Sunday, November 14, 2010

A Non-Rival Call to Duty

The latest Call of Duty video game was released on Thursday in the US and UK. First day sales were $360 million. Its predecessor netted $310 million on the first day, over half a billion in the first week and well over a billion overall.

The latest production costs weren't disclosed, but they should be about the same as the last version which was estimated at $40 to $50 million. The prior version's marketing and distribution budget was about $200 million, and I suspect at least that much was spent on this one.

From an economic standpoint, one of the things this illustrates is the value of selling something that is non-rival. Although the production cost is high, once paid, the incremental cost of serving an additional buyer is very small. In addition, one person's usage of the game has no effect on another being able to use the game at the same time. This allows very large profits to be made on the sale of the good.

There is a potential problem however. Since consumers can all access the same thing at the same time, they have a very heavy preference for only wanting to use the best. A second best game can lose money even when it is a follow on to a very successful franchise. Note that Viacom, which produces non-rival programming, is currently shopping Harmonix the maker of Rock Band.