The Sad State of Digital Software Distribution

#41

Part of the problem, I imagine, is that software companies want to maintain a degree of control over how their software is distributed.

Take your windows example: $250 retail, $260 online. Let’s pretend the reverse were true ($260 retail, $250 online)-

That means that (vista sales performance aside) in theory, I could make an out-of-my-garage business downloading copies of vista for $250 a pop, burning them to DVD, and selling them for $255. By making online copies cheaper, Microsoft has just CREATED a retailer who they have no business relationship with, who has no return policy or customer service department- Brick Mortar’s have more purpose than moving software; they serve as a buffer between the customer and the creator, handling things like refunds basic customer service. Also, if instead of going to CompUSA for versions of windows, millions of users were buying from thousands of home-retailers like my hypothetical self, it would be nearly impossible to apply pressure and stop us from, say, writing the word “STUPID” on every copy before we sell it, or displaying it in the same “aisle” as a copy of Ubuntu, or whatever- A chain like CompUSA, they could just stop providing the supplies to. The garage retailer, they’d have to increase the price AFTER RELEASE of online downloads in such a way to cripple our business- which would be a PR nightmare.

So, I think it’s probably more than just charging lazy-tax. They’re just trying to put a leash on distribution of their own product

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#42

@dbr: Steam added a feature I think about a month ago that’s supposed to make it easier to play your games offline.

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#43

Since HL2 has come out If a game is on Steam that I want, I’ll buy it there. Steam has no download limits, I can re-format, and install on as many computers as I want. You can get the pre-order discount, and save 10%, and they usually have some bonus content, like the TF2 beta. You can also pre-load the files int he week or so before the release, which means you don’t have to fight with the masses at the store or to download.

The final reason I like to do this, is buying a copy over Steam sends all of the money STRAIGHT to the developer. They can break even on selling fewer copies of the game, which in turn allows them to take more chances. I don’t want/care/desire to support the Suits at EA, or the pimply faced geeks selling games at EB.

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#44

Max Lybbert on November 12, 2007 02:39 AM said:
Or it could just be that they will charge full price as long as people pay it.

I worked on the “digital distribution*”+DRM industry on my previous job and every time anyone from my team asked “Why the prices are so high?”, the answer from our manager was exactly that: “If people is buying it at those prices, Why should we lower them?”

  • digital distribution is such a stupid name I almost hate it because it’s used as if CDs DVDs were not digital

GG on November 12, 2007 05:39 AM said:
Try buying any product directly from the manufacturer, if you even can.

Then I’m sorry to disappoint you, because where I live you can purchase some goods from shop at shop price, or actually from a warehouse/manufacturer at a way cheaper price.

And that’s usually the reason you can find the same product from a shop in a street market but at a cheaper price too: they purchase it from the manufacturer at manufacturing price, and sell it at lower price than ordinary shops.

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#45

I really hope there is Steam available in Argentina, where I live. With no really high prices. Over here, legit console games are about 80-100 dollars, with PC games at about 60-70 dollars (the newest ones). The price is very high as most people can’t afford those games, and most who can wouldn’t pay that much for anything but Orange Box. As in Brasil, it’s so bad that the police allows people to set up businesses selling pirated software, including pirated copies of Windows selling for 10 dollars each. Not to mention games and expensive professional software. And it’s close to impossible to find a PS2 or Wii without a modchip. If there is a videogame market in Argentina, it’s 100% pirate. No wonder why Nintendo and Microsoft don’t even think about selling their consoles over here.

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#46

GG is correct - the BM distributors like Best Buy, Target, GameStop, etc will not distribute your product unless there are clauses in the agreement stating things like: Manufacturer can not undercut; Minimum price for all distributors. Sometimes they will state that the manufacturer can not sell directly.

And despite our wishes, at this point being a featured game or title at Best Buy still results in quite a bit more sales than being downloadable. So what would you do? Make 90% profit from 10K sales, or bow down to the BM and make 10% profit from 1M?

You say we’re not ignorant of distrubution economics, but perhaps most people are. The fact is, game publishers have to pay distributors. And distributors have to pay the retail outlets. Each step does this by adding a markup. But they want to protect thier profits, so they require certain agreements. I mean, If I said “advertise, stock, display this game, and you can have 10% off the top, but I’m going to undercut you. You’ll probably still sell a good number to people who don’t know. Thanks for the free ads!” Would you sell for me?

*note: Let’s not discuss the terms required by wal-mart. wow.

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#47

Why hasn’t anyone set up XBox 360 gray market sales channel for people in Europe? Sounds like they are getting ripped off!

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#48

Jeff, you’re paying for the convenience. And it is convenient. Discs are a waste of time. And for games, 99% of the time you’re getting the disc and a cardboard box and maybe a 4-page installation guide. And that 1% of the time that something like a nice guidebook comes with the game, you’re not actually going to use it. It’s just going to take up space on your shelf.

For games, also you have to deal with copy protection. If you buy a digital downloaded version (ala Steam), you get the convenience of not having to download a nocd patch from a dark alley of the internet or having to dig out the physical cd and hear you cd drive whine when you start the game. Also, you don’t have to deal with disabling Daemon tools or uninstall CloneCD to install the stupid game.

Also, the deals that digital distribution systems like those from Microsoft and Valve have to make with traditional publishers would prohibit them from undercutting the distributors on price. The theory goes that brick and mortar chains (Best Buy, Office Depot, et cetera) would be very upset if the manufacturer were undercutting their prices.

