To the layman, the phrase “horse armor” may not carry any special meaning, but to gamers, it’s synonymous with being snookered. It refers to a downloadable horse costume for Bethesda’s 2006 hit The Elder Scrolls IV: Oblivion, and it served no strategic purpose. Horse armor only made your steed look fancier.

The costume’s uselessness became a source of outrage for Oblivion players, but in a new interview with Official Xbox Magazine UK, Bethesda Vice President Pete Hines said that even now, horse armor is a money maker.

“I swear to you I don’t have the report in front of me, but multiple people bought horse armor yesterday!” Hines said.

There’s a bigger point to be made here. Hines was talking about the success of downloadable content for Bethesda, and said that “so long as it’s good value, people will like it and buy it.” Apparently a lot of people thought a plate of false protection for a horse was worth $2.

In a way it’s not much different from the avatar costumes for which Xbox 360 owners and Playstation Home users happily pony up. They don’t serve any purpose but to make the player look good, but that’s something people value. Bethesda figured that out a long time ago.

A funny thing happened when players of Bioshock 2 began downloading a $5 package of downloadable content: They realized there wasn’t very much to download at all.

Turns out, most of the “Sinclair Solutions‘ content pack — a collection of characters, abilities and challenges for the game’s multiplayer component — was already on the disc. A community manager for publisher 2K Games confirmed that its customers were basically buying an unlock code. She explained that if the content wasn’t included on the disc, players who bought the DLC wouldn’t be able to play with people who didn’t.

Outrage in this situation easily turns to the obvious. If the content already there, why is 2K charging for it? It would be a valid question if downloadable content wasn’t already sandwiched against new releases, but publishers are increasingly relying on these optional extras to boost profits (for example, last year’s versus mode for Resident Evil 5 or the Warden’s Keep dungeon in Dragon Age: Origins). Not enough people voted against these extras with their wallets, and the rest of us lost the battle. Whether the disc actually holds the content is academic if it’s all being released at the same time.

I propose a different question: Why is 2K withholding a portion of the multiplayer that lets players progress further in the game? Among the pseudo-DLC’s contents, you get the ability to reach level 50, new ways to evolve your weapons and extra trials that give you more powers. It’s the multiplayer equivalent of stopping players before the last level of a game and making them pay $5 to see the conclusion.

I know, multiplayer isn’t plot-driven, and there’s no ending whether you buy the extra content or not. But it feels cheap to hit a ceiling in multiplayer that goes away if you pay up, especially considering that 2K didn’t announce this little trick until after the game was released.

Electronic Arts chief executive John Riccitiello is no hard-liner when it comes to software piracy, and in an interview with Kotaku’s Stephen Totilo, he’s back on the stump for pirate-as-potential-sale.

“They can steal the disc, but they can’t steal the DLC,” he said, referring to downloadable content that’s often sold after a game’s release.

Riccitiello’s tone is less extreme than it was in June, when he told IndustryGamers that “if there are any pirates you’re writing for, please encourage them to pirate FIFA Online, NBA Street Online, Battleforge, Battlefield Heroes…” but the idea is the same: If you don’t demonize the bootleggers and illegal downloaders, there’s a chance they’ll purchase some extra content, and that’s better than nothing. They may even go legit as a way of showing support for developers.

Minus that last part, it’s essentially the same view Riccitiello — and much of the games industry — takes towards buyers of used games, from GameStop or other second-hand sources. Even if EA didn’t make any money off you for the base purchase, they can still get you on the optional extras.

I like Riccitiello’s dovish stance, but there’s a dark side in just how much DLC has become available, to the point where it seems like legitimate buyers are eating some of the costs of piracy and used games. Where extra content was once an afterthought that came months down the road from release, it’s not uncommon now to see additional content available on the day of purchase. Dragon Age: Origins, published by EA, is a recent example, where some of content was free, but some cost money. At least the publisher rewarded buyers with some free content as well, which pirates or second-hand purchasers would have to pay for.

Still, it’s hard to argue that you’re not getting your money’s worth from a game like Dragon Age, which boasts over 100 hours of play. And Riccitiello says that when customers are offered more DLC, they lap it up. He may be on to something.

GameStop’s tentacles are wrapped pretty tightly around most of the games industry, the exception being downloadable content that’s sold after a game is released.

