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Videogames have been extremely expensive for a long, long time. And not in a galaxy far away; right here in the U.S. and pretty much everywhere else.



How expensive?



Gaming-capable PC or Mac: $600 to $3,000

Game console: $150 - $400

Games on DVD/Blu-ray discs: $40 - $60



Then mobile arrived and made gaming affordable. Any recent iPhone and/or Android device is a capable mobile gaming rig. Same for most Android tablets and the iPad. Games are free or cost $20 at most.



But before looking at mobile and why it's such a disruptive force in gaming, let's go back in time. Back to the the late 1970s, 1980s and 1990s, when gaming was made expensive because of cartridges.







Carts costs are at the root of the $60 game





CARTS



Memory might be ridiculously cheap today, but back in the 1970s even 16K used to go for thousands of dollars. To solve the problem of "one game/one console" exemplified by home Pong, Fairchild Semiconductor released the Channel F. At first, cartridges only flipped switches (they didn't really contain any memory chips) but soon consoles like the Atari VCS/2600 would introduce REAL cartriges to the world.



Variety = cartridges holding a game each

Cartridges = memory chips

Memory chips = $$$



From the Atari onwards, game consoles would rely primarily on cartridges to boot up and load any games. This trend lasted about 20 years, from the VCS' early days in 1977 until the advent of the Sony PlayStation in 1994.



High cartridge prices made Nintendo 64 games expensive, costing upwards of $80 (in 1996 dollars) versus $40 or $50 for PlayStation. Publishers were able to sell games for less because manufactoring costs for games on CD-ROM were much lower than making cartridge copies. Lower software pricing was one of the reasons why Sony dominated the 5th generation of consoles, leaving both Nintendo and Sega eating dust.



The $60 pricing trend started with cartridges, but then it mutated into something else with the advent of CD-ROM-based consoles. Three-dimensional graphics and 650 MB of storage made games much more expensive to make than the 2D goodness of Mario and Sonic, forcing publishers to steadily raise prices.



$80 = cartridges

$50 = Playstation CD-ROMs

$60 = traditional AAA / next-gen price point







Modern Warfare 3





AAA BUDGETS



Budgets of $30 to $50 million are quite common now. It takes that much money to deliver a game capable of achieving triple AAA status and selling accordingly (think Modern Warfare 3). Teams are huge, Blu-ray discs can hold 25 GB on a single layer and gamers expect hours of entertainment for their hard-earned moolah.



Making AAA games requires a $60 price point from the point of view of both publishers and developers. It makes logical sense. Howewer, we need to ask: is that the whole story? It costs $5 at most per copy (DVD) maybe $10 for a Blu-ray disc. Do games really need to cost $60 since the media itself is so cheap?



RENTAL



To understand the $60 price point, we need to look back at rental VHS tapes. Yes, really.



When Sony launched the first consumer VCRs in 1975, Hollywood studios panicked. They feared consumers would start recording movies off the air (which did happen) for profit (which did not happen). They feared losing control of the original IP.



Then video stores arrived. At first Hollywood was dead set against allowing movies to be rented. It turns out a legal concept named "First sale doctrine" allowed video stores to buy a rental copy ONCE, but make 100 percent of the money aftewards. Hollywood studios were not entitled to ANY revenue after the first sale.



With the popularity of movies on Betamax, then laserdisc and VHS, studios had to relent. Video stores never agreed to sharing revenue with studios. So Hollywood figured they could:



a) Create a 2-tier system

b) Charge $$$ for a "rental" copy and $ for a "sell-through" copy

c) ??

d) Profit!



Video stores would pay, say, $100 per copy of Desperado but consumers could buy the same exact tape for $24.99. The inflated cost of each rental copy was designed as compensation for first sale "losses" -- making up for the fact that the video store would make the money back after a number of rental cycles.



My thesis is that the same principle applies to gaming.







GameStop has built an empire on used game sales





PRE-OWNED



The first sale principle allowed GameStop to prosper. It makes selling (and buying) games on Ebay possible. Used games generate BILLIONS but developers and publishers don't see a cent.



So publishers price AAA titles at $60. Just like that VHS copy of Desperado.



If some of the income from used game sales went to developers instead, indie houses would find it easier (and less ulcer-inducing) to stay in business. Modern Warfare 5 would cost $20. Mobile games would have some competition :)



In fact, a revenue sharing deal DID eventually take shape in the home video market. It suceeded wildly, making a known brand the most powerful video store in the world.



BLOCKBUSTER



Back in the late 1990s, Blockbuster Video signed a revenue sharing deal with most Hollywood studios. It allowed every store to buy hundreds of rental copies for dramatically lower prices.



First sale / no revenue sharing = $100 rental copy

Revenue sharing = $40 rental copy



The result was a constant income stream for Hollywood studios (versus a surge every time a new movie hit home video), cheap rental copies for Blockbuster and hundreds of copies of new releases for consumers. Getting The Lion King at the local video store at launch was akin to Mission Impossible, but Mission Obvious at Blockbuster.



So Blockbuster killed the video star (local stores), Hollywood made stable income and the home video market flourished.





Blockbuster mopped the floor with independent video stores thanks to revenue sharing





MOBILE



Revenue sharing is standard on mobile development and publishing. Developers pay 30 percent to Apple, then keep the rest.



Mobile publishers like Chillingo might charge 30 percent as well, depending on the deal.



Goods are digital, so the first sale principle doesn't apply. You can't auction your "used" iPhone games on Ebay.



Mobile budgets are still a fraction of the budget found on a AAA title. Angry Birds reportedly cost Rovio $100,000.



Mobile games are free, free-to-play and always cheap when compared to console games, resulting in a huge influx of new gamers. They're doing pricing right by all the parties.



THE FIX



To solve the $60 retail pricing puzzle, any companies selling used games or renting them should have revenue sharing deals with publishers and developers.



I'm looking at you, GameStop and GameFly.



Consumers should still be able to execise their first sale rights though, even if it "hurts" publishers and developers. Some may call it preferential treatment; I think it's a fair approach to the first sale doctrine. Consumers are not the same as giant corporations. At least until physical copies exist -- it might not be the case in five years.



The $60 retail pricing model will be killed by digital donwloads. That's how it all ends. No more used game sales, no more expensive media like cartridges, just bits and bytes through a fat pipe.



Once these two factors are in place, AAA prices will recede to compete with mobile gaming.



AAA Xbox 360 game = $60

AAA Xbox 720 game = $30

Casual Xbox 720 game = $10



These are seismic changes. They will transform the industry, starting with publishers made uncecessary by self-publishing (already a reality with PC games on Steam). AAA publishers like EA might in fact become more like Chillingo, since "retail" will not be one of their responsibilities.



Developers will connect directly with their fans. A subscription model might become a reality:



a) I love developer X's games

b) I pay developer X $1.25 every month to play all of their games as they are released

c) I pay for extra content (note the word extra -- not missing content)



The lines between "mobile" and "console" will be blurred. You will play the same game on your Xbox 720 and on the smartphone of choice, be it an iPhone or the last Android monster.



$60 games are already dead -- they just don't know it yet.