CD Projekt Interviews: Digital Distribution. Oh, And Monks.

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Monk-y business - Iwinski and Rambourg get monastic

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Next: Digital versus physical


Digital versus physical

Speaking of product: one of the common misconceptions of the amateur games economist is that digital downloads are effectively free to deliver - the same misapprehension that imagines the cost differential between the money a shop pays for a second-hand game and the price it sells it as pure profit. Thus, there is a demand for digital copies to be radically less expensive than boxed copy. The price of boxed copy is certainly an element in the pricing of downloads - if the differential is too great, it will further damage the subsiding market for physical media. However, there are also hosting costs, security certification, bandwidth fees, staff and infrastructure costs... I asked Rambourg what sort of cost differential he saw between producing boxed copy and a digital download.

Digital distribution requires quite some resources. We have 35 people working at GOG across various departments: web-development & design, IT, PR & Marketing, product, testing, engineering, customer support, business development, finances, and management! However, I also know that quite a lot of other digital distribution platforms often run with less than 10 people on-board. The fact we have comparatively “so many” employees at GOG can be explained by the fact that we’re not shovelling out games as fast as we can. For example, it takes quite a lot of effort make many of our PC classics compatible with modern Windows operating systems--and to provide technical support for over 400 games!

On top of our headcount, we obviously have various extra expenses, such as the cost to host our IT infrastructure to provide all users with fast and stable download speeds across the globe. This accounts for several hundreds of thousands dollars per year, which is quite a big number for a company not even four years old yet. Also, we dedicate a lot of effort on the PR & Marketing side to give every game a chance to shine among gamers and media, while most digital distribution platforms simply sign and release content without any special care. This is part of why they have gigantic catalogues made of thousands of titles and which end up becoming something like a Bermuda’s Triangle for games--many games enter, never to be seen again! Last but not least, one should also bear in mind that we need to pay royalties to all the companies that allowed us to promote and distribute their games on

Despite all these regular expenses, I actually believe digital distribution to be more profitable than retail in terms of margin. The reason is simple: everything goes faster in the digital world.

First of all, we have a permanent, direct and immediate contact with consumers, which allows us to be very much aware of our community’s expectations and improve the quality of our service on a daily basis.

We constantly receive tons of comments from our users worldwide regarding our releases or the weekend promotions: this is a big plus because we can learn from our successes and failures to make GOG a better place for everybody. It is much harder for a physical distributor to collect such data, as their retail network is spread across various locations, sometimes on a national or even international scale. The information flow is much slower and it is hard to translate the combined input of all your sales offices into a coherent action plan to improve your global business.

Also, one should note that there are way more stakeholders involved in the customer service delivery chain when it comes to retail distribution. The usual scenario in the brick and mortar business is that a games publisher is providing a license to a local distribution house to sell their game. That local distribution house needs to deal with various local distributors (supermarkets or specialized games shops) to have the game properly marketed and brought to the shelves. All these retail partners need to take their cut on the way - obviously - which can leave some of them with pretty low margins.

In comparison, digital distribution is simpler. Fewer companies are involved here; a publisher or developer simply gives his game to GOG, and then we sell it directly to the consumer. Of course, we then have to dedicate a lot of resources on our end (as explained above) to make the game ready for release and visible among media and gamers. Still, a shorter chain means better margins for us (in comparison to retail) and the ability to be more reactive with our business. Time is money too!

Speaking of which, there are a lot of differences between the logistics of retail and digital distribution as well. Retail distributors have to deal with stock and warehouses to store all their boxed copies. This is a huge, expensive, and time-consuming process. When it comes to digital distribution, everything is easier. If one of our games on GOG does not do well, for example, we will not have a stock of several thousand unsold games coming back to us. On the other hand, if one of our titles proves to be a massive top-seller, we can deliver as many units as needed within a split second. There is no need to manufacture thousands of extra boxes to meet the demand and have them dispatched worldwide via numerous warehouses. Our system takes care of everything for us and we can therefore concentrate on how to make our business grow, rather than having headaches with complex logistics processes.

To sum up, time is money and digital distribution is more agile than retail. Time and systems are computerized in the digital world, while they are in a comparison still very much “human” in  physical distribution. One unit of time spent in the digital world usually provides a better ROI than in the physical world.

 Steam - the digital gorilla

Recent years have seen a proliferation of digital retail channels for games - not only from the big publishers sprucing up their storefronts with new social and media functionality, but smaller operations such as Desure, GamersGate and Green Man Gaming, general-purpose app stores both mobile and desktop-based, including Apple's various stores and Intel's AppUp, and the growing trend for "bundles" - groups of indie games bundled together and sold through novel pricing strategies. However, when it comes to PC gaming, it is impossible to ignore Steam. As demonstrated by Rambourg's figures above, Steam bestrides the world of digital gaming like a colossus, and in some ways is the anti-GOG: its catalogue is vast and its use of DRM stategic. However, it is also a lesson in how to run a digital enterprise - obvious from its success (and the billionaire status it has conferred on its visionary CEO Gabe Newell). Its social and multiplayer functions are streamlined, its DRM largely unobtrusive - to quote another visionary, it just works. And, while GOG and Steam both sell classic games, Steam is also by a huge distance the largest distribution channel for digital copies of CD Projekt games.

I asked Rambourg and Iwinski how that relationship felt. I may have used the word "frenemies".

Rambourg: We actually do not see GOG as a competitor to Steam, Origin, Green Man Gaming and the like; but rather as an alternative for gamers. Our model differs drastically from theirs as all our games are sold without any copy protection system,[with] no regional pricing and with significant value added. Also, our current catalogue is still mostly made of PC classics; other digital distributors have not been that interested in reviving and selling them  as they know how much work it requires. As a matter of fact, our model and current catalogue shield us effectively from any competition. Even the new games that we have been releasing, have had that “good old” feel to them; we want to release newer games that are modern classics.

Our aim at GOG has always been to become the main alternative to Steam, rather than copying/pasting their approach. Several reports show that Steam accounts for at least 60% of market share. Many companies have tried to imitate them to get a small cut, but ended up losing money and then sold their business for not much. We certainly do not want to go the same route and this is why our obsession is to be different, which is both a philosophical and business need for us.

Iwinski: “Frenemies.”  So that’s how it looks from outside? That’s interesting.

The reality is very different, as the guys at Steam are just great partners and passionate gamers. Whenever we meet and talk, they come up with creative ideas how we could sell our Witcher titles more successfully, which promotions would work and which wouldn’t. It's really all about good games and good business - no strings attached. We are looking forward to doing more business with them and I wish we would have more partners like this all around the world.

Next time: Back to the D-word - DRM, and its discontents.




