The Price Gamble

Does Modern Warfare 2's success mean that Activision's price hike was justified? Not quite.

1.7 million people in the UK bought Modern Warfare 2 last week, a figure almost lost in the controversy which has surrounded this game for months. Amid the raised voices over the controversial airport level, it's almost possible to forget that a few months ago, it wasn't the content of Modern Warfare 2 that concerned us all - it was the price.

In the end, the higher price point which fermented so much debate over the summer meant nothing to consumers. While specialist retailers fumed, some supermarkets discounted the game down to GBP 26 and online giant Amazon dropped its price tag to GBP 32 a few days before launch. Even considering the buying power of such retail giants, it's likely that some outlets were treating the game as a loss leader.

As such, Activision's GBP 10 price hike was mostly absorbed by retailers, not passed on to consumers - a fact which will give publishers pause for thought in the coming weeks. There has always been a fear that if MW2 was not damaged by the higher price point, other publishers would seek to drive their own prices up - in defiance of the obvious decline in most consumers' value perception of all media, games included.

Well, Activision pulled it off and delivered the industry's biggest ever launch - but we're still not much the wiser as to whether consumers would have accepted the move, since most consumers never got to see it in action. Some readings of Activision's figures for the game suggest that the average selling price of MW2 was actually lower than that for Grand Theft Auto IV, which carried a perfectly normal SRP.

For Activision, of course, this is perfectly fine. It's not all that bothered about how much consumers paid for the game - as long as retailers paid the inflated trade price, then the publisher laughs all the way to the bank, regardless of how much those retailers then chose to debase their own margins in order to remain competitive.

One wonders whether this had been Activision's plan all along. From the moment that the price hike was announced, commentators sucked in their breath and marveled at what an immense risk the publisher seemed to be taking with a goose that had previously been guaranteed to lay golden eggs. Yet it may well be that Activision knew perfectly well that retailers would never sell Modern Warfare 2 at full price. Anticipating the price war that broke out between supermarkets and online retailers - with specialist stores unwillingly caught in the crossfire - it knew that it could gouge its "partners" with a higher trade price, confident in the knowledge that consumers would not feel the sting.

If that is the case, then one side of the industry can only take its hats off to Activision's clever maneuvering, even while the retailers who have just helped to inflate the company's quarterly figures lick their wounds and glower. They'll get their own back, of course - MW2 will turn profits for companies like GAME, GameStop and GameStation for months and even years to come as copies cycle through the second hand market - but right now, Activision is the victor, having sneakily managed to hammer retail margins for one of the biggest releases of the year into the ground.

However, everyone knows that this isn't a situation which will be repeated too often. Supermarkets will only treat a small minority of extremely high-profile, seasonal releases as loss leaders, and specialist retailers simply can't take this kind of margin squeeze indefinitely. The next publisher to try and shove its SRP up may well find that retailers are not prepared to soak up the difference this time - leaving it in the exposed position of passing the price hike on to consumers for the first time, and almost certainly doing so with a far less attractive and anticipated product than MW2.

In other words, what was seen as the great pricing experiment of 2009 has ended up providing remarkably little data, and what few hints we have regarding consumer reaction to price hikes are totally obfuscated. Any publishing executive in the coming months who refers to Activision's higher price point as a success should be regarded with deep suspicion, either in terms of their competence or their honesty, or both, because the reality is that the market did not bear the higher price - it was simply never asked to do so.

Far from seeing a wholesale uptick in pricing, I suspect that 2010's story will be of continued downward pressure on prices. It's still unclear just how much impact the appearance of "freemium" business models and low-priced software on platforms like the iPhone is having on consumer perceptions of value, but all of the smart money is on a general erosion of the willingness to pay high prices for software.

Consumers who spend hours playing something like Farmville for free will increasingly question the basic concept of spending the same amount on a videogame that they would spend on a night out, especially as web game experiences become more and more complex and involving. The same goes for mobile phone games, which generally retail for between GBP 3 and GBP 5 - as those experiences improve and evolve, DS or PSP software selling at between GBP 20 and GBP 30 is going to look increasingly ridiculous.

More importantly, the decisions about pricing are increasingly being taken away from traditional publishers. In the past, the only way that prices would fall wholesale was through a gradual process of competitive attrition with your publishing rivals - who all had the same costs as you, and the same incentive to keep prices high.

Not any more. Facebook game developers couldn't care less if they devalue console experiences. iPhone game developers would dearly love to see the DS fall on its face and move a whole new wave of consumers over to their phone as a gaming device. These new rivals have no reason not to undermine existing business models, and everything to gain by doing so.

Of course, it goes without saying that publishers could not survive if they sold games developed and marketed using their existing business model for a handful of coins rather than a handful of notes. However, this is the challenge to which they must rise - that others are finding cheaper, more effective ways of delivering experiences to a wide range of consumers (including many upstream gamers), and that they must adapt and innovate upon their development processes and business models in order to survive.

There will almost certainly continue to be a market for the monolithic, premium-priced gaming epic, of course - but it would be foolish to underestimate the reach of the new business models which are emerging around the traditional boxed games industry, or the impact they will have on that industry. In that context, we can now view Activision's price hike as exactly what it was - a clever and ruthless way to extract a bit of extra revenue from the launch of a blockbuster, nothing more, nothing less. Anyone viewing it as a valid model for the future of the industry is making a deeply flawed assumption.

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