There are 2 basic tenants that seem to drive digital distribution: content can be easily subdivided and or content can be consumed in a short period of time:
1. Subdivided Content: Ex- buying single tracks off a music CD
2. Short Time Frame: Ex- renting a movie (viewing time 3-4 hours)
Video games do not really fall into either of these categories: for the most part a game is a single entity that is difficult to divide into smaller packets and they take on average 15-20 hours to complete. Even for games that appear to be easily dividable (like Rock Band’s Track Packs or the latest version of SingStar), digital distribution is not taking off on the consoles; why do video game players continue to shell out $30 for extra songs (many of them they may not want) when they could spend far less to get just the ones they desire? Part of the answer to the digital divide for video games is pricing (publishers still charge too much for individual tracks) and connectivity (many players fail to connect their consoles or lack a high speed connection).
In addition to pricing and connectivity, many consumers prefer traditional cases and discs due to the value they can get out of them selling them back when they are done. Why would someone pay $50 for a digital copy (which can not be sold back to the store) when they can pay $50 for a physical disk and trade it in for $20 in store credit (when they are done with the game), making their actual game cost closer to $30 (a 40% discount). Unless publishers significantly discount digital versions of games, there is no incentive for users to buy them; this also explains why computer games are much more apt to be downloaded since there is no secondary market for used games (and therefore no trade in discount).
It appears the planets are not aligned for digital distribution in the sort run, but longer term where will it play out for video games. One area that digital distribution should flourish with is older content; older games offer a potential significant revenue stream for publishers but are a burden for retailers (and their over crowded store shelves). I like what Nintendo has done with their virtual console and using digital distribution to release older or niche (small market) games; Microsoft has also done a nice job here with X-box Live fostering smaller independent titles that would never be released through standard channels (i.e Braid). Pricing is key for digitally distributed content though, if publishers set the price too high the market could disappear of stagnate; Valve is doing a nice job keeping games available at inexpensive prices through Steam. Another area that should benefit from digital distribution is micro transactions: buying new costumes, new levels, or additional characters for a standard release. Micro transactions should also benefit publishers by forcing players to keep their original discs (not trading them in), thereby taking a little bite out of the used game market. Again, pricing here is critical as well; charging $20 for new maps or $10 for a costume upgrade that should have been put on the original disc is not going to cut it.
Unlike movies and music, video games are not easily dissectible or rentable, making them less likely to be downloaded; combining this with the vibrant used market for used video games will force publishers to heavily discount digitally distributed content and thereby most likely slow its adoption. Although full game digital distribution for new video games is unlikely in the near term, publishers can use this method for older or niche games and small in game additions: such as costume upgrades or new levels. In the end I see digital distribution making up a small portion of publishers revenue (10%) but done right could open up additional revenue streams and foster customer loyalty.
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