Tuesday, January 5, 2010

The Perpetual Value Machine

After dumping buckets of money into Valve's little online service this holiday season, I got curious about how exactly they make money by charging things this cheaply. It's not exactly the same process as bulk distribution like Costco and it's not really Wal-Mart either. They basically just sell CD Keys and then wrap that up into this really handy update service with social networking. They have low overhead but not as low as their competitors. Instead, the reason Valve owns this scene is that waaaay back when Half-Life 2 came out, you had to install STEAM. They've had that policy for a while now with all their games. And it looks like it's paying off.

For some reason or another, the process reminded me of a perpetual motion machine that is supposed to generate infinite energy if you just set it up right. Prices go down, value inflates, prices go back up, sales continue. I'm not sure this would work for every single game out there, but something like Madden or Team Fortress 2 would be the prime candidates for perpetual value games.

On paper anyhow, these things never quite work like you'd expect.


Rob Zacny said...

A little ways back I wrote a piece for The Escapist on my bargain addiction, but it was only about half of what I'd originally planned (which proved to be too unwieldy an idea). But the question I wanted to explore was whether there was going to a long-term cost for operating Steam the way Valve does.

I don't necessarily believe this is how it works in a significant number of cases, but here's what I'm curious about: Steam sales work so beautifully because we all have anchor prices to which we refer. I'm a lifelong PC gamer, so I used to think "Game = $40-$50". So when I saw something for $30 or $25, it was like winning a jackpot.

But Steam and the other distributors have started playing this game so well, and playing it so often, that my price anchor has dropped through the floor. Unless it's a relatively new game or something I'm really interested in, I'm not even going to consider it for anything more than $20. Hell, in this last sale I started turning up my nose at $10 games. "I'll wait until it hits $5 or $2.50." The other problem is that I think we've all been conditioned to wait.

I'm not complaining, because it works well for the consumer and I think it will probably work out for the producer and vendor as well. But I do wonder sometimes if they haven't created an inflated expectation of the value gamers feel entitled to when they buy from Steam.

L.B. Jeffries said...

Hard to say. There are a couple of really bad scenarios that come to mind. They might end up in a price war of attrition by seeing who can charge the lowest and still survive as a business. STEAM will not win that one against Rupert Murdoch's IGN backed service. There's also the fact that a lot of those games are old and out of fashion, no matter how cheap you make them. I don't see anyone going on about Jade Empire despite the awesome sale it had.

On the other hand, there are some games like Modern Warfare 2 that if you don't buy it at release, the multiplayer will be too brutal in 6 months for a beginner.

If I had to guess, what Valve stumbled upon is a way to sell games that are constantly updated and expanded on like Team Fortress 2 or maybe a Madden title. Possibly an MMO as well.