The Genius Accounting Behind Gamestop’s Power Pass Program

Gamestop is launching a new rental program called PowerPass. Here is the details from Engadget

The program will run you $60 for six months. You can drop in to your local GameStop to get a different game at any time, but you can only have one title out at a time. At the end of the six months, you can choose one game to keep for no extra cost. You’ll need to be a free or paid member of GameStop’s Power-Up Rewards program to sign up for the rental program.

Now, a lot has been said about this new program. Instead, I want to discuss why, from an accounting perspective, this is a genius idea.

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Nintendo in China

Since the unveil that Arena of Valor would be coming to Nintendo Switch, the internet has been abuzz of Nintendo going to China. Not long after the announcement, another report from Digitimes came out claiming Nintendo was entering the Chinese market in 2018. Then, Nintendo released a video showing games that would receive Chinese translations. These translations may be for the Tiawan and Hong Kong releases, which Nintendo has officially announce. Nintendo has not officially announced any plans to expand into China; however, that hasn’t stop investors from speculating on the fact which results in a surge in Nintendo’s share price. With this in mind, let’s talk about how Nintendo’s move could impact Switch’s sales numbers.

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Lootbox Epidemic

Although I originally promised another article, lootboxes are becoming far too much of a hot issue to not talk about. Every game seems to have their version of the lootbox. Today, I want to address some topics that are coming up about loot boxes.

Are Lootboxes Gambling

No.

With gambling, there is a high chance you will receive nothing in return. For instance, if you put money in a slot machine, you have no guarantee you will get anything in return. With lootboxes, there is a guarantee you will get back something, but there is no guarantee you will get back what you want. Lootboxes are analogous to collectible card games. If you buy a pack of Pokemon cards, you are guaranteed to get a set number of cards, but you’re not guaranteed a Charizard. Another example is gatcha machines in Japan. These are machined where you put money in and you have a chance of getting a toy. Which toy you get is not guaranteed. This is similar to the ESRB’s reason lootboxes aren’t gambling.

ESRB does not consider loot boxes to be gambling. While there’s an element of chance in these mechanics, the player is always guaranteed to receive in-game content (even if the player unfortunately receives something they don’t want). We think of it as a similar principle to collectible card games: Sometimes you’ll open a pack and get a brand new holographic card you’ve had your eye on for a while. But other times you’ll end up with a pack of cards you already have.

Everyone is focusing on is the fact there is some chance with a lootbox, but as the ESRB affirms, chance alone does not constitute gambling. Insurance, for instance, has chance. You only get paid when your house burns down which may never happen. Lookboxes always give you something. Slot machines usually don’t give you anything.

Are Lootboxes OK

No

The issue I have with lootboxes is you should not hard to buy anything if you already bought the game. When you buy a game, everything that is in that game should be available to you. You shouldn’t have to buy a $60 game and then either grind for in-game currency or have to spend more money to get the game’s connect. The same goes for cosmetics. This is content that is in the game that the game purposefully tries to keep away from you.

If the game is free to play, then microtransaction are acceptable as there is no entry cost into the game (they are bad for other reasons though). Customers already paid for the game. They don’t need to be charged for little add-ons

Why Do These Practices Exist?

Two reasons: development cost and greed.

I’ve discussed before that DLC and other similar things are done to recoup the outrageous development cost these games have. With EA’s closure of Visceral games, a former employee provided insight on how bloated these budgets are getting. From Twitter

Dead Space 2 cost 60 Million dollars to make and they were merciless with their budget. they only sold 4 mil and that wasn’t enough….cause you gotta spend 60 million dollars marketing it and you take a huge hit from MS and retailers taking their cut

He added that the marketing cost of these games is almost as large as the budgets and the cut to retails is about 50 percent ($30 on a $60 game). See here

The solution to the problem is simple: shrink the budgets. As games became HD, development cost and time got longer and longer, but the improvements from graphics is miniscule. But for whatever reason, companies continue to prioritize the visuals over the game themselves. I had a conversation with a friend who discussed creating an open world game with procedurally generated elements. On paper, the idea seems unfeasible. However, we concluded it would be easy if the game used graphics similar to a PS2. For a real-world example, look at Minecraft. The games looks like it came from the N64 era, yet it went on to sell 10s of millions and made the creator a billionaire. You don’t need to make a 4K masterpiece to turn a profit.

