In-Depth: Going Digital

For a couple of years now most analysts have gone on, at length, that the future of gaming (and most media) is a strictly digital one, with the physical disc in a physical store slowly becoming the sort of thing that ends sentences that begin with “When I was your age…” Many debate the validity of this argument, most often arguing that consumers will never fully buy into a completely product-less marketplace where they never hold an item in their hand, or perhaps the more genuine argument, that consumers will never embrace a system where they have no option to resell the media or buy the media second hand for a lower price.  (And lets face it, more than a couple of companies that specialize in used product do not want to see that happen either.)

The growing digital market seems to be proving the analysts theories though, as every day more and more people buy and play “digital only” games; whether on Xbox Live, PSN or even Facebook.  For many smaller companies the digital distribution method makes financial sense, providing an outlet to sell their game with much less overhead.  Additionally, the current digital market specializes mostly in “smaller” or “casual” games, some of which take significantly less development time and would simply not sell as a full price retail product.  Those lines are narrowing more and more every day though, as more “full” retail games become available in purely digital formats.  The PC has seen this on a much larger scale than the consoles, but even Xbox Live has Xbox on Demand, a digital marketplace where users can buy full versions of games previously only available at retail.  At what point do the big companies begin to look at the digital distribution method as making more financial success than the physical?  What will this transition look like? Who will be the major players and which of the big companies will make the move first? There is already a growing trend for almost all games, regardless of the format of their initial release (physical or digital) to have a plethora of digital content to expand upon the initial product.  Downloadable content (or “DLC” for short) comes in many varieties, is available for almost every game released today and in the case of EA is even being used as incentive to buy the physical game new with their “Project Ten Dollar” campaign.

Out of all the “big guys” in the gaming industry, one company does seem to be exploring the digital marketplace more than the others.  There is no denying that EA has made moves to capture an early share of this relatively new market; with the company currently claiming to be the number one publisher on the iOS, Windows Phone 7 and Blackberry as well as number two on Facebook and currently publishing two of the top five products on the Android’s App Market.  More important, and possibly more indicative of a future trend, than the number of downloads is the earnings figures EA announced in their recent quarterly report.  Net digital revenue for the company is up an impressive $62 million year over year, reaching $195 million, while net traditional retail publishing revenue dropped $78 million to $91 million in the quarter.  To put it simply, the digital market is not only proving more profitable, the physical retail market is starting to be less profitable, even for a publisher as big as EA.  While it is unclear how much of the digital revenue may be from DLC for traditionally released retail games, the numbers still speak for themselves.  Additionally Activision also released numbers showing similar growth in the digital markets, likely aided by the sales of map packs for their Call of Duty games, but none-the-less highlighting how this is an industry trend beyond just EA.

This may seem borderline unbelievable for most console and PC gamers.  How much money can a Facebook game for example really bring in?  The answer is higher than you would expect.  Recent estimates put together by IGN are truly astounding (and they really are only estimates, as many of the developers have not released sales figures publicly).  Facebook craze “Farmville” has brought in an estimated $300 million dollars in revenue, roughly equally that of Halo Reach and topping EA’s own guaranteed yearly money maker: Madden 11. No, you didn’t read that wrong.  Farmville, that game suggested to you by Facebook friends you haven’t spoken to in five years, and the game that you have subsequently hit ignore for roughly three hundred or so times, beat out Madden 11. While these numbers are surprising, what is even more surprising is that ultimately games like Farmville have competed on the same level using micro transactions (Numerous small purchases rather than larger one time purchases), next to no traditional marketing and lacking a retail presence.  The real key to games of this type is the significantly reduced overhead, especially in terms of production/distribution, as it is no secret that packaging and distribution is expensive.  This also means the risk is lowered; if a game does not sell well you are not left with a four million disc already bought and paid for collecting dust on Best Buy’s shelves, and the only cost to keep selling the game long-term is bandwidth meaning it is significantly easier for a company to attempt to recoup development cost over long-term sales. Additionally, in many cases the digital distribution method removes the retailer/middle man by selling to the consumer directly allowing for a greater final profit. Take for example the indie hit Super Meat Boy, which has sold roughly 400k copies on XBLA and Steam, for the most part at $10 a unit.  The odds that SMB would of found the same success on store shelves seems unlikely, not to mention the additional cost of producing the game’s physical product and shipping it around the world. Additionally SMB can continue to sell on XBLA for no extra investment, while selling more physical copies would require producing more, which would require more money and so on. And even though recently Team Meat has announced a retail version of the game, it is a case of digital sales allowing a company to be able to attempt and reach a greater market through retail.

There is still the issue of the consumer’s perception of value.  While buying a small, casual game on your iPhone so you have something to play while stuck at the airport is one thing; but the release of Call of Duty 15: Modern Gang Warfare never being sold in a disc format, is a much different beast.  While it seems like that day must be far off, if not entirely unlikely, we must remind ourselves that the most recent iterations of classic game franchises such as Sonic and Lara Croft were digital-release only games.  While admittedly both series has suffered this generation (and last), to see characters and franchises of that magnitude getting digital only releases is none-the-less notable.  This is how the future of digital only gaming will likely unfold, we begin to accept that big name franchises are releasing “digital only” games, our digital libraries begin to build up faster as our physical libraries shrink or even just stay the same, till one day we realize we haven’t bought a physical game in recent memory.  I’ve personally experienced this myself, having said less than a year ago that I prefer the tangible disc too much to ever fully embrace digital gaming only to realize as I sat down to write this article that I now own almost as many digital games as I do physical; and my recent purchasing habits has clearly leaned me even more in that direction. In fact, doing a double check as I write this I found that 15 of the last 20 games I’ve played have been digital-only releases. I stream movies from Netflix on my Xbox, and then when I’m done I am significantly more likely to play a game stored exclusively on my hard drive, and there is a significant chance I will stream digital music files from my computer while playing that game.  I got so sucked in by the convenience and fun I was having with my digital content that I didn’t even notice it till I stopped to look.

There is no doubt a benefit to going digital; and EA certainly seems to be embracing it.  Will they abandon retail anytime soon?  Unlikely, but… well it just feels like there should be a “but” in that sentence doesn’t it?  Certainly if any of the big publishers were going to make the jump EA stands out as a top contender, as they already seem to be limiting traditional retail sales while steadily increasing digital.  One has to wonder when the moment will come that EA decides to see if Madden can sell as well in a digital only format, and it is not hard to imagine that once a publisher as big as EA takes that step many will soon follow.