Publishers, Retailers, Consumers: 1-1-0. How about 1-1-2, instead?

There are three main players in the videogame market: publishers, retailers, and consumers.

And the last five years have demonstrated fairly clearly how the market arranges itself to screw consumers, to the ultimate detriment of all.

Let me explain, with reference to the last two big fights between the publishers and retailers: second-hand games, and online publishing.

Each is in the interests of one, at the expense of the other.

Retailers found that they were quite good at running a marketplace for used games, where consumers could trade in their old games just in the very physical location where they were likely to spend that money on a new game. Retailers took a cut (and at the margin between what they were paying customers for the used games and the price they were reselling them, a very substantial cut) on each exchange. The publishers became increasingly antsy at all this economic activity from which they weren’t directly profiting (although they were, indirectly, by consumers having more money with which to buy new games and by consumers feeling that the almost hundred bucks they were about to spend on a new game wasn’t going to be completely lost).

So the publishers started crippling games so that critical features were available to the first purchaser – and only that one purchaser, no longer could a couple purchase a game together and each play the whole thing. Second-hand purchasers found themselves unable to play significant parts of the games they’d just bought.

The publishers thereby seriously slashed back a revenue stream for retailers.

In return, when it came to online sales of games, the retailers – now with one revenue stream curtailed – put their foots down. You must not undercut us with digital sales, they demanded, even though without a physical copy of the game the production and distribution costs are significantly lower and consumers know that they are paying full price for a product that costs you less and requires that they pay the distribution costs themselves (by way of bandwidth) and forsake their right to resell it.

And so the publishers charged full price, even on games that were discounted physically in stores. Digital copies of games often cost more than the physical counterparts, even though this makes no sense whatsoever.

In regions where the retailers overcharged customers substantially, like in Australia, where a 50USD game retails at EB Games for $110 Australian (ie, more than double, particularly when the Australian dollar is actually worth more than the US one), the online retailers were required by the publishers to similarly overcharge. So on Steam, which actually charges Australians in USD anyway, new games will be 50USD for Americans, and 90USD (or worse) for Australians.

The number of sales lost to consumers who simply refused to buy games at that markup apparently didn’t occur to the publishers. Nor did it occur to them that they should be doing everything they can to encourage consumers online, where they can have a higher margin even with a lower price, boosting sales and revenue at the same time.

So – two fights, and each side won one and gave ground on the other. Only they both took the sides that screwed consumers. One each for the publishers and retailers; nil on both for consumers.

Instead of the retailers selling second-hand games uncrippled, and the publishers selling online games at a reasonable price, thereby encouraging consumers to buy, they chose the options which reduced sales. They each carved out ground from the other – but the wrong ground if they want consumers parting with their hard-earned.

They forget – videogames are a discretionary entertainment expenditure. Consumers have plenty of choices for their entertainment dollar, both within and without the field of videogames. Nobody likes feeling cheated or ripped off, and in industries where consumers simply can easily go elsewhere, it’s surely not a good idea to leave them with that feeling.

Perhaps it’s no coincidence that so many publishers (eg THQ) and retailers (eg GAME) have struggled or gone out of business this year.

Maybe they should consider renegotiating their faustian pact. Maybe the retailers should say – okay, we’ll agree to you selling games online at an appropriate discount from physical retail, if you’ll agree to stop crippling second hand games. You can increase revenue from online distribution, and we’ll increase revenue from what we’re good at, facilitating a physical marketplace for these products between consumers. We both give and gain ground – and the consumers win and will be willing to buy more of our products. And the retailers the same in reverse.

And that’s what would happen.

If the market actually worked.