But here’s the secret: that’s what these companies want. Big companies like EA and Activision want to snuff out the competition, and they do this by making games budgets bigger and more ridiculous. If you haven’t noticed, numerous game studios closed around the 7th generation, and this is good for EA and Activision. It means they reduce the competition in the industry and even have the opportunity to buy out the stellar firms who could otherwise not compete.

And don’t let these companies make it seem like they are suffering. EA generated $4.8 billion in revenue and $967 million in net income for 2017. Net Income, as a percent of revenue, was 20 percent. This ratio is far greater than the 1 percent it can be for other companies. Moreover, revenue and net income decline from 2016 where revenue was $4.4 billion and net income was $1.2 billion. EA, and others, complaints about development cost is nothing more than crocodile tears. (source)

What To Do About Lootboxes

There are two good actions you can take. First, don’t buy these games. Even if you don’t buy lootboxes, you are still contributing to the game. See, certain consumers called whales drive the spending for these products. If there is a robust community playing the game, the whales are more invested and will spend more. However, if the game is akin to Lawbreakers and has almost no one playing, no one will spend money on it.

On the other hand, make fun of lootboxes. Companies like EA and Activision care about their public interest, and if you’re there making lootbox memes on everything they tweet out, they are going to get upset real quick. These companies want you to buy the game and spend more. Consumers won’t spend if everyone on the internet is saying “lol lootbox.”

DLC ages like milk. Companies come in with a new scheme, milk it for what they can, and then bail. Lootboxes will pass, but a new scheme will emerge. Stay frosty!

 

Cuphead is Successful Because It’s Hard

Game Journalists have been hard at work denouncing Cuphead’s difficulty. “It’s just too hard” they write. “We should be able to skip bosses.” However, the Journalists ignore that Cuphead succeeded because of its difficulty.

Games need a hook to get us to purchase them. If you are just the same as the competition (like Lawbreakers) or don’t really provide a solid hook (the new Paper Mario games), then the game crashes and burns. If Cuphead was simply defined by its aesthetics, it wouldn’t be near as successful. Cuphead’s difficult gives consumers a reason to be interested in the game. Not only does this game have a cool 1930s cartoon look, but it’s also tougher than nails.

The Dark Soul meme has lost its meaning at this point, yet I would argue that Cuphead’s success is akin to Dark Soul’s. When every game that is released is a cake walk, games like Dark Souls and Cuphead are tough games in a sea of throwaway titles.

Game Journalists forget that they way they consume games isn’t the way consumers do. Journalists play the game, write their review, and move onto the next title. Journalist want games that are “artful” but can also be beaten in a weekend. They consume and move onto the next. Cuphead impedes this process. To the regular consumer, this is great as Cuphead becomes a longer and more engaging game. Journalists hate this because they only want the game to end.

Since the Wii, consumers argue that every game must appeal to every person. Journalists argue that Cuphead should be easier to appeal to a wider audience. In truth, the goal should be designing games for different customers. Cuphead has sold over 360,000 copies, resulting in revenue of over $7 million. These figures show that Cuphead is doing just fine by being difficult.

In the end, journalists were not the one’s mortgaging their home to create this game. They may want the game to be easier, but is that going to result in greater sales? I doubt it. The Journalists just want the game to cater to their specific taste. They are right in that the game would reach a wider audience by being easier; however, this audience already got the game for free so they could review it.

Who Funded Indie Pogo

While browsing social media the other day, I came across a plea from a Kickstarter game: IndiePogo. It didn’t look that interesting and looking at the numbers, it didn’t look like it was going to make its goal. I awake the next morning and by some miracle, it did with about $3,000 to spare. So I took a deeper look into the numbers and what I found was peculiar, to say the least.

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Do Game Enthusiast Make Games Worse

Its not unusual to hear the complaint that games are getting worse, and I can’t say I disagree with it. Some games released that are so bad and buggy it would make early NES games blush, yet no one seems to question if it’s the consumers who are the cause of this. What if its the game enthusiast, the kind of people who must have every title day one, who are sending the wrong signals to these publishing giants and making games worse. Today, I want to present the ways the gaming enthusiast may be ruining videogames.

