The video game industry is huge. Based on revenue alone, the console and computer gaming market is significantly larger than the U.S. film industry. Millions of Americans have at least one video game console or gaming-capable computer in their home, with many spending dozens of hours a week playing their favorite games.
When it comes to sales and operating tactics, however, the game industry couldn’t be more different from Hollywood. A film studio makes money through box office sales, home video or on-demand sales, and licensing fees from services like Netflix. Game companies, on the other hand, only have one product to sell and make money from: their games. There’s no money anymore in releasing them to arcades, as there are few arcades left in America. Game streaming services do exist, though mostly for legacy titles and games released years ago.
During the ’00s, game companies were still trying to find a way to get customers to spend more without creating more products. That’s when they came up with a solution: split the game up into essential and non-essential parts, and charge money for as much extra content (or DLC) as possible.
What is DLC?
Downloadable content, or DLC, is any extra content not included with a video game. This could be anything from an extra level to cheat codes or a way to speed up the game’s progression. Most DLC sold these days used to be included in games before as rewards for beating a game or part of the standard game experience. Some were even hidden as “Easter eggs” by developers as a way of rewarding die-hard fans. Instead of simply including these extra bits of content at no added cost, developers decided over a decade ago to start selling them in stand-alone transactions.
Are people actually buying DLC?
Heck yes. According to The Wall Street Journal, add-ons for video and computer games made the industry $4.78 billion. That number will only increase this year. Not every video game player will buy every DLC and expansion pack, but those that do certainly help line developers’ pockets.
It wasn’t always this way. When Bethesda Softworks released The Elder Scrolls: Oblivion in 2006, they sold in-game virtual horse armor for $2.50. This was instantly ridiculed by the video game community, who felt such an item should be included with the full game. Over time, gamers became more complacent and accepting of similar content as every developer and publisher added paid premium content to every game.
These days, it’s common for gamers to buy horse armor-like visual enhancements, extra characters, and all sorts of virtual goodies for a few bucks at a time. Many developers incentivize pre-paying for this content months before a games release by offering most or all content at a discount, yet still charging an extra $25 or so on top of the game.
Why do game companies charge extra for this stuff?
Because they can. Video game companies even started charging $10 more per game in 2006, or when DLC became the norm. Game companies want to charge much more than this, but know that a higher barrier of entry would mean a drastic decrease in sales. That is why they sell the game piecemeal with a standard upfront cost and added “micro-transactions” for extra content. DLC not only lets them increase the price of a full game in a sneaky way, but gives them the chance to make significantly more than before.
Should you invest in video game companies?
The video game industry grows every year, as do many of the publicly traded game companies. If you want to learn more about how to invest in video games, read our guide about companies like Activision ($ATVI) and Electronic Arts ($EA). Just be sure to do your research if you ever decide to invest in the business.