Alternative Access

Alternative Access
The Downside of Direct Downloads

Michael Comeau | 28 Jul 2009 12:28
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Software companies also wouldn't have to worry about the logistics and expense of getting products into stores - just upload them to a server, and the money flows. There would be no shortages of the hottest titles on launch dates and no unwanted boxes piling up in stores. They'd have to compensate Sony, Microsoft and Nintendo for enabling the downloads, but it could still be a nicely profitable setup.

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And as we move into the future, every dollar of potential revenue is becoming more and more important. Ubisoft CEO Yves Guillemot recently told business network CNBC that next-generation games will cost $60 million to produce as opposed to $20 to 30 million today.

To break even on a game, a publisher would have to move well over a million units, compared to about half that today. There isn't much of a chance that the gaming market will double in size by the next console generation, which means revenue isn't likely to increase as fast as production expenses.

Remember, a videogame company's prime objective is to make money for shareholders, not necessarily to make great games. And it's pretty much a given that companies with falling profit margins also have falling stock prices.

Of course, a direct-download system has potential drawbacks for the big software companies. Microsoft and Sony might end up charging publishers an arm and a leg to enable game downloads, especially as they gain more and more control over distribution.

Think about it: What if, 10 years from now, 50 percent of software sales for Microsoft's latest console come through Xbox Live? Or, in an even scarier scenario for consumers, what if there is no physical media drive at all, and everything goes through Xbox Live? Sony's marriage to the Blu-ray format ensures its continued support of game discs, but Microsoft has no such restrictions. They could cut console production costs and take control over the entire supply chain in one fell swoop.

There would be zero room for publishers to negotiate anything in such a de facto monopoly. The perfect comparison is Wal-Mart. As the world's largest retailer, Wal-Mart is able to demand pretty much whatever it wants of suppliers because it grants access to such large numbers of consumers.

Brick and mortar game-sellers won't like competing with direct downloads and could reduce shelf space for videogame hardware in retaliation. The average markup on a videogame console is roughly six percent, according to GameStop's financial statements. The only reason to carry hardware is to sell higher-margin software and accessories along with it. If a retailer loses business on the software side, it won't have an incentive to be in the videogame business at all.

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