How do entertainment retailers come up with the prices they charge? Why is a movie theater ticket $10, a music CD $15, a rental DVD $3-$5 and a top video game $60?

We asked Strauss Zelnick, executive chairman of game publisher Take-Two. He says it's simple math, based upon the value of that experience.

Prices are determined by the marketplace -- if folks stopped buying stuff, prices would fall, etc. (Think gasoline). Balance that with cost. A game like Halo or Grand Theft Auto takes years to develop and costs as much to make as a Hollywood film.

Here's Zelnick in his own words:

The reason the consumer is willing to pay $60 for front-line product is because they are going to get 20-plus hours of game play out of that product.

I'm a big believer that there is an equation for the pricing of front-line entertainment products, which is: The hours of expected consumption times the value per hour, plus the catalog value.

The price per hour is pretty stable across media. For example, a motion picture: You have two hours of experience in the theater, a very high-quality experience, zero catalog value. So what's that worth? I guess about $5 an hour (on a per capita basis). If you apply that to a video rental, also zero catalog value, there's multiple people watching typically, it's a lower quality experience, that's how you get a video rental of three bucks. Recorded music, you will listen to the album (up to 10 times -- or hours -- on average). The same equation applies.

There's more:

What's driving that front-line price point is the perceived quality of the experience, times the number of hours you are going to have that, so that the price per quality hour of the experience, times the hours, plus catalog value. And I understand why that number would be, for the sake of argument, $60, versus for sake of argument, $15 for an album, versus $3 for a video rental, versus 10 to see a front line movie.
They are not so far off.

So it's not that we came up with that price point out of the blue. If we came up with it out of the blue, we wouldn't be selling anything at that price point.

For the record, the industry walks the walk. Take-Two's Grand Theft Auto has sold more than 10 million units in less than a year. And other huge industry sellers such as Metal Gear Solid, Fable, Halo, Madden NFL, Rock Band and Guitar Hero? Most have sold more than a million copies -- at $60 a pop, or more.

I admit that I've bought $5 DVDs, cheered, and watched them only once. I've also paid $60 for games, grumbled about it, and played them for months. Now I'm thinking about buying Rock Band 2 ($189) or Guitar Hero: World Tour (also $189) for the holidays. (grumble grumble grumble)

So what do you think? Are video games fairly priced?

(Photos: Screenshot from Amazon.com; Zelnick, Reuters)

Microsoft's videogame chief Shane Kim came by our New York office this morning for the Reuters Media Summit and shared his thoughts on XBox 360 sales ("cautiously optimistic") and the outlook for the gaming industry amid the economic doom-and-gloom ("Who knows, maybe flat performance will be considered a remarkable achievement").

He also gazed into his crystal ball and served up some insights on the trends shaping the gaming business.

Consolidation is going to continue, he thinks, especially among the smaller videogame publishers as they search for hit games while keeping costs in check.

"There are a number of mid-tier publishers behind the Electronic Arts and Ubisofts and Activisions of the world who are struggling."

Another exciting trend for Kim is the return to videogame content developed by small creative teams, which he thinks could reduce the industry's dependence on sequels of hit games.

"That would be a good thing... because one of the challenges the industry has had, in my opinion, over the last five to 10 years is a growing reliance on sequels and licensed properties as opposed to those new creative hits. If we can find those nuggets that start smaller and can grow into big hits, that's a great thing."

He did wonder how smaller creative shops could find funding for their pitches, given that dollars could be hard to come by these days. But at the same time, it's an opportunity for bigger publishers, he said, since nothing rocks the gaming world like a hit game.

(Photo: Reuters)

Gaming insiders who have given consoles the death sentence, get a life!

Shane Kim, VP of Strategy and Business Development at Microsoft Corp's Interactive Entertainment Business, said it's too soon to write off the Xbox.

"This console generation will have a long life cycle. I think it's way premature to say there will never be another Xbox," said Kim at the Reuters Media Summit.

Industry veterans like WildTangent Chairman Alex St. John and Sandy Duncan, who set up and ran the European Xbox business for Microsoft, believe that consoles as we know them are doomed. Duncan said they will "die out " in the next five to 10 years, according to an interview published in www.Thatvideogameblog.com.

Such forecasts are based on views that gaming consoles will be rendered obsolete by the increasing convergence of devices such as set top boxes and the fact that gamers will increasingly turn to the Web for new cool applications.

Kim admitted there was a lot of room for expansion via the Web.

"What's interesting to think about will be what will define the next generation. It is absolutely a possibility where the next generation is defined by what we can do online rather than the hardware," he said.
"We can reinvent the experience with the magic of software," he said.

