Sony profits conundrum!

Here's a conundrum.

On one hand, news that Sony Corp's profits are healthily up, due in majority to its games division's performance and sales of LCD televisions. On the other hand, news that Sony is slamming the practice of second-hand games sales on the high street, claiming that pre-owned games distort market prices:

“The blame for heavy discounting of current releases can be laid at the door of the pre-owned market,” SCE UK’s commercial director Kevin Jowett told MCV. “When consumers see pre-owned titles for £10 or £15, this fosters the perception that this is the realistic price for all games, and the new release roster looks unrealistically priced.”

Yet it turns out that discounting new releases also results in higher sales. MCV continues:

BVG’s The Chronicles of Narnia jumped ten places up the ChartTrack top 40 last week, thanks to a 16 per cent sales increase, following its slashing to £19.99 at most High Street retailers.

Meanwhile, over in the news on Sony's profits for this quarter:

The company's PlayStation 2 and PSP-inclusive Game division played its part in the turnaround, raking in profits more than 50 percent higher than it claimed for last year's third quarter.

My question: what the hell are they complaining about? Why curtail the perfectly reasonable and legal second-hand market if they're making money hand-over-fist with the current situation?

Comments

[Shard]

Because they're a business and businesses want to make more money. Plus, production costs for the next generation are really going to start to eat into those bottom lines, so anything that impacts their profits is going to be subject to attention.

Plus, on the Narnia point, that's a 16% sales increase for a 50% cut in price... That's not exactly fantastic!

[Alice]

But they're setting the prices in the first place. And raking it in with current sales. So I don't buy the argument that they need to make more more more money, even if it means killing off viable business models like second hand games market.

Nope. Don't buy it :)

[Shard]

The prices aren't just set arbitrarily by SCEI though, there'll be lots of negotiation with the developers, distributors and sellers in order to work out profit margins.

If a developer is going to have to ask for larger milestone payments in order to pay for their increased resources, then that money has got to be recouped from somewhere in order to maintain the profit margins of all in the supply chain. Now, if they don't want to put the prices up then the only other way is to sell more copies at retail. And if they see a reason why they might not sell as many copies as they need (sales from 2nd hand only make profits for the retailer) then it's not surprising that they're going to try and reduce the impact of that reason!

That's 20 pounds, or about 40 dollars, probably down from 25 pounds or 50 dollars. I can't say for sure, but a 10 or 20% cut is reasonable.

[Shard]

A new title for PS2 will usually retail for £39.99

[Gamerone]

So why don't they build a constructive and profitable business model from the second hand market?

I am naieve about actual business models in other industries but on the face of it, why can't sony or microsoft or EA make this work? Consider the car industry - manufacturers have licensed second hand dealers for their products. Considering the number of products released worldwide via large publishers why don't they work with retail to license second hand game product with the aim to recoup for all parties? We all know the retailers get the biggest slice of the pie from a 1st hand game. Supporting a pre-owned policy means they get all the profit.

The tragedy is that the developers of games see the least profit. Many developers are paid to cover the cost of a single product. They have no control over how the product is marketed and how it represented at retail, both of which make a break a good developer. Current business models arre broekn.

[Gamerone]

So why don't they build a constructive and profitable business model from the second hand market?

I am naieve about actual business models in other industries but on the face of it, why can't sony or microsoft or EA make this work? Consider the car industry - manufacturers have licensed second hand dealers for their products. Considering the number of products released worldwide via large publishers why don't they work with retail to license second hand game product with the aim to recoup for all parties? We all know the retailers get the biggest slice of the pie from a 1st hand game. Supporting a pre-owned policy means they get all the profit.

The tragedy is that the developers of games see the least profit. Many developers are paid to cover the cost of a single product. They have no control over how the product is marketed and how it represented at retail, both of which make a break a good developer. Current business models arre broken.

[Pixel Kill]

The issue publishers have with the second hand market is that mere days after a game comes out you can often buy it in good condition for much less. That isn't an issue with DVDs or books. It's not really fair but it's also basically tough shit until digital distribution seriously takes off.

Gamerone - publishers rely heavily on retailers, they can't setup their own second hand games sales because they mostly don't even sell new games.

Why has nobody mentioned yet that for there to be second-hand games in the first place, someone has to want to sell back the games they own? Why don't developers just make games that you don't want to sell back after playing for two weeks?

[freddie]

The problem with the car analogy is that once you sell your car, you need to go out and get a new one. The value is in the physical object.

