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Steamconomics

17 February 201206:24PMrants

Last year I took Economics 101, and since then there's a bunch of stuff I've been meaning to write before it all gets overwritten, because that's totally how brains work, right? A warning though, this is gonna get a bit technical.

Firstly, a little background. If you've ever done any economics, you'll recognise this graph:

And you'll know that what it shows is for any given price P, the number of widgets a consumers will buy (demand) and how many widgets producers want to sell (supply). Demand points downhill, because the cheaper you make something, the more people want it. Supply slopes uphill, for a bunch of more complicated reasons which involve rising costs as production increases. Where the two meet in the middle is a happy medium (allocative efficiency), where the amount consumers want to buy is exactly what producers want to sell - everyone who wants a widget has one, and every widget is sold.

This is the foundation of a lot of how our society works, because it mostly gets the right amount of stuff produced. However, it only really works for what are called private goods.salute A private good is something that is both excludable and rivalrous - in other words, a regular product. Excludable means that you can stop a non-paying customer from using it, and rivalrous means that your having of this good stops someone else from having it. Air, for example, is neither of these, unless you're a Spaceball.

That's all well and good for air, but if you're trying to cover costs by selling something like this, you run into what's called a free rider problem. This happens when there's no benefit to paying, because nobody can stop you getting the benefits of the good anyway. Now, the example they used in the lecture is the army - every citizen benefits equally and automatically from its existence and nobody 'uses it up'. The thing that immediately jumped to my mind? Video games. And not just because I was bored.

Because, if you think about it, rivalrousness and excludability match up almost exactly to the default arguments used by pirates: Lowbrow pirate: "Well, it's not like taking something from a shelf. I didn't deprive a store of a copy, so it isn't stealing." Highbrow pirate: "Computers and the internet are designed for copying bits. Information wants to be free!" Which is all well and good, until everyone adopts that attitude, and the free rider problem rears its ugly head. Because if nobody has to pay, nobody will, and suddenly there's no money for game studios. And games aren't cheap to make.

The regular solution to this problem is in the name: A non-rivalrous, non- exculdable good is called a public good. It's generally up to the government to step in and produce it, for the public. But unless you want to go all Soviet Russia on your game industry, that's not really a viable solution. So what do you do?

Well, here you have two options, as far as I see it. Firstly, and most obviously and bluntly, you make your game rivalrous and excludable - in other words, limited activations per copy, and online authentication. Back when games came on disks this wasn't a problem. You could just sell the disks like you would with, I don't know, mugs or something. With the advent of online distribution, though, this doesn't work. This is why DRM is so appealing to companies, despite their customers complaining: It's because it allows them to continue with the same economic assumptions about selling _stuff _which fundamentally underpin a lot of our society. As always with economics though, being economically sound doesn't mean it's necessarily morally right.

The other option is what Steam does. Steam looks like it sells games, but it doesn't. What it sells (much like Apple, much as I loathe to admit it) is user experience. Sure, you could spend four hours downloading torrent after torrent, trawling warez forums for cracks, trying to hack the multiplayer and get all your friends on the same version, then coordinate over MSN or something to get a game together... for free. Or, you could buy it on Steam, and get a reliable download followed directly by a screen with a big ol' PLAY button and a list of friends who already have the game... for a price. (This is, incidentally, probably why Steam patches so often - their slick experience is their whole product)

Steam doesn't sell games. They sell convenience, and a sense of legitimacy (and the biggest network effect other than Windows, but that's a whole other post), which, as fairly standard 'serivces' are much easier to make rivalrous and excludable and thus make money on - in Valve's case, rather a lot of money - and for the moment it seems to be working.

And that's pretty much that, except for one last slightly depressing point, which is this: If you've done I've done, and moved much of your chat-based internet-talking to Steam chat out of convenience, then what you're essentially doing is the virtual equivalent of hanging out in a shopping mall.


Congrats if you made it this far. Have a cookie.

_ To be honest, I don't expect anyone to - I mostly wrote this to get it off my mind and hammer out my own thoughts on this stuff. If I can make one recommendation, though, it's this: If you ever get the chance to take an economics class, do it. Even the most basic stuff totally changes the way you think about how the world works. If that's too much for you, Freakonomics by Stephen Levitt is a brilliant read, if not much of an actual primer, into how this stuff affects... stuff._

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