new items, characters, levels, whatever. In a typical example, it's a first-person shooter where everyone can play with a little trifle of a pistol but you have to pay real-world money to use a big, impressive assault rifle. Many variations exist--for instance, at least one free online game seems to have generated a small economy around players paying real-world money to give their characters a variety of silly hats.
Everyone hates it. The practice is widely despised among gamers. Periodically, articles appear attempting to convince gamers that this is irrational, and that free-to-play is something they ought to embrace, but to no avail. The Kotaku piece above is just the latest in this proud tradition.
The gamers are completely right.
Their hatred of free-to-play is not only understandable, it's actually a completely economically rational feeling, and I'm going to explain why. Be forewarned, this is slightly on the long side. But I think it's worth reading, if you're even slightly interested in games or economics.
Free-to-play games are a sophisticated, clever form of price discrimination. Price discrimination, for the non-econ nerds out there, is the practice of encouraging each consumer to pay what a product is worth to them. It's a way for producers of a particular product to extract the maximum possible value from consumers of that product.
Let's use an example to see what I mean. Imagine you go to buy a hamburger. You're a little bit hungry, you'll pay three bucks for that burger, and you're in luck, because that's exactly what they cost. Now another guy comes into the burger joint, and he's starving. He'll pay a huge amount for that burger, up to fifteen dollars; to him, a hamburger is worth fifteen dollars. If he pays three, like you did, he keeps twelve dollars in value (extra value known to economists as consumer surplus).
But the hungry guy also represents a potential economic opportunity for the restaurant. If they know he's hungry, they can charge him the full fifteen, retaining all the extra value for itself. Let's not get into the ethics of this just yet: it's easy to see how this is an enticing proposition for the burger makers. In fact, they'd love to be able to sell burgers to any buyer for the amount the buyer was willing to pay. Three for you, fifteen for the hungry guy, maybe eight for the next customer, four for the next customer, and so on. That technique, of charging everyone what they're willing to pay, is price discrimination.
Two important asides: first, you can see how, in practice, this is very difficult for sellers to do. The burger maker has no good way of knowing what someone is willing to pay for the burger, unless the buyer is willing to say so upfront. And even if the producer could figure that out, other people on the market could undercut it. For instance, you could buy your three-dollar burger, turn around, and resell it to the hungry guy for fourteen. He'd get a relative bargain and you'd get an eleven-dollar profit, enough to buy a new burger and then some.
Second, the seller obviously doesn't want to sell to anyone for less than the cost of manufacturing the burger; it would be taking a loss. That puts a price floor on the product, even if price discrimination is occurring.
There are some times when economists agree that price discrimination is actually helpful; for instance, in a market dominated by a single monopolist. But this has led to the impression, among many economists and policymakers, that price discrimination is, on-balance, a positive practice in virtually any market, and that's wrong. And it's wrong for exactly the reasons demonstrated by free-to-play games.
Price Discrimination and Free-to-Play
The structure of free-to-play games is entirely determined by very basic economics. First, their free-ness: unlike hamburgers and other physical products, there is no "price floor" determined by the cost of manufacturing each additional copy of a game. The cost of additional digital copies is very close to zero. (There are, of course, initial development costs, but those are the same regardless of whether ten people or a million people play the game.) As a result, game producers can price discriminate over the entire potential price range: up from zero to whatever astronomical amount players are willing to pay.
And hopefully, the example above helps illustrate why free-to-play games are a form of price discrimination. Basically, the bottomless well of add-ons and upgrades let a gamer who really likes a game spend a lot of money on it, while allowing a gamer who only kinda-sorta likes it to only spend only a few dollars on it. It's not perfect price discrimination--the two people are getting slightly different products--but it's pretty darn close, about as close to the abstract version of the practice as could conceivably be achieved in the real world.
Finally, gamers may have noticed that all free-to-play games are online games. That's not a coincidence! Remember the part above where I said you could turn around and sell your hamburger to the hungry dude for fourteen dollars? That's no less possible in the games market--unless everyone has to buy the game in question from a centralized manufacturer. The main example of this is online games, where you're barred from playing on the game's central servers if you aren't paying the game's producer.