Sir Martin Sorrell, CEO of WPP Group Plc, was interviewed as part of the Reuters Global Technology, Media and Telecoms Summit held this week around the globe. He talked to Reuters reporter Kate Holton in London, with groups of reporters calling in from Paris and New York to ask questions. Here are extended excerpts from a longer interview:  

SOFTER 2009; REBOUND IN 2010

Reuters: How is the U.S. advertising market holding up in light of the credit crunch and housing crisis?

Sir Martin: I would just say that I think we continue to be surprised by the relative strength of the US in the first four months of the year, I guess.

Reuters: Previously said you see a stronger 2010 but concerns in 2009. Are you still happy with that characterization?

Sir Martin: Following the Beijing Olympics and the elections of the new US President, 2009 may see a little bit of slowdown in China but all of these things are relative because China is still growing at 20 percent plus and it can’t carry on forever. The GNP can’t continue to grow 10 percent per annum consistently so — forever. The laws of compound arithmetic just make it very difficult. So ‘09 I think you have a little bit of relaxation and also I don’t think the world has decoupled. So if America’s weak, as we have said before, you may not catch a flu, but you may certainly catch a cold.

And then in 2010 a number of events –you have the (U.S.) mid-term congressionals. So any US President has to do something unpleasant in ‘09 will do it early and hope that mid-term congressionals would not be affected. But you’ve got the Shanghai fair, the expo in 2010. You’ve got the Asian games. You’ve got the Winter Olympics in Vancouver and you’ve got – the biggest event is probably the World Cup in South Africa

Reuters: If we did experience a greater economic downturn would you expect to see increased competition amongst agencies for business? How does that impact on you?

Sir Martin: On price competition I said before that we saw some deep discounting on the media side. We don’t know whether — where that came from but one of our — two of our multinational competitors won in the context of a multinational piece of business originating in America. These were both incumbents because of the threshold on the incumbents’ key business is very great. One paid a check for $28 million and in the UK here another one paid a check for $20 million and we were given the option in both cases to respond (inaudible) clients.

We thought the pricing that they were promising was commercially unrealistic and impossible to achieve. In other words it would have a significant impact on their profitability. Because once you start to offer those things it has an impact on other clients. Those other clients say why didn’t you to the same for me?

But you know that’s not in 2009 obviously or 2010. But generally we manage to consistently increase our margins and Omnicom (the world’s largest advertising conglomerate, ahead of No. 2 ranked WPP) has the same margin today exactly the same or maybe I think maybe even a little bit smaller than it was five years ago. That does not seem to worry their shareholders. They talk about making investments in their business.

We are making investments in our business as revenues have grown over the last, say, three or four years at about 5 percent. We managed to increase our margins. So we are looking for progress and progress is 60 basis points or half a margin point each year which we’re hoping to do this year as well.

WPP GROWTH DRIVERS

Reuters: What areas of your business are driving these margin increases?

Sir Martin: I think it is decent growth topline. And there are some economies of scale, not enormous, in our business but some economies of scale — our portfolio is probably more orientated towards Asia, Latin America, the Middle East, Central and Eastern Europe, because that’s 35 percent. It’s more orientated towards digital. It’s about 25 percent now digital in one way or another. And we don’t see margin compression as we move increasingly into the digital area.

So I think it’s probably due to the fact that we are growing pretty rapidly. I was in Moscow this morning (after the Chelsea-Man U match the night before) and in Russia we continue to grow (around) 25 percent. It’s probably the fastest-growing country that we operate. We have a big company there, a joint company, effectively: Video International. It’s been very successful and continues to grow.

Obviously as the price of oil increases, the economic power of Russia increases too. So all of these things — I think in Moscow I think is 9 percent of the population and 39 percent retail sales. So there’s a very heavy concentration there of activity.

DIGITAL BUSINESS AND ‘FRENEMY’ UPDATE

Reuters: How would you characterize your relationship with Google, for which you famously dubbed the word “frenemy”?

Sir Martin: We are a very big customer of Google. I think we’re spending about $850 million a year with Google. That excludes I think search with Dell. So that will add to it. If you look at that, it’s about — it might be 4 or 5 percent of Google’s revenues this year. That will be smaller than our share for traditional media normally which would be around 20 or 25 percent.

If you ask why that is I think it’s because Google has focused and grown at least initially on SMEs. You know it’s sort of a mechanical Yellow Pages, a crude way of putting it. But it’s been extremely successful in I think improving the primary demand for Internet advertising and search obviously. They want, I’m sure, to build up their search business in Europe as we heard at Google Zeitgeist this week, the same they want to develop their business in television and print and radio, not by acquisition but organically, and I am sure they will do that.

