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The Economics of Downloadable Content (DLC) in Video Games

 

The video game Evolve just launched with a $70 base game, $100 premium edition, and $60 of additional downloadable content (DLC) features. That’s right, to get the full version of the game, you have to pay more than twice its base cost. Evolve is not alone.

 

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Batman: Arkham Knight will launch later this year as a $60 game with $140 of DLC, going so far as to make the Batmobile an extra. Even smartphone games have this problem. Clash of Clans costs $5 but has $12,000 of extras. We don’t even want to delve into the money traps that are Plants versus Zombies 2 and Candy Crush Saga. For players, these extras are new and strange. Many people think video game companies are not being reasonable. But are they? Let’s look at the economics of the video game industry.

Destiny, currently the most expensive game ever made, had a budget higher than $500 million.

 

The industry takes in over $46 billion a year, about twice as much as Hollywood. However, that number represents revenue, not profit. Profit is the money left over after all expenses have been paid. These expenses are called overheads. Although revenues are increasing, so are overheads. Around the year 2000, when The Sims and Deus Ex hit the market, most major games cost about $1-4 million to produce. In 2014, smaller games cost around $20 million, major titles cost a lot more. Destiny, currently the most expensive game ever made, had a budget higher than $500 million. It’s not only development costs that are increasing. Video games are also getting more expensive per unit, due to the costs of supporting multiplayer. This cost per unit is called a marginal cost. So, the overheads for game studios have increased between 400% and 49,900% in just 15 years. A product could cost up to 500 times as much to make.

 

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When overheads increase, profits decrease. Many businesses try to increase prices to keep profits up. For example, a Ferrari costs a lot more to make than a Chevrolet Spark, so it is priced much higher. Strangely, the same is not true for video games. A $1 million project like Super Smash Brothers sold 18 years ago for $60, and the $500 million Destiny juggernaut hit the stores for $55. Why do game prices always stay the same?

For this, we have to look at something called “elasticity.” Elasticity means the amount that demand is affected by price. Elastic demand means that small changes in price affect sales. Inelastic demand means that most changes in price don’t affect sales. For example, nobody needs to buy Destiny. If Destiny’s creators increased the price to $200, then everyone would just buy Wild Star or Borderlands 2 or the zillion other multiplayer sci-fi action RPGs. This means that Destiny’s demand is elastic. By contrast, the tap water you drink while playing Destiny so you do not die from dehydration after a 15 hour raid is inelastic. Houses need a lot of tap water and have no alternatives. The price of tap water could double, and it would not really affect sales. So, what do you do if your overheads are increasing, but you cannot raise prices because demand is too elastic? You find money wherever you can.

 

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The result, video game companies break up their products into several pieces to turn a profit. Although elasticity controls the price, it does not control the features of the game. By removing features from the game and selling them as DLC, game producers have a way to generate more money for the same product. It is annoying to be sold a product with some features deliberately removed. But is there a solution that works for both consumers and producers?