The Econonmics of Pay-Per-Play

Recently, it was announced that Japanese Playstation 3s had a new version of Gomibako (released stateside as Trash Panic), which actually charged gamers on an installment format similar to what is found in arcades. By paying out 100 Yen (about $1.06 right now), the title gives players three full cracks at the game, after which, players would have to pony up another 100 Yen. The format even further entices players by offering unlockables if they are able to clear modes that the pay-per-play game offers. It is very clear the company is testing the waters to see who bites on this, but reports of this are already attracting its fair share of neigh sayers.

Of course, I’ve had to deal with similar claims this previous year with the advent of Guitar Hero: Arcade. Why would people want to lay down $1-2 a song for something they can purchase for keeps for $15 or less? While in the United States, it seems Trash Panic can now be purchased for a meager $4.99 as opposed to its original $9.99 asking price, further cheapening the $0.99 per three plays format if it were to ever arrive in the U.S. But what if this were to take off? Could we be entering a phase where instead of Microsoft Points, Wii Points and Sony Wallets come stuffed with “virtual quarters” as avatars roam the digital midway looking for a hungry machine to stuff them in? Just imagine paying $0.25 to jump into an online Street Fighter match as people fight for the right to not have to pay again (just like in my interview with Capcom’s Seth Killian about getting into fighting games at the arcade – “I didn’t have that much money, so I had to win if I wanted to keep playing”). All of this just begs us to answer, “is there really an advantage to paying less to receive less?”

Let us go back to my Guitar Hero example. In actuality, the game is doing very well. In my experience with the arcade machine, my specific location had no shortage of players and I’ve seen the great arcade news site Arcade Heroes report on solid numbers the game is receiving in cabinet sales. Even though the typical Internet game site user scoffed at the idea of limited game play, the end result reflects those projected by the economic concept of marginal utility per dollar.

Understanding consumer behavior can be tricky and, in fact, in my microeconomics book (Microeconomics by R. Glenn Hubbard/Anthony Patrick O’Brien, published by Pearson Prentice Hall in 2008), there is an entire chapter dedicated to it. Obviously, the reason for this is everyone acts, thinks and behaves differently, but even so, economists still assume consumers will use their limited resources to buy goods and services that satisfy them the most. No one buys things they do not want – even if you think you have made a purchase and didn’t want it, there was indeed an underlying factor of self interest. You might not have personally wanted that action figure you bought for your son, but the interest of satisfying your son fueled the decision purchase the product. You can later regret purchases you made at the spur of the moment, but at the point of purchase, you were acting on the impulse of self interest.

No matter the situation, economists have a term known as “utility,” which is the subjective satisfaction ones derives from consuming a good. Furthermore, people experience marginal utility as they consume more of the same product, the marginal difference stemming from the change in utility one receives by consuming more – you’re going to enjoy slices of pizza less and less as you become full, for example.

In order to stop sounding like a rambling professor, let’s put all of this onto a video game track of thought. Obviously, we buy video games because we enjoy them (or like the action figure example, we buy them in the interest of satisfying someone else). The varying degrees of the best decision to make for a game – purchase outright, rent or pay-per-play – all stems from the person’s desire to repeatedly pay for a game. While the initial costs of renting or paying to play are much lower than spending the full amount of the game, eventually, there comes a point where repeatedly paying becomes less advantageous to consumer. Think about it – a one-month Xbox LIVE card, when still carried in stores, was $9.99, yet a 12-month card is $49.99. If you were to buy 12 one-month cards, you would be paying $119.88 for the same service a mere $49.99 provides for you. However, again, budget constraint sets in – our limited resources sometimes doesn’t make the initial $49.99 available to us.

What you have to remember is, economically, satisfaction is determined by the purchase – sure, when you buy a $60 game, you can play it whenever you want to, versus only one time if you pop 50 cents into an arcade machine – thus, replayability has no function from an economic standpoint and proving per-per-play as a feasible model. Going back to pay-to-play versus purchasing a game, we have to consider the rule of equal marginal utility per dollar spent (marginal utility divided by cost). While consumers tend to receive more enjoyment from the initial purchase of an expensive item, most often than naught, purchasing inexpensive items provides us with a higher favorable ratio between utility and cost.

Again, utility is subjective, but let’s just say the utility one receives from playing a song in Guitar Hero is 20. Purchasing Guitar Hero II at GameStop is $14.99, giving this option a utility per dollar of 1.33, while popping $1.00 into a Guitar Hero: Arcade cabinet, results in a utility per dollar of 20. In economics, there is a law of diminishing marginal utility that states in nearly every case, the difference seen by marginal utility is negative. When someone makes another purchasing decision, let’s just say the utility has diminished to 16 – the novelty has worn off for each version: You’re picking up Guitar Hero III, also $14.99 at GameStop, for new songs even though the game play hasn’t changed and in Arcade, you played your favorite song already, so you choose a less favorite song or repeat your favorite song. Now, the second utility derived from the home version is 1.07, while the arcade version drops to 16. In an economic utility cycle, the marginal utility (enjoyment) eventually hits zero or drops into the negative, signifying the point at which the consumer no longer sees the purchase as being viable. However, you can start to see how pay-per-play becomes a viable device – short-term satisfaction comes at a much lower price.

Just think about it – when you see an arcade game you really enjoy, your usual first reaction is to probably thrust your hand into your pocket to see if you have a quarter. On the other hand, even though purchasing a console title is a long-term purchase, a lot of people can wait until the price drops or they would rather rent the title. In economic terms, these people are seeking a higher marginal utility per dollar and whether people know it or not, consumers unconsciously run the formula, marginal utility divided by cost, through their head every time they are confronted with a purchasing decision.

Going back to Gomibako, offering a demo to people to decide whether or not they want to purchase the full version isn’t the point anymore, which seems to be the basis of many arguments I see online. The fact that the pay-per-play version can offer up goods that have nothing to do with the game itself is further indication that such a structure doesn’t have the goal of “forcing gamers to pay for a demo.” Business-wise, the aim of offering such as service goes back to a person’s desire to seek a high marginal utility per dollar. If a person decides they will not be satisfied with three gameplays for a dollar, they won’t use the service – again, when utility is zero or less, the person does not purchase the product. However, on the other hand some people will pay the single dollar and not do so again, some will pay multiple dollars to enjoy the game or receive Home unlockables and others will pay once and decide to pay again to purchase the full game. Pay-per-play basically laid the groundwork for video games ever since Nolan Bushnell and his colleagues released Computer Space and Pong and I would imagine it will be seen in some form or fashion as long as video games remain relevant to our culture. If you don’t like it, do what consumers with that same distaste have done since 1971 – don’t pay and don't play.