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

Cutting out the middleman

[Profane MuthaFucka]

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.

Re:Cutting out the middleman

[An El Haqq]

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.

That $15 pays for shelf space, advertisement through store flyers, customer assistance, and other publicity. If a company sells directly to customers it has to figure out how to get eyeballs on the product. It also has to employ direct sales associates and manage individualized (as opposed to cheaper bulk) shipping. While some companies do sell directly to customers (in addition to retail channels), such as the EA Store, their prices are not particularly competitive. Perhaps this is due to the extra costs associated with direct distribution.

Thinking back to the shareware companies in the early 1990s (id software in particular), word of mouth got games into the hands of people, but once the opportunity arose, successful titles like Doom were sucking up shelf space wherever they could. Even today, direct downloads are likely to be offered as an option along side retail-based purchase. You can even get WinZip in a box these days.

So, I suppose my point is that the $15 pays for quite a bit of service, and that the service is apparently useful for moving the product (otherwise, why wouldn't id, 3DRealms, etc. just keep up with the direct marketing angle and avoid brick & morter completely?).

Re:Cutting out the middleman

[obeythefist]

No, no, no, no, no. Never outsource marketing or sales ever.

I do not want my mailbox full of "Buy cheap xanax herbal daikatana doom3" thank you very much.

Re:Cutting out the middleman

[Teddy Beartuzzi]

While some companies do sell directly to customers (in addition to retail channels), such as the EA Store [ea.com], their prices are not particularly competitive.

That's because they're intentionally trying *not* to compete with their distributors. Don't want to piss off your partners.

In order to undercut them, they'd have to be willing to give up the retail channel forever.

Re:Cutting out the middleman

[cgenman]

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.

Re:Cutting out the middleman

[mandalayx]

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.

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.

Re:Cutting out the middleman

[guybrush876]

I don't think you can completely rule out the middleman, but you can surely given pay less. Considering that Music CD's, Movies DVD's and even books come out with a price tag between $10 to $25, I'm sure the middleman takes a lot less, and considering the service they provide is the same, games, without taking in to account the other costs, should be at least $10 cheaper.

Re:Cutting out the middleman

[Anonymous Coward]

"I don't think you can completely rule out the middleman, but you can surely given pay less. Considering that Music CD's, Movies DVD's and even books come out with a price tag between $10 to $25, I'm sure the middleman takes a lot less, and considering the service they provide is the same, games, without taking in to account the other costs, should be at least $10 cheaper."

It is all about economies of scale and the lack of them compared to cd's and movies. It is also a case for the mega publishers like EA ugh.

p diddt quotes?

[sheiqck]

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I am a very...

[Anonymous Coward]

modern major general..

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.

Re:Finally a financial view

[Anonymous Coward]

As someone in the real world, it pisses me off when academics (particularly undergrads) think they have a clue wtf goes on outside of the ivory tower. Now go back to dropping spherical elephants in a vacuum.

Eliminate the middleman!

[Nomihn0]

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!

Bypass the chain

[Datasage]

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.

Re:Bypass the chain

[obeythefist]

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?

Re:Bypass the chain

[Herkum01]

I always find it funny that companies, in general, are willing to hype up the "new economy" in which everything goes online but then you have whole industries that will not even consider trying to sell most of their product online.

Bypass the chain.. and feel its wrath

[Roman_(ajvvs)]

There's also the issue that undercutting your retailers doesn't make them very happy...

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.

Re:Bypass the chain.. and feel its wrath

[obeythefist]

Yes, but the Telstra example is different for two reasons:

Firstly, ISPs (and everyone else) despise Telstra already. Telstra is a monopoly however, so it's just like having God and the Devil in the same body. Just bend over and take it, resellers.

Of course the ACCC is working to put Telstra back in thier place, and Telstra really is afraid of the ACCC in general, so you need to ask why Telstra would do such a thing. Here's our second point. Telstra has seen the writing on the wall with regards to telephone over IP. Telstra makes $400-700M a year out of their telecommunications business. The more of that business that leaks to IP communications that they don't control, the more of that delicious multimillion dollar pie they lose in the long run. So the risk of a $1M/day fine for Telstra is bad, but losing that $700M moneytree is much, much worse.

Either way things will undoubtedly get better for the consumer once Telstra is in court with ACCC having a new one reamed for them.

Re:Bypass the chain.. and feel its wrath

[Roman_(ajvvs)]

I'm aware the whole telstra thing involves a different set of companies, but the same business economic foundations apply. It kind of proves my point, though doesn't it? Telstra can make bucketloads more money distributing its games- er.. I mean its broadband services than reselling it to others. It just so happens in this case Telstra is the 800kg gorilla*. Game publishing companies like EA are large primates in their own right. If anyone was to successfully cut out the retailers from the chain, they'd have to be big enough to say "we don't mind pissing you off, because it makes us more money". There aren't many game designers who can survive without that income and support their own distribution.

I'd like to see a public torrent-style network, either subscription based or "pay-per-download", where game developers can easily disseminate their games and still have that "retail" feel. Download and play now, and get the printed stuff later. You wouldn't necessarily be paying for the download but instead for the immediate start in playing after purchase. Having a scheme like that wouldn't necessarily eliminate standard retail outlet distribution, but could augment it with something value-added or significantly different as to not overtly undercut a retailer.

*I'll take my gorilla over your 800 pound gorilla any day. :)

Is Valve attempting to cutout the middle man?

[Lucius Septimius Sev]

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

They did excellent

[Anonymous Coward]

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.

Figures seem a bit optimistic

[Scorchio]

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.

Re:Figures seem a bit optimistic

[Radius9]

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).

His costs are too high

[Radius9]

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.