Video Games – Digital vs Physical Distribution

Video Games – Digital vs Physical Distribution

As we move into an increasingly digital world, it’s worthwhile to take stock of what is occurring in the realm of this hobby we call gaming. With the recent release of the IGEA report regarding the sales of computer game-related items in Australia, I figured it was time to take a look at how we access video games in Australia – whether it be via brick and mortar stores, or digitally. Let’s begin with physical releases.

Dick Smith is no more. The future of the company that sold (mainly) technology based items is not clear, given the recent purchase by Kogan. While never really the ‘place to go’ for video games, it is worthwhile mentioning the closure of one of Australia’s ‘technology’ stores. Often regarded as a costly alternative to JB Hifi or (when it existed) Tandy, Dick Smith stocked everything from TVs through to games and gaming consoles.


Prior to Dick Smith being sold off, retail stores like Kmart and The Good Guys made the step to reduce their gaming stock. Good Guys (in WA at least) removed all gaming stock from their stores after simply not making enough money on them. Kmart made the decision to remove games from their stores as 2015 came to an end. Don’t let the reduction of gaming stock lead you to believe that Kmart is doing badly (it’s not) – in fact, it had a good year with growth in the areas you would expect Kmart to grow (homewares and clothing). What dropped, though, was the sales of entertainment items such as DVD’s and gaming items.

Step into a Kmart store today and you’ll find that the only gaming stock that they’ll have available are physical items, such as Nintendo’s Amiibo range and the popular Lego Dimensions, Skylanders, and Disney Infinity series’. Long gone are the shelves of consoles and games. Even the Amiibo range is heavily reduced in terms of variety, stocking the main staples in the series rather than having every single item. Understandably, these toy-based games are huge money-makers for the companies that create them, and no doubt the companies that stock them. Kmart, and other family friendly stores like Big W and Target, keep these items well away from the regular toy section, ensuring that family members looking to purchase these physical expansions for birthdays or gifts don’t end up accidentally spending hundreds of dollars on a ‘toy’ that has no use.

Which leads to the next reason as to why places like Kmart have reduced their gaming stock, and why companies like Big W and Target are looking to reduce their stock even further. When Grand Theft Auto V was released, Kmart and Target made the decision to not stock the controversial game. The reasoning is that these are family-friendly stores, making the decision to not stock a game that includes a horrific torture scene rather logical. Throw in the fact that often the average staff member at these stores is under 18 years old – in order to legally sell an R-18+ game, retail stores require someone over the age of 18 to physically sell the item (similar to how the average checkout person at Coles can’t sell cigarettes). As you’ll see in the stats below, not stocking R-rated games technically shouldn’t have mattered given that G-, PG-, and M-rated games outsold MA- and R-rated games in 2015.


Now, that’s not to say that R18+ games aren’t sold in Target and Big W anymore. Love it or loathe it, Call of Duty is still a cash cow, so even though the latest iteration is rated R18+, it is still stocked in R18+ specific areas within these stores. Walk into your local Target (or any store that stocks games, for that matter) and you’ll find a clearly demarcated area designed to clearly state that the games available in this area are rated R18+ and only available to those who are over the age of 18.

These are all quite logical steps really. The cost of stocking a game is not cheap. Using figures pulled from a 2010 article in the LA Times, the breakdown in cost of a video game (in US dollars) equates to the following:

A $60 game has:

$27 returning to the publisher
$15 going to the retailer
$7 returns (meaning, the cost of returning an unsold item)
$7 licensing fee (going to Microsoft, Nintendo or Sony)
$4 distribution/package creation cost

Understandably, these figures and the way they are distributed could very well have changed in the last six years, but they still give a fairly good idea of how much it costs to stock a video game. If a company like Dick Smith or Kmart stocks five copies of Battlefield: Hardline and does not sell that game, then the amount that they need to reduce it by before they start having to pay to stock the game is greatly reduced very quickly. It simply becomes unprofitable for them to have the space for that game (or many others) in their store. Unfortunately then, if your company is set up solely on video games alone, that too may be your downfall. One only needs to look at the collapse of gaming retailer Game to see that selling stock at RRP to help maintain profit margins is not a great business model – especially in the face of competitors such as JB Hifi, who regularly discount new titles.

