Analyzing Piracy: The Industry's Scapegoat - NewsNick Pantazis, posted on 23 February 2011 / 6,404 Views
It seems every year the piracy issue pops up again. Some publisher blames their losses on piracy, or some writer claims it’s destroying the industry. Pirates are characterized as anything from super villains actively seeking the destruction of publishers to champions of the DRM-oppressed masses. So what is the reality of piracy? What’s its effect on profitability in gaming and is PC gaming really dying a painful death due to its prevalence in the industry?
First, let me get the disclaimer out of the way: I have, many years ago, pirated games. I was a stupid kid and didn't care. I don't do that anymore, but I didn’t have any malicious intentions at the time. I was just young and silly and broke. In my adulthood, I legally bought the handful of games I pirated as a child, generally on Steam. This is not a defense of piracy as a practice, just the perspective of a former pirate and their motivations.
What is Piracy?
Piracy is not actually the proper term for downloading software without permission. In the United States, it is considered copyright infringement of software. Because that’s cumbersome to write, I will continue to call it piracy through most of this article. Copyright infringement in the United States is punishable by both fine and prison time, based on the degree of the crime, although to this point I have been unable to find anyone sentenced to prison time without also selling the pirated software on a large scale. Like any crime, there are varying degrees of severity. While it is not defined as theft by law, it is a morally objectionable practice, and an illegal one.
So why do people pirate games? A couple of years ago, a man named Cliff Harris, the creator of the one-man-company Positech Games, asked pirates to tell him why they pirated his games. He received hundreds of responses. There were a few crazy responses about how intellectually property isn’t a valid concept, and about 1/20 people who said they did it just cause they liked taking things and they wouldn’t get caught, but the but the majority of responses came down to four things: money, quality, DRM, and the games not being on Steam. Yes, even in 2008 people were complaining about PC games that aren’t on Steam.
So how about money? A lot of people who pirate games seem to be just kids who have no money but plenty of time. They pirate games which they couldn’t otherwise afford because they want to play them and have nothing else to do. Others were just down on their luck at the time and planned to buy the games later when they could afford them. Others simply considered games too expensive in general and didn’t agree with paying the prices which were being charged. Cliff found that even people who didn’t site cost as the main reason listed it as a factor. The quality issue was also related to money. People felt that games weren’t meeting their expectations and demos either weren’t provided, or were too short and unrepresentative. It’s very likely that the majority of people who pirate games couldn’t afford to purchase them even if piracy wasn’t an available option at all. It’s also possible that a good demo is important to sales of any game.
The DRM issue comes up in a lot in these discussions. Many pirates will steal games simply because the pirated game experience is better than the legitimately purchased one. DRM can be intrusive, frustrating, and seem incredibly unfair to legitimate buyers. 2D Boy’s Ron Carmel, creator if indie hit World of Goo, stated that DRM is a waste of time and not only doesn’t prevent piracy, but wastes money and causes a worse final experience for legitimate buyers. Cliff agreed with this after the results of his survey. This issue is related to convenience; some people pirate games because purchasing can be a pain and the pirated versions often offer better experiences because of the lack of intrusive DRM. This part also ties to digital distribution. Steam is an extremely user-friendly and convenient service which allows companies to avoid more intrusive DRM. Most gamers also prefer to not have to change discs when switching games.
Is Piracy Destroying Publisher Profits?
Piracy is often considered a major factor in gaming profitability. When either a specific piece of software or software on a platform as a whole fails to meet expectations, it’s common for a publisher to cite estimated figures on the amount of times the software was pirated and shift responsibility for the failure to the prevalence of piracy. PC generally takes the brunt of this criticism since piracy has been an issue on PC for longer and the PC landscape is much more difficult to understand, thus profits are often lower. Of course, PC is hardly the only place where piracy is a major issue. With Sony’s PSP, Sony themselves have stated that the primary cause for the less-than-stellar software sales on the system is piracy and with the DS flash cards have yielded some of the most rampant piracy on any platform in history. The Xbox 360 and Wii have had their firmware hacked for years, and even the PS3 has fallen to custom firmware which allows piracy.
So why shouldn’t piracy be blamed for loss of profits? Well for one, there’s no data to support that any significant portion of illegal downloads would actually be legal purchases if the games weren’t available for download in the first place. I'm not suggesting that piracy has no effect on sales, just that the effect it does have is impossible to determine. In addition, it’s impossible to get rid of piracy completely. While removing DRM and releasing on Steam may benefit PC releases, every platform, including consoles and handhelds, will eventually be opened to piracy in one way or another. Because piracy is an inevitability and cannot be prevented, it is something that has to be worked around and not attacked directly. Clearly pushing against piracy often results in the pirates pushing back even harder, as with DRM.
There are quite a few examples of heavily pirated games that have still been very successful. Dissidia was pirated over 5 million times but was still a big financial success for Square Enix and sold well enough to make a sequel. Starcraft II was pirated 2.3 million times by November of last year but was a huge success for Blizzard with more than 4.5 million copies sold to date. World of Goo was reported to be pirated five times for every one legal download, but 2D Boy was so successful they actually gave a presentation on making a profit as an indie developer. They also are vocal opponents of DRM and accept piracy as an inevitable occurrence. So what makes these games different? There’s nothing different about them. These games all come from very different publishers and were released under very different circumstances. This shows that even the most heavily pirated games can be very profitable, and heavy piracy and large profits can (and often do) coexist.
