What's a video game worth? For the past 10 years, the answer to that question has been fairly simple. Except for special cases, top-of-the-line games went for about $50. But
with the launch of Microsoft's ( MSFT) Xbox 360, and with it the beginning of the next console cycle, prices appear to be in flux. ( TheStreet.com this week also looked at how Microsoft's rivals will cope with the ballyhooed rollout; how far Microsoft will make it into consumers' living rooms; and what all the new game machines mean for investors.) Depending on the publisher, games for the Xbox 360 are being offered at two different price points, one of which is set at about $60, or $10 more than the typical price for current generation games. At the same time, prices for current generation games appear to be starting to slip. With development costs rising as much as 100% on next-generation games, publishers have a strong reason to try to push up prices, says Van Baker, an analyst with industry research firm Gartner. But the $50 price point seems to be a psychological barrier with consumers that publishers may have a tough time overcoming, he says. "It's going to be a challenge for the market to sort itself out," he says. Where things end up when pricing starts to settle down again could go a long way toward determining how profitable the game publishers will be both in the near and longer term. And it also could help determine which publishers and developers will be able to stay in the game. But right now, the market seems to be unsettled on prices: On the Xbox 360, games from publishers such as Electronic Arts (ERTS) and Activision (ATVI) are priced at about $60. But the standard games from Microsoft all are set at about $50. In the past two console cycles, so-called triple A games all have generally carried the same $50 price, no matter whether they are from the console manufacturer or outside publishers. In recent weeks, industry giant EA has cut the price on several of its games for Sony's (SNE) PlayStation 2 and the original Xbox, according to industry analysts. The price cuts have meant that the retail charge for the games has fallen from about $50 to about $40. According to some analysts, the price cuts also are starting to affect games for Sony's handheld platform, the PlayStation Portable. A number of recent triple A games for the systems have come out at about a $40 price point -- instead of $50 -- which could put pressure on overall pricing, says Brent Thill, an analyst with Prudential Equity Group. Software publishers such as Electronic Arts and Activision have been itching to raise prices on next-generation games. The argument made by the publishers and analysts who defend the plan is that games are costing more to develop, the hours of entertainment they provide have been rising and consumers are paying more for other forms of entertainment, such as sports or movie tickets.
"I think we can sell a lot at a higher price point," says Brian Farrell, CEO of THQ ( THQI), which plans to launch two Xbox 360 titles in coming months. "It's consistent with what we've seen in general in the past." But Microsoft isn't taking that route. Although the company is charging $60 for a special edition of its Perfect Dark Zero game, it is charging $50 for the regular edition of the title and for its other two launch titles, Project Gotham Racing and Kameo: Elements of Power. Microsoft wanted to reassure consumers that they'd be able to get top-of-the-line titles for the next generation at the same price they have paid for current generation games, says David Reid, the company's director of platform marketing for the Xbox. "Our perspective on this is clear," Reid says. "We believe we can have a good business model in parity with what we have today (on pricing)." Microsoft's decision could weigh heavily on the ability of the third-party publishers to maintain their price hikes on next generation titles. According to IGN, which runs a series of Web sites catering to gamers, Microsoft's Perfect Dark Zero was the most anticipated title for the Xbox 360, and all three of its games ranked in the top seven. There have been past examples of publishers pricing their titles higher than those from the game-system makers, at launch, says Joe Spiegel, a hedge fund manager at Dalek Capital. Typically, that strategy of pricing games higher than those of the system manufacturer "didn't end well for the third-party guys," says Spiegel, who is long Take-Two ( TTWO), Nintendo and, through put options, is effectively short Activision. But others believe the move may pay off -- at least in the short term. IGN's survey aside, the titles that are commanding the premium prices on the Xbox 360 are likely to be games such as Activision's Call of Duty 2 or EA's Need For Speed: Most Wanted, some analysts say.
And consumers who are paying $500 or more to buy an Xbox 360 bundle this holiday season are unlikely to balk at paying another $10 for some titles, others argue. The question is whether those premium prices hold up when more games hit the market and when more mainstream -- and presumably price-conscious -- consumers start buying the next-generation systems. "We'll see how long that will last," says one buy-side analyst, who asked not to be named. However next-generation pricing shakes out, many analysts expect prices on current generation games to fall by the time the PlayStation 3 launches next year, if not sooner. Some analysts hear EA's recent price cuts as the death knell for premium pricing on current generation consoles. As the Xbox 360 and other next-generation consoles become more available and as the games for them become more sophisticated, the quality gap between current and next-generation games will become more apparent, says the buy-side analyst, whose fund is long EA and Take-Two. That will pressure publishers to lower prices for current generation games. The danger for publishers is that many of them are investing heavily in developing games and technology for next-generation systems while getting the bulk of their revenue from current generation consoles. And if prices erode precipitously on current generation games, and if publishers are unable to maintain premium prices on next-generation games, their bottom lines could take a big hit. Sales of next-generation games "should start to help" those bottom lines this holiday season, but "it's going to be gradual," says the buy-side analyst, who adds that companies' results "might go backwards for a period of time."