DigitalvsPhysical-Dark Souls III

Gaming retailers like JB Hifi and EB Games are juggernauts in the field. EB Games can be comparatively considered high priced, but their ability to remain in the front of the pack with physical games sale in Australia is their pre-owned game selection. EB Games ‘carrot rewards’ system rewards regular customers who ‘sell’ their games to EB Games for in-store credit with greater item-value percentage. This means that the more you trade in, the more you will ‘earn’ in trade-in value (to a limit). Fairly simple stuff, but this kind of reward system encourages customer loyalty.

EB Games isn’t stupid though and is aware that its future as a physical games retailer is being chipped away each year as the digital revolution creeps further forward. To help with this impending change, EB Games has increased stock of toys and board games. It’s not uncommon to walk into your local EB Games and be greeted with a stack of Pop! Vinyl figures and baskets of plush toys. To deal with this surplus of toys, Zing! Pop Culture has been created as an offshoot of EB Games and provides an avenue to stock all things pop culture toy and figure related.

EB Games is not alone with stocking pre-owned games; JB Hifi also has a variety of pre-owned games. Unlike EB Games, JB Hifi does not have a rewards system in place for return customers. Of course, JB Hifi is not solely a gaming stock company, with Blurays, CDs, and vinyl also being offered. However, this alone is not enough to keep them in business, something that has seen the company move towards stocking whitegoods as well as branching out further into home entertainment and computers. A company like Game Traders is able to remain profitable by stocking retro games and consoles, while still also being able to provide current generation gaming consoles and games. The (almost) pure profits of retro games and the rising appeal in retro gaming ensures that they remain both a niche environment as well as a relevant company.


Then you have companies like OzGameShop or Mighty Ape, which work on ‘grey imports’ – meaning their games are compatible with Australian consoles, but aren’t Australian versions. However, for the sake of this article, we’ll focus on places that you can purchase and play games on their release date within Australia, whether it be physical or digitally.

Microsoft seemingly jumped the gun a few years ago with the announcement that the XBox One would need to be always online in order to be played. Of course, this was redacted and the feature was removed prior to release; however, Microsoft possibly had the foresight to see that one day we will be moving towards a solely digital gaming world. So, on that note, let’s take a look at digital sales in Australia alone.

(Again, for the sake of this article, I won’t be touching on digital licensing or the desire for gaming companies to remove the pre-owned games market.)

The third annual IGEA report was released on March 2nd. This report works to provide the Australian games industry a bit of a health check. As it is, the games industry in Australia is valued at $2.832 billion – up 15% from the last report. This report is solely related to how much Australians as a whole spend on gaming-related items. So let’s break it down briefly.


Physical game sales increased by 13% to $579 million, while digital game sales increased 33% to a great $606 million. Before writing this article, I personally would have guessed that the two would be neck and neck, and they pretty much are. However, the increasing trend towards digital sales indicates that interest in physical sales is reducing. The cost of digital games is still almost equal to physical games, and in some circumstances actually exceeds the cost of the physical release.

It’s understandably not possible to tell what platforms have received the most sales; however, what is interesting to see is the huge increase in mobile software sales, which grew by 24% to reach a total of a staggering $840 million. Whether this is because of the success of in-app purchases or simply the grand amount of games on offer on mobile platforms is hard to tell, but it does at least shine a light on why dedicated handheld platforms like the PlayStation Vita and 3DS are decreasing in popularity.

If we look at the digital sales for PlayStation during 2015, there are some surprising rankings (unfortunately there are no released stats for Microsoft’s consoles). For PlayStation 4 alone, the top ten games were:

  1. The Witcher 3: Wild Hunt
    9. Need for Speed
    8. Star Wars Battlefront
    7. Rocket League
    6. Battlefield 4
    5. Grand Theft Auto V
    4. Minecraft
    3. FIFA 16
    2. Call of Duty: Black Ops III
    1. Destiny: The Taken King

What is interesting about this is that all but one of these titles (Rocket League) had physical releases in 2015. The ability to pre-order and pre-load the game and have it be playable on launch day without ever having to step out into the real world is a huge element for digital games that no doubt helps push sales.

Two of the points that are interesting enough to explore when it comes to digital versus physical releases are quality and size of the game. With AAA titles regularly tipping past 50GB, you would think that their sales would be primarily physical, but that’s not always the case. Call of Duty and Battlefront were still (internationally at least) huge sellers digitally. Even with Australia’s substandard Internet, digital sales still surpassed physical releases.

