Valve on Economics of Pricing, Piracy

At a recent conference in Seattle, Vavle co-founder Gabe Newell gave a pretty interesting speech about how Valve deals with piracy, and how they experiments with the economics of pricing using Steam, Valve’s digital distribution platform.

“It’s interesting to touch on a number of pricing and service issues, because it will help convey the complexity of what we’re seeing in the entertainment space, and there’s probably also going to be lessons in it for other people trying to create value on the Internet.

“… the people who are telling you that Russians pirate everything are the people who wait six months to localize their product into Russia. … So that as far as we’re concerned is asked an answered. It doesn’t take much in terms of providing a better service to make pirates a non-issue.”

Newell also detailed the companies experience with “free-to-play” games, and explained how the principle of price elasticity applies to video games (and how it doesn’t).

“Now we did something where we decided to look at price elasticity. Without making announcements, we varied the price of one of our products. We have Steam so we can watch user behavior in real time. That gives us a useful tool for making experiments which you can’t really do through a lot of other distribution mechanisms. What we saw was that pricing was perfectly elastic. In other words, our gross revenue would remain constant. We thought, hooray, we understand this really well. There’s no way to use price to increase or decrease the size of your business.

But then we did this different experiment where we did a sale. The sale is a highly promoted event that has ancillary media like comic books and movies associated with it. We do a 75 percent price reduction, our Counter-Strike experience tells us that our gross revenue would remain constant. Instead what we saw was our gross revenue increased by a factor of 40. Not 40 percent, but a factor of 40. Which is completely not predicted by our previous experience with silent price variation.”

Newell says Valve will continue to experiment with pricing using Steam.

It seems Valve has found out some interesting things. Like that you make more money when you charge less for games, and that you can make piracy a non-issue by offering a better service, and not putting outside programs on the games to try and protect them. Of course, this probably won’t stop anyone from putting things like SecuROM in their games, but one can dream.

For more about their experiments and findings with free-to-play games and a few other things. You can find an edited transcript over at GeekWire. Or you can watch a video of the whole thing below.