Distributors is the least sexy sounding part of the vertical chain, but it’s the most important one over the past decade. Everyone hears in school about the massive changes in the music industry or film, where digital destroyed the old way of delivering product. Games have gone through the same phases, and with a lot more grace than the music industry. Traditionally, distributors are responsible for the physical storage and delivery of the product, and usually for the sales effort.
Storage and shipping is a very low-margin business. National distribution networks still move boxed goods to the Walmarts and Best Buys of the world, but of course a digital product is about moving bits, not atoms. What we have today is a dual system, with trucks still moving boxes, but more and more Internet pipes moving data instead. As a result, online games end up with different economics than retail.
The retail stage is notable for the increase in concentration due to the rise of ‘super stores,’ in the 90s and for the demands placed on publishers. The U.S. retail stage is marked by a lack of independent software outlets. Due to the mass merchandising style of the retailers, shelf space is at a premium and so retailers wield considerable leverage over distributors and publishers.
In 2002, publishers began to release PC games in smaller boxes to enable more product on store shelves and so to reduce this leverage. Retailers charge publishers significant MDF (‘market development funds’) for posters, end-of-aisle space, and a host of other devices. Publishers are forced to comply with these costs and risks because of the need to maintain a positive long-term relationship with the stores. In the long run, this won’t last. Brick-and-mortar masters will be replaced with online ones, and the dynamics aren’t that different there.
Disruption is the New Normal
Despite the fanfare over new consoles, we are no longer living in a console-centric world. Consider that a TV manufacturer can embed streaming tech or even graphics chips in their screens and make consoles technically irrelevant. Or that mobile devices, tablets, and soon wearable devices continue to disrupt the market.
Still, Walmart remains a force since no major publisher can afford to stop sending boxes to any company that’s responsible for a major chunk of its revenues. This is changing, of course, but in this transitional period everyone is still pretending to be friends.
For those who never needed Walmart, the future is all about online distribution, whether that means self-publishing like Mojang’s Minecraft, using an established portal like Steam, or partnering with a big publisher like Sony or Microsoft. These arrangements are generally about power, and if there is good competition among these outlets, there is good opportunity for developers and better games for players. Fewer storefronts means the opposite.
On the business model side, the buy-once-and-done model is no longer the only flavor. Free-to-play models, largely imported from Asia, now rule the online world. Subscriptions linger in some quarters, but the most successful titles of the past few years--Candy Crush Saga, League of Legends, World of Tanks, etc.--allow free play and create game mechanics or cultures that incentivize spending. The result is generally better price setting. Rather than charging everyone $60, games are now charging $0, $.25, $25 and $250, depending on the player’s interest and income.
These kinds of innovations mean that a thousand flowers are indeed blooming, but well, many more whither. We may be living in an era when two students in a dorm can launch the next Angry Birds, but it’s also an era where there are far more failures than successes. If Walmart used to hold all of the power, today’s equivalent is often Apple’s control over the front page of their App Store.
The lessons of the past are worth remembering, and basic economics still apply. Technology creates new opportunities and outlets, but corporate forces always shrink them down over time. This see-saw is inevitable, so it pays to have your eyes wide open and understand where the power sits in any given year.
Here are links to this 5-part series past sections: