Revenue/pricing models for next year and beyond...



It's a very long transcript of Q&A with several game publisher CEOs.

Some choice quotes:

Analyst Question: Can you talk a little bit about how many titles you will have at launch for the PSP and Xbox 2? And secondly, you've talked a lot about potentially higher price points on the next-generation consoles, so with the Xbox 2 if it comes at a holiday, how do you price it? $54.99 or $59.99 for one console, and then $49.99 or $39.99 for current generation on the same title?

BK (Bobby Kotick, Activision): No, I can't really talk about the number of titles that we're going to have on launch on those platforms, but you'll probably see more visibility on our next conference call on the title count, which titles will be available--at least we'll give you a one-quarter-forward look at what the delivery state looks like. As far as pricing, this is something that we've seen in the past, but the products that we will release for next-generation titles will be significantly different than the products that will be released for the legacy platforms. So they'll be different products, a different entertainment experience, and we intend to price them higher because they are different products.

Analyst Question: Could you discuss the pricing strategy around the legacy platforms when a new platform comes out, and also how that extends across the marketplace? So if yhr Xbox comes out with a new platform next year, how would that affect pricing on the prior Xbox and on PS2 games?

BF (Brian Farrell, THQ): Well, your pricing strategy should always follow not necessarily hardware trends, but should follow the demographic of the purchaser you're trying to hit. So let's start at the high end of the market. I've heard some talk and we're actually researching whether or not prices can go higher than $49.99 on the next generation when it launches. And I think there's some potential there. If we look back a few cycles to the Nintendo 64, we were selling lots of products at $59.99. There is a market there, but you always have to weigh price versus volume. So again, you start with the demographic you're attacking, and you can usually at the highest end of that demographic, that core gamer is a fairly price insensitive customer, as some of these gold editions or collectors editions have shown. You can get a few more dollars if you have a little more content. Now, our pricing strategy for the core gamer is the highest possible price regardless of platform.

But again, looking at the large installed base of both the PS2 and Xbox now, we price all of our mass-market titles day one at $39.99. Why do we do that? The idea is to maximize profits not price points. What I mean by that is at about 23 percent more volume you make more money at $39 than at $49, and at that large installed base it's not a great leap of faith to say we can do about 23 percent more by pricing it at the right price point. Retailers also like it, we get full distribution on all of our mass-market titles, because we understand that demographic. The other thing you'll see going into next year is you'll see a more active consumer at the greatest hits titles. The $19.99, last year's greatest hits properties. So when we look at pricing in 2005, core gamer titles we think will still sustain $49.99, although we think there will be fewer of those as more people like us target their core gamer offering at next gen. We believe the right price point will continue to be $39.99 for our mass-market titles. We're already there, and then you'll see a lot of activity at the greatest-hits catalogue $19.99 price points. So that's how we think about pricing.

Larry Probst (EA):

What does that mean for next year? I think that you'll see us once again bring our titles to market at a premium price point. I don't know what that will be next year, but it'll be in line with other premium-price titles, and I think you may see some changes from the competition. Because the licensors like the leagues and player associations, I think will implement minimum unit royalties, not only for the people that have employed a $19.95 pricing strategy but I think for everybody in the industry that may be a licensee. And so I think that will make it very difficult to have a successful financial model in the future at a $19.95 price point. So I think you're going to see an adjustment there, and you're going to see us continue to price our products at a premium level.

Probst also talked about seeking incremental revenues for additional online services. But that implies basic online features will be included with the game purchase. EA is looking for online subscriptions in markets like China where there is rampant piracy but believes the US, Europe and Japan will remain primarily packaged goods markets.

EA is preparing for the next generation by consolidating around Renderware, which it acquired with the Criterion acquisition. There is no talk about a pricing strategy above $50 the way Activision and THQ talked about it. So if the market leader doesn't attempt to price above $50, it should be more difficult for second-tier publishers to sell at $55 or $60 (plus there seems to be the assumption that $50 pricing will hold up for PS2 and Xbox games even after the next-gen launches, when most of the "core gamers" will have moved on to the new consoles). Otherwise, EA says they will be "prolific" with the number of launch titles on all the new platforms -- PSP, Xbox2, PS3.