DLC 2011: Implications For The FutureEEDAR's new report on downloadable content (DLC) has some interesting facts and figures about DLC, and some interesting implications for the game industry. The popularity of DLC is growing among Xbox 360 and PS3 owners; some 51% of them have purchased DLC in the last 12 months, compared to 40% in 2010 and 34% in 2009. EEDAR estimates that DLC will generate more than $875 million in revenue in North America in 2011, and that amount will be over $1 billion in 2012.
Interestingly, EEDAR does not include the Wii in its study. Certainly the Wii's online offerings are inferior to those of the PS3 and the Xbox 360, but Nintendo makes some amount of money from them. EEDAR is estimating that the arrival of the Wii U in 2012 will include a more robust online store, and consequently better DLC sales, which will help propel the DLC sales figures over the $1 billion mark.
"If you have to charge $10 for your map pack, you may sell 10,000 of them, but you'll never know if you could have sold 50,000 at $5, which would obviously be more profitable."
The key factor that EEDAR notes as barriers to the sale of DLC, cited by 47% of those who have not purchased DLC, is privacy. This may be related to Sony's massive security breach of PSN data earlier this year. Publishers will need to determine what they can do to reassure customers that their privacy will be protected in order to maximize their DLC sales. The potential for additional sales is large, as EEDAR estimates that if the remaining 49% of non-DLC buyers were to purchase DLC, that could mean an additional $600 million in annual revenue.
Other reasons cited for not purchasing DLC include No Return Policy (38%), Too Expensive (32%), Enough Free DLC (24%), and No Demo (24%). It might be hard to address the No Return Policy concerns, but if the price of DLC was lower and/or a good demo of the DLC was available, that might allay some of those concerns about the return policy. DLC pricing can easily be adjusted if the platform controls allow it. There's no particular reason that all DLC on Xbox Live or PSN has to be priced the same way, or that it has to be a certain minimum price. Forcing constraints upon DLC pricing is merely going to make it more difficult to have a wide range of DLC. Since there's no cost of goods (only small transaction costs), keeping DLC prices high by fiat may be reducing the total profit that might be obtained from the DLC. If you have to charge $10 for your map pack, you may sell 10,000 of them, but you'll never know if you could have sold 50,000 at $5, which would obviously be more profitable.
EEDAR estimates that 20 million consumers in North America have purchased DLC in the past 12 months, which represents 43% growth from the 14 million purchasers in 2010 (and 126% growth from the 9 million in 2009). EEDAR's numbers show that there is a good amount of growth ahead for DLC if publishers can work to overcome the barriers to sales, and as consumers get more familiar with DLC and the benefits.
Publishers will continue to look for ways to increase DLC sales, as the margins are excellent. There's no cost of goods to worry about, only the cost to produce the DLC. More importantly, perhaps, is that DLC can increase the longevity of the original title's sales, as customers see new interesting content appearing. Additionally, publishers can make some revenue from sales of used games, if those purchasers then go online to purchase DLC. It's not the same as selling a new copy of the game at full retail, but it's certainly more than publishers get now from used sales.
The losers, of course, in the DLC market are the traditional retailers. Or are they? If DLC boosts sales of the core title at retail, that can help retailers. GameStop isn't sitting around waiting for that to happen, though, by aggressively investing in digital distribution themselves. Other retailers seem to be focusing on sales of game cards as a way for them to cash in on DLC sales, and looking for special DLC they can hand out to encourage pre-orders from a particular store.
One further effect that the growth in DLC has is the change in game design. Producers are now having to look at a design and determine where DLC can be added in later. It's a difficult question, as players can be outraged if they feel that the game is not worth the price without additional DLC, or if they feel they have to purchase the DLC to make the game playable or to compete online against other players. This is an area where PC games have seen more experimentation, since there are no constraints on the pricing or availability as in the console market. Publishers are free to charge what they like for DLC, and for games, which has led to companies like Riot Games providing their game League of Legends for free, and relying entirely on DLC sales to provide their revenue. One of their core design principles for their DLC is “don't sell power.” All of their DLC is basically cosmetic, but it's popular enough with their players that the revenue keeps the lights on. It should be noted, though, that you can buy new characters to play, but those can also be obtained through gameplay. The different skins, though, must be purchased.
Finally, it's important to note that this report only covers North America. DLC is generating big sales in Asia and Europe as well, and the ease of distributing digital content is likely to keep those markets growing rapidly. The amount of game content being distributed digitally is enormous, particularly when you consider all the digital items being purchased in mobile and social games as well as online games and regular PC games. The next big experiment in DLC will be Activision Blizzard's Diablo III, where the game will include an Auction House for players to upload and sell their own DLC to other players. This can potentially be a very good source of revenue for Activision Blizzard, and other publishers will be watching the results closely. DLC is just beginning to level up, and it's nowhere near a level cap yet.
