Star Citizen: A Close Look at the Cash

Recap

In my last article, Star Citizen Has a Huge Development Cost Problem, I estimated development costs by comparing it to the ambitious GTA V. In short, my best-case estimate for total development and marketing costs is $205 million, which puts the project around $55 million short of the cash it needs to complete the title as promised. Why such a high development cost figure? It comes down to scope. Between universe size, complexity, systems, and graphics, Chris Roberts has promised a tremendous title, and that doesn’t come cheap.

In this article, I’ll continue my financial analysis by estimating the current cash position, cash burn, and future sales rate for Star Citizen (SC). This will afford a rough picture of financial health and an estimate of development runway. Remember, in the first installment I was estimating total cost of marketing and development, while in this article I’m focused on cash: Once the cash runs out, things get ugly and that’s why this deserves a closer look.

Not Your Grandma’s AAA Studio

Before we dive into the details it is important to note the unique design of the Star Citizens business model. A typical AAA studio will use some combination of existing funds and investment to fund a new title. Star Citizen is instead relying on pre-sales. This means there are continuous customer service and support costs, in addition to payment processing fees, that Star Citizen must shoulder that most studios don’t.  This is one of the challenges in crowdfunding.  However, there are advantages to this too. SC has cut out the middle man saving money. Most AAAs will distribute the title through 3^rd party platforms and retailers (like Steam and GameStop) and take home a percent of sales. SC takes home almost all sales dollars, but must pay for sales and support staff.  

Starting Cash

Starting cash is the starting point for all our calculations, so it’s important to get it right. We start with the total amount Star Citizen has raised, subtract out payment processing fees (for processing credit and debit cards), Kickstarter fees on the $2 million raised on that platform, and returns. Since we don’t know exactly how many returns have been made there is some guesswork to be done here. On the low-end I calculated returns as one-tenth of one percent and ten percent on the high-end. Crunching the numbers results in a starting cash figure of $141.5 million to as high as $157.6 million. Returns are the biggest variable here.

SC Personnel Ramp

I’ll be using a rate per head to calculate out costs, but I can’t just multiply this rate times the current headcount since that headcount has been changing. Instead the headcount must be plotted and projected forward. To make matters more complicated, a lot of the available data on the headcount doesn’t include contractors, and we need to count contractors. Here’s all the headcount figures I have been able to track down:

Sources:

Using these figures, I developed low and high headcount projections. The low projection assumes SC will cut back on the number of contractors to 50, then maintain a total headcount of 390 going forward. High assumes the number of contractors will remain consistent with the peak of 135, putting total headcount at 525 going forward. Of course, if SC increases contractors, headcount would be even higher! Here’s what that projected headcount looks like for those of you that speak graph:

SC Sales

Next, we must consider future sales. Star Citizen will continue burning cash going forward, but they will also be taking in more cash in the form of sales. I used this handy tracker to pull monthly sales figures. According to this data, SC pulls in an average of about $3 million per month. I thought there might be a bump in August sales after the Gamescomm demo of Alpha 3.0, but August sales hit a record low of $2.7 million. The pessimistic scenario assumes sales decreases of 10% annually until launch. The optimistic scenario assumes sales stay about the same.

Comparables

Friends, our marathon number-fest is almost over. The last piece of this puzzle is a comparable rate per head. This rate is the amount of money, on average, a studio pays per employee. This cost includes cost of salary, employer-paid taxes, benefits, computers, office furniture, equipment, software, server hosting and more. It doesn’t actually cost this much to employ one person, but we’re taking all related studio operating costs and breaking them down per head: It’s an easier way to determine cost than figuring out every line item.

The industry standard rate is $120,000 annually per head. However, in an inefficient studio, this can go as high as double. In fact, Chris Roberts (Space Badass) claimed the cost per head on Freelancer doubled from $100,000 to $200,000, after the Microsoft buyout. Amounts on the high side really apply to large studios with big bureaucracies and a lot of existing assets and structures. Since Cloud Imperium Games started from scratch, their costs should be nowhere near the high side. In fact, they may be able to push average cost per head down if they can closely manage costs and keep everyone focused on the mission.

With that in mind, the comparable rate on the low side is $90,000 (a 25% savings over the industry standard) and on the high side I’m setting it at the industry standard of $120,000. But wait, there’s more! Remember how SC must pay customer service and support staff to handle customer transactions and issues? Well, those employees, on average, earn less than many developers and artists. They are already included in the headcount, so the average cost per head needs to be adjusted down just a bit to accommodate. After working in a sales and support force of 3% to 10% of total headcount, with a cost that is 25% to 33% less, our low headcount number moves to $87,000 and our high to $119,100.

A Hard Look at the Cash

And we’ve arrived! First and foremost is how much cash does Star Citizen have left? To answer this, I’ve factored in all the pessimistic and optimistic factors developed earlier to create two projections. On the pessimistic side, Star Citizen has negative $59 million in cash. Now obviously they can’t really have negative cash or they would be bankrupt, but remember our pessimistic projection assumes standard industry cost per head and a total headcount of 525 (includes contractors). With this we can safely say SC has a lower total headcount, is operating at a lower cost per head than the industry standard, or both.

