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."

Comments

Finally a financial view

[Anonymous Coward]

As an economics major interested in gaming, theres nothing that annoys me more than a bunch of ranting online trolls complaining about X game not having Y features when a game is rushed out. People need to remember that video games is a business like almost everything else. Developers aren't spending time coding and making fancy graphics out of their parent's garages for the fun of it. Producers don't pay magazines, websites, and the occasional TV broadcasting channel money to air some advertisement.

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.