Analysis: Kotick's 'Raise The Price' Comment And AAA Game Value

[Activision Blizzard CEO Bobby Kotick caught flak last week for a flip comment about how he would like to increase game prices. Gamasutra's Kris Graft looks at the outcry, and how it may reflect a deeper resentment toward publishers of premium-priced games.] Talk about price sensitivity. As of this writing, Activision chief Robert Kotick was still being raked over the coals for exposing himself as an executive at a publicly traded company who wants to make a whole lot of money. Gamers are seething, and some of the more colorful news outlets have gone for the jugular. If you didn’t hear, during Activision Blizzard's earnings call last week, when the Call of Duty, World of Warcraft, and Guitar Hero publisher said it beat quarterly expectations by posting $1.04 billion in revenues, Activision execs fielded the following question from Pipar Jaffray analyst Tony Gikas: "[What’s] your comfort level regarding pricing of some of your new games that have some expensive controllers and any feedback that you had from retail as we move through the holidays?" Activision Publishing head Michael Griffith replied, saying retailers “very strongly” support the price points for Activision games, such as the turntable-based DJ Hero and the skateboard controller-enhanced Tony Hawk Ride -- both of which are expected to sell for around $120. Kotick interjected, “And Tony, you know if it was left to me, I would raise the prices even further.” Cue mischievous giggling from Activision Blizzard execs. (I think I may have heard a rustling of Benjamins in the background too.) Gaming press jumped on Kotick’s quote, either halfway defending him (“He’s a CEO, his job is to make money for investors”) or outright attacking him (“He’s the devil, but slightly more evil”). I’ll do neither here, but I’ll say that his comments are far from surprising, and while I’m not personally horrified by Kotick’s remark, I do understand why gamers have cried foul. Let’s take a step back. Here’s the CEO of Activision Blizzard, who is reporting that his company just made over $1 billion in revenue during a single quarter. We’re in a recession, and the average $60 game is already difficult to afford (let alone the peripheral-based games that cost $80 to $200). Kotick made $15 million last year as Activision Blizzard’s CEO. Now, here’s the big rich guy and his posse having a good guffaw in the presence of adoring analysts, saying, That’s not enough, I want more. And with the giggling, some saw that Activision execs, and maybe investors as well, are just having a jolly good laugh at the expense of the cash-strapped gamer. They’re Saying “Boo-urns” The media reports, both the even-handed and blatantly anti-Kotick stories, fanned the flames on internet message boards, blogs, and Twitter. “That is such bullshit,” said one poster on the popular gaming forum NeoGaf. “It's like Mr. Burns [from The Simpsons] is running a video game company.” Commenter bill0527 was straightforward when he wrote, “Congratulations Bobby Kotick, you're now the biggest douchebag in all of gaming.” Are upset gamers and press being over-sensitive? Or is there legitimate reason to be upset at the mere suggestion of higher prices? Maybe it’s a little bit of both. There was a time early on in this console generation where execs and analysts were watching closely the sustainability of the $60 price point for next-generation video games. It remained to be seen whether or not this price hike would take. We see now that gamers are willing to pay $60 for a worthy piece of software – 2008 US video game retail sales alone were $ $21.33 billion, up nearly 19 percent year-on-year. But in the last year-and-a-half, the economy has tanked, US game revenues have been down for the past four months, and for some, $60 today is quite a bit more than $60 was to them in 2007 or 2008. Now, the US market is hoping to achieve flat sales in 2009, and at least one analyst is suggesting the lagging growth could be more than just tough comparisons to last year -- gamers may finally be feeling the recession pinch. Proper Pricing A Tricky Matter Perhaps this easily-prompted outcry in response to Kotick’s price comment is an audible manifestation that reflects just how carefully the $60 price tag rides the line drawn between guarded consumer acceptance and perceived price gouging by the games industry. It wasn’t just Kotick in recent days who suggested raising the price of video games. Games industry stalwart and former Sony Computer Entertainment Europe head Chris Deering said premium triple-A games should cost customers £70, a 40 percent hike over the standard £50 in the UK. And I don't think he even cracked a smile when he said that. Proper pricing for a video game is a tricky matter, and a subject that game developers have closely examined. There’s one camp – the Koticks and the Deerings – who seem to believe that game prices should be higher in order to compensate game makers for skyrocketing development costs. Then there are people like Valve Software boss Gabe Newell, whose company has put the lower price tag/higher revenues theory to the test. “One thing that really annoys me is the inefficiency of pricing we have in our industry,” he said at the DICE Summit in February this year. There, Newell