The console gaming industry in India owes Milestone Interactive a debt of gratitude. At a time when Sony itself was reluctant to support PlayStation in India amidst high piracy, the Mumbai-based distributor stuck to its guns and brought the PS2 to India on its own. Today, console gaming is the biggest revenue earner for the Indian gaming industry.
Now in its 15th year, Milestone is one of India's largest game distributors, representing the likes of Sony, EA and Capcom. But in keeping with this fast-changing industry, it has expanded its operations of late by venturing into video game retail and even mobile game publishing.
In the first half of this two-part interview, Milestone Interactive's chairman and CEO Jayont R Sharma tells us about the company's beginnings, the unique challenges of the Indian gaming market, the sensitive issue of video game pricing, and more.
You can read part two of the interviewhere.
MCV: Can you give us a bit of background on Milestone and how you guys started out?
Jayont R Sharma: We started out in 1997 as a PC games distributor and we were the first guys to pitch to PlayStation to bring consoles into the country. After two years of effort and a lot of competition from some large business houses, we landed the PS One business in 2001. At that time, the business was split; hardware was handled by Sony India, while the brand and the software came to us. By the end of 2002, Sony India had given up on PS One support and distribution. As a result, the PS2 launch happened through us in 2003. That was a couple of years late, but given the time it took for the PS One to come to India, the PS2 came relatively sooner. Then with the PSP and PS3, we have been the partners for Sony to build the platform.
When we launched PS One games back then, we didn't have any of our channel partners supporting the business because of almost 100 per cent piracy. Given the price of a pirated game as opposed to a genuine game at that time, it was a challenge to even place the product. That's when we decided to bypass all our PC distributors and go straight to market and we opened up about 35 stores across six key markets in India. With the PS2 as well there was heavy piracy. So from 2003 to 2006, it was just about maintaining the brand in the market and maintaining the hardware and software in legitimate channels. Yet we had about 1 per cent of the business because it was dominated by parallel imports and piracy.
Things changed after the launch of the Xbox 360 in 2006, and it got the guys at Sony to look at the market in a serious manner. I think from 2007, there's been no looking back. We had huge success with pricing being aligned, and software being the cheapest anywhere in the world.
"We had about 1 per cent of the business because it was dominated by parallel imports and piracy."
Sony taking over the PlayStation hardware distribution business in 2010 was a wake-up call for us. Around this time, we were starting to see the market evolving. There was a channel expansion happening, but we did not see an involvement in the game category that was needed for it to take off. Given the limited space we would get in some of the large format stores and the lack of sales staff there that specialised in gaming, we took the call to go the retail way ourselves in order to create a benchmark in the market and hope that others would follow our example. To a large extent, we have been able to do that. It's led to guys like Landmark and Planet M redoing their stores, and lots of other stores waking up to consumer demands and becoming more service-oriented.
MCV: A big topic of discussion nowadays is pricing. More than any other publisher, EA has had a drastic change in pricing. Part of that must have to do with currency exchange rates and custom duty structures, but surely, a part of it must also be the publisher deciding to go with a higher price.
Sharma: EA has for years been the most aggressive and committed publisher in India, and they've had a lot of success with IPs like Need for Speed and FIFA. Over the last couple of years, they've had a reworking of their internal business strategy, and given that they're taking a next-ten-years view, somewhere they have not had the kind of successes that an Activision has had, especially with the Blizzard properties. Now, this is a triple-A market; there's really no place for an A, B or C franchise. EA is also cutting back on the number of releases and getting more focussed on fewer IPs.
Given their position on going completely digital in the next few years, obviously India had to be integrated somewhere with the world view. Last year, we had the first round of price recalibrations, and that was just after the Origin store launched. So while you have local currency stores, somewhere there has to be an alignment. In India, PC pricing has been way lower than anywhere else, and it's an English product, so there's a risk of it finding its way to other English-speaking markets. Given that we've maintained a certain pricing for all these years, we've never got that quantum jump in volume the moment prices were dropped. In the same context, the price changes (increase) from last year to where we are on preorders for FIFA this year, it's a very tricky situation. Volumes are growing at higher prices.
