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Bypassing retail for the online sale
This column originally ran in ComputorEdge on September 1, 2006
(Issue 2435, Security in an Insecure World)
I've bought 4 games for my PC in the last six months. Only one of them – Microsoft's "Flight Simulator 2002" – was purchased at a bricks and mortar retail store.
Nor did I purchase the others from Amazon.com or another online retailer.
The others, including most recently "Half-Life 2: Episode 1," were bought and downloaded online.
And when I renew my anti-virus software, purchased a year ago at a real-world store, I'll do so online, and download the annual upgrade.
Nor am I alone.
Online sales continue to grow by leaps and bounds. This holiday season we are again likely to see stagnant sales figures at the mall and Wal*Mart, yet see double-digit growth on the Internet.
Why?
A couple of developments are driving this online boom – and in particular, the online sale of software that is then downloaded immediately.
First and foremost is profit margins: A software developer that sells its products – games, say – in a retail store will get less than half of what you pay for it. The distributor, a company that deals with the actual retail stores, will buy the games from the software company and then sell them to each department store, discount store and specialty computer store. There, each store will further mark the price up to whatever the suggested retail price is – say, for illustration's sake, $49.99. If that's what the store is asking, then the store likely bought the game from the distributor for about 1/2 to 2/3 of that price. Subtract the distributor's cut, and the company that actually made and packaged the software will get, maybe, $15 per. Subtract the costs of having the CD or DVD-ROMs burnt, the packaging printed and assembled, and the software company gets about $13 per box.
Now, sell that same product online, and the software company gets every dollar you fork over.
Plus, there are no packaging costs, no shipping to deal with, nor returns. Set up a high-volume server, upload the game, throw the switch on the online store, and you're good to go.
So the advantage to the software publisher is pretty clear-cut.
For the consumer, convenience has always been the attraction to buying software online. No more driving to the store or waiting a few days for a package to arrive in the mail.
But games (and other software, too) tend to be rather large files, and so it's only as more and more folks have broadband connections to the Internet that outfits like Valve and EA found it worth their while to develop methods of selling and delivering games online.
Security, security, security
If location, location, location is the key to retail success in the physical world, consumers' confidence in the reliability and security of online transactions are on the 'Net.
But the success and popularity of online points of purchase like Amazon.com and Apple's iTunes store have paved the way for others. People now understand that if they shop on reputable sites, their credit card or debit card transactions are every bit as secure as the ones they make at the mall.
Game publishers, though, have a slightly more difficult challenge than the iTunes model in terms of fulfillment and customer satisfaction: With iTunes, Apple has been very upfront and clear that once you buy and download a song, it's your responsibility to back it up. If you hard drive crashes, you can't re-download the songs you have purchased.
It's a tough stance, but Apple has stuck to it.
Valve and EA, though, recognize that gamers aren't so likely to back up their games as music fans are to burn CD-ROMs or DVD-ROMs of their favorite songs. Besides, Valve's Steam environment and EA's Downloader both auto-download and install the game for you, removing any practical way of quickly backing up your purchases.
Instead, both companies use a login and password system that maintain your records on their servers. Your hard drive crashes, your purchase is safe. Now, you may have to log in and re-install everything, but you won't lose your investment.
That approach helps build customer confidence and trust.
And those are the key to moving more and more of our economy online.