Steam Sales

Before I was recently was gifted my first gaming-capable-PC in a while, I watched the development of Steam, Valve's online gaming digital distribution service, from the outside, as a skeptic.  I am more of a game collector than most of the gamers I know--I have never traded a game back in at Gamestop.  Would receiving a digital download of a product, with no package to place in my library and view proudly among all the others, bring any real sense of ownership?

As I joined this console generation, it soon became clear the digital distribution game could not be ignored, with Microsoft pushing XBox Live Arcade, Nintendo mining its library with Virtual Console and then branching out into original WiiWare, and Sony moving aggressively into the space with its release of Warhawk over PSN at the same time as retail.  The reasons for the push into this new method are various and sundry, and best saved for another article.  Steam, however, was the brave forerunner in this front, and has shown itself to be the boldest innovator in pressing forward with this service.

Sometimes they did so in ways that were unwelcome.  I know I'm late to the party in this regard, and most PC gamers had the "compulsory Steam account" experience with their install of Half-Life 2.  My participation modern PC gaming has been fairly recent (I was a console gamer using Macs exclusively for a while, and thus was late to virtually every party--first playing Half-Life 2 on XBox!).  It was the purchase of a retail boxed copy of Left 4 Dead that finally introduced me to the Steam service, and to Valve's aggressive insistence that you join up with it, even when you buy a retail copy of Valve software.

Since then, Steam has grown on me, and despite my love of pretty printed labels and plastic boxes, my Steam library has indeed grown.  I have, in fact begun to trust the digital avenue of game distribution more and more, letting both Nintendo and Sony sell me products in this fashion.  Steam, however, has done the best job of drawing my dollars away from products available in traditional retail outlets, primarily through Steam's amazing sales that they offer, letting me buy games for discounts up to 90% off the price of the same game in a new, boxed form.

This is a very fine and clever marketing tactic in the battle Steam has been waging, to draw these dollars away from retail.  Yet I am aware that the story I have told secures my status as an unusual PC gaming consumer, a long-time holdout against digital distribution.  Steam has in fact been running this tactic successfully for a long time, and has garnered the attention, and the retail dollars, of quite a large number of PC gamers who are on-time to these parties.  As such, I have heard rumblings from other circles of PC gaming that indicate the crazy, crazy prices Steam is offering through these sales may be presenting some drawbacks, the kind I can remember Jake Jabbs explaining to me.

Jake Jabbs

Jake Jabbs is the President and CEO of American Furniture Warehouse, the largest furniture retailer in Colorado (where I live), and one that offers the largest selection of home furnishings under one roof in the nation.  His 1,500 employee business, with 12 locations, was built from the humble beginnings of one store purchased in 1975 (ref:  http://www.afwonline.com/about.asp).  He is practically a media superstar in Colorado, where his kitschy, low budget commercials have been a mainstay on local television for decades, often starring him, his family, and a tiger or some such wild animal, lounging across his advertised furniture pieces (somewhat perplexingly).

Jake and American Furniture Warehouse have garnered the respect of his customers through a clear "honesty is the best policy" practice in business:  Jake Jabbs does not and will not run crazy sales with huge discounts.  I can specifically remember years of commercials where he explains this policy:  by keeping his prices low and his margins fair at all times, he is able to consistently offer the best value to his customers on his entire selection.  Even as a child, his logic seemed clear to me:  if he were to offer typical marketing strategies like zero percent financing or huge discounts on some of his merchandise, to try and draw in business, he would have to raise prices on other items and give an unfair deal to customers to offset that marketing cost.  Instead, American Furniture Warehouse offers consistently fair and reasonable prices on its entire selection, all year round.

The effect of this strategy is this:  people who want to buy furniture in Colorado know they can trust Jake Jabbs.  When you want to buy a piece of furniture in Colorado, it doesn't matter what season it is, how the economy is doing, or how close you are to Christmas: you know you will get a fair deal from American Furniture Warehouse.  Whatever the price of the furniture you are interested, the perception is that you can rest assured Jake has only marked it up enough to cover cost of sales and get a fair and reasonable margin on the sale.

Over time, this kind of consistent marketing has immeasurable value.  Psychologists will confirm true, lasting trust is something that builds slowly over time.  When trust is violated, it degrades and disappears rapidly, and again takes a long, laborious process to rebuild.  This is true of human relationships, and it is true of consumer trust as well.  Consistent pricing--that indicates a business has interest in a reasonable profit and a long-term relationship with a customer base--is a marketing tool that may not generate a lot of flash, pop, sizzle, and attention, but if it is applied over time, can build a loyal customer base that trusts you and returns to you again and again.  Perfect for the furniture business.

Perceived Value

Contrast the marketing philosophy above with what goes on at Steam.  I'm not attacking the marketing Steam has done.  Each type of marketing has its own place for maneuvering your business, depending on what position your business is in.  As "scrappy underdog"--as a service that is starting out and trying to convince consumers to change their very buying habits from traveling to a brick-and-mortar shop to a new and less-trusted method of delivery--Steam's attention-getting sales have proven their worth.  Steam's challenge was to convince PC gamers to forgo their usual habits and sample something that would initially be uncomfortable: even gamers without my compulsion to collect would initially be skeptical to buy a product that didn't physically exist in a graspable form.