All games will be pirated to one extent or another. What makes a game successful or not is not determined by the presence of piracy. It has to do with a publisher creating a game with a realistic budget and reasonable expectations. This might sound like common sense, but it is becoming a problem this generation. Many major publishers are clearly failing at this very basic premise of operating a business. Maybe people haven’t noticed because of all the big sales numbers, but gaming has shrunk considerably in production this generation. Numerous talented studios have closed (RedOctane, Free Radical, Factor-5, Neversoft, Pandemic, Propoganda, 7 Studios, Bizzarre Creations, and way too many to name in this article).
In October of 2008 EA laid off 600 employees. In December of the same year they laid off another 1,000 employees and a year after that another 1,500 employees. Yes, EA has laid off more than 3,000 people in the last two and a half years due to poor decisions, and it’s no secret why. EA’s combined profits by GAAP earnings since 2007 are $2.65 billion in loss, although the software giant is having a profitable quarter. Ubisoft’s net gains over the same time frame are a mere $53 million in profit. Take 2 has lost $159 million in the same time frame. Midway closed and Eidos had to be bought out to survive. This is not something to be blamed on PC or piracy. These are console focused developers who have been primarily making games on platforms with low piracy ratios. Only Activision, among the console-focused western giants, has been particularly profitable in the current generation and even more-so now that they are Activision-Blizzard.
So what is causing this problem? Publishers are bloated. They’re stretching themselves thin, putting millions of dollars behind blockbusters which cost them a fortune if they fail, and completely failing to budget and manage their teams with smaller, more reasonable quality projects. Western publishers have turned the console development landscape into an oligarchy of the powerful. It is a place where you have to have millions of dollars at risk with most projects and job security is nonexistent. Smaller developers are cut out completely and the successful are almost exclusively Japanese. Independent studios on home consoles are almost completely dead (with a few obvious exceptions like Playdead). This isn’t solely a property of HD development costs. Not at all. Many smaller companies such as Atlus manage to stay profitable while publishing HD games. It is entirely a matter of managing costs and managing sales expectations. When a company fails to do that, what’s the easy target? Piracy.
Is PC Gaming Dying Because of Piracy?
PC gaming has become the target of many attacks this generation from developers, publishers, and gamers. It’s frequently accused of shrinking and even dying, often with piracy cited as the cause. In many ways the market is the hardest to understand of all gaming markets. It is a market now heavily reliant on digital distribution and in that way is several years ahead of the console market. Piracy is absolutely rampant on it, probably more-so than any platform aside from the handhelds, but as I’ve already pointed out it’s impossible to determine what the effect is on total potential software sales, but it’s also clear that piracy and success are not mutually exclusive. In fact, piracy is always present, even when games are very successful. It is not something which can be eliminated entirely.
The 800 lb gorilla of the PC industry is Steam. The massively successful service was recently estimated by Forbes to control 50%-70% of the $4 billion digital distribution PC market. This is an impressive accomplishment considering it’s competing with dozens of other providers including Blizzard who refuses to put their games on the service. Add to that Valve’s own cut of the software sold on the service, plus advertising revenue generated by it, and the company is enormously profitable. Forbes estimates their worth at $2-$4 billion, placing them among the largest of third party publishers by value, although as a privately owned company this is impossible to confirm. Valve themselves have reportedly sold more than 12 million copies of Half Life 2 since its release in 2004, and it continues to find new buyers steadily on Steam through sales. Of course there are plenty of other huge PC publishers including Blizzard, owners of the 4.6 million sold and counting Starcraft II, and World of Warcraft, which is undoubtedly the most profitable piece of entertainment media in human history.
So if the PC market is so profitable, why do big publishers attack it? Well, piracy is part of the problem. Publishers still aren’t ready to stop attacking it head on with DRM and until they are it will be difficult for them to maximize profits on the platform. Another reason is the platform is simply much more open to smaller developers. This is not what large publishers want. Consoles are a market that can be controlled. You need a publisher to make a game on PS3 and 360. Even smaller games have to get through the barriers of PSN, Xbox Live, or WiiWare. 2D Boy claimed it took them one day to handle the legal stuff to be approved for Steam and four months to do the same for Windows Live. Magicka, made by a handful of college kids, can sell 30,000 copies in a day on Steam, knocking out major publishers from the top 10, and making a profit in 24 hours. The game has gone on to sell 200,000 copies in two weeks, funding the small developers for years to come.
Not all games make it on Steam, though. It’s true that even Valve severely limits the amount of games added to the service, but this is PC. A game doesn’t need to be on Steam to be successful. Even without Steam, Minecraft, created by a single guy, has sold 1 million units even in alpha and beta. This is a platform where indie developers can congregate to make things like the two pay what you want Indie Bundles, which grossed $1.3 and $1.8 million. PC is a smaller and more astute core gaming market which relies less on advertising for purchase decisions. The market is much more dependent on word of mouth, which allows more variety in successful software and severely limits the control these large publishers are able to exert on it when there are a number of quality, self-published independent games readily available.
So what's the point of all this information? Well, hopefully this wil clarify the issue of piracy for some of you. The point of this topic is to add some perspective to the discussion. This is a big issue in the gaming industry and it deserves legitimate discussion rather than just wild accusations. I'd love to hear your opinions and feedback in the comments. How do you view the issue of piracy? Do you think the industry can ever evolve to a point in which DRM is no longer used? Would that even help?
Note: All GAAP earnings reported in the above article are public knowledge and publicly available on the investor sites of the companies listed.
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