Loss Leaders

I’m a big fan of Valve’s Steam service. It took me a while to come around though. Even today I still keep local copies of all my games in case of a doomsday scenario. It takes a lot of trust to buy into a Digital Distribution service. Will they respect their customers, because it’s not like you can take your library someplace else if they decide to change their Terms of Service for the worse? Will they remain competitive, or will I have to start buying from other services and fragment my library? Will I still be able to access the things I paid for in 10 years?

One of the things that push me over the edge was their amazing sales. Amazing games for just a few dollars. As someone who was unemployed at the time, or even just price conscious, it was too good to pass up. The basic idea is loss leading. Valve, or the publisher, takes a hit on the sale of a game hoping you’ll come back and buy more games from Steam or from that franchise. In the end, gaining a returning customer at the cost of a game that they may have never bought anyway.

David DeMartini Origin’s, EA’s competing DD service, boss was asked in an interview about these sales to which he responded, “We won't be doing that. Obviously they think it's the right thing to do after a certain amount of time. I just think it cheapens your intellectual property.” Take from that what you will considering partiality of the speaker.

Valve’s business development chief, Jason Holtman, responded to the criticism, “If all that were true, nobody would ever pre-purchase a game ever on Steam, ever again. You just wouldn't. You would in the back of your mind be like, okay, in six months to a year, maybe it'll be 50 per cent off on a day or a weekend or during one of our seasonal promotions. Probably true. But our pre-orders are bigger than they used to be. Tonnes of people, right? And our day one sales are bigger than they used to be. Our first week, second week, third week, all those are bigger.”

What’s underestimated in Holtman’s response is the importance of the social side of gaming. If all your friends are playing a game now, you’re more likely to buy it now to be able to discuss it with them or play it with them. Not to mention, if you happen to pick up a multiplayer game several months after launch, your libel to be greeted by many an empty server.

I’ve recently started dabbling in another Digital Distribution service, Amazon MP3. They too have been a major user of the loss leading tactic. It’s not odd to see a $10 album drop to $3 or songs drop from 99 cents to 25 cents. And boy do they give away free credit like there’s no tomorrow.

They too faced scrutiny for their tactics. One unnamed retailer is quoted in a report as saying, “I love it when they have a successful loss leader pricing deal. I can't stop laughing every time I think about how much money they must be losing”.

The problem is that music doesn’t have the same social aspect as gaming. Outside of people who are really into the technical aspects of music, most really don’t discuss it beyond “like” or “dislike”. There’s no real analog to multiplayer in music. So, there’s no pressure to buy music quickly beyond a few special circumstances like social gatherings. At the same time, this means the price of music will generally stay constant over time. What is a 99 cent song now will remain so for the remained of its life, barring sales.

While Amazon certainly has the money to keep their MP3 Digital Distribution service afloat for quite some time, I question how effective their loss leading strategy will be in the long term.