Why Does Digitally Distributed Games and Software Cost More?

Shouldn't Digital Be Cheaper?
Many video games and pretty much all software titles now-a-days are available for download online. This saves everyone time and is convenient for the users but it seems to only saves the software and game companies money. Digitally distributed video games, in particular, are usually more expensive than their physical disc counterpart. Isn't distributing games and software online cheaper since you don't have to create the discs, package them, ship them to stores, sell them cheaper to stores so they can make their cut, and all the rest that comes out of cutting out the middle man? So why are digitally distributed games and software more expensive most of the time?

When is Physical Cheaper than Digital
I'm primarily talking about video games since physical software discs hardly excites anymore. One of the best examples, of physical media costing less than the digital distributed copies, is with Mac video games. If you want to purchase Call of Duty 4 for Mac you have two choices, you can either pay $16.50 for the physical disc or pay $37.99 for the digitally distributed copy on the Mac App Store. This is a pretty big difference.

Another good example is with used physical Xbox games which are almost always $5 - $10 cheaper than games offered on Xbox Live On-Demand. Granted one is new and the other used but I have never had a problem with used games and companies like GameStop will replace them if they don't work. So from a perspective of acquiring a game to pay it's all the same. Xbox recently has done a pretty good job of keeping their new prices competitive with that of GameStop but that wasn't always the case and the used copies are always cheaper.  

Why Digital Distributions have the Advantage
The problem with digitally distributed video games and software is demand is really the only thing that effects the price. They have an unlimited supply of the game or software because you are just downloading a copy of it. They can sell 1 copy or 1 Million copies with the same basic overhead cost. If the game is no longer popular the sellers only reason to reduce price is to drive sales rather than having to do damage control with a back stock of depreciating video games and software.   

Physical Media's Disadvantages
With physical video games and software the price is effected by many different aspects like supply and demand, medium popularity, and the used media market. If you are a retailer and have 5,000 copies of a video game that is starting to slow down in sales you don't want to get caught with a collection of useless disc that no one wants anymore. So the price goes down to sell off their inventory. Digital distributed software doesn't have to worry about this situation at all. Another interesting situation concerns computer  software and the fact that no one purchases it from a store now-a-days. The demand for software on a physical disc is down making the price lower and retailers are just trying to get rid of it. Have you visited a software isle at a store recently? It's like a wasteland out there.  

Another big price advantage physical media has over digital media is a used game and software market. You can go out and sell your used copy of Call of Duty 4 to someone else who's willing to pay for it. You can't do that with your digitally distributed games because the licensing agreement and DRM wouldn't allow it. This creates a market of cheaper video games one that companies like GameStop have centered the business around for years.

My Theory
So what does this come down to? Well digitally distributed games and software are convenient but that convenience comes at a price. A higher price to be exact, with little effecting the price they can set the bar wherever they want. Physical media has the price advantage of depreciating over time, being sellable, and falls under the rules of Supple and Demand. For this reason I wouldn't be surprised if physical media sticks around longer than people think. I think software and game developers would love to see an entirely digital distribution architecture because it will give them more control of the price of their games and software. This would be bad for people who love getting the discount they get from purchasing physical discs, but perhaps that's where we are headed sadly.

With the bad comes the good, because it's so cheap to distribute software digitally video game and software companies give away some of their products for free. Something that wouldn't happen if they had to release on physical media so theirs that to consider.

What are your thoughts? I'm for from an expert on subjects like this so please let me know what you think. Leave comment in the section below and let me know.