The DLC Movement

Call of Duty: Black OPS 3 launched this last week which means that people lined up outside of video game stores everywhere for the midnight release to pick up the hard copy of their game for the great price of $59.99. Not only will the vendor allow you to buy the game disk, but you can also buy a season pass. What is a Season Pass you say? A season pass gives you the entire map DLC, or Downloadable Content, the developers of Black Ops3, that Treyarch and Activision, the will issue for the life cycle of the game.

Downloadable content allows revenue to be generated during different stages of the year. Activision and Treyarch will also put out smaller portions of DLC that aren’t covered by the season pass at certain points in the year. These pieces of DLC will be things like camo packs, guns, skins, or different features in game.

The Season Pass for Call of Duty: Black Ops 3 costs another $49.99. A consumer needs to now spend roughly $110 in order to get the full benefit of the game. DLC has been the standard for developers as of late. This creates high revenue for the developers. In fact Electronic Arts, a different game developer, reported that 77% of their first quarter revenue was created by “downloadable game add-ons” according to an article in Fortune. This is a large percentage especially for a developer as large as EA.

It may seem like developers are ‘double dipping’, but this strategy has actually helped keep layoffs from happening in different firms according to Brad Wardell, CEO of PC software and gaming company Stardock in an article written in Kotaku. Wardell said “before DLC took off, you laid off lots of people” upon launching a game. “You really had no choice.” The problem was that all of the revenue generating work for a project was done up front and there was no reason for developers to keep programmers and other staff employed.

DLC also provides a more stable job environment for employees of the game creators.  The content also helps keep the game fresh for those who choose to partake. The plan seems to be working for developers and gamers alike. 


Dave Tufte said...

Brigham Kindell: 94/100 (last sentence of the first paragraph is a real mess)

This is pretty interesting, but I'm not sure what to make of it.

I can see how the firms' revenue would mostly come immediately after release of the game. But I don't see how that necessarily translates into layoffs. Pharmaceutical companies have the same revenue issue, but not the layoff part.

I can see why they'd want to avoid the layoffs: they want to keep decent designers and programmers for the next project. But I'm not sure why they don't just hire some financial professionals to plan out how to do that.

I also find this similar in motivation to the two part tariffs discusses in the chapter on pricing strategies. Those are used to extract more consumer surplus to turn into profits, and it seems like DLC is helping do that.

JP said...

The two-part pricing strategy is exactly what this post reminded me of. With the purchase of a season pass, a customer has the opportunity to purchase downloadable game add-ons at marginal cost. (Or are the add-ons free with the season pass? I couldn’t exactly tell.) Meanwhile, the gaming company has extracted all the consumer surplus with its fixed fee of $49.99 it charges for the season pass. This and other profit-maximizing strategies from the text bothered me just a little as I recalled this non-economics principle: just because you can do something doesn’t mean you should. Also, this particular pricing strategy doesn’t apply to my consumption habits in any obvious ways because I’m not a big season pass/membership kind of purchaser. For the gaming industry the two-part pricing strategy seems to definitely be increasing profits, and one positive impact this article points out is the fewer layoffs. So that’s great. But I still have a hard time sometimes reconciling this idea of extracting all consumer surplus possible with the idea that just because you can do something doesn’t mean you should. In the Kotaku article Brad Wardell discusses the negative opinions consumers have regarding DLC. It sounds like many gamers are unhappy with the pricing strategy, which they consider “nickel-and-diming”. Wardell argues that the DLC and the current pricing strategy makes life better for the programmers and that will translate into better games and better experiences for gamers. So I guess that will remain to be seen.

Dr. Tufte said...

JP: 50/50

I have one economic correction: it's unlikely that any two part tariff is ever going to convert all the consumer surplus into producer surplus. Maybe in a textbook, but not in real life. Even so, I can see your point.

On the other hand, I think the gamemakers are suffering from the same problem that a lot of software/internet/entertainment producers are having: they have huge fixed costs, low variable costs, and are not served well by traditional pricing strategies with rivalrous goods in mind. If they can figure out a way to help their bottom line through price discrimination, then personally I think I can put up with it.

But, there's an "elephant in the room" that you've missed. Wardell is basically arguing that its OK to convert some consumer surplus into producer surplus because either way, it's surplus for society that we all get back. That's true, but it ignores that any reduction from the perfectly competitive level of output will result in a deadweight loss. So, perhaps you couldn't articulate it JP, but I think that deadweight loss is what's driving your sense that just because they can do this doesn't mean that they should.

Jacob Cole said...

I admit that I enjoy playing video games online with my friends. I am not a fan of the DLC movement by video game developers. I can relate to the frustration of the gamers quoted in the Kotaku article and feel like DLC is a way for the video game developer to make more money off of me. Often times one of my friends will decide to purchase the DLC for a game we are all playing, which forces the rest of us to purchase the DLC in order to continue playing the game together. I agree with the comments that DLC is a form of two-part pricing strategy used by the video game developer to convert some of the consumer surplus into profit for the company. It now costs me and other consumers more to enjoy the full benefit of the game. I can spend over $100 to enjoy a game that used to only cost $50.

DLC is also a way for the video game developer to keep their game popular and competitive when other games are being released every month or so. DLC is less expensive than purchasing a new game, so some consumers may choose to buy the DLC and continue to play the game they already own rather than buy the newest game coming out from a different company. Even though I do not agree with or like DLC, it appears as if DLC is going to be a part of the video game industry for the foreseeable future.

Dave Tufte said...

Jacob Cole: 50/50

Would I be out of line if I remarked that it sounds like the video game industry has figured out how to get you personally to pay more, and they probably don't care about how you feel about that? It seems to me that you sound like a perfect example of why they do this.