That’ll change early next year, when the retailer will begin selling digital game downloads through its stores. A report from Reuters doesn’t explain in detail how this will work, but my understanding is that you pay at the store and supply GameStop with your Xbox Live Gamertag or your Playstation Network user name, and the content will be ready for download when you get home.

Boxed retail games aren’t dead yet, so you’ll still have reason to visit GameStop in the first place. The retailer hopes that by visiting the store, you’ll learn about new content that might’ve flown under your radar — say, additional multiplayer maps for Modern Warfare 2 — and instead of reminding yourself to buy it once you’re home, you can just make the transaction right there.

The problem is that GameStop’s plan doesn’t add value for the buyer. It’s nice to be reminded that map packs are available, but that doesn’t make the store any less of a middleman. This is an issue the retailer will increasingly have to deal with as more people get their gaming content online instead of at the store.

For now, I’d suggest that GameStop get creative with how it sells downloadable content. Maybe it can work with publishers on selling all-you-can-eat passes, entitling you to all a game’s extra content in exchange for one up-front payment. Everyone wins: GameStop gets the extra revenue, the publishers feel safe knowing you won’t immediately trade the game back, and you get a discount. Or maybe the retailer can simply lure people into the store by with launch parties for the new content. That’s at least a service that isn’t being duplicated at home, and avoiding redundancy is GameStop’s best bet, now and in the long haul.

Good news for game developers and people who hate “Lite” iPhone apps: Apple is now allowing purchases directly from within free apps. This feature was previously allowed only for paid apps.

Certainly the decision will affect anyone who develops a “Lite” app that has less features than the paid version, as it’ll let them combine both into a single download. But my mind jumps straight to gaming, which could see a rush of apps with paid microtransactions to unlock extra content or features.

Consider, for example, an MMORPG. Apple’s decision will allow developers to adopt a free-to-play model, charging players for extra items or abilities. Some games, such as Mafia Wars, were already doing this by having players purchase entirely new app for their upgrades, with their stats preserved. But the new solution is much more elegant, as it allows people to keep playing with minimal interruption, and without scrapping the app they already have.

That makes me wonder, what will the economy of iPhone microtransactions look like? If buying small bits of content is going to be a lot easier, I’d expect there to be a lot more of it, except for one snag: The iPhone economy is already dirt-cheap. The majority of iPhone apps are free, and the average price of a paid game, according to a recent study, is $2.50. People aren’t exactly throwing around fistfulls of money on the App Store, so even a handful of $1 microtransactions in a single game could be a tough sell.

I doubt that transactions for less than $1 would be allowed, but I think the cleverest free-to-play game developers will find a way to break it down. Perhaps they could sell credits, $1 at a time, that let you download a handful of in-game items. However they work it out, microtransactions will have to get extremely micro to thrive in the App Store.

Addressing what increasingly seems like a glaring omission in its sales charts, The NPD Group says it will start tracking sales of downloadable video and computer games.

That’s important if you’re at all interested in how gaming is changing. NPD finds itself in headlines every month, when it releases sales figures for games and consoles. When we want to know if games are in a recession or whether an experimental game idea worked out commercially, NPD is usually a good resource.

But lately, it seems like the group’s sales figures don’t provide the whole picture, and NPD itself knows it. NPD’s corporate marketing director David Riley told MCV that tracking game downloads will reduce “the spin, and in some cases, misleading information that often appears on the internet.”

It’s not clear who Riley was pointing that comment at, but I think game publishers shoulder at least some of the blame. We usually only hear about the performance of downloadable content when it’s wildly successful (see the popularity of Shadow Complex for the Xbox 360). Even then, the news is just a flash in the pan, and we have no way to track the performance of a downloadable game over time. I’d definitely like to see, for instance, how the shelf life of a downloadable game compares to a boxed retail title.

NPD was short on details for this plan, which seems awfully ambitious. The group plans to track console, PC and mobile games, which, as Joystiq points out, would comprise a lot of distribution channels, including small, independent outlets. No start date has been announced, and NPD didn’t say whether it will track downloadable add-ons for existing games, or just full games.

Still, I look forward to whatever NPD puts together. For understanding how digital distribution is changing video games, anything’s better than nothing.

Come Tuesday, Microsoft will begin selling major Xbox 360 games for download through its Xbox Live service, but from the prices we’ve seen so far, it’s not a sound investment.

