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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."
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!
The problem then is that you no longer have the point of sale presentation. A big part of the battle along the entire chain is getting the game on store shelves and in front of people. Anyone who has ever had to redo any part of their game to qualify for a Teen rating and, qed, the shelves of Walmart knows what I'm talking about. The wholesalers and retailers provide a service: they take something that comes in a few large shipments, sort it, manages it, finds buyers for it, ships it by region, and present it at thousands of locations for millions of people to peruse, buy, steal, return, and generally abuse.
Direct downloading would be a step in the right direction (and downloading through Bittorrent would be even better), but that economic model is well known... It's called shareware, and despite some high quality releases it tends to produce riches far below what would be attainable through traditional retail channels. If a player can't hold the box, can't feel it in his or her hands, it is much more difficult to convince them to pull out their credit card.
The manufacturer could also sell boxes to the public. However, you would still need to do basically all of the above... Ship to regional distribution centers around the US, manage the product, run a call center to interact with buyers, take returns... Aforementioned lower total sales aside, you still have the entire warehousing cost and much of the customer relations to deal with. You might manage to cut your total retail (equivalent) expenditure in half by storing your product in less expensive real estate, but you have to tack on an additional $5 for shipping. So, in essence, you have done nothing but bought the inventory control and customer relations side at the expense of the ability to aggregate the cost of selling the game with other games in a large pipeline.
Personally I want to see more direct downloads being used as a sales model, but I just don't see that happening any time soon. Having a physical thing in your hand is too tempting for the player, and broadband penetration is still too shallow. Plus, the model won't work for consoles unless a publisher were to design the console specifically around it. For more examples of the future as envisioned here, see Steam, and The Phantom.
The ______ Agenda
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 Software, the developer of Half-Life, is trying to do just that with Steam. Basically when you buy any future Valve games, they'll come with a content-delivery program: Steam. This means you're going to Valve's portal, if you will, every single time you go to play online. I imagine it must be a huge logistics problem, but they did hire Bram Cohen (the BitTorrent guy)
This is Valve's perfect target for eyeballs, and they know it. For example, after their newest Counter-strike expansion pack released, I went to go play Half-Life online and got an ad for their new game, that I could download instantly. And 99% of the profit would goes to Valve. Smart.
But this has been covered before: here and here. Read up more if you'd like, I think it's pretty interesting. While this probably won't spell the doom of EB Games quite yet, I do agree with the parent that there is some market inefficency in the current system.
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.