The Economics of Software Piracy

In the last year I have read an astonishing number of books on the subject of economics. I've found myself studying the Austrian economists in particular. As a game developer it bothers me to hear other game developers and gamers talk about software piracy in a negative light. The worst part is when webscites like Gamasutra post an article about how piracy is hurting the video game industry.

On the contrary, Piracy is good for the video game industry as it is forcing gaming companies to compete in ways they have never thought of before. The companies that are loosing money today because of piracy are doing so because of their inability to adapt in the new marketplace created by the internet. Those that are adapting are already finding thier pocketbooks full of fat dollar bills.

I will not delve into the Morals of piracy, because that is a topic for another blog. For now we can consider morality's effects on the market to be insignificant.

What piracy does is force the gaming publishers to compete in an area they have never had to compete before. For the first time they must compete in terms of service instead of price or quality.

You see, publishers have rarely competed in terms of price. The licensing costs of development kits from the platform holders (sony, nintendo, microsoft) as well as the price of human labor in software development have largely forced the game makers to sell their products at the same price across platforms. Every now and then you get a niche "budget title" like Katamari Damacy, that is sold for a reduced price. This is usually because the quality of a budget title is perceived as lower than that of a regularly priced title.

That is the other factor that game companies are used to competing for, quality. With the price of new titles in the market mostly set in stone the developers where forced to compete in terms of quality. He who makes the best quality game, gets the most money. This was, and is, good, it means our games keep getting better and better, this competition fosters improvement and we gamers all get to reap the benefits.

Enter Piracy. When you pirate a video game, you are sacrificing service for price. You are sacrificing service because a pirated game comes with no instruction manual, no technical support, no patches, upgrades, or downloadable content. If you are lucky your pirated game will come with a readme.txt file that may or may not have been written in english. Why do people pirate then? It's simple, a pirated game has the best price: free. The video game publishers can't offer their products at a better price. The publishers are now suffering because they cannot compete in this new market.

That is probably the most important point in this post. Piracy has changed the market. This is permanent and the industry needs to learn how to deal with it. There is no law in the world that could stop internet piracy, no new invention will be created to stop it. Google tried, it didn't work. The market has changed for good, and gaming companies need to adapt in order to survive.

Many companies are already doing just that. Valve has totally turned the industry around with their Steam Service. If I where to attempt to install Half-life using the disc that was shipped in 1998 on the PC I use today, it would be an epic failure. (I have actually tried this recently) but if I use Steam I can download the game for a nominal price and start playing it with little to no problems on my top-of-the-line PC. For too long the gaming publishers have been used to completely abandoning products after they ship for retail. Re-releases, re-makes, and ports of video games are relatively new inventions (introduced to the market within the last 5 years) created by the old industry struggling to give the market what it wanted: Games that could be played several years after release.

With piracy, and the conventional boxed-goods retail service used by game publishers, your game is not likely to work after several years. If you are lucky, a publisher will release a remake or port that works on modern systems, otherwise you have no option but to play the game on the platform it was developed for.

This is the message I want publishers and developers to hear the most: Stop abandoning your games. Pursue alternate distribution models after release. The longer you continue to provide support for your game, the less money you will "lose" from piracy.