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Games & Gaming

LittleBigProblem?: How Digital Distribution, Games as Services and UGC may Cause Problems for Games Companies

April 2009

Player Extend

An audiophile friend of mine who had to sell over 5,000 records to create space when he started a family recently told me how his heart sank when his eldest (now aged 4) calmly asked him, “What’s vinyl, Daddy?”. Being old enough to have had a gaming life spanning floppy disc (8 inch, 5¼ inch, 3½ inch and 3 inch), ROM cartridge, cassette, CD, DVD, UMD and Blu-ray, might I feel a similar pang when my own children one day ask about the olden days when games were purchased on physical media?

Certainly, the signs are that the industry is clearly heading in that direction. All current generation consoles allow for downloads through online stores, the new OnLine Game Service looks to deliver games direct to your TV without the need for a PC or console and industry rumours suggest that the next iteration of Sony’s handheld (the PSPGo) will drop the UMD format and become a solely digital download device, much like the iPhone (which has emerged over the last 6 months as a leading platform for games development).

It’s easy to see why this is attractive for both developers and publishers: game disc and packaging production costs can be cut, as can the percentage points given to retailers. Indie developers have the opportunity to find an audience for innovative but low-budget games without having to compete for shelf space with blockbuster titles.

In addition (and perhaps most importantly) games which allow for additional content to be digitally delivered enable gamers to keep paying after the initial purchase, extending the life span of (and the profits generated from) the game. Games have an average physical shelf-life of around 4-6 weeks; by releasing a steady stream of downloadable content, this purchasing window can be greatly extended. User-generated content also helps keep game content fresh and desirable to late adopters.

But is the move towards online console game distribution inevitable and what are the legal issues thrown up by such a move?
This article looks at the current barriers to wholesale digital downloads and what the problems may be for businesses moving away from traditional distribution to becoming entertainment service providers.

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There’s no denying that the digital distribution market is already extremely lucrative: PC downloads from platforms such as Steam, Direct2Drive and Impulse reportedly generated over $600 million in revenue in 2008 (and are forecast to be even higher in 2009); figures from VG Chartz for March 2009 show significant revenue generation of downloads through XBLA and the Wii Virtual Console (old-school Nintendo titles lead the way – Mario Kart 64 has generated nearly $15 million worldwide, Super Mario 64 upwards of $12 million – with XBLA games such as Texas Hold ‘Em ($9 million), Castle Crashers ($8.5 million) and Bankshot Billiards 2 ($7 million) not far behind).

These figures are all the more impressive when you take into account the surprisingly low worldwide penetration rates of online-enabled consoles. An IDC report from the end of 2008 suggests that only 15% of current-gen consoles will ever be connected to a network, with the majority still not online by 2012 – and this where online capability is integral to experiencing many games in full.

Console downloads have also, to date, been confined to games of a restricted size; current hardware limitations prohibit the quick download and storage of more than a handful of triple A titles (which can reach sizes of 10GB and upwards). Clearly, further advances in download speed and hardware capacity will be necessary to move towards distribution by entirely digital means.

Consumer attitudes to digital distribution of games may also make it difficult to phase out physical media completely. The console games market remains focussed on Q4 activity; a significant percentage of annual revenue in the games market is generated due to gift purchases. “Gifting” a download is far less attractive, particularly where the person giving the gift does not have sufficient technical skills to download the game without the help of the person receiving it.

In addition, for so long as games companies are concerned about piracy, DRM mechanisms will continue to tie the downloaded game to the console which downloaded it. Sharing a copy with friends then becomes extremely difficult, as will trading it in for a new game – something which retailers will no doubt be reluctant to see disappear (a recent Variety report suggests that the second-hand market accounts for 44% of all profits of US retailer GameStop). A quick glance of the commercial and legal issues the music and film industry has faced in enforcing a DRM and anti-piracy policy highlights the concerns with such a model.

For some of the new generation business models for gaming, though, piracy and file sharing may not be a problem. If the vast majority of revenue generated through your game is made by way of subscription fees or downloading premium content – like many MMOGs - how the gamer accessed the game in the first place (or whether she paid for it or not) becomes less relevant. Real Time Worlds has intimated that it will wait to see how the community plays its upcoming MMO APB before settling upon a revenue model, even considering giving the game away but charging for additional content. Whilst this model won’t work for every game on the market, it’s certainly a mindset that a number of the larger games companies are looking to adopt, given the massive profits generated by successful online games; World of Warcraft generated more revenue in 2008 than all Xbox 360 software combined (although, admittedly, with much higher operating costs than most games).

Spending less of your annual budget on trying to track and take action against unlawful P2P file sharing can only be a good thing, even if governments are starting to introduce stricter obligations on ISPs.
Once your console game moves towards a subscription model or being provided online by instalments, however, you will also – by necessity – be committed to continued involvement beyond the release date. Whilst this enables games companies to continually improve or respond to gamer comments, it may also require them to monitor and police their games to a level greater than they may have initially anticipated. Nowhere is this more evident than with user-generated content.

The Dawn of Creation

UGC in the gaming world is by no means a new phenomenon. The PC modding community has been creating its own content – and extending the life of games - for years, of course, but despite companies such as id Software, Bethesda Softworks and Valve increasingly incorporating modding tools within their titles, a certain technical competency of the user has always been a pre-requisite. However, with the launch of titles such as Spore and LittleBigPlanet, where content creation is both user-friendly and at the heart of the game, the development and sharing of UGC has never been so immediate or accessible.

In interviews before the launch of Spore, Will Wright said he expected players to create around 200,000 creatures in a couple of months. In fact, 100,000 were produced in the first 22 hours of the creation tool launch and the number rose to over a million within a week, before the game itself was actually released. At the time of writing, the Sporepedia is poised to announce its 100 millionth creation, the equivalent of over 50 times the number of identified species on Earth.

Although the extent of the enthusiasm for UGC may not have been anticipated, what should not have come as any surprise is that individuals, when free to create content, do not necessarily have regard to legal concerns which may trouble the game developers – things like infringing third party rights, ensuring the game is age appropriate and that it does not contain defamatory, obscene or offensive material.

So what can games companies do to reduce UGC risk? Although they can take care to ensure that at release their product complies with all relevant laws and will not offend anyone, control is lost once this is opened up to gamers. The addition into the mix of UGC increases liability risks, akin to those faced by more traditional service providers like MySpace and Facebook. If players of the game are able to create new content using the game’s tools and share that content through a publisher’s servers, gaming companies will need to consider whether they try and take advantage of the “notice take down” protections offered to ISPs in the US and EU.

Conclusion

Whilst it seems that physical media in one form or another will be around for some time to come, we expect to see a rise in subscription models, games provided in instalments and premium content. As games companies become service providers, they will have to deal with a raft of new challenges, including legal risk over UGC.

If you have any questions or would like to discuss anything in this article in more detail, please contact Andy Moseby at Kemp Little LLP on 020 7600 8080.