My Broadband recently published an article which looked at the sharp increase in the of price of video games in South Africa, and this begs the question, why? The price of video games is affected by three main factors: the current ZAR to USD exchange rate, the cost of import duties, and the costs associated with developing games.

Video games are simply very expensive to develop, with upper costs showing no real signs of being reined in on consoles. Five years ago, an AAA title would cost between $25 and $50 million for development expenses alone, and that spend could very easily be matched with marketing costs. This leaves the developer with a $50 – $100 million investment for a product that retails at $60 per unit. After distribution, manufacturing, and other sales costs, only 30-50% of revenue goes towards the publisher. At best, the developer makes around $30 per unit, and needs to recoup a minimum of $50 million to break even – that’s 1.7 million units. This is not for profit, or to fund the next game, but simply to break even.  It becomes incredibly difficult as a business given the massive amount of units needed to sell to avoid running at a loss.

Traditionally, publishers attempt to solve this problem by spending even more money in trying to differentiate their product from their competitors. The perception is that if you create the best game, you can sell 4-6 million units. To do this, however, the game needs to really stand out from the crowd, and this increases marketing costs. According to discussions of this on twitch, it’s an arms race of sorts between publishers, where only those with the biggest budgets will succeed.Unfortunately, that means games need to be sold at a premium.

It should be noted, however, that the real costs of games in US dollars terms haven’t actually increased much over the past 10 years, so the investment isn’t being passed on entirely to the consumers. Instead, the publishers are getting better at targeting bigger audiences to help boost revenues and cover costs.

Unfortunately, South African consumers are hit doubly by both the exchange rate and the import duties. The exchange rate is something we have no control over, and game retailers pay for products in dollars. Any fluctuation with the exchange rate affects their bottom line.

While a retailer is waiting for products to be delivered the value could increase or decrease. This results in retailers needing to jealously guard their margins, simply aimed at ensuring they stay in business and make a small profit. At the same time, they are affected by import duties, which European and US consumers don’t feel, due to trade agreements negotiated between European nations and America. While there are certainly import duties, South Africans are hit much harder by these, and importers have no choice but to pass the costs on to the consumer, as they too need to stay in business.

In summary, none of the publishers, importers or retailers are acting unfairly, or trying to fleece the regular South African gamer. The prices are merely a reflection of the realities of the market, with each side having to guard their business.Otherwise, they’d simply not be around to make any more games – which would definitely be worse than a high price.

All of the above has led Fuzzy Logic to believe that Free-2-Play is the only answer to this problem.

Free-2-play changes the market realities in that:

• Marketing costs are drastically reduced, as it’s a lot easier to let someone play a game for free and decide if they like it, than pay $60 upfront to decide if they like it. The core principle of free-2-play is about letting everyone play your game so that you can find as many hardcore fans as possible and only then try to offer them upgrades and improvements that they can pay for. These hardcore fans will already know they love the game and therefore spending money is an easier choice. And who doesn’t like to play great games that are free?

• Import duties are no longer a concern as we’re working in a digital world where there isn’t any physical import. The government shouldn’t see this as a negative either as the money potentially available to SA developers is pure profit coming into the country with nothing leaving the country. This money is used on staff, hardware and general expenses which in turn goes to the government in some form. This is the opposite of currency control and should become a really positive goal to strive for our country.

• Retailers unfortunately do need to adapt, however this has been going on in Europe and America for the past 6-7 years where traditional retailers need to adapt to a digital world. There will always be a place for retailers to sell free-2-play like add-ons such as gift cards, special release toys or other value added services for a game. This is more in line with music in that retailers wouldn’t sell the music but could assist with getting tickets to people, selling t-shirts and setting up ways for the public to meet the stars. Digital will change the world in many ways and this is in process, so it’s about finding a retailer’s niche in that world.