It was smart of Steam to battle this by offering deals a gamer could not refuse.  If a game is fifty dollars at retail, and you can access to the same content for twenty or ten percent of the cost, it's kind of hard to pass up trying out the service, and seeing how it works out for you.  After all, if you don't really like the experience of getting the product through Steam, you're not out very much money.  But I think for most PC consumers, those days are past.  Sony may still have this obstacle ahead of them for selling games on PSN that are available at retail, but PC gamers are a different market, and Steam has become accepted among most of them.  No longer the upstart, Steam suddenly finds itself on shifting public relations ground.  Gearbox's CEO and co-founder Randy Pitchford recently accused Steams' DRM (digital rights management) scheme Steamworks as restricting and confining to small publishers  (ref:  http://www.1up.com/do/newsStory?cId=3176406).  And Brad Wardell, CEO and founder of Stardock (another digital delivery service), has released estimates stating that Steam currently owns 70% of the PC digital distribution market  (ref: http://www.1up.com/do/newsStory?cId=3177041).  Even though Mr. Wardell's statement also makes clear that digital distribution currently represents about one quarter of the revenue generated by PC game sales, the day is here when Steam finds its PR goals changing from getting attention to managing attention.

I have already noticed some rumbles of disquiet (on Twitter) from people who have purchased a game on Steam, only to find that days or hours later the same title is available for a fraction of what they just paid.  To these consumers, paying two to ten times as much for a particular product just due to the timing of their purchase is a violation of consumer trust.  How will these consumers respond?  To my mind, they may quit buying games on Steam at full price, unless they are motivated by some factor like enjoying the multiplayer swell of popularity of a new release.  If such a factor does not exist, Steam may inadvertently find itself creating the opposite effect with these sales than what it originally intended: a hesitancy, a reticence in its consumers to buy a game on Steam UNLESS it is on some crazy sale.

What may end up happening is that consumers lose trust that Steam is getting a reasonable profit margin on its regularly-priced offerings.  If Steam can afford to sell software at 10% of its usual cost, without the brick-and-mortar need to move old product out of inventory and make room for new product (that Jake Jabbs avoids with his warehousing system), people will begin to wonder how much it truly costs Valve to sell something digitally, and therefore whether the margin Steam makes on a full-price sale is a fair one.  A digital warehouse is an infinitely and easily scalable warehouse, and the significant cost associated with digital distribution (after covering the original costs of development) is the bandwidth required for customers to download the games.  The swell of sales that a 90% discount brings in bandwidth can only be cost-effective under one of two models:  these sales bring other add-on purchases that cover the loss achieved by such a low margin against cost of sales, or the cost of sales is very low in the first place, and the margins are unreasonably, untrustably high.

Intangible Items

Most gamers, of course won't think of it that way.  It's marketing guys like me who will put these thoughts into such specific business terms.  What most consumers may feel is that they don't trust Steam at full price, that there's no reason to buy a game on Steam when you want it, when you are better off waiting for one of their sales.  The upswing of trust in the distribution method will be matched and overtaken by a downswing of trust in the pricing method. 

The perceived value of digitally distributed software may suffer for all online publishers as a result, which could have a ripple effect which leads consumers to question the true value of digital entertainment in general, whether it comes in a box or not.  Many would argue that the pricing and distribution model of the iPhone has already had this effect, and there are other articles written that seem to indicate that, when it comes to buying games on Steam, perhaps less is more after all (ref:  http://www.gamerswithjobs.com/node/48545).  As Sheryl Crow said so succinctly, "It's not having what you want...it's wanting what you got."

I know the biggest costs in this business are on the development side, and a certain groundswell of interest in any title has to be achieved to reach enough sales to cover that cost.  I also know that I have placed myself, with this article, in the unpopular position of criticizing a marketing system that allow most gamers to get more games for less, whether they actually play those games or not.

And I know Valve deserves a lot of credit for its marketing and pricing structures.  For example the console publishers, although mimicking Steam's sales, seem to have ignored another tactic Steam deploys effectively.  Namely  the awareness that consumers expect prices to go down over time.  This recreates the phenomenon in digital distribution that game developers decry at retail: sales in your initial release window are pretty much the sales you are going to get.  They should recognize that consumers are used to brick-and-mortar pricing, dictated by limited inventory, and often wait on their buying decisions for something they are interested in until "the price comes down a little."

But the marketers at Valve would do well to pay attention to their shifting public relations standing, and realize that as their effective marketing makes them a dominant force in the market, the most important tactic becomes taking your existing consumer base, and making sure you have their trust.  Because the eventual goal is to ensure that, whenever you want to buy a game, you think of Steam.

Not just when you hear they have a crazy sale going.