Wednesday, May 25, 2005

Prestige Marketing in Video Games

Today, I promised I'd talk about secondary marketing and video games, which I believe is the future of massive online games. I use the term ‘secondary’ marketing incorrectly.

NOTE: What I mean by ‘secondary’ marketing, is the notion that Company A produces a widget and then Company B buy that widgets and resells the widget for a much higher markup based on the demand and alleged 'rarity' of the widget. I also use the term to label the idea that people will pay extra money to increase their prestige within a particular hobby. People pay extra for an “exclusive” Barbie, or a “rare promotional” baseball card. Perhaps, what I mean, is better described as "prestige marketing"...

Did you know that during the height of the "Pokemon card" craze, the demand for the product was so high, that the single biggest logistical problem for the company producing and profiting from the cards, was finding ways to increase to production? Literally, every available outlet that could produce and package the cards was tapped out. The company literally could not produce cards fast enough. At the height of this craze, production was so high that there were more Pokemon cards produced each year, than there were people in the United States.

Yet, on web sites like eBay, individual "rare" Pokemon cards were commanding 100 dollars or more. The fact of the matter was, there were 100,000 copies or more of that allegedly "rare" card.

Secondary market, doesn't work on the reality of ample supply, it works on the "illusion" of scarcity of it. More importantly, it also works on the notion that acquiring the product increases one’s prestige and reverence within the hobby itself.

The first concrete example I ever had of the power of secondary marketing, was the Upper Deck baseball card craze of 1989. Literally, a case of Upper deck baseball cards in 1989 was commanding thousands of dollars. The reality was, Upper Deck was not only cranking them out a break neck pace they continued to produce the "rare" set until 1991.

To this day, a Ken Griffey Jr. card from this set sells routinely for 100 dollars or more. There are probably at least 50,000 copies of this card in sleeves and plastic protectors, because the card is so "rare" and valuable.

Magic the Gathering proved that secondary market can drive and define a game's identity. Consider how ridiculous the notion is of a card game whereby the more you spend to acquire cards, the better you are at the game. The more you pay, the more you win and the more success you have at the game. Add to that a continuing cycle of cards rotating in and out of what is "legal" to play and you've not only tied the purchasing of your product to winning, you've also stamped a limited life span on each purchase. A Magic card, no matter how expensive it is, is only ‘legal’ for two years in the most common format of the game.

Magic players are dumb asses, they truly are. I say that knowing many of my friends and acquaintances love the game with a great passion and the game is, at its core, a great strategic game. But Magic players are scalped into a 300 million dollar a year business that is about 80% profit and that may be a low estimation. The highest cost of goods on a pack of Magic cards is the foil wrap they come in and that chimes in at about a penny and a half per pack. Rarity? I've personally seen entire boxes stacked with Black Lotuses and original foil Serra Angels. The notion some of the cards are 'extremely' rare and valuable is once again predicated on an illusion of scarcity.

How long before video games exploit this? If Magic the Gathering can command 300 million, or if Pokemon in its hey day can generate nearly 1 billion dollars in a single year, how can companies like Sony and NCSoft ignore that revenue potential?

When you consider how lucrative the secondary market for video games is already, even as a cottage industry, with no real business strategy behind it, it seems obvious to me, this is where video games will eventually. There are people who make 30,000 or more a year, harvesting items, currency and wealth on video games and then distributing what they acquire to the highest bidder in real dollars. Now 30,000 a year, isn't much more than a job at 7-11, I grant you that, but like I say, that's just one person, acting as a cottage industry.

What if the companies behind the game, started to tap into and exploit this demand and market? The idea that people will pay more to succeed in a gaming community, has been proven umpteen times over. While many will gripe about it and say the game is 'ruined', many of those same gripers will then begrudgingly pay "just to compete".

Don't think the secondary market translates digitally? Think again. Magic Online has already proven that.

Magic Online is garbage. The game crashes, it has security leaks, it is ripe with fraud and dubious practice. It has serious scalability issues and is a technical abomination. It has limited graphics and a very high learning curve for new players. It does everything wrong, that makes a video game successful. As a result, it has a fairly limited player base, a mere fraction of what a game like World of Warcraft commands.

Now, what if I told you that the average Magic Online player spends 50 dollars a month? Isn't that 350% more revenue than what your average subscriber to an online RPG pays? What if I told you because the game is very low tech, the development costs and support costs for that game are also considerably less?

In fact, in some ways, less players with a higher revenue stream actually wind up helping you. It means you require less bandwidth, less hardware and less customer support. If Magic Online has 50,000 players, this equates to over 175,000 of a game that fails to exploit secondary purchases and markets and the cost of support. The fact the Magic cards purchased online are just digital objects (you literally pay for database inserts, I suppose) and can only be tenuously converted to an actual physical card does not sway demand. People will still pay, most especially, and this is key, if the purchase increases the players’ ability to compete and succeed in the game itself. Prestige within the hobby is always something people will pay for. Games like golf and tennis figure that our years ago.

So how does a game like Everquest, step lightly into this business approach? Well it has to be done gingerly I believe, especially for the first one. It has to be sold as a 'feature'. I don't know the marketing angle on it, but it seems to me, I should have the option of paying more money to World of Warcraft, in return for prestigious quests, prestigious items and other 'unique' qualities. And yes, the initial reaction from gamers will be to holler and scream, but many of that same crew will begrudgingly commit to the purchase once they see how "cool" the additional feature/quest is, or once the competition of the game itself drives them to do it.

Tying a virtual economy to the real economy is no easy trick, but the revenue potential is too high for someone not to try it. The first few attempts will likely be clumsy and fail, but someone will get the balance right. When they do, suddenly your user base translates to a higher revenue stream. Given how expensive making and maintaining these games have become, I believe its inevitable.

So yes, one of the days, Halo 3 will offer you a special quest to retrieve a special weapon, but only if you pay 5 dollars or if you retrieve a special code from a Burger King Happy Meal. The possibilities and ties in are endless and the code can be just as simple as inserting a unique item into a player’s record. Again, as getting users to pay for a database insert, the cost of goods on such a scheme is probably negligible compared to the revenue potential.

Look for things like this, it in the next year or two. NCSoft already tried a small venture, they released a DVD version of their video game, where if you purchased the DVD you got one additional power and access to a unique cape design that regular users could not access. The DVD contained no new game code that had not already been release. Despite the fact 95% of their users already owned the product, the small additional ‘features’ and prestige, pumped up sale of the DVD significantly.

In short, if there is one thing the gaming and collectable industry has taught us, there is no limit to the demand for items (even digital items) that increase the prestige of the obsessive hobbyist and gamer. I expect that simple fact to become exploited in more and more creative ways in the video game industry as time goes on.

I have one more rant about the gaming industry in me. I have forgotten to mention paper/dice/board gaming, which is becoming more and more of a relic. I think tomorrow I will talk about the atrophy of TCGs, paper games and board games.

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