Fanboyism

As you may be able to tell from this site, I am a big fan of Nintendo’s games; however, I often find myself at odds with Nintendo fans. Nintendo fans often see the company as doing no wrong and will defend Nintendo’s poor decisions. When it was revealed that the 3DS game Metroid Samus Returns would have hard mode locked behind amiibo, some fans rushed to Nintendo defense. Let’s not kid ourselves; Nintendo’s practice of using amiibo of locking features behind amiibo is scummy. Nevertheless, Nintendo fans defend this action and say you can’t criticize it. “It’s just extra content.” “You don’t have to buy it.” They never question if its OK for Nintendo to lock features that are already in the game behind dumb toys. Nintendo can do no wrong.

And I’ve seen other attacked as well. For instance, if you complain about Nintendo’s bizarre features, such a Splatoon limiting map to specific times, fans will circle the wagon to defend a multibillion dollar company. It’s a “design choice,” they’ll claim. Yes, these odd quirks Nintendo puts in are intentionally, but that doesn’t mean they are good. I’m sure if these guys bought an empty box with Mario on it, they’d call it a design choice and tell me how it’s definitely worth $60. Sony and Microsoft have their own cult that defends everything the company does. Who cares if Playstation Plus is more expensive. Who cares if it’s a cheap cash grab. Who cares that Sony is making you pay for what use to be free. It’s worth it.

Day One Purchases

The trend nowaday is to rush out and buy a game the second it’s out. Now, I have bought games day 1 two, but by doing so, we are telling these company what they are making is good when we know no better. Take Mass Effect Andromeda. The game was universally panned by fans for it’s numerous flaws, not least of which is the stunted and awkward animations. But if you look at the NPD charts, the game actually sold really well. In the month of March, the game was the third best selling games for the month and seventh the month after. The game eventually fell off the charts, but was the damage already done? I’m sure the game’s quality hurt long term sales, but will EA look at the game as a success because of early adopters who bought the game before these problems were evident.

By buying every game that comes out day one, companies are encouraged to continue the same practices. Enthusiast, by buying every game, tell companies that what they are doing is great. Why should the companies improve when, to them, consumers liked the product.

That said, the companies aren’t entirely blameless in this regard, especially with this influx of preorder bonuses. Sometimes it’s a pointless trinket, but other time its content in the game that you have to preorder to get. Regardless, companies are trying to find more and more way to sucker you into making a purchase rather than waiting to see if the game is even worth it. Yet enthusiast buy it hook line and sinker. Can you blame companies for doing this when consumers with more sense than money lap it up?

Collector’s Edition

One of the biggest scams in gaming that is being ignored is the collector’s edition. Rather than selling you a game at $60, now the company can sell you the game. Sure, you’ll get a trinket they are selling cost far less than the inflated price, but it’s worth it I’m sure. Collector’s editions are even more devious than DLC because they seek to extract more money from the most dedicated consumers. It also creates a sort of scarcity that makes it seem like the product has more value when in actuality what you are getting is worthless. The best part for the company is no one is criticizing it like they are with DLC. Why do you think almost every game nowaday has one? It will only get worse.

Backlogs

Another thing that has never made sense to me is this idea of a “backlog.” That you have all these games you own but haven’t played. Perhaps I’m just cheap, but why buy a game when you can’t play it? And you send the same message to the company through your purchase. Alternatively, you could not buy the game, wait for impressions, and they make a decision when you can play it. Instead, the enthusiast has to gobble up every game that comes out. As a result these companies know they can continue the same poor practices and not improve the quality of the product because enthusiast will buy the game up like hotcakes.

 

Closing

In essence, what these companies are doing is rather than make products reach a wider audience, they are milking more money out of the enthusiast. These companies love your backlog. They love when you buy a game the first day. They love when you buy a collector’s edition for $40 bucks more than the MSRP. And the more enthusiast buy into these practices, the more these companies do it. And I can’t say I’m totally blameless. Lord knows I’ve committed these sins as well. But the longer we play ignorant and ignore these issues, the more developers and publishers will employ on these loathsome practices.

The moral of the story is that if you want better games, you need higher standards. Maybe we shouldn’t be buying games day one. Maybe we shouldn’t be putting money down on DLC. Maybe we should take more of a hardline approach with this games and demand higher quality. Gamers always want to complain about the actions of these companies, but we never think about what message we are sending with your purchase. The point is that if we want better games, we shouldn’t be buying everything that comes out. We shouldn’t be buying it the first day. And we sure as hell shouldn’t be buying collector’s editions.

