Reuters: Microsoft Gets 30% Royalty Fee for Xbox Live Downloads

Here’s an interesting article from CNN. Might explain why Gears of War downloadable content (DLC) wasn’t offered for free at Microsoft’s request and maybe why free DLC may be on the decline in the future.

New charges for online extras are sharply raising the price serious video gamers pay for Xbox 360 games, a profitable move by Microsoft Corp. , but one that could alienate some fans.

With more than 6 million users, Microsoft’s Xbox Live online network has become the key feature distinguishing the Xbox 360 from rival Sony Corp.’s PlayStation 3 and Nintendo Co. Ltd.’s Wii.

More than 3 million Xbox Live subscribers pay a $50 annual fee that allows them to play games online against one another. About 3 million more use the service without an annual subscription, taking the total to more than half Xbox users.

Through Xbox Live, players can buy maps for fighting terrains and other add-ons that are indispensable to serious gamers, usually at a cost of $10 each. Such add-ons used to be free most of the time and the additions can raise a game’s cost to $80 or even $100 over its life span .

“The (downloadable maps) are very profitable for us,” said Tony Key, vice president of marketing for UbiSoft Entertainment SA, whose Tom Clancy-themed shooters such as “Rainbow Six” and “GRAW 2″ are among the most popular games on Xbox Live.

“If you’re a ‘Rainbow’ guy and you don’t have the maps, then you can’t play a match,” said Key, referring to online competitions. “I doubt there will ever be a Clancy game without the Xbox Live component any more. It’s now a key part of the game’s DNA.”

Games such as UbiSoft’s “Rainbow Six Vegas” and Activision Inc.’s “Call of Duty 3″ can cost as much as $25 million to make, but extra game levels and maps are extremely cheap to produce, by comparison. Key said they required only about 10 percent of a game’s development staff.

Maps and other content are also profitable for Microsoft.

Wedbush Morgan analyst Michael Pachter estimates Microsoft charges a royalty rate of 30 percent for most downloads. That means that, for a $10 download, Microsoft gets $3, while the publisher pockets $7.

Pachter estimates the entire downloadable game content market is currently valued at $200 million, compared with $19 billion for overall game software sales last year, but he points out the additional sales have much higher profit margins.

“It’s like building an extra room in a house,” Pachter said. “It’s nowhere near the cost of building the house.”

But pricing the downloads is a tricky science that many game publishers, including Microsoft, are still figuring out as they try to balance profit with the risk of alienating gamers who might feel they are being taken advantage of.

Microsoft was criticized by many gamers after the May 3 release of a map download to its popular alien-blasting game, “Gears of War,” which has sold more than 3.7 million copies worldwide since its November release.

The first map pack was released for free months earlier and generated more than 1.5 million downloads. The new download included several new battlegrounds online users could fight on during multiplayer matches, but this time they cost $10.

Mark Rein, vice president of “Gears” developer Epic Games, said in an interview on video game Web site 1up.com that the studio would have preferred to give away the maps, but Microsoft, which published the game, decided to charge for it.

This set off angry complaints from fans who felt Microsoft was taking advantage of them. Epic declined to comment for this article.

Microsoft Xbox Live group product manager Aaron Greenberg said few gamers complained about the add-on features and that the charge helped Microsoft recoup the cost of developing games and running the expensive online service.

“We are like the complaint department. We hear from the small minority that are not happy,” he said.

Third-quarter revenue at the entertainment and devices division dropped 18.7 percent to $947 million, with an operating loss of $330 million, compared with a loss of $438 million a year earlier. Microsoft shipped 500,000 Xbox 360 consoles during the quarter.

Some times you have to call obvious PR bull – crap. This is one of the times. Aaron Greenberg claims that only a small minority complained about the Gears content? Obviously, because gamers don’t like their DLC free, especially when you have the development house making the content behind the game asking that gamers not be charged.

Being told the complainers are a small minority is what I seem to hear a lot. But let’s face it, there are a lot of complaints with the way things are handled on live. I think it’s fair to say most of like our DLC and the pricing still needs a lot of work and there needs to be a lot better judgement out there for what the pricing of content should be. Rather than finger pointing at each other like seems to happen so often in these situations, I think Microsoft needs to set the tone of what is and is not proper content for the marketplace. With their new found power position in the HD gaming market I think they can pull it off effectively. Of course, the politics behind the scenes are beyond what anyone of us can comprehend and may be a likely reason why they don’t and won’t do this.

For example, when Bethesda made the mistake of releasing horse armor (I’m sure many of you remember that) their next content was robust and appropriately priced. Some other developers seem to be less inclined to learn their lesson. Red Octane with the recent release of Guitar Hero II still think it’s okay to bundle song packs in 3 and then charge 5 bucks a song, not for the original, but for what instantly strike you the first time you hear it as bad covers until you forget all about that because the game is so fun. EA is also notoriously guilty of over-priced marketplace content. Last year when Madden debuted they wanted to charge some gamers for gameplay video tips on the live service. There need to be checks and balances for this type of thing. The hardcore gamer knows this is bad deal for gamers and so they vote with their marketplace points and do not buy the content.

However, the casual gamer has no concept there is a chain of dealings involved for such things. The content is on live, live in a Microsoft product, and hence any obviously shady offerings from companies trying to score a quick buck are instantly Microsoft’s fault which is somewhat an unfair judgement, but one that is relatively common. The community views the live service and marketplace as Microsoft’s baby and as such Microsoft should bear in mind the community when questionable content at questionable prices are put up. The hardcore crowd I think also feels since it is ultimately there service, there should be some measure of control that Microsoft can exert to minimize frivolous DLC. It appears as though Microsoft has no trouble telling their first and second party developers what the cost of their DLC is going to be, and that they’re going to like it. I hope they extend their fervor and firmness on the issue of DLC to their 3rd party publishers in the cheaper direction.

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