explained now Valve performed a bit of a pricing experiment through its Steam digital distribution platform. As part of a weekend sale, Valve slashed the price of the popular first-person co-op shooter Left 4 Dead from $50 to $25. At half of the normal price, revenues from the game exploded with a rise of 3,000 percent. It raked in more revenues during that sale than when Valve originally launched the product in November 2008, Newell said. Valve has similarly seen revenues of third-party games rise as a result of discounts. A little over a week ago, a weekend Steam sale cut the price of Relic Entertainment and THQ’s real-time PC strategy game Dawn of War II in half to $25. After not appearing in the service’s top 10-selling games for months since its February 2009 release, the weekend sale drove it to the top of the Steam charts, which are ordered by revenue, not unit sales. The sale ended after a few days, and the game soon disappeared from the top 10. While Steam can offer interesting ideas about pricing, it deals in digital distribution, which is different in important ways from physical retail (e.g. digital needn’t worry about shelf space, digital customers have different buying habits than the average Joe who buys games at GameStop, physical distribution requires physical logistics). But Valve’s observations in game pricing in particular certainly make one consider that we have little understanding of game pricing (even Valve referred to their sales as “experiments”), and while pricing decisions are mainly based on hard numbers, there’s a gut instinct that plays a role in picking the elusive magic price point. To see just how difficult pricing a video game can be, you just have to look as far as the fledgling iPhone video game app market, a microcosm of the games industry where many developers have expressed frustration and confusion when trying to price their games attractively. Some succeed, many don’t, despite releasing a quality product. It’s All About Value Game makers are wrestling with the question, “How expensive should games be?” But that’s not the question that they should be asking. In the end, it’s about a game’s value in the eyes of the consumer. When the Wii launched, people didn’t buy a Wii – they spent $250-plus for Wii Sports. Guitar Hero and Rock Band bundles cost more because of their special controller pack-ins. But people were willing to buy those games because there is value. “Value” can mean different things to different people, but the most obvious value signifiers for a game are, in general, a game’s perceived quality, longevity, and above all, its fun factor. Activision recently said it would be pricing Infinity Ward’s surefire-hit Call of Duty: Modern Warfare 2 at £55 in the UK, a £5 premium over the typical current generation game. Again, a bit of an internet uproar ensued, but Kotick and crew are apparently confident that the title holds a lot of value with gamers -- value that has carried over from the original Modern Warfare. Most of the people complaining about the price of this game will probably buy it at that higher price, even though they won’t be happy about it. The same goes for Activision Blizzard’s decision to sell StarCraft II in three parts, a brilliant move by analysts’ estimations, but one that met heavy criticism from gamers when first announced. With the upcoming launch of Activision’s peripheral-based games DJ Hero and Tony Hawk Ride, Activision’s pricing instincts will be put to the test. Value is also all about perception. For instance, Left 4 Dead may have seen a 3,000 percent increase when Valve put the game on a 50 percent sale, but all that experiment showed was that a big discount can hike up a game’s sales for a few days. It does little to provide insight into what a game’s price "should" be at launch. To the people who bought Left 4 Dead during that sale, much of the value they saw in that purchase may have been because they knew the game was normally twice as much. And the sense of urgency of a weekend sale also led many gamers to pull the trigger. Would Left 4 Dead’s launch revenues have been higher if Valve released it initially for $25 instead of $50? Until more game companies start sticking their necks out there and launching full-blown “triple-A” premium games at half the cost, it’ll be hard telling. What stinks for game developers is their perception of a game's value is sometimes way off the mark in relation to a consumer's, and disappointment ensues. It's really hard to convince gamers that they should pay over what they think is a fair price. So you have outlets like GameStop, rent-by-mail companies like GameFly, and free-to-play online game publishers who can satisfy the demand for lower pricing. The Punchline So was a laughing Kotick simply joking about wanting to “raise prices even further”? No, the guy’s dead serious -- he wants to make sure he can turn a profit, and price-hiking may be one way to do it. Not to over-analyze a chuckle, but maybe it’s the general situation that the video game industry is in that’s rather humorous. You spend $10-$20 million developing a game, additional millions on marketing, release it out to the retail wild, and in many cases, have virtually no idea whether or not the game’s sales will recoup the expenditure. Absolutely hilarious, isn't it?