The caveat here is that this won't happen with all IPs, so it will sift the really good games from the good and the average. For the big IPs, there is no price elasticity, but for the next rung of IPs, there is huge price elasticity. I think the whole pricing strategy has to now start moving in that direction, where triple-A franchises can continue to retain a premium price point, and the next rung comes at a lower price. So this is the logic behind EA's prices.
MCV: So is it the case of EA fearing that games sold here would make it to other countries?
Sharma: That is just one of those fears that lingers.
MCV: Or is it a case of EA thinking that these are prices Indian gamers can easily afford to pay?
Sharma: From a macro view, I don't think that at this point, that aspect is bothering them. In an environment where, inflation aside, revenues are growing year on year, is there enough reason for you to say that, ‘if I continue these prices my business is going to go down so let me go back to the old formula'? Given the size of the Indian market in EA's global view, we're still a miniscule part of it. At this point, EA is seeing India from a global perspective versus a more regional or local perspective, and the recent price rebalancing has happened as a result.
"Given the size of the Indian market in EA's global view, we're still a miniscule part of it."
MCV: What do you think is the ideal pricing for new games in India, assuming currency exchange rates and rising custom duties weren't a concern?
Sharma: I think Rs 2,499 for a PS3 game was a very good price, given the $60 pricing abroad and our high custom duty and taxation structure. As volumes and install bases grew, those prices should have moved downwards. Since local PS2 manufacturing had started, we were hoping that somewhere along way, the same would happen for PS3. After PS2 manufacturing, we went from having no market for PS2 software to PS2 games accounting for 22 per cent of the revenue. That was down to local manufacturing and local pricing. If that happens with the PS3, console gaming could really become mass market, and our large PS2 consumer base would then be able to graduate to the PS3 much faster.
The biggest challenge for Indian consumers is the running cost. We're happy to pay a premium for the hardware. It's like it is with cars; we like buying diesel cars because the perceived running cost is lower. The Indian consumer isn't used to paying a lot for content. Look at how much we pay for cable channels, movie tickets or books.
By logic, gaming ought to follow a similar path, but look at what happened in movies. That industry was doing well 3-4 years ago when Moserbaer came in with DVDs at piracy level prices – Rs 49 and Rs 99. Everybody followed suit and dropped prices, but the volumes did not translate, and the guy who wanted pirated movies still got pirated movies. So by one logic, pricing ought to keep moving downwards. I would love to see the day when we have a triple-A console game at Rs 999, but would that give us 5x or 10x volumes? I don't think so.
MCV: You said dropping prices won't correspond to an increase in sales, but wouldn't increasing prices lower sales?
Sharma: For triple-A franchises, no. For anything that is outside your top five games, yes there would be a drop.
MCV: So for EA, if you were to look at Dead Space 3; wouldn't sales of a game like that suffer from a price increase such as this?
Sharma: The Dead Space franchise has been evolving. The previous iteration wasn't too strong and didn't do too well. Given that as a benchmark, the next one will definitely sell more even at a higher price point. So I can't really do a direct co-relation because the installed base increases all the time too. I think an important figure is the attach rate. Software is not growing at the same pace as the hardware is. So while consoles are penetrating deeper, the consumers in B and C towns may end up buying one or two games along with the hardware and never come back. So the attach ratio is the biggest challenge with the current breed of consumers.
MCV: Is the price sensitivity more on the PC side? Is Rs 999 the psychological barrier?
Sharma: Yes, PC is more price-sensitive and I think that is because we've tuned our PC consumers to be price-sensitive. PC consumers here now consider it their right to get PC games at sub-Rs 1,000 prices. There's nothing wrong with that as long as the business model allows for it. The conundrum here is whether you'll see a quantum leap in sales at lower prices. Let's take a franchise like Grand Theft Auto, which was launched at Rs 499. Would volumes have really changed drastically if it was priced Rs 699 or Rs 999? I don't know. So it's going to take a bit of trial and error, but we have to find a balance between the publisher's global aspirations and the needs of the local market.