Endsights got a hold of the pricing for nine of the 24 games that will be available initially. Using the online retailer Newegg as a comparison (because of its consistent pricing and free shipping), it’s clear that in some cases you’ll pay $10 or even $15 more to download the game than you would to order a boxed copy over the Internet.

A chart, and some more thoughts on Microsoft’s bold venture away from retail, after the jump.

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Apparently not satisfied with the level of controversy in video games lately, Rockstar has announced the next downloadable expansion for Grand Theft Auto IV, and it will be subtitled “The Ballad of Gay Tony.”

The add-on will focus on an assistant to the eponymous nightclub owner Tony Prince. Players will “struggle with the competing loyalties of family and friends, and with the uncertainty about who is real and who is fake in a world in which everyone has a price,” according to the press release.

So it’s only a matter of time before someone appears on cable news channels to complain and we start hearing appeals to bar the game from release — all for naught, of course.

Normally, I’d say “let’s not jump to conclusions,” but I’m willing to bet that this expansion pack will offend people because Grand Theft Auto has always relied on stereotypes for its characters. Like Comedy Central’s South Park, GTA is an equal opportunity offender, but instead of relying on satire, it mixes horribly offensive jokes with a thin layer of compassion that gently tugs at the player’s sense of decency.

For that reason, you won’t get a condemnation from me. I’m actually pleased to see Rockstar Games state its intentions so blatantly, especially in an industry whose fear of homophobia (no, that’s not a typo) has repeatedly caused problems. Besides, this is a game for mature audiences. Those who worry for our precious children might first want to check on seemingly innocuous games, like Punch-Out.

It’s easy to imagine video games without discs or cartridges, but this downloadable future could spell disaster for GameStop. In a recent SEC filing, the world’s largest game retailer acknowledged that it sees the writing on the wall:

While it is currently only possible to download a limited amount of video game content to the next generation video game systems, at some point in the future, this technology may become more prevalent. If advances in technology continue to expand our customers’ ability to access video games, PC entertainment software and incremental content for their games through these and other sources, our customers may no longer choose to purchase video games or PC entertainment software in our stores.

This is sort of obvious, but as Gamasutra notes, in past filings GameStop has only referred to classic downloadable titles (such as Nintendo’s Virtual Console offerings) when discussing this subject matter. Never before has the company been so ominous about its ability to sell games of all kinds.

The gloom is appropriate as rumors abound regarding Sony’s next PSP handheld console. It would be the first time a major manufacturer dropped physical media entirely in favor of downloads and built-in memory. Handhelds are an ideal place to start with this business model, but come the next generation of home consoles, I wouldn’t be surprised if most games were offered for download, even if the disc-based model sticks around.

After writing about the PSP yesterday, it occurred to me that there’s still plenty of room for GameStop in a downloadable future, but not as it exists now. A better GameStop would mimic the resurgence of hands-on tech outlets, like the Apple Store, but with incentives for customers to purchase games at the store instead of at home. I’d like to see frequent buyer cards and an atmosphere that encourages try before you buy, to name a couple ideas. Download codes and kiosks may save GameStop from obsolescence, but it’ll take forward thinking, not fear, for the retailer to maintain its dominance.

We’re hours away from the midnight launch of Capcom’s latest blockbuster, Resident Evil 5, and there’s already news about downloadable content coming in a few weeks. And it will cost an extra $5.

This isn’t not your typical bonus level pack, either. The new content is a Versus mode, in which several players compete against each other. Paid downloadables have been around for a while now, but this is the first time I’ve seen a standard gameplay mode excluded from the disc and sold for an additional cost. I fear that other publishers will follow suit, leaving more significant content for separate purchase while keeping the initial game’s price tag intact.

With all kinds of post-release content, there’s always a question of “too soon.” How long after a game’s release is it appropriate to offer new material? The question is even more pertinent in this instance, because it regards a mode of play that’s usually part of the whole package.

Now, it’s possible that Capcom simply didn’t have the Versus mode ready in time and excluded it from the disc to meet scheduled ship dates, but it could have been offered for free if that was the case. Or perhaps there’s a mindset that not all players are interested in Versus mode, so it isn’t worth including as a standard feature. But that would suggest an a la carte approach to gaming, and that’s not happening here. Consumers aren’t saving any money by skipping the extra mode, they’re simply getting a raw deal.