EA and their hate of sales

I don’t know if you heard about this, but sometime last month David DeMartini – the head honcho at EA’s digital delivery platform known as Origin (you know their incredibly shitty spyware ridden attempt to replace Steam) said they will never do Valve style sales events. I didn’t get to comment on this back then, so I wanted to discuss it a bit now. I apologize if this is old noodles for you now. Bear with me – I will try to make funnies along the way.

Here is the direct quote from Mr DeMarcepaniPants:

Obviously they [Valve] think it’s the right thing to do after a certain amount of time. I just think it cheapens your intellectual property.

Right, that pretty much goes directly against everything we know about sales and marketing. It flies directly in the face of what everyone else is doing but let’s see what this guy has to say. Maybe he has a point. Maybe every fucking sales executive in the world has it wrong, and DeMancyPanda has it right.

I know both sides of it, I understand it. If you want to sell a whole bunch of units, that is certainly a way to do that, to sell a whole bunch of stuff at a low price.

Right. So the bottom line is that DeMoodPruneJob does not want to sell a bunch of units. Deep discounts are a way to move large volume of merchandise, and I guess Origin does not want to do that. Wait… No. This makes no sense at all. If you don’t want to sell a lot of video games, then what exactly do you want to do?

The game makers work incredibly hard to make this intellectual property, and we’re not trying to be Target. We’re trying to be Nordstrom.

In other words, Origin strives to be an outlet that does not sell video games. Cause Target certainly does sell games, and it does have bargain bucket deals on them, whereas Nordstrom does neither.

When I say that, I mean good value, we’re trying to give you a fair price point, and occasionally there will be things that are on sale you could look for a discount, just don’t look for 75 per cent off going-out-of-business sales

Ah, got it. Now we are getting to the bottom of the issue. It is a philosophical one. The upper echelons of EA seem to be stuck in the mindset of copyright maximalist. Let me explain DeMarcoPolo’s point to you in a way that does not make him seem like he is snorting coke of the ass of a hooker between sentences.

EA believes that their inventory of virtual goods has some intrinsic bottom live value. This is of course a flawed reasoning. Pretty much everyone knows that while a physical product has a manufacturing cost beyond you can’t discount it without taking major losses, a digital product can make profit at any price point as long as the volume of sales is large enough. For example, if it costs you $5 to factory press a CD, print a label and assemble it, then you can’t sell your product for less than $5. The way you recoup development costs is by taking profits and subtracting the manufacturing costs. But if you are offering a digital product there is no manufacturing costs. You can sell the same $5 product at $0.99 and you can still re-coup your development costs provided you get enough people to buy. That’s how the digital distribution world works.

EA however believes that video games should never be sold at deep discounts, period. The philosophy here is that virtual goods do not take up shelf space. You see, if you run a retail store you probably don’t want to have a hundred copies of a 5 year old game in your inventory. Chances are no one will want to buy that game at full price anymore, and it takes up the limited shelf space you have that could be better utilized for displaying the new, hot releases. So what do you do? You discount the game by 75%, throw it into the bargain bin and hope it clears out before the end of the quarter. Digital games however don’t take up space. You only have to store a 1DVD worth of data on a server somewhere, and that data can generate infinite sales. So since the game is not wasting much space, there is just no reason to discount it. Does it make sense now?

What Steam does might be teaching the customer, ‘I might not want it in the first month, but if I look at it in four or five months, I’ll get one of those weekend sales and I’ll buy it at that time at 75 per cent off.

See, I don’t agree with this at all. You know why? Because when I’m really excited for a game, I don’t wait for Steam sale. I fucking pre-order that shit. I want to play it on day one. And yes, I might later regret not waiting a bit, but I still regularly plonk down money for brand new games. Unless they are Origin exclusives of course – but that’s EA’s own fault for making their delivery platform collect personal info without permission early on. They have lost my trust, and I won’t buy from them. But I digress.

I’m not an economist, but I see the video game market as a pyramid. The very top of that pyramid is composed of a tiny elite group of “Collector Box” customers who are willing and ready to pay upwards of $100 for the new game, as long as it comes in a fancy box with a cool doodad or gadget inside. Second tier customers are pre-order fiends like me who are eagerly waiting shove $70-80 down your throat as soon as you start taking orders. There are significantly more of us than of the collector box dudes. Also, because we didn’t pay for the deluxe-box we can be nickled and dimed with DLC’s quite easily. Third tier are the regular Joe customers who will buy the game at full price in the first week or two of sales and they might even buy some extra DLC’s (but probably won’t).

