So piracy is rampant, physical media is on the decline and people want the option of getting everything delivered by broadband, and they want to pay less for it. Fair enough, you might say. The technology exists, the distribution costs very little and in a competitive marketplace the consumer will decide what is a fair price for a song, movie, game, etc.
So what happens in this scenario? We can look to the iPhone game market for an insight into the consequences. This comprises a section of the iPhone App Store and allows developers to set the price of their games, and change them at will to respond to consumer demand.
In theory, what should have happened was that products end up at prices reflecting their quality and worth. The people making quality games should have been rewarded and the rest should have been filtered out.
In practice, what happened was that a price bar was set at the lowest available price: 99 cents. Barely a week goes by without some developer online writing an article about how hard it is to even get noticed at a price above 99c, and how they poured months of work into something only for someone to say "cool game, but I wish it was 99c".
What happened was that the theory assumed that consumers and developers had a similar appreciation of value, which they didn't. The developer's appreciation of value is largely related to the cost of making the game, while the consumer's appreciation of value ignores that completely and is based primarily on the benefit to them.
And that's where the problem lies: the value to the consumer of something digital is almost completely arbitrary. Especially in the case of entertainment, the value is often expressed in relative terms. A game, for example, is worth a number of times the cost of a movie because it will probably last a number of times longer. A DVD is worth more than a movie ticket, because multiple people can watch it multiple times. A Blu-Ray disc is worth more than a DVD because it's the same thing in better quality.
But these things are generally justifications made after the fact. An entertainment product is generally priced at an amount necessary to make a profit. A game doesn't cost more than a movie because it will entertain you for longer, it's priced that way because of the costs of development, the size of the market, the demand curve, etc. And while the price is set by the suppliers, it stays at a price point that, on the whole, works for both. When the price is set by the consumers, as is essentially the case in the iPhone game market, they will haggle the supplier down. And when the cost of each unit is almost nothing, as is the case for digitally distributed media, they can haggle a long way, past the break-even point of the supplier. In the short term, the supplier will prefer a cheap sale over no sale at all. In the long term, there are two options: either much of the market can leave, or the amount of money going into a product has to drop.
Leaving the market is a last ditch resort, and most people in entertainment industries are there because they want to be. Also, a relatively small barrier to entry means that even if some do drop out, there's probably more coming to take their place. So the more realistic option may be to change the product to match the price. Or, to put it another way, to churn out cheap product and hope to strike it lucky in a sea of cheap competition.
And this is bad for everyone. While people may want cheaper games, and probably a bigger range of pricing, nobody wants the quality to drop to achieve this, and that seems to be a likely result. But what other options are there? People are demanding lower prices, pirating when they don't get them and even pirating half the time they do get them.
Compared to free or near-free alternatives, there's only so much you can charge. And in the entertainment markets, people just aren't used to paying more for quality. A terrible, low-budget movie and a high-budget Oscar nominee (if only for visual effects) cost the same at the theatre, and the same thing happens in the games store. A new release is expected to cost roughly $100-130 regardless of quality. Look at the reaction to Activision trying to charge a premium for Modern Warfare 2, the follow up to one of the most popular and highest rated games this generation. The claim that it's almost certainly going to be better than an average game is no excuse, because the average consumer doesn't buy the average game, and hence doesn't consider it to be worth its price.
As another example, look at the reaction to the "minis" released to coincide with the launch of the PSPgo. Within a day of release, multiple articles on the web make note of how they're overpriced. How so? Not because they're not worth that much (though they may not be, that's a separate issue), but because the same or similar games are available on the iPhone for less.
So when it comes to entertainment products, it's hard to charge more than the competition, and in the digital download space, it's hard to charge more than the bare minimum. This ultimately leads to what you might call a super-casual market, one dominated by what would have, in years passed, been a free Flash app online, but may in future become the only business model that still works, if we abandon a physical product to help justify a price point that encourages games to be experiences instead of impulse buys.
This concerns me, and if you care about playing well-crafted, large-scale games, it might concern you too.
Robert Green (aka 'martian') is an ex-Brit who's been playing games since they came on tapes. By day, he makes games at Wellington-based development studio Sidhe Interactive. (Please note however that the views expressed in this article are his personal opinions and do not necessarily represent those of his employer.)