"PC consumers here now consider it their right to get PC games at sub-Rs 1,000 prices."
MCV: Do you think local replication of PS3 games will help drop prices?
Sharma: Well, I would hope so, unless somebody gets greedy.
MCV: How much of your distribution revenues come from back catalogue titles as opposed to new releases?
Sharma: It used to be substantial. I always say that India is a long-tail market, because you have a consumer at every price point, and it's not about the game being new or the latest, because maybe for that consumer it's new. Looking at the geography of our market, distribution can keep going beyond the top 16 cities. With e-commerce, you've got Flipkart covering around 200 cities, Game4u covers over 160 cities, etc. So penetration is going deeper and there's still a lot more depth to it. So back catalogue is massive in helping us penetrate into these smaller cities, and since these are even more price sensitive, prices like Rs 299 and Rs 499 are vital. Many of these games aren't even on store shelves in other countries, so given what the publishers are able to make out of back catalogue, and it's something worth supporting.
MCV: Sony is planning to begin PS3 game replication in India this year. Since EA and Capcom's PS2 games are already being replicated here, will that also happen with the PS3?
Sharma: Everyone's been spoken to and I think Sony is very clear that they'd like to have all publishers on board. EA was the first third-party to begin PS2 replication, so I'd hope that they would also be first movers here, but I haven't heard anything yet.
MCV: Milestone has started offering stock protection for retailers now. This is something you had done in the past as well and then discontinued it. Is this a big risk for you guys?
Sharma: For a while, we offered stock protection on select new titles and a certain percentage of protection on back catalogue. This is something I picked up from my background in the music industry, where stock protection was vital considering the product life cycles there. This worked well for us till about 2009-10, but this comes from the cost structure and such redundancies have to be built into the game's pricing. We've also always been very aggressive with our volume push. A lot is said about how we generate our volumes, but we truly push volumes into the market and back it up with strong marketing to make sure that sell-through happens. You won't find any of our big releases missing on store shelves, while that is the case with several others. So given that, it's only fair that we step in and provide some support and protection to the retailer.
We withdrew that for a while largely to recalibrate the thinking process of the buyers and the approach of the retailers. We sensed that there was a danger of gaming going the way of music, so we didn't want to encourage bad habits developing in the channel. So for a while, we told retailers that ‘if you want to order less, that's fine, but you have to take the risk'. With that, those who were serious about the category got more serious, and those who were just marginal players got out. So it was sort of a cleaning up process in the channel, which has now contracted, to some extent, to our original players. Indirect channels and resellers are more prominent, mom-and-pop retailers have become stronger, specialists have emerged, consumer electronics giants that were huge have mellowed down, and the hypermarkets have got out of the category. So a rebalancing has happened, and now with the psychological challenges of the higher prices, it was important for us as a distributor to provide that confidence.
"You won't find any of our big releases missing on store shelves, while that is the case with several others."
MCV: How much of a challenge is it to educate retailers? Most of them don't seem to know anything about the games they're selling.
Sharma: It is a challenge and it's a never-ending process. Even now, we go and meet our national accounts and give one-on-one presentations to all the buyers. Our trade channel team goes out and meets every independent retailer and runs them through videos, product positioning, gameplay features, etc. We believe that is critical to sustain and grow the market. The retailers at times don't care about what they're selling. Many of them operate on consumer demand. So while it's important that our marketing creates a buzz at the consumer end, it's important for the retailers to understand what they're buying and why in order for them to make an educated sale. If the market has to go beyond the hardcore gamers, somebody has to teach new and potential consumers, and that's where retail comes in. We can do that through Game4u, but we don't have 200 stores.
You can read part two of the interview here.
Sign up for the free MCV India newsletterhere.