This is basically the same reasoning for higher prices on music on iTunes than what you’d pay for the physical CD in a store.

Eventually brick and mortar stores will go away and no one will miss them. The people who worked there and managed the stores may have some adjusting to do, but eventually they’ll find new jobs that will hopefully be more rewarding. Sort of like how the horse and buggy companies went out of business and their employees found new things to do with their time.

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#49

So, I’m a big believer in Steam, and the reasons I use to justify the negligible price differential is such:

  1. I don’t have to go into one of those shitty game stores and have to deal with those universal assholes at the counter, and pay all that extra money to pay their rent, rather then to the actual game company.

END OF LIST. Seriously. That hassle is worth that money to me. This weekend, I bought Bioshock on steam, got it at a meg a second, was playing it within the hour. Plus, I’m saving the environment! No plastic CD, no paper manuals that I would never look at anyway, no boxspam. It’s lovely. EB can fuck off, Steam is their death knell.

See also: http://www.penny-arcade.com/comic/2007/03/30

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#50

Jeff, the article has a typo: “ingnorant.”

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#51

GG and Philip have portrayed a great perspective on the whole situation from the Distributors and Retailers end. Kind of makes you think before calling regular consumers ignorant or not. There’s a lot of info we don’t know, and we might never know, that occurs between manufacturers, distributors, and retailers. Like everything else it’s important to know that our perspective affects our judgment. In this case, the perspective of a consumer. I believe in order to know exactly if people are being unfair, greedy, or making “pure profit” we have to understand the situation from the perspective of every party.

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#52

I know it’s virtually a niche compared to Windows software, but lots of popular third party Apple software is sold exclusively online. Retail never comes into it.

I guess when you’re in a market small enough to be ignored by retail, you don’t have to try to protect their interests.

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#53

I DL’d office 07 from MSFT. If you have a .edu email you can get full version for $60 www.ultimatesteal.com Not bad.

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#54

Whats really ridiculous, some games have different prices based on where you live. Recent example on STEAM:

Call of Duty 4 for US Customers: $49
Call of Duty 4 for EU Customers: $69

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#55

I worked on a game published recently, and our team asked our execs this very same question. We were told that retailers are sensitive to losing sales to websites. The bad online pricing is an agreement required in order to secure shelf space (which is extremely important).

And this was a subscription MMO, so we had an even greater reason to distribute the client online as cheaply as possible.

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#56

GG is correct that the normal situation is the manufacturer cannot sell for less than list price.

You don’t have to like the situation, but there is a good reason for it. Consider what could happen otherwise (especially in today’s environment with widespread broadband):

  1. Best Buy sells product from Company X for $40.

  2. Company X, taking advantage of the massive savings available to them by not having to distribute the physical product, sells it online for $15.

  3. Best Buy’s sales of Company X’s product plummet.

  4. Best Buy stops selling Company X’s product.

  5. Company X does well initially but with no retail presence they become less visible and sales begin to drop steadily.

Basically this can very quickly turn into a lose/lose situation for both the brick and mortar retailer and the manufacturer. This is why ironclad contracts are typically in place to force the manufacturer to sell no lower than retail price.

This is not a new thing, as Atari and Nintendo used to sell games through their fan club newsletters, and those games were always sold at full list price for the same reason.

Getting people to sell your product when you’re going to compete with them at a level they mathematically cannot achieve is next to impossible. About the only company that could pull it off is someone like Microsoft who is so gigantic that Best Buy wouldn’t consider not stocking its core products.

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#57

Jeff:

Where are your justifications for your percentages in your list of “basic retail economics”?

And aside from the other comments posted, while I agree with you, I think this is an overly simplified look at how retail shops sell products.

http://www.ordinarygeek.com/post/2007/11/The-Sad-State-of-Digital-Software-Distribution—Questions.aspx

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#58

I discussed this very topic with a friend who works rather high up in an online game company, and he said that the “old school” distributors force them to do it - according to him, they were threatened with a total block on all products if they were to sell their product online for cheap.

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#59

Brendan and a few others have it right, but today Jeff gets an “F” for economics.

The price of a product has very little to do with the cost of the raw materials, distribution, etc. Ideally, the price is precisely what people are willing to pay for a product. And the consumers are willing to pay the amount that the product makes their life better. That’s the whole story. (The only place that the cost of manufacture and distribution enter the picture is in the business decision of whether to enter the market in the first place, or to stay in it)

If two companies make similar widgets, but company X’s cost of goods sold per widget is $10, while company Y’s cost is $15 for the same stuff, that does NOT mean that consumers will be willing to pay $5 more for company Y’s widget. The market price for a widget is what it is, regardless of underlying costs.

So if, as you and many commenters have already illustrated, downloadable products make your life better, then you should be willing to pay a premium for that service.

That’s why, for example, woot.com was recently selling brown Zunes for $20 less than white or black. People don’t like poopy-colored MP3 players as much, so they can’t be sold for as much. You don’t think that brown was cheaper to manufacture, do you?

For years the phone company charged a couple of dollars extra for touchtone dialing service. However, it’s my understanding that in later years, it was actually cheaper for them to decode the DTMF tones than to interpret the make-break pulses of dial phones. In other words, it saved them money to use the technology that they forced customers to pay extra for.

This is how economics works.

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#60

Woops, should have read all the comments first, guess I’m not the only one who heard about that. Sorry for posting dupe info.

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