GeekWire has published an interesting interview with Valve co-founder Gabe Newell. The discussion centers on Steam, and specifically, the experiments Valve has conducted to explore how pricing affects the games that it sells through the service.
When Valve altered the price of one of its games without announcing the discount, it discovered pricing was perfectly elastic—lowering the price did increase sales, but given the lower cost, Valve's gross revenue was unaffected. However, Valve has seen very different results when sales are promoted heavily. When Counter-Strike was discounted by 75% in a widely publicized sale, Valve enjoyed a 40-fold increase in revenue from the game.
CS is pretty unique in the gaming world, but Newell says Valve observed similar behavior from at least one third-party title. He also claims that discounts as low as 25% reliably generate increased revenue. Interestingly, Newell claims discounting games on Steam hasn't necessarily cannibalized future sales at higher prices. Games tend to sell better after a sale than they did before it, he says, and Valve has observed an uptick in retail sales while a Steam discount has been in effect.
Newell also has some interesting things to say about the free-to-play gaming market. Team Fortress 2 went free to play this summer, and Newell reports about 20-30% of free players have bought something in the game. He doesn't put a dollar value on those purchases, but the conversion rate is purportedly much higher than the 2-3% that's typical in the free-to-play world.
I'm a big fan of Steam and what's it's done for the PC gaming market, but I have to take issue with one of Newell's comments on piracy. Before boasting about Valve's success in Russia, a market with a reputation for rampant piracy, he states: "The easiest way to stop piracy is not by putting antipiracy technology to work. It’s by giving those people a service that’s better than what they’re receiving from the pirates." Fair point. However, Steam has plenty of anti-piracy technology built in. You've gotta be connected to install a game, and games don't always behave reliably in offline mode—Valve's own Portal 2 requires periodic reconnection for things like save games to remain valid. We have to dial back the date on our storage test systems manually just to get Portal 2 to work properly in offline mode.
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