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)

Strauss Zelnick, chairman of Take Two Interactive, has a bone to pick with the media: He doesn’t like the two words “Financial” and ”Crisis.” At least not when they are used to describe the current state of economic affairs.

“I don’t think we’re in a financial crisis,” Zelnick said at the Reuters Media Summit. “The use of the word crisis — I’m loathe to be critical of the media since I’m every bit a part of the media — but I don’t think the word has been especially helpful. We’re obviously in a recession and these are very very trying times.”

If not a financial crisis, then what? Well, Zelnick offers up a hospital metaphor. 

“We’re still seeing the car crash, and the ambulences are still showing up at the scene. Maybe we’re in the emergency room, but we’re not even in the intensive care unit yet for a lot of these companies. But they will get there.”

Call it what you like. Either way, It’s not pretty.

(Photo: 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)

The spectacular debut this month of Take Two’s blockbuster video game Grand Theft Auto was no better than expected, EA’s head of international publishing, Gerhard Florin, told the Reuters Technology, Media and Telecoms summit in Paris.

EA on Monday extended its public offer for Take Two by a month after failing to win more shareholder support for its $2 billion hostile bid but did not up the price. Florin said he was surprised there had not been a more negative approach to the violent game, which instead was hailed as a work of art, even in Germany, which tends to shun violent video games.