Sunday, February 15, 2015

In General: MTG Economics Part 1: The Primary Price

Hello and welcome back to In General. On Sunday's here at TGZ we talk about anything and everything related to Magic the Gathering. Today, I am beginning a four-part opinion/educational piece on the economics of MtG, starting with everyone's favorite scapegoat: MtGO.

You can ask anyone in town, they will all have a few complaints about Magic Online. Specifically, I am going to pick out something that has been bothering me since the very beginning of online play: the cost structure.

Market Control

If you want to purchase a physical MtG sealed product, they are pretty expensive. There are certainly costs to creating and producing the game, but those are relatively small. Primarily, what drives up the cost of Magic cards is demand. While Wizards works to make the game appealing and grow the player base, the demand for cards is largely outside of the company's control. Some sets sell better than other. The reason for this is the strength of the product and people's interest in it.

Things are a little bit different when it comes to Magic Online. The costs of maintaining the program and providing support, etc., are still definitely there, so it could never be free, but there is no scarcity. A mint condition Black Lotus is expensive because only a handful still exist and thousands of people want one. Black Lotus is expensive on MTGO because Wizards has decided it will be that way.

By restricting the supply of new electronic cards 'produced' they keep the price of electronic boosters and other sealed product high, which they can then continue to sell for 99% PROFIT.

I fully endorse Wizard's right to run a profitable business and make money by entertaining people. That is their right as a corporation. But make no mistake, there is no real correlation between the price of an electronic booster pack and a physical one.

They don't require the same materials, don't trade in the same market, and don't suffer the same economic constraints, so why are they the same price? Actually, electronic boosters are usually more expensive from the Wizards online store than they are in real life. Tying these prices together is a convenient way for consumers to visualize and accept the costs, but in actuality this represents a clever price fixing scheme by Wizards.

Consumer Protection

When you provide a product to consumers, you should be required to disclose the extent to which you a Market Maker in that particular product and what your Compensation, if any, is for facilitating that transaction.

A market maker is any entity that has a way to control the supply, and thus the price, of a product. If you are a dealer with an inventory position, you are a market maker, provided you have at least a small percentage of the market under your control.

Compensation is pretty straightforward. I am not saying that every dealer needs to provide a full income statement and balance sheet with every candy bar they sell, but interested consumers should be given the opportunity to scrutinize such information at their request, if only in the interest of consumer protection.

Savvy readers may have picked up the language and rules that I am referencing. This is securities law. In the United States, nationally traded securities are regulated by the Securities Exchange Commission, which utilizes these rules for enforcing proper disclosure of material facts to consumers BEFORE THEY BUY.

Servicing vs. Profiteering

I am an adamant supporter of consumer protection. Not necessarily consumer protection LAWS, which are often politically motivated and have only modest effectiveness, but rather responsible business practices.

If a man was dying of thirst in the desert you would give him some water, right? Well, if you always did it for free, soon you would be out of water yourself because people would take advantage of your kindness, so you need to regulate the price somehow. You also don't want to charge extortionate prices because that will turn people away from you, shrink your market share, and most importantly: it won't serve your customer's needs.

I am arguing that, by pegging the price of online boosters to physical boosters AND artificially restricting the supply by only presenting limited public offerings, Wizards is behaving in an anti-consumer way. They are charging a fixed, theoretical maximum for a product which has a negligible marginal cost to produce. They hold a monopoly position, which is unavoidable because they created the game themselves and it is their intellectual property, but for those who are not inclined to an in-depth economic analysis, suffice to say that this situation usually ends poorly for the consumer.

Charging the highest prices that you can while optimizing sales is a typical indicator of a profiteering business model. A servicing business model is one in which you voluntarily charge lower prices to build up loyalty, trust, and social equity with your customers.

At the beginning I promised that this would be an opinion piece, so in case you don't think that you have gotten your money's worth, here is my final opinion on this subject: Companies, particularly someone like a toy manufacturer who brings so much joy into the world, should use a servicing model for pricing their products, NOT a profiteering model.

Join me next week Zoners, when I discuss why Magic isn't a great investment. Oh joy!

-GG

2 comments:

  1. I have a couple questions about this:
    -Isn't Wizards contextually in a no-win scenario with MtGO vs. the TCG? I don't see how they could make the prices decreased successfully in a servicing model without effectively destroying demand for the other. Double buying can't be avoided in this model, but it essentially does make this "more fair" to consumers while also being profitable.
    -I don't do a whole lot of MtGO, but didn't they also begin under the guise that you could pay extra to get real copies of the cards? Do they still do this? Do you think this has a lot to do with the price problems, or do you think it has more to do with the sliding scale in the secondary market?
    -I know that they "re-printed" Vintage Masters on MtGO. Did this not help to lessen the extent of the Black Lotus problem mentioned?
    -What kind of pricing plan would you install for MtGO cards if you were looking to move into a servicing style?

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    1. -Conventional business wisdom would indicate that creating a product that competes with your own product would cannibalize your own brand and should not be done. However, this doesn't really seem to be the case with MTGO. People haven't stopped playing paper tournaments just because online ones are available. As the game as a whole grows, the popularity of both ways to play has increased proportionately. It is inherently unfair to consumers to charge a premium for something that could be distributed for free. Because they are the only supplier, they set the price. They have chosen to keep the online price the same as the paper price despite having none of the variable costs associated with actually producing additional units. Compare to the World of Warcraft TCG and Heathstone. Hearthstone is very affordable to play compared to Magic Online.

      -This is not a real thing, nor was it ever. You can redeem online cards for physical ones, but only if you redeem an ENTIRE SET. Meaning if I had one copy of every card in M15, then they would ship me a physical set of M15 in exchange for my MTGO set. There are no partial redemptions and many sets are simply not redeemable because they include cards on the restricted list, such as Vintage Masters.

      -Prior to Vintage Masters there simply was no Black Lotus online. They are still expensive, but nearly as expensive as they are in real life. Vintage Masters was a good thing in my opinion because it made many cards that were important to the Vintage format available for the FIRST TIME on MTGO. You simply couldn't play proper Vintage because the cards didn't actually exist online yet. There is still a huge artificial supply gap on key cards like Lotus and Moxen, which create barriers to entry in the format, which is obviously anti-consumer and anti-new player.
      -This is going to sound blasphemous but...don't charge by the pack! *GASP* What if instead of charging for digital goods that have no intrinsic value, you were charged only for the online platform instead. If you buy any other computer game on Steam, you will likely get access to free online multiplayer along with 100% of the content in that game for the price it takes to produce that game. Steam doesn't use price fixing nor does it peg prices to the physical copies of those same games which would be available on other platforms. They have a streamlined digital distribution service which eliminates many of the costs of a game publishing company. They pass those savings on to the end user. Which I know appeals to you.

      I would guess that in the real world, alternative pricing for MTGO would either require:
      1. A one time lump sum investment like most games.
      2. A subscription service like some online matchmaking services.
      3. Or both, like the WOW MMO.

      Personally, I don't like the idea of a subscription cost because I enjoy being able to play Magic for free already. However, I might be able to be persuaded if you told me that $15/month got me access to every card ever printed for constructed and unlimited free drafts. The question then would be, if everyone has access to all the cards, what would they give out as prizes in tournaments?

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