So I think the situation remains the same. You see interestingly that Microsoft have been talking not in a dissimilar way recently about the rebranding of parts of their operations to Microsoft advertising yesterday. You saw presumably the announcement about our cooperation with them on paid search or cash-back search. And on Yahoo you see also that we announced or rather Yahoo and ourselves announced last week increased cooperation with Right Media on their inventory and making available a broader inventory to 24/7 Real Media with them.

I think it’s important to understand that our strategy is very different to our competitors. Through 24/7 Real Media we gain access to technology platforms which involve the application of technology in our business in search, media sales, advertisers, websites and publishers websites. And what that was about was the application of technology. This to do with the application of technology and that’s where I think we’ve taken a different position. So 24/7 is a technology platform or represents a technology platform, which is smaller than Doubleclick. But it is in some sense as competitive for that.

The nervousness that you referred to is understandable because Google is a massive company. It is still what — $175, $180 billion. It’s $22 billion of revenue. You add up all our market caps in the top four (global advertising groups), I think we get up to maybe about $50 (billion) maybe less — $40, $45 market cap…You add up all of our revenues we get to about 33, 34, 35.

So we’re 50 percent bigger than (Google) on revenues and combined market caps of the four (ad groups, including WPP) is about a third or a quarter. So the market’s saying something about the relative growth prospects and dynamics of the last four businesses and their business. I don’t think — going back to your question the position has changed whatever the companies that you mentioned were saying. Google is a phenomenal company as is Microsoft as is Yahoo frankly and we have increasingly tried to find ways to work with them.

But our strategy is, you know our strategy in the digital areas is as I said 25 percent of our business. We’re growing our businesses organically, the traditional businesses I put it that way — organically. We are acquiring digital agencies and you talk about companies like Blue, Aqua (Online), Last Radius, Agenda which is five sort of very strong companies that were acquired in the last year or so. And at the same time you know we continue to boost our traditional businesses…like Wunderman, G2, RMG Connect and OgilvyOne. Those four businesses alone have about $2 billion of revenue between them.

So, organic growth, acquisition of digital agencies and then finally what I said before which is the application of technology which is a very different route. I don’t think you and your frankly — forgive me for saying this — make the adequate distinction between that and what others, our more direct competitors are doing. So, we in this new area of growth we see the growth is coming in the new media and the traditional markets and in the new markets. The difference in the new markets is the old media, the traditional media that are also growing.

So Russian sites, Polish TV stations, CCTV, Shanghai Media Group, Indian newspapers — there was an article in the press this week or so about the growth of Indian newspapers and…readership and circulation. The traditional media are growing in the new markets whereas in the old markets, the more developed markets — traditional media is under pressure.

THE “VALUE” OF PR

Sir Martin: I think generally people — our clients continue to be concerned about pricing and as a result look at alternatives which one of the things that has interested us is the public relations, the public affairs which is about 10 percent of our business. Last year I think it was about $1.3 billion in revenue.

So if I can convince Reuters journalists … to be more — to be positive about WPP editorially that’s more effective than taking an ad in a press. The research that we see shows that. So public relations has become more important. Social networking is a way of writing letters to our mother like we used to do or some of us used to do.

And then the other thing that’s happened with PR which is interesting is polling has become much more scientific and that has enabled us to put a quantitative basis to an industry that probably was described historically as (dead) and has made the industry — these two things — technology and polling and data and made the industry I think much stronger and more attractive and I think that will carry on. So alternatives that we talked about, new media alternatives, alternatives whether they be Internet based, PC based, mobile based or video based alternatives that — the range of alternatives (inaudible) to significantly greater.

ONLINE VIDEO AND MOBILE ADS

Reuters: What’s your takeaway on online video? What does it need to do to attract online video advertising?

Sir Martin: It’s all a question of time. As the technologies improve, as bandwidths improve these things will become more — as mobile screens improve in terms of quality and capability these things will become more and more important. So you could say following your line of argument that the Internet is only 10 percent the worldwide advertising budgets and therefore it’s small.

The fact is it’s growing very rapidly from the small base. People would make similar arguments about China a few years ago or India or might continue to make it about Vietnam or Pakistan or Indonesia or Russia or the Middle East. These are small markets geographically in these cases and therefore deserve to be ignored. If that’s what people believe so be it and let them ignore it. I think that’s where geographically here — there are two issues.