The market model for Intellectual Property is the same as for Physical Property. Currently, the market model places value in the physical medium only (dvds are very cheap). The real value is in the IP.

MMORPGs are different because you are paying for a service, not a physical product.

These arguments are mute once digital distribution takes over. Prices can come down to US$15 when the majority of people actually start paying for games, and you can expect to see more niche games (check out darwinia and rag-doll-kung-fu on steam, geometry wars on xbox arcade).

I'm banking on Steam. May it allow more developers to enter the market, cut out the publishers and distributors and all the other middlemen that take the majority of the earnings. It will be a fairer and more competitive environment which can only benefit the consumers.

[Shard]

I'll be far more interested to see how Sony and Nintendo react to Xbox Live and it's Marketplace and Arcade sections..

Which of them will be the first to offer true digital distribution of a major title? Now that will be when it gets interesting!

[FatHed]

They did this same thing with the record/tape/cd second hand markets.

[Gamerone]

Digital distribution is a holy grail. Look at music downloads, £7.99 for the Arctic Monkeys album ... this is the same price a play.com for a packaged product. Consider sky movies. £3.50 for movie rental yet there is no box, no cashier, no site overheads. Its no cheaper than renting a DVD. Half Life 2 is still $39.95 through steam ... ridiculous.

The real value is indeed in the IP, but the publisher tends to own this. And an IP needs an outlet and thats what publishers and retail provide.

Pixel Kill - I was suggesting publishers enter into a new model of distribution with retailers, whereas the retailer would license the rights to sell a publishers product. In this case pulishers and maybe developers would still keep a slice of the apple pie.

[Todd]

Digital distribution. Now here is something I am pessimistic about. The game companies will try to charge the same amout for downloaded games as they do for a boxed copy. Game companies have discovered the price that people are willing to pay and that is what games are going to sell for. Have you noticed how nearly every game on the shelf costs about the same price?

Case in point: ebooks. The book publishers charge the same amount for an ebook as they do for a new paperback or hardback, priced exactly the same as the title in print.

Digital music. iTunes proved that people are willing to buy music at .99 cents/song. But the music publishers want to raise the prices for new music on iTunes. There have even been proposals to make a sliding price scale where popular music will cost more. Just because I want to buy a popular, doesn't mean that song is more valuable TO ME than a less popular song. Also, I can't resell a digital download, so it is less valuable than a pressed CD. Let's say I buy an album for $15, listen to it for a while, and resell it on Ebay for $5. I'm 2 bucks or so ahead of where I would be had I downloaded that 12-song album for 99 cents per song.

So, what should happen? Once a game publisher gets their digital distribution infrastructure in place, distribution costs will be flat. It will cost no more money, practically speaking, to sell 10,000 copies of a game or 10,000,000. Publishers should ideally price games according to developement costs and how many copies they expect to sell. Popular games should cost LESS because they make up for sale price with volume. But that won't happen. The establised game publishers will charge a more or less flat fee on games. Games in demand will subsidise developement costs on games that flop, just as they do now.

Prices will HAVE to be somewhat lower on downloaded games or else people won't buy them. People won't like the hassles of backing up games, keeping track of download keys in case of system failure, and reduced value for lack of resaleability. What if a game company folds and you can't ever replace a lost copy of a game you paid good money to play?

The danger is that the price people are willing to pay for digitally distributed games may be too low. Distribution of optical media may be expensive, but developement of blockbuster games can run into the tens of millions of dollars. Even with the negligable costs of online distribution, it may not be profitable enough to offset the greater sale price for a boxed copy. The major players may try digital distribution and refuse to make any consessions to the customer's desires. The buisiness model will flop and you will be stuck going to the store to pick up your brand new copy of Halo 6.

The bright spot in all this is the small game publishers and independent developers with niche markets. They have already moved to online distribution. I just bought and downloaded a cool little game this weekend, and I paid half of what a new game costs in the stores. If the big game publishers are smart, they will make their back catalogs of games available on the Internet. All that old intellectual property is gathering dust when it could be a machine making free mony. I'd be happy to pay 10 bucks to download an old classic game now, rather than trying to ebay-snipe a copy. Of course, I don't expect that to happen any time soon. I suspect that most executives are just afraid of the Internet bubble bursting again. I think they are terrified of using the Internet for real business.

[Peter]

Can somebody please tell me if it is legal to open a 2nd hand games shop in South Africa which deals only in the buying and selling of 2nd hand games esp ps2 games or what the legalities of such a venture would be...do the manufactures hold a restraint on reselling of the games