Below that tier there about a dozen price point tiers for thrifty or budget conscious gamers. Some won’t buy the game at the usual $69.99 price point, but will consider it at $49.99. Others won’t budge until the game is less than $30. At the very bottom of the pyramid there is a huge base group of customers that most companies calls “dirty unwashed pirates” because they have little or no disposable income, and no desire to buy games legally. But if the price is right they might actually consider going legit every once in a while. What is the right price to them? Anything below $10 probably.

What Valve does with their sales is hit every tier of this pyramid in sequence. They get the first three on the launch date. Few months later they drop the price by 10% and get the lower tier. Six months down the road they discount it 30% and get even more people to buy it. A year later they cut the price by 75% and get pretty much all the customers they could possibly get. And it works.

I mean, think about it – if you let the game sit in your catalog, after a few years no one will want to pay a full price for it. You may think that the game is still worth $60 but most customers won’t pay that much. For example, would you pay the same price for the original Deus Ex as for Deus Ex: Human Revolution? No, probably not. But would you buy it for $5? Fuck, why not, right? I know I did. I haven’t played more than 15-20 minutes of it but you know what – at that price point I don’t really care. Valve and whoever owns the rights to the original game just earned $5 from me, whereas at full price they would have earned exactly $0.

You want another example? I paid full price for Max Payne about a month ago. I knew summer sales were coming but I shelled out money for it anyway because I kinda wanted to play it. I should have waited, because just the other day I saw it being at a 50% discount, but alas there was no guarantee it would be on sale. Furthermore you never know how deeply will they discount an item. So DeMustartStain is right in one thing – Valve does train us a little bit, but in different ways than expected. How did Valve train me? It trained me not to wait for sales, because the title I want may not be discounted any time soon. They trained me to impulse buy during sales, because an item usually only stays at 75% discount maybe for one day twice a year. But if I miss that 75% markdown they usually graciously offer a 50% or 30% discount the next day so I can still shell out my money without feeling like a total chump. They trained me to spend ridiculous amounts of money in small increments on games I probably won’t play, just because they suddenly fall below my impulse buy threshold and I can’t resist.

Jason Holtman of Valve recently responded to the EA accusations re-iterating the same point I just did above:

The nice thing is buying a year later at some discount or special promotion, those things used to be really hard to find. It used to be, if you didn’t get a game in the first three months it was around, you were out of luck because you had to find a copy of it. You had to find a box where it was stocked. Now you can do things like say, I never did own XCOM. Maybe I should buy that for $2 or $5 and pick it up. Or I didn’t get that triple-A game from three years ago, maybe I’ll pick that up on a promotion. And that’s making people happier. And it’s making them more willing to even buy the first time release.

That’s the beauty of Steam sales. That’s the beauty of the large digital catalogs that sell not only the new releases but older games at deep discount prices. These older games can consistently earn money for years. Instead of sitting on some hard drive for years, hoping that some collector will come along and spend $60 (which becomes less likely every month as the game ages) the game can make profit every year, albeit at a lower price point. And regardless of what you may believe the game is “really” worth, it is still profit.

Hell, if Valve strategy was bad for content creators, would they use it for their own games? Chances are they wouldn’t.

If we were somehow on a cycle where you could see it, you wouldn’t see us repeating it. We wouldn’t repeat it with our own games. We wouldn’t repeat it with partner games. Partners wouldn’t want to repeat it. Actually everything we see is to the contrary. It’s funny, when you look at the data, things come out and they make you scratch your head for a little bit, and then you’re like, that kind of makes sense.

Holtman confirmed that data they collected from their 40 million customers, over many repeated summer/winter sales cycles completely debunks the EA claims. The sales actually had the opposite effect to the one DeMuppetFist described – the numbers of pre-orders and launch day sales on Steam have been steadily climbing each quarter regardless, or perhaps thanks to the extensive sales.

Valve gets human psychology. They know that while people like to bargain shop, and wait for big sales, big hyped releases will still generate high profits. People want to play the new game and talk about it with friends, and not wait 6 months hoping that maybe it will go on sale. That’s just not how people work.

EA, as usual is out of touch with reality. Not surprising really, seeing how they handle their fight against “digital piracy” – a war that Valve definitively won about a decade ago. No seriously – I actually don’t even want to pirate Steam games. It’s way too much hassle. Hell, Steam made buying games so easy and so addictive that I have bunch of games in my library that I have never played.

You would have to be completely out of touch, and a bit crazy to argue against hard data and real world results. But leave it to EA to do exactly that.