Interesting discussion over at the U. of Chicago blog, concerning the closing of the Xbox to Linux users via tinkering. Randall Picker starts off with a post in response to Ed Felten.

Here, I sought commentary from a game industry insider and add some of my own. My insider, who wishes to remain anonymous, responds as follows:

The first two commenters hit on the most important point, namely, that from a pricing strategy point of view, the number of people who will buy an Xbox purely to tinker with it and have no intention of ever buying the games is vanishingly small compared to the overall market.

I definitely don’t think MS has monopoly power in the games market. Not even close. (After all, who is it that bought the NFL’s exclusive games license for over $1 billion earlier this year? Not MS!) So that part of the analysis, while interesting, is irrelevant (I think the original author recognizes this).

Pricing strategy isn’t the only relevant factor here. Why isn’t there an issue with people converting Playstation 2’s to run Linux? Sony uses a similar loss-leader approach to sell the PS2, after all. Answer: the PS2’s architecture and development environment is far harder to work in. Microsoft chose to create a software environment for the Xbox that is very similar to the sorts of environments people commonly work in – that is, you don’t need to specialize in Xbox programming very much to get up to speed on it quickly. That means it is much easier for game studios to quickly ramp up on Xbox programming. That naturally invites the efforts of tinkerers. If your product is easy to tinker with, relative to the competition, then more people will buy your product just to tinker with it.

The two comments about bundling are interesting. Bundling games with their consoles is sort of an odd practice in the industry. It used to be very commonplace (e.g. Nintendo’s original console came with Super Mario Brothers no matter what, or if you got the one that came with the light gun, you also got Duck Hunt). Now it is common only at the retail level (you can go to Gamestop or EB and get console bundles, although almost always months after launch, and not with any regularity). I don’t know what caused this change in practice. Perhaps the rise of eBay has something to do with it, since it’s much easier now to unload games you don’t want (and thus cost the publisher a full-price sale).

And my own commentary:

--The whole discussion is essentially an exercise in Act Utilitarianism--trying to intelligently comment about policy while discussing a single isolated example. There's nothing wrong with this, so long as one keeps in mind that the vast majority of general rules are NOT going to have an optimal outcome in every single case. The policy question is, what general rule (about DRM, about tinkering, about whatever) is likely to have the best outcome most of the time, overall. The fact that the numbers here are unlikely to show a significant impact on Microsoft's market is may play a role in deciding whether Microsoft responds (by making Xbox harder to crack for example), but it not of overwhelming importance overall.

--The discussion also raises the question, why do most interesting games tend to be proprietary rather than open source? Movies? Books? Music? This burning question of the access of the open source community to proprietary interfaces would be much less burning if, oh only if, the open source model were more useful in producing content that requires a heavy investment at the front end. Perhaps someone will solve this problem soon. Perhaps not.

--Bundling is tough as a market strategy unless there are workable restrictions on unbundling at the consumer end (just plane DRM, contract, or DRM backed up by legal are some examples).

--Will the law and economics crowd PLEASE stop the silliness about marginal cost when thinking about pricing strategies? Yes, yes, we know, when information or transaction costs are low enough, prices drop to marginal costs. While this model is an interesting academic exercise that tells us something about the tendency of prices in the real world, it was simply never, ever intended to serve as an example of how the real world ought to work. In the real world, transaction costs and information costs and so on are just as much a part of the picture and it makes no more sense to assume they are zero than to assume transportation costs or labor costs are zero. Talk to Gordon Tullock or someone else who does real economics if you have questions. In the meantime, go with a pricing model that gives you dynamic rather than static efficiency. This discussion would be a heck of a lot more pertinent if we were not assuming that the cost of producing games is zero. It isn't.

--Finally, re tinkering: the arguments about open source hacks raise not only the question of the freedom to tinker, but the freedom to tinker and to widely distribute the results of the tinker. These aren't necessarily the same things. In fact, they are very different. Of course, the DMCA doesn't distinguish the two, and it may be difficult for it to do so without creating an exception that swallows the rule. In practice, just plain tinkering isn't likely to attract any enforcement. Not entirely satisfactory, but to be considered.