The Free Trade

Any business as big as the videogames industry is inevitably going to face a range of complex trading challenges. Everyone working in the games business has a shopping list of problems which the market needs to surmount - ranging from "good" problems like the challenge of addressing changing demographics and developing markets, through to the "bad" problems like piracy and the increasing bitterness regarding the second-hand trade.

One of the biggest challenges which videogames are going to face in the coming years, however, is a slightly more abstract business concept. Ushered in by the digital era - not just by the technology, but by the subtle yet fundamental shifts in consumers' thinking created by that technology - the concept of Free is slowly gathering pace, and threatens to wash away many of the business models which have supported media industries for a century or more.

The notion of Free isn't new in economics, of course. It's well understood that as a commodity becomes less rare, its value tends towards zero. When something becomes sufficiently commonplace, you can no longer charge a notable price for it - unless you artificially create a market based around image and prestige (bottled water) or find a way to add value (pure oxygen canisters, flavoured water).

You can also create artificial scarcity to keep prices high, although there are obvious moral problems with doing that with anything other than luxury items - and markets, like networks, interpret this kind of interference as damage, and usually find a route around it.

The similarity of markets to networks in this regard is important, because it's exactly this trait which is leading us towards such a drastic re-imagining of the economic basis for media industries. Media has always been maintained as a scarce, high-value luxury item. Physical media created an artificial scarcity which enabled prices to be kept high, and while the market did route around this to some extent - cassette to cassette copying of games and music is a good example - in general, the barriers held firm.

Digital technology has changed that scenario entirely. The advent of the Internet completely removes the rarity value of information and media. Modern swarm technology, like BitTorrent, make it possible to "create" and distribute hundreds of thousands of copies of a piece of media in a matter of minutes or hours for practically zero cost. That's not just a geeky technological consideration - it totally changes the game, and shifts the perception of media's value in the perception of consumers. Media's value tends to zero. The concept of Free steps in through the back door.

This isn't just about piracy, but piracy is at the vanguard of where this is leading us. The industry overstates the economic impact of piracy today, but tends to underestimate its impact tomorrow. Pirates can distribute your software more quickly, to more people, at a lower cost and more efficiently than your own distribution methods can - and the product they distribute is often more functional and appealing, with fewer restrictions on consumers' use of it, than the one you're distributing.

Thankfully, due to the moral and legal implications, most consumers still won't turn to piracy for their media. This is, however, only a short stay of execution. Even those who don't turn to piracy are having their perception of the value of media changed by the existence of that piracy. The games industry is like a stall selling bottled water, which has suddenly had a free water cooler set up next to it. Initially, most customers will probably still buy bottled water, but their value perception will inevitably be changed by the availability of essentially the same product for free next door. The stallholder will eventually be forced to change his business - offering more value, reducing prices, or starting to sell something very different.

The hardware dongle function of videogame consoles protects that part of the industry from rampant piracy, but it can't protect it from the "water cooler effect". On other platforms, where piracy is easier, the effect will be even more pronounced - and that's where Free takes over.

Free isn't about piracy. Free is about pioneering game companies recognising the decline in consumers' perception of the value of media, and deciding to short-circuit this decline by switching business models and giving their products away for free. Free means dispensing with boxed products except as promotional items, throwing away up-front costs, and relying on the ability of a game to pull consumers back for long enough to make money through advertising, micro-transactions, game time cards or other services.

Of course, the rise of Free will in itself drive another nail into the coffin of Paid. Piracy provided consumers with their first taste of media as non-scarce commodity, of videogames as something distributed like confetti over the Internet's practically limitless (for these purposes) bandwidth and storage, but piracy was tainted with legal and moral unpleasantness. Truly Free products will have even more impact, stripping that commoditisation of any legal grey area and creating a market where paying $30 to $60 up front for a piece of media seems utterly unjustifiable.

I've talked before about the importance of the sense of ownership to many consumers, and that remains absolutely true - but Free is another market force which, while not necessarily in opposition to ownership, needs to be balanced against it. Consumers want to own things, even digital things - they want the sense that they have a library of media with which they can do as they please. Free doesn't change that, but it does allow media holders to reign back on many implications of ownership - you don't need a second hand market for a free product, for example.

The bad news is that many western companies are going to struggle to catch up with the Free concept. Wedded to the idea of selling boxed products and moving on to the next game, western (and Japanese) publishers are far behind their counterparts in developing economies such as China, where rampant piracy has forced publishers to think outside the box for many years. That was a reaction to a localised problem, but it turns out to have been exactly the strategy that the global market will need in years to come.

The worse news is that some companies simply aren't going to make the transition. The move away from traditional business models in the coming decade is going to leave many firms high and dry, as they struggle to find a way to replace boxed game revenues with ongoing revenue streams from Free products.

The worst affected will be those who assume that the Free market won't cannibalise the boxed games market, dismissing it as being a new market demographic unrelated to existing sales. This will, I suspect, be a common mistake - but even today, the availability of Free, be it legal or illegal, is starting to have an impact on gamers' willingness to pay boxed game prices. Within a decade, I suspect that only expensive peripherals and very special collectors' editions, filled with added value, will be able to command anything like the prices we now pay for standard boxed games.

Free is a concept that's either exciting, terrifying or both, depending on where you stand in the market today. It's a concept that's going to radically shake up every media industry, not just games - and it's a concept that's utterly unstoppable. The market and the network will interpret interference as damage and route around it.

When pirates are giving away your games in a more efficient distribution model than your own expensive one, and when your competitors are building compelling experiences and handing them out for free, entirely legally, the only sensible choice is to embrace the future. Those firms who decide to hold out and build sandcastles against the tide are going to get more than their feet wet.