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Economics Of Game Publishing Analyzed
Thanks to 1UP for its feature discussing the precise financial details of videogame publishing, described by Mastiff Games publisher Bill Swartz at GDC in San Jose last week. Swartz "put together various slides showing where the money goes for a hypothetical game", revealing that "a publisher can clear seven dollars on a game [after all costs are taken into account]." However, it appears that "only one of every five games will sell enough copies to make money, since publishers have to consider things like taking back inventory that doesn't sell through to customers", and elsewhere in the article, photos of the GDC slides show "a breakdown of how much publishers, wholesalers, and retailers can make, as well as what risks they face."
The charts show that a full $15 of the price is profit to the wholesalers, and the retailers. I'm surprised that more studios don't try the direct channel, selling right to the customer. It seems that there's some serious inefficiency there.
Alternatively, I think there might be marketing specialists in the future just for videogames. They'd take a smaller cut to just market the video game. The studio would make the game available on the website for download, or would contract with a CD publishing house for a nice package they could sell on a website. That would cut out the $10 retail profit.
The value that a small web publisher could add looks better and better the higher the middlemen push the game prices.
Fascism trolls keeping me up every night. When I starts a preachin', he HITS ME WITH HIS REICH!
only one of every five games will sell enough copies to make money, since publishers have to consider things like taking back inventory that doesn't sell through to customers. They have to be smart about the number of copies they ship into the market. Wholesalers have a smaller amount they can make on a single game, and face risks such as dealing with retailer payments. Retailers can sometimes make good money on a single game, but that margin drops when the game price falls.
Lets see the immediate pitfalls.
Back inventory: Costs due to having to rent/own land and a warehouse. Shipping costs (both in and out). Occasional maintenance (taking inventory to make sure the neighborhood kids aren't stealing and selling the game on the street 1 week before the game actually hits store shelves).
Limiting actual number of units sent out: Again, have to maintain back inventory. Lack of demand/supply may damage public relations.
Wholesalers dealing with retailers : May have to sacrifice profits to wholesalers to stock more units of your game. Bungie may have to pay wholesalers $5 for each unit, but you better believe Valve is gonna pay pennies when it comes to stocking Half-Life 2. Nuff said.
Retailers being reluctant to sell games at a lower price due to lower profit margin : Bad bad bad. Consumers don't like high prices, bad. Lowering prices makes retailers angry, bad. Not being able to clear inventory because of low demand and high supply, bad.
I will voluntarily pay those $7 to download a working retail game off of bit torrent. If advertising costs are an issue, I would suggest paying an additional $3 per game. Using bit torrent would allow for worldwide distribution at no cost to the publisher and would more or less sustain itself. Piracy may not dissapear, but reducing prices would certainly lessen it. If little Joe down the street could spend a week's allowance on the latest pok-ee-men game rather than a month's allowance, game buying would become just as much as a pasttime for kids as game playing is. Companies should endorse this oppurtunity to net compulsive buyers. I'd fall for it for sure - and love it all the same!
I think publishers have an opertunity to bypass the chain and offer thier titles for a lower price. I have purchased software directly from ubi before, but it wasnt near wholesale price, it was at msrp.
Publishers have an opertunity to offer it at a lower price and still make as much money as they do from wholesale. A lower price also means a likelyhood to sell more copies. A publisher selling software direct to the consumer at near or slightly aboce wholesale is a win win situation for publisers.
In America we are imprisoned by our fear of them.
An current example here in Oz: telstra supplies broadband services to smaller ISP's and telco's, but also sells it under its own brand. Telstra recently dropped their own retail broadband price to below their wholesale prices, gaining the ire of the ACCC (australian competition comission) and getting a lot of their retailers angry.
Now, telstra, being a goverment monopoly has a lot of power and so far has withstood the torrent of complaint. But imagine a game-publisher and EB, with a different balance of power and influence. You do not want to get EB upset at you for seriously undercutting them... It would be the first and last time you'd deal with them and any other upset retailer.
Even ignoring the inventory and sales maintenance issues involved with acting as an online retail outlet, competing with dedicated retailers you supply isn't always the bestlong-term approach for a game-design company. Stick with what you know.
click-clack, front and back. I'm not moving this car otherwise.
Valve's software Steam look likes it will be the first real attempt by publishers to sell their products themselfs. I wonder how other publishers will react to this? Will they get on board with Steam if they can get it to work correctly? If so they can really take a bite out of the Wal-Marts of the world.
They still will have to sell their games in stores and it might get tricky with the large chains they might even refuse to give publishers access to their shelfs.
http://www.steampowered.com
Looking at the numbers used in the presentation, they had had a net profit of $740,200 on sales of $3,130,200 or a return on slaes of 23.64%! That is huge especially since had sales of just 90,000 units. Now this is just one product but they qouted a great selling game of 900,000 units. I am willing to bet that the profit margin for those products are even greater that 23.64%.
The point is that if the profit margins are so large for good games spend more time making them instead of trying to rush crap out the door.
To give an idea for profit margins, lets take Wal-Mart, Net Income 8.039 Billion on Revenues of 246.525 Billion for a return on Sales of 3.26%. I know it is not the same industry but in a competitive industry this is a typical number. A number of companies would just drool over getting a return on sales of >23% so it is not like that this is a truly competitive industry.
The example shows the development costs as $600k, plus licencing fees, which leads me to believe this is quick+easy conversion, not a brand new original title.
Take a small to medium sized dev team - 8 programmers, 10 artists, 1 designer, 1 project manager, 1 audio guy. Give them 18 months to take a game from concept to finished product. Even with a modest average salary of $35k, you're looking at over $1.1m for wages alone. Add in equipment costs, software licences, non-dev staff, QA staff, office rental, insurance, utilities, and so on, and you're looking at much higher figures for development costs. At this point, you're going to be looking at much higher than 90k sales required to return a profit.
Looking at his costs for the publisher, and having some experience with this myself, his costs seem WAY too high. How can the unit cost be $27.95? I understand the high price if you include the cost of development, but he's not including that. The publisher cost should be MUCH lower. I just finished a title on a cartridge myself, and even counting the higher material costs of the cartridge, packaging, licensing fees, and royalties, our unit cost is about $9, nothing close to $27.95. I've never heard of a game having a $27.95 unit cost.