Why Are Activision and EA Falling Behind in the DLC Market?

In a previous article, I discussed GameSpot's GameTrax survey of 3,500 gamers, which revealed an overwhelming preference for boxed retail titles over digitally downloaded ones. That bodes well for brick-and-mortar retailers like GameStop (NYSE: GME), which generate most of their revenue from sales of boxed games.

Yet the GameTrax survey also revealed that gamers are still downloading plenty of additional downloadable content (DLC) for their games, adding to companies' revenue and gameplayers' fun. This add-on content for retail games comes in the form of additional single-player missions, in-game items, new characters, or multiplayer maps to increase a title's replay value.

Most DLCs cost a fraction of the price of the original game, based on the amount of additional content offered. DLCs were available on earlier consoles such as Microsoft's (NASDAQ: MSFT) original Xbox and Sony's (NYSE:SNE) PS2, but only truly took off with the seventh generation Xbox 360 and PS3, thanks to higher download speeds and much larger hard drives. Today, it's common for a single game to offer half a dozen DLCs, which can double the original cost of the game.

Robust market demand for DLCs
61% of the gamers surveyed by GameSpot purchased a DLC over the past six months. Console gamers were the most active group -- 71% have made a DLC purchase, compared to 59% of PC gamers and 47% of handheld gamers.  

Therefore, despite frequent complaints that DLCs from leading publishers Activision Blizzard (NASDAQ: ATVI) and Electronic Arts (NASDAQ:EA) are ruining games, these add-on experiences remain immensely popular.

However, neither Activision nor EA made the list of top five games for which DLC was purchased within the past six months. Instead, their rivals Take-Two's (NASDAQ:TTWO) 2K Games, ZeniMax's Bethesda, Sony, and Ubisoft (NASDAQOTH: UBSFF) dominated the DLC market:

Source: GameSpot Trax, February 2014.

Why Activision and EA are slipping
Activision's Call of Duty: Ghosts ranks sixth on the list of DLC purchases, despite selling nearly 20 million copies retail worldwide. EA's Battlefield 4 and Mass Effect 3, which respectively sold 8.8 million and 5.1 million copies, are ranked seventh and eighth. By comparison, Take-Two's Borderlands 2, the leading title for DLCs, only sold 5.0 million retail copies.

Activision and EA are losing ground against these four companies for a simple reason -- gamers may be eager to buy new DLCs, but they are selective in their purchases. Here are the top five reasons that gamers purchased new DLCs:

Source: GameSpot Trax, February 2014.

While gamers were craving new single-player missions, Activision established a reputation for selling new multiplayer map packs -- now shown to be one of the least popular reasons to buy a DLC -- for $15 each.

The latest Call of Duty: Ghosts DLC, Onslaught, is similar -- it adds four new multiplayer maps, a new dual-use weapon, and a co-op mode featuring alien combat for $15. Activision, like many other publishers, is also selling a "Season Pass" for $50, which allows access to all four planned DLCs, which will cost $60 if purchased separately.

EA has employed a nearly identical strategy with Battlefield 4 by selling $15 DLCs with additional multiplayer maps and weapons. With Mass Effect 3, the results have been hit and miss, with some single-player DLCs like Citadel ($15) earning critical praise, but others, such as Omega ($15), receiving a lukewarm response.

COD: Ghosts' Onslaught DLC. (Source: VG247)

By comparison, 2K Games offered gamers several new single-player missions in Borderlands, which expanded the original single-player campaign across two seasons. The newest DLC for the game, Sir Hammerlock Versus the Son of Crawmerax (the fifth and final part of the Headhunter DLC), will be released on April 15 for $2.99. The previous DLCs cost up to $10 each, and could previously be purchased together with a $30 season pass. Therefore, Borderlands' strategy of offering cheaper DLCs with more single-player content has been received more warmly than Activision's run-of-the-mill multiplayer map pack and weapon sales.

Bethesda has also kept Skyrim fans happy with beefy DLCs like Dragonborn and Dawnguard, which originally cost $20 each but add entirely new areas, missions, and single-player modes to the original game. Another DLC, Hearthfire, costs $5 and allows the player to build a homestead by gathering various building materials.

Skyrim's Dawnguard. (Source: PCGamer)

Therefore, gamers are willing to pay for additional DLCs, but Activision and EA need to step up their game beyond packs of multiplayer maps and weapons if they want to remain competitive.

Do DLCs encourage publishers to release unfinished games?
Purists argue that regardless of the price or content of a DLC, it's a greedy tactic that encourages publishers to intentionally release incomplete games.

Nintendo (NASDAQOTH:NTDOY), for example, has repeatedly resisted the rise of paid DLCs. In 2011, Nintendo of America President Reggie Fils-Aime stated in an AOL interview that customers "paid for a complete experience," and that the company was only interested in add-on content if it "makes sense to the consumer."

Despite that noble position, Nintendo started releasing paid DLCs the following year in titles such as Fire Emblem: Awakening for the 3DS, which currently ranks ninth on GameTrax's list of top DLC titles. In the DLCs, Nintendo offers maps, episodes, and characters from previous games, as well as paid downloadable chapters with unlockable characters.

Fire Emblem: Awakening. (Source: Technobuffalo)

On-disc and zero-day DLCs -- have publishers crossed the line?
Whereas Nintendo has taken baby steps toward DLCs and microtransactions, other gamemakers have arguably crossed the line with two increasingly prominent forms of DLC -- on-disc and zero-day (or day one) DLCs.

On-disc DLC refers to locked content that is already on the retail disc. EA's Mass Effect 3, 2K's Bioshock 2, Capcom's Resident Evil 6, and many other games were found guilty of this controversial practice. Even Wedbush Securities analyst Michael Pachter, best known for stating that "whiny gamers" should be less demanding of major publishers, said the motivation for on-disc DLCs was "plain greed."

Meanwhile, publishers launch zero-day DLCs at the same time as the retail game, prompting gamers to wonder why the content wasn't included in the original game. Many cases of on-disc DLCs have originated from these zero-day DLCs, after shrewd gamers discovered that the DLC was simply locked away on the disk that they just purchased.

The bottom line
Despite these problems, DLCs represent a natural progression of the video game business, evolving directly from the "expansion packs" that PC gamers have long been accustomed to. Meanwhile, console games are actually the cheapest they have ever been on an inflation-adjusted basis -- in 1991, the average $50 Super NES title would cost $83 today.

However, DLCs are a new method of generating sales that video game publishers should use wisely. Gamers are quick to realize when DLCs and season passes aren't worth the extra money, prompting them to wait for "Game of the Year" editions, which pack in the extra bells and whistles for a more affordable price. On-disc and zero-day DLCs also have a high risk of alienating customers and tarnishing a publisher's name.

Last but not least, Activision and EA should be concerned that multiplayer map packs -- which have generated plenty of sales for their respective Call of Duty and Battlefield franchises in the past -- might not have enough staying power to compete against more substantial, scripted single-player experiences that its rivals excel at delivering.