The Ant Nest

The Elder Scrolls: Oblivion is out, and garnering critical acclaim and great sales.

At the beginning of the week, Bethesda (the game’s developer) announced a series of paid downloadable add-ons to the game, the first of which is some armour for the game’s virtual horses. This turned out to be quite the controversy - one place I saw the announcement clocked up over 400 comments.

Though I’m not normally one to comment on the business side of games, the uncharted territory that Bethesda has waded into seems particularly fertile and worth trying to map out. Will their discoveries usher in a utopia of more game content for all and more money for developers? Or a dystopia of unfinished games and paid patches?

Pony Payments?

The price for harbouring your horse from harm? 200 Xbox Live Marketplace “points”, which translates to about $2.50. Not a lot when put against the perspective of about $400 for the console and then $60 for the game. But against other points of reference: free content for other games; the internet as a whole is built on Free Stuff … well, as Tycho puts it, there’s a “yawning conceptual gulf between no cost and any cost at all”.

The bridge for this gulf is commonly considered to be “micropayments”; the goal being to charge a price that is considered negligible to the individual customer (and so not a barrier to paying), but that still adds up to a significant income for the vendor. That seems to be the target for the Xbox Live Marketplace - hence one of the reasons why the currency is points and not dollars: to help customers forget that they are spending real money.

The problem here is the bridge breaks and the horse goes tumbling into the ravine, because it’s just too fat. If the price of music has to fall to $1 a track to get people interested in buying it again, then many will find nothing ‘micro’ about paying $2.50.

At this point, the price is asking most customers to make a decision about the value of what’s on offer. Bethesda seems to have the mobile phone customisation market (ringtones, fascias, etc) in mind with these value-pricing decisions (as does Microsoft’s wider Xbox 360 strategy with its Marketplace, Live gamer pictures, faceplates and the like). As Pete Hines says on behalf of Bethesda, “Lots of people have done themes, so nobody flinches when we put out a theme for 150 points. They download it like crazy”.

However, while it’s easy to frame horse armour as a similar kind of customisation to a new fascia on a phone, there’s a fundamental point to be noted that makes this comparison false. The value in a ringtone or a fascia is that it is a public display of personalisation, just like the clothes a person wears or the car they drive. It’s easy to see how this value can transfer to, say, an Xbox Live display picture, but Oblivion is a single-player, offline game. There is no equivalent public display in the game, so it’s hard to see the appeal (and consequentially, the value) of such superficial customisation.

Show Jumping

Like any armchair commentator, I can sit here and discuss hypothetical arguments and assert that “most” people this and that. It doesn’t make me right: real numbers will always have the final say.

As Pete Hines points out, this is premium content - the expectation is that it won’t be to everyone’s tastes. I’m certain Bethesda have already turned a tidy profit on the developer hours put in to making this stuff.

Given finite resources, though, is this the best possible type of add-on to be making? Bethesda have announced another two upcoming paid downloads. The three pieces of content can be abstractly defined as “Something the player keeps with them throughout play”, “A quest with a reward”/”Something for the player to do once” and “Somewhere for the player to repeatedly return to and use as a base”.

From that definition, it’s easy to see that Bethesda intend to answer the question of “what sells best?” by experimentation too. My instinct is that quest type add-ons will sell much better than the other two, both because of the offline-related reasons I outlined above and because, in the longer term, new things to do will continue to provide better incentives to go back to the game than minor tweaks to the same activities.

Free range horses

In the din that followed the announcement, some questioned why these downloads aren’t just made available for free. Others responded saying that Bethesda have to get paid for the extra work somehow, so giving them away for free was simply economically illogical. That’s a pretty simplistic response, however. Giving away free content after a game’s release can do a number of things: provide free, positive exposure to the game when its PR cycle would otherwise have finished (given most games sites much prefer talking about upcoming titles); build goodwill with existing customers, making them more likely to come back for more when sequels and expansion packs come around; and convince wavering customers to get off the fence and buy the game.

I applaud Bethesda for taking a step into the unknown and, in the process, risking a lot of negative PR, and consequentially, I don’t intend to argue for these add-ons to be free. But that shouldn’t stop the question being asked: Can free really make economic sense?

