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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."
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.
You'd think so, but, just as in all things, there's a reason things are the way they are.
Mostly it relates back to the console-IQ demographic of gamers, who want to buy the nice shiny things on the shelves and don't know what the internet is for apart from possibly pr0n.
Publishers find that game sales are roughly proportional to shelfspace used by thier product in EB/whatever. Publishers find that by keeping good relations with retailers, they get more shelfspace and hence more unit sales. Completely ticking off the retailers is much like suicide. Would Enter the Matrix have sold much copy if it weren't for shelfspace and paid-for 5 star reviews?
I am government man, come from the government. The government has sent me. -- G.I.R.
Being in the games industry myself, and having worked on quite a few titles, your end figures aren't too far off, but by my estimates, you're coming in a bit high. I would say on your average small to medium dev team, halve the staff and double the salary. Generally you're looking at 4-5 programmers, 4-5 artists, and a designer/project manager. The audio guy will usually be shared amongst multiple projects. Generally speaking, your staff will probably have an average salary of about $50k. For equipment costs, on a console game at least, you're looking at about $25k per development kit, so at least 1 for each programmer, plus possible 1 more. Then add in high end art machines at about $3-5k, plus art software at about $5-7k per seat, and you're looking at probably $1.2mil for an 18 month project (rounded up).