If you want better games, make better purchases.

June 2017 NPD Analysis

From VentureBeat

June Results

  • Total: $765 million (up 7 percent from $712 million in June 2016)
  • Hardware: $231 million (up 27 percent from $182 million)
  • Console software: $343 million (up 1 percent from $339 million)
  • PC software: $32 million (up 2 percent from $31 million)
  • Accessories: $159 million (down 1 percent from $160 million)

Total video game spending in June 2017, which includes hardware, software and accessories, increased 7 percent versus year ago to $765 million,” NPD analyst Mat Piscatella said. “Accessories was the only category to see a decline in spending.

The increase in hardware sales seems to be driven by stronger sales of the PS4 and the Switch (which wasn’t released this time last year, obviously). What the analyst doesn’t mention is despite multiple new games this month, software sales for consoles increased only 1 percent. This seems to be a flattening as the 8th generation consoles wind down. The Switch contributed to an increase in software sales, so sales of the PS4 and the 3DS are likely down this month.

Software

  1. Tekken 7
  2. Injustice 2
  3. Grand Theft Auto V
  4. Crash Bandicoot: N. Sane Trilogy
  5. Arms
  6. The Legend of Zelda: Breath of the Wild
  7. Mario Kart 8 Deluxe
  8. Overwatch
  9. NBA 2K17
  10. Horizon Zero Dawn

The NPD combines SKU together, rather than report an individual game. This means exclusives are further down the list. This is especially true for Crash Bandicoot N Sane Trilogy and ARMS.

One thing to notice is, despite the multiple SKUs taking the top spots, Nintendo has a very strong presence. Nintendo Switch lacks the install base of other consoles (and PC), yet Nintendo has 3 of the top 10 best selling games. One of them is a brand new IP. We may very well see a situation in a year or two where Nintendo dominate the best selling games charts similar to the Wii and DS (which was the reason for the change to reporting multiple SKUs)

We’ll get to Crash below, but here is what the analyst had to say about the game:

“Crash Bandicoot: N. Sane Trilogy had a strong debut, reaching number 4 on the month’s top-seller chart despite having only two days in market,” said Piscatella. “Crash Bandicoot: N. Sane Trilogy is the first Crash Bandicoot franchise game to debut in the top 5 since Crash Bandicoot: Warped, which launched on the Sony PlayStation in November 1998”

Hardware

“The PlayStation 4 was June’s best-selling hardware platform, driven by the Slim PlayStation 4 system in Gold with 1TB HDD,” said Piscatella. “It was the best performing June for PlayStation 4 unit sales to date.”

The analyst statement aligns with total software sales. Despite strong sales for PS4, overall software sales only grew 1 percent. This is in spite of the large library of games on the PS4 and Nintendo propping up sales with their new system.

However, I don’t think the Gold system alone was the reason for the increase. Crash Bandicoot N Sane Trilogy is also a reason for the increase (if not the main reason). As the analyst mentioned above, Crash Bandicoot N Sane Trilogy is the first time the series topped the charts since 1998. As I mentioned before, Crash Bandicoot did very well in the late 90s and later fell off due to quality.

The rule in the console market is that games sell software. So when you have a major hit like Crash Bandicoot N Sane Trilogy doing incredibly well, it’s no surprise that sales of the PS4 would also go up. A Gold PS4 with a 1TB HHD may be nice, it’s just a shiny box without any games. Thus, I think Crash was the catalyst for the PS4’s strong sales. 

Crash Bandicoot N Sane Trilogy And Nostalgia Buck

It doesn’t take a rocket scientist to tell you nostalgia sells. Look at the numerous remakes of old movies coming out of Hollywood nowadays. Video games are no different. Look at Sonic Mania. Consumers are incredibly excited for the title despite the lackluster track record of the series. Given this, it’s bizarre when Sony’s global head of marketing Jim Ryan says he doesn’t understand why anyone would want to play old Playstation 1 and 2 games:

When we’ve dabbled with backwards compatibility, I can say it is one of those features that is much requested, but not actually used much. That, and I was at a Gran Turismo event recently where they had PS1, PS2, PS3 and PS4 games, and the PS1 and the PS2 games, they looked ancient, like why would anybody play this?

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