Significantly, this question isn’t so easily answered just by looking at a few sales figures: how many sales might a developer miss out on by charging for the new content? However, when considering this wider question, there is some pre-existing data from within a different games market that may provide some illumination. Within the online action/first person shooter genre, the paid add-on approach has butting heads with the free approach for several months. With Counter-Strike: Source (CS:S), Valve has made ten new content releases available free of charge, and they have also executed a similar pattern of free releases with their other Source-engine games. On the other side, with Battlefield 2 (BF2), DICE and EA have followed a strategy of paid content releases, first an expansion pack entitled Special Forces and most recently a smaller “Booster Pack” release called Euro Force.

Here are some numbers for how the popularity of these games has fared over the past 9 - 12 months:

[Click the image to enlarge the graph. Data for CS:S is listed under "<hl2> cstrike". From http://hosted.zeh.com.br/zeitgeist/games.html, which in turn takes its data from http://www.gamespy.com/stats/.]

From this data, I would make the following observations: CS:S shows a generally consistent upward trend, gaining more than 15,000 new players between July 2005 and April 2006. Between its release in June 2005 and Christmas 2005, BF2 player numbers show a general decline and in 2006 have been essentially static. The release of Day of Defeat: Source in late September causes a symmetric decrease in CS:S players. The release of the BF2 expansion pack Special Forces in mid November produces no immediate impact on player numbers, but an increase can be seen at Christmas (this is in line with the typical EA strategy of using expansion packs to extend retail exposure for a game). No change in player numbers can yet be seen with the release of the Euro Force Booster Pack in mid March.

Gaining 15,000 players on top of 30,000 - growing your active player base by 50% in 9 months - is no small feat and stands as a strong testament to the power of free content. It’s difficult to precisely discern the economic consequences of that growth, because CS:S is frequently bundled with Half-Life 2, but it doesn’t seem a stretch to suggest many of those new players will also be new customers. By contrast, leaving the Christmas present market aside, it seems to me fair to suggest that paid expansion packs have attracted no discernable number of new players to BF2.

What conclusion would I draw? Free content acts to expand a customer base, whereas paid content only works as a way of getting more money out of existing customers. That perhaps comes across as stating the obvious, but its consequences are important. Picking up, say, an extra 30% full-price sales because of free content surely punches the same weight as selling an expansion pack to, say, 60% of pre-existing customers.

Remember the stud farm

Both strategies - expanding a customer base and selling to existing customers - are valid and different strategies suit different companies. Free content is the right strategy for Valve because with Steam, they are building more than just an active player community, they are building a platform.

Bethesda don’t quite have the same goals in mind, but Microsoft certainly intends to continue building Xbox 360 and Xbox Live as a platform. A platform is an on-going relationship with a customer and so ultimately, this is achieved through perceptions and trust.

For both mobile and internet businesses, the perception that the company has unleashed an avenue for personal expression has proved a powerful means of relaxing a customer’s tendency to frame their relationship with the company in purely economic terms. As I’ve discussed, the mobile phone comparison isn’t valid because, owing to Oblivion’s offline nature, Bethesda’s add-ons aren’t personal expression.

In the void left by the absence of this positive perception, negative ones have appeared instead: The perception that this is content which could have been included in the original game (an assumption easily refuted by knowledge of the final content-lock stage of game development, but it’s naive to expect a customer to understand that). The perception that this is a cynical attempt to extract more money from customers already paying premium prices. The perception that the opportunity to spend more money is not a good way of rewarding the loyalty of Xbox 360 early-adopters. It’s a notable positive that Bethesda have responded to the reaction to the original announcement by reducing the price of the add-ons, which should go a long way towards neutralising these perceptions.

In this issue’s widest perspective, while it’s an economically sound principle to try and maximise the money paid by each customer for a given product or service, gaming is already the most expensive hobby most people have. In an already fierce competition for disposable income and time, some suggest it is already losing the perception battle.

I hope that Bethesda’s experiment proves successful and I hope that this opens up new revenue opportunities for developers.

But I hope that in the resulting gold rush, Microsoft and others remember the entirely different and complementary powers of Free: to grow a customer base, to build trust and to generate sales.