In a recent interview, Gabe Newell said that piracy is "almost always a service problem, not a pricing problem."
I've been surrounded by pricing problems & various solutions these past few months, so this seemed like a very timely comment to me. Consider:
1 - Many "free" games make tremendous revenue. Many players pay a little, and a few pay a lot. I've heard this phenomenon described as "players pay to match their emotional investment."
2 - Steam and other digital download services have had the freedom to vary prices wildly - in a way retail shops cannot. In many cases, they have found that the highest revenue came from price points well below retail - at $20 or $15 for a console-style game.
3 - There are an increasing number of bundles which follow the "pay what you want" pricing strategy... and make buckets of money.
Taken together these trends seem to imply that while most players are being overcharged for their video games - some players are paying too little, because they get more out of the games than most. By opening up pricing schemes such that people can pay more or less depending upon their play style - we can bring games to more people, without sacrificing significant revenue.
Maintaining Revenue while expanding Service
But, in fact, what these approaches achieve is even better than "same money, with more players." By expanding the player base, you also get to save on those factors which previously cost you money - like DRM. If you let people share and download your game for free, you save on packaging, distribution, and hosting costs. I paid $20 to play Savage 2 online, and 100% of that money went to the developers. If they had sold me the box in stores for $50 (I would have paid it) the developers would probably have received only $10 or so. Lowering costs means you can lower prices, and expand your market.
I think this is exactly the sort of thing that Gabe Newell is talking about when he says we have a service problem - we aren't servicing the markets that exist, in favor of over-serving a market we think we can better control.