Activision CEO Bobby Kotick credited "record high-margin digital revenues" for the company's all-time-high revenue last quarter. EA set its own profitability record and bragged to investors about its "digital transformation."
But video game retailer GameStop (NYSE:GME) last week spotlighted a problem with these electronic sales: People just aren't paying for digital games.
When a sale isn't really a sale
GameStop published market research from DFC Intelligence showing that 60% of all digital sales last year were free giveaways attached to a hardware bundle. In other words, almost two-thirds of the AAA titles that were digitally "sold" in 2014 were actually delivered as part of a bigger purchase of an Xbox One or PlayStation 4 console.
In the context of all video game buying, full-game downloads represented 12% of sales volume. However, because the majority of those sales came with $0 price tags, the digital channel accounted for only 2% of the industry's sales dollars.
A huge pile of money was left on the table here. According to market research firm NPD, free digital games reduced the industry's software sales by $250 million last year. GameStop estimated that it gave away over $100 million of digital content by itself in 2014.
Why the giveaway?
Video game sellers have a method behind that madness. In fact, there are two big goals driving the giveaway strategy. The first is to build as large an installed base as possible for the next-generation video game consoles. That helps Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT) as much as it boosts the game publishers, which have a larger audience for their products.
The hardware strategy has been a success. This generation is running at about 60% more consoles than were present in homes at the same time in the prior generation's lifecycle.
The second aim is to get gamers comfortable with the process of buying a downloadable game. This isn't as easy as, say streaming video, where Netflix showed people that full-length movies could be delivered just as quickly and seamlessly as a YouTube video. In contrast, most games take hours to download. And they are likely the most expensive digital product that many people will buy.
The pricing risk
That makes pricing especially tricky for game publishers. Sure, millions of customers have now downloaded a AAA title. And that should help keep digital sales steadily climbing higher.
But gamers also paid far less for these games than they would have at a physical store. GameStop's survey in November showed that customers reported paying an average of $22 for a full game download, compared to the $60 normal retail price.
Microsoft, Sony, and the video game publishers all aim to scale back on the free digital giveaways this year. They might be heeding GameStop's warning. As company President Tony Bartel put it late last year, "We want to help ensure that our industry does not make the same mistake as other entertainment categories by driving the perceived value of digital goods significantly below that of a physical game."
It will be interesting to see how full-game download sales hold up this year now that the industry aims to defend the retail price for these digitally delivered products.