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

[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.

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.

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.