The astute gamers out there might also now be thinking of the other major form of price discrimination in the games market, which no less common and no less hated. That would be DLC (for the uninitiated, downloadable content, which is a euphemism for paid expansions to existing games--levels, items, and other new features--ranging from tiny, cheap, and cosmetic, to sprawling and expensive). Think about how DLC works: it's an add-on you buy for a game you really like, or in economics terms, extra money paid for a product the buyer highly values. But one feature of DLC is that in today's market, it is always bought direct from the manufacturer. Even if I buy a used Xbox game from my friend, it doesn't come with his DLC. Once again, this kind of has to be the case, because price discrimination doesn't work if there's a resale market.
I think it's fair to say at this point that the game industry is obsessed with price discrimination. It's completely bonkers for it! Barely a new game is released without significant DLC, and free to play is rapidly gobbling up the online gaming marketplace. Many if not most online-only games are now being designed as free-to-play, and even older games, designed to be sold for a fixed price, are actually being converted to free-to-play in retrospect.
This makes sense. If you're the manufacturer, price discrimination is awesome. You make literally the maximum amount of money that you could possibly make with your product. I'm sure if you're making games, it seems like a gold mine.
But what's it like for the consumer? That's a question that isn't often addressed. The gaming market, however, provides a clue. And the answer, I think, is a lot less rosy than the manufacturers currently believe.
Why Consumers Hate Free-to-Play
Right now, think about the things you bought recently that you were happiest with. Seriously, do it! Here, I'll do mine: I bought Crusader Kings II and all the expansions for $20. I play that game a lot! I'd have happily paid five times as much for it! I bought a Margaritaville Frozen Concoction Maker for about $200, but I've surely drunk twice that much in delicious frozen margaritas from the machine! A fantastic bargain!
That sense of happiness I'm feeling with my purchases? That's what consumer surplus is. I've got similar feelings, in various degrees, about most things I buy. Chinese food for dinner. A pack of gum. A new pair of pants. If a product is sold for a fixed price, most buyers of that product will come away a little bit happy with their purchase.
Price discrimination, in the form of DLC and free to play games, is the practice of taking away that happy feeling for 100% of a product's customers. In the strictest economic terms, it's literally the practice of taking consumer surplus and transferring it to producers, ensuring that consumers derive no extra enjoyment from their product.
Go back to the hamburgers. You will pay for a three-dollar burger and pay three dollars for a burger, and a hungry guy will pay fifteen dollars and pays three. The hungry guy is presumably happier than you at this point, because he wanted it more. But if you pay three and he pays fifteen, both of you are, economically speaking, equivalently happy. In fact, every burger buyer is exactly the same amount of happy with their food: just enough to buy it, but no more.
Increasingly, that's the game market. The industry hopes that it can get everyone to pay exactly what they'd be willing. As a result, no one ever gets a bargain. Maybe everyone likes their games enough to buy them, but no one ever feels very good about it. The market is completely homogenized; there are no good deals, only just-good-enough deals.
Short run, this might be a bonanza for manufacturers. They make bank, and yet people keep buying. But who knows what the long-run effects are? I think we're already seeing a few, in gamer circles. Consumer exhaustion. Frustration. It's not hard to find: go to any game blog or site, find the announcement of some new free to play game (or some new DLC) and read the comments. These two things are hated by gamers, probably more than anything else in the game market right now. They're completely anathema to the excitement that gamers traditionally feel about new games. And that's completely by design. DLC and free-to-play monetize that excitement, extract every cent of it from customers.
No one can say for sure, but I think producers are slowly killing the golden goose here. It's good for them when their customers are giddy about their products. It's bad for them when their customers are part of a farming operation, slowly being milked for cash until the entire industry is lost in a fog of perceived mediocrity.
Markets require both consumers and producers. Can a market survive when half of those people are participating grudgingly at best? Maybe. Can it thrive? I doubt it.