One is geography which I think is intellectually much easier to get your mind around. The other is technology which is (inaudible) more difficult because unless you are a physicist or mathematician or a scientist, it’s often very difficult to understand the significance of all of these changes. Having said, the Internet is only 10 percent, we know that consumers spend 20 to 25 percent of their time online. We know that in the UK Google will probably outdistance ITV next year in terms of revenues.

We know that in Sweden Internet advertising is bigger than — is the first country where it’s become bigger than TV this year. Internet advertising will outdistance television in the UK next year as a result of what I said about Google and ITV. Somebody said to me that they went to the Google Zeitgeist…and there was a presentation on the site by three teenagers and the three teenagers were asked whether they watched and what do they do — this site was I think Stardoll where you build virtual dolls…And the three teenagers were asked whether they watched any television. They said no. I was talking to a journalist and he found that remarkable. Anyway so that’s just another example of consumption as it’s changing, media consumption as it’s changing. I’m sure yours have changed, I’m sure mine have changed. This is all part of it. So what seems small today may be big tomorrow. So I think you have to examine it and see what you think.

Reuters: And advertising on mobile?

Sir Martin: Okay, you’re paying money and you (have a) choice. You either decide that you’re going to invest some time and effort in looking at that or not. And if not you risk missing out on an opportunity. It may be the Beatles, it may not be the Beatles. But one of the things that have to do and you know the sort of things we’ve been investing in whether it be a SpotRunner, a VideoEgg, WildTangent, what it happens to be and really whatever it is that we are facing a view that we have to invest in some of these areas to understand what’s going on. I mean if you or I knew which way things were going we wouldn’t be spending our time talking to one another here. You wouldn’t be at Thomson Reuters and I probably wouldn’t be at WPP.

Reuters: Advertising on the Internet so far has not been about making sure the transaction happens rather than say building a brand or brand awareness. Would you go along with that and is video online a way that brand awareness would develop?

Sir Martin: Ultimately, everything will come together and you know when I say 25 percent of our business is digital, that will morph into all our business is affected by digital or digitizing data, pictures whatever it happens to be in due course. So you won’t make the distinction. So I think these are forced distinctions.

I think there is an inherent inertia to change which happens in lots of areas and you’ve got to try and overcome that. And when you have got 100,000 people in over 100 countries who have done things really successfully in various communication services and often because of the pressures of the moment don’t move on to experiment with other things. …The honest answer is when you put it all together it’s about strategy, creative execution and distribution. Those are the three things we do to.

But going back to your point obviously Google with its DoubleClick platform, Microsoft with it’s aQuantive platform can look at both sides or both strands of the market — search and display — and I am sure we will try and develop even better approaches and the agencies that work with them will do so too. It’s a bit like the question about the three strands before. I don’t think you’ll focus on one or the other.

I don’t think we’ll differentiate between online for tactical and offline for brand and we will be looking at all of these media.

What’s happening is the medium has become more and more important some might argue (that) the message is more important than the medium. I would argue increasingly the medium is as important or maybe even more important than the medium and is starting to (change) the messages that you put out through the various medium.

So I think the balance of our business has changed. Not only do we apply technology in a way that we didn’t do before but (the way) we think about media and the importance of media in our organization is far greater than it used to be.

MICROHOO

Reuters: How does all the talk between Microsoft and Yahoo and the potential consolidation of other major players relative to Google, how does that affect your thinking about the shape of the online industry?

Sir Martin: I think our clients like to see balance in the marketplace. And the attraction of Microsoft getting together with Yahoo in its original form was there would be better balance. So having one very strong competitor in the marketplace and then another one and make sure two competitors are not as strong.

You know, I mean it may not be the right assumption but bringing the two smaller ones together would create a bigger force that would balance the marketplace more effectively. Now that wasn’t to be for whatever reasons. But we now are told that Microsoft is talking to Yahoo about buying certain parts of its business or reaching agreements in relation to certain parts of its business and I think again that is a positive development because it will again bring more balance.

We have to see what happens. It depends on I’m sure lots of factors but on balance I think our clients and media owners and indeed agencies feel that better balance is a better thing. Whether right or wrong or not time will tell. But I think that is the overall position.

ON MERGERS

Reuters: Thank you very much, Sir Martin.

Sir Martin: Good luck with your merger (The Thomson-Reuters merger closed in April).

Reuters: It is done — it’s over, we are the survivors.

Sir Martin: Sorry. It’s not done, it’s just starting. The easiest thing is to do the deal. The most difficult thing is to make it work.

(Photo: Reuters)