Of course, it’s not possible to tell if DLC is getting bundled in with the main game releases in these stats. With that in mind, when some DLC tips past the 10GB point (Destiny’s The Taken King expansion, for example), you do have to question whether gamers are just more forgiving with having to download such large files, or have just learned to suck it up and accept slow download times.


Then we move to quality. In 2015, one of the highest rating games was the indie smash, Undertale. According to Metacritic, it managed to hit the same level as many people’s Game of the Year, The Witcher 3: Wild Hunt, with a rating of 93. Now, of course, high quality does not always equal high sales. But in times where AAA games are seemingly under-delivering on quality and content (Star Wars: Battlefront, for example), cheaper, high-quality digital-only games are a good alternative. Undertale sold like hotcakes given great word of mouth and its affordable price, as did Rocket League – even after its debut as a PlayStation Plus game.

When we look back at JB Hifi and EB Games as being leading sellers in physical releases, we have to look at one other key element that keeps the two in front – exclusives. Both JB Hifi and EB Games pride themselves on pre-order exclusives, whether it be physical elements such as the Pip-Boy edition of Fallout 4, or purely aesthetic items like exclusive costume varieties for LittleBigPlanet, these retailers like to use these ‘exclusive’ items not only as a tool to get people through the door to buy the game, but also to avoid people being able to price match on bigger releases. EB Games will (mostly) be happy to price match other retailer’s prices to ensure they receive the sale – especially when retailers like Big W come along with heavily reduced week one prices for games – e.g., $68 on launch week for Fallout 4, compared to $88 at EB Games. Now, if someone goes to EB Games and price matches an item at Big W, Big W (naturally) doesn’t get a bite of that money, it all goes directly to EB Games.

So wouldn’t it be in EB Games’ favour to price match everything? Yes and no. When EB Games can sell collectors editions that tip over the $250 mark and be the only place that sells them, it has no need to price match – if you want that fancy looking hand from Metal Gear Solid 5, then EB Games is the place to go. Once again, this ensures that they’ve locked in a physical release sale. One could go on and on about how EB Games successfully runs its stores, but this is not the article for that discussion.


One other curious thing is the ‘exclusives’ that some family-oriented stores have been able to obtain. Take, for example, the Gold Mario Amiibo’s that were released sparingly in Targets around Australia last year. These were snaffled up by collectors and potential scalpers quicker than you could say Yahoo! Whether the idea was that there would be a flow-on effect from people buying them\se items (i.e., come in to buy the Gold Mario, also end up buying a few other items as well) or not is unsure. However, this ‘exclusivity’ of items is a rarity for shops like Target and Big W, and has often only applied to physical items, not to the games themselves.

The other intriguing element is the ability to buy download codes at a huge variety of places. Sure, EB Games and JB Hifi stock them, but the ability to buy currency for League of Legends at Coles or the Post Office opens up a whole avenue of options for people who are unable to or prefer not to use digital currency. Whether this applies to total digital sales or not is hard to tell. In fact, stores like EB Games allow the ability to purchase a code in store that can be used to download digital games online – whether it be on the PlayStation Network, XBox Live, and even some PC games. This is just one more way for people to access digital content.

So, after all of this, what does it mean for the future of gaming in Australia? While we don’t exactly consume games on the same scale as a country like America, one only needs to look at the $2.832 billion that the gaming industry alone created in Australia during 2015 to see that there are a lot of people consuming games in some form or another. Physical media will always have a place in the world; however, low returns for retailers stocking games means that it’s becoming less and less attractive to sell, which means that there could be fewer retailers willing to stock them in future. The ease of access to digital content is always appreciated, yet the price, which is often on par or even higher than physical releases, is not. We’re a long way off gaming being a predominantly digital platform, but it is in the future, and that is likely closer than you could ever think. Of course, there are many steps that Australia needs to take to get there – a great internet service, or a well-supported games development industry within Australia, for example, but these are steps that will hopefully come in time.

Andrew was nameless for the first week of his life. His parents were too busy trying to figure out the character creation model that they forgot to name him. Unfortunately, they molded him into a bearded film loving idiot who runs The Last New Wave and AB Film Review with his wife as well as talks about games every so often. Sometimes he knows stuff, most of the time he’s an idiot.

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