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To Infinity and Beyond: Business Model Adaptation in the Video Game Industry

· October 15, 2013

The video game industry has always been at the forefront of adopting new business models so as to stay one step ahead of infringers while entertaining consumers and generating handsome profits. The industry first responded to infringement by requiring users to enter passwords printed in manuals. When the infringers began distributing photocopies of the passwords, the industry employed digital rights management systems such as “handshake protocols” between the game and the console. When infringers hacked the protocols, the industry shifted to online multiplayer platforms with stronger security that denied many functions to owners of infringing copies. When infringers hacked those protections, some video game companies shifted to a business model that derived revenue from players purchasing additional features such as more “lives” or weapons from the online platform. Under this model, the game company could still profit from the owner of an infringing copy, who would want to buy these features.

And now, Disney’s Infinity system has elevated cross-merchandising and piracy prevention to a new level. The Infinity base connects to game consoles such as the Xbox 360, PS3, or Wii. Physical figures from the Disney pantheon of characters contain chips which, when placed on the base, unlock a “play set,” a virtual universe based on that character. A Disney Infinity starter pack, which includes the base and three figures, costs $75. Additional figures cost $13 a piece. Power discs, which provide special abilities and characters, are sold in packs of two for $5. Disney initially has rolled out 17 figures, so purchasing the base and all the figures will cost over $250. And Disney intends to release additional figures.

Without doubt, someone will soon be distributing infringing Infinity chips that unlock the play sets associated with each figure. But the relevant consumers, mainly children, will demand the figures as well. One can assume that counterfeiters will also market fake figures, but global distribution of figures with chips will be far more difficult than infringing CDs, DVDs, or digital downloads.

Disney is not the first company to combine video games with physical toys. Activision has already generated more than $1.5 billion in revenue from its Skylander series, where toy figures interact with a “Portal of Power” base which connects to popular video game consoles.

Disney sold 400,000 starter packs in the first week after the product’s debut in mid-August. Certain figures have already sold out and are back-ordered. It should be a very green Christmas for Disney.

Jonathan Band is a DC-based attorney whose clients include Internet companies, providers of information technology, universities, library associations, and CCIA.  He previously guest-posted on DisCo about movie theatres and competition.

Competition

Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.

Innovation

New technologies are constantly emerging that promise to change our lives for the better. These disruptive technologies give us an increase in choice, make technologies more accessible, make things more affordable, and give consumers a voice. And the pace of innovation has only quickened in recent years, as the Internet has enabled a wave of new, inter-connected devices that have benefited consumers around the world, seemingly in all aspects of their lives. Preserving an innovation-friendly market is, therefore, tantamount not only to businesses but society at large.

Intellectual Property

The Internet enables the free exchange of ideas and content that, in turn, promote creativity, commerce, and innovation. However, a balanced approach to copyright, trademarks, and patents is critical to this creative and entrepreneurial spirit the Internet has fostered. Consequently, it is our belief that the intellectual property system should encourage innovation, while not impeding new business models and open-source developments.