On the optimistic side, Star citizen has $46.6 million in cash. This is the best-case scenario. The truth is SC probably has quite a bit less than this but more than zero, which is not great at this point in development. But it is still hanging in there.

Next up is runway. How much longer can SC continue development? In the pessimistic scenario they are already bankrupt, so no help there. In the optimistic scenario Star Citizen brings in just a bit more cash than ongoing development costs, meaning they increase their cash from $46.6 million (August 2017) to $51.4 million in December 2019. But let’s look at a more realistic scenario. Say headcount cost is $100,000 annually, in line with what Chris Roberts achieved with Freelancer before the Microsoft takeover. Headcount is 400 (340 employees plus 60 contractors), 5% of staff is sales and support, and sales are $2.8 million per month instead of $3 million. These are all very small changes in the model and certainly realistic. With our more realistic model available cash is only $30.9 million at the end of August and will decrease to $17.3 million in December 2019. For those of you cheering in your head, bear in mind, this is not enough to cover advertising costs for launch. Even with this much cash, it puts Star Citizen in a position of having a very poor launch. They need more.

Going Full Circle

How does this all square with my earlier conclusions when I compared SC to GTA V? Based on that comparison I predicted SC would cost at least as much to develop as GTA V, or $137 million. Add in another $68 million for marketing and that puts total cost at about $205 million. In our best-case scenario, SC has already spent about $110 million, leaving $20 to $40 million left for dev costs (some marketing/sales costs have already been incurred) if they are going to match GTA V. That would be enough for 7 to 14 months more dev time. I highly doubt that will be sufficient time to get to a release considering we still don’t have Alpha 3.0.

Let’s cut this pie another way. GTA V had upwards of 1,000 people working on it over its 5-year development, but they weren’t all working on it at once. If we use the industry standard rate of $120,000 per head, that’s only 228 equivalent full-time “heads.” Even using the best-case SC figure of $90,000 per head, yields a total headcount of 304. Why does this matter, and why do I continue to ask myself questions? Because this means Star Citizen has already exceeded the development team size of the most expensive game to date, GTA V! 5 years into Star Citizen’s development cycle, backers are preparing for the release of the Alpha. 5 years into GTA V’s development, it was released to the market. Larger dev team size and larger dev time than the most expensive game in the history of gaming, is not a good place to be unless you have a massive pile of cash, which SC doesn’t have.

No matter how you cut it, it looks like dev costs will exceed those of GTA V! If development takes just two more years, dev cost would be around $180 million on the low end. And then there is the marketing. SC still needs a few tens of millions for a big push when the game finally gets released. If we take the best-case scenario, add a meager $50 million for marketing (some marketing dollars have already been spent at this point), and assume two more years of development, we’re looking at a total cost around $230 million! Folks, this is the optimistic scenario with a ridiculously low $90,000 per head cost, that I’m not even sure is possible to achieve.

If all the stars align, they have a slim path forward to get to release without running out of cash. But alas, anyone who has managed large projects like this know that the stars never align. There are too many things that can and do go wrong, and that adds cost and time. Star Citizen needs more cash to succeed.

Matt, You’re Wrong!

I know not everyone will agree with all my assumptions or methods, and that’s ok. My primary purpose is to get backers and the dev community at large to start critically evaluating the financial health of CIG. I’m not doing this to prognosticate the end of SC so I can smugly say, “I told you so,” if it happens. I take no joy in people getting screwed on crowdfunding, and I’m tired of reading about it. If we all demand a bit more transparency in these projects, and do a little more diligence, more great games (and other projects) can come into existence.

SC is 100% funded by gamers. It is your money paying for all of this. Private company or not, CIG has promised transparency. So far, they have partially fulfilled this promise by releasing internal schedules and updates, but this does little to inform backers about how well (or poorly) their money is being spent. In the spirit of transparency, it’s time for backers to demand quarterly updates on the cash position of the company, or better yet, quarterly releases of the balance sheet. This will allow backers to stop guessing on when they will wake up to news of mass layoffs and bankruptcy. If CIG has a healthy stash of cash to continue development, this will silence the critics and assure backers there is substantial runway left to complete Star Citizen. On the other hand, if CIG is short on cash, the community can begin discussions on how it wants to proceed if failure is imminent. The community that made this game possible, deserves this much.

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A Note on financial Heresy

So the way I conducted this financial analysis is not technically correct for cash calculations. This has to do with depreciation. Our rate per head is assuming depreciated costs. We look at depreciation cost like this when we are concerned with the income statement/profitability (on an accrual basis). On the other hand, for cash, we examine cash inflows and outflows. For example, if  CIG stands up a new studio with the following costs:

The way I calculated costs takes those one-time up-front costs of computers and furniture and spreads them over their useful life. So a $2,000 computer with a 5-year useful life and no salvage value would cost $33.33 a month (straight-line depreciation). But from a cash basis that computer cost $2,000 in cash in month 1 (as soon as it was purchased) and then zero cash thereafter. The issue is I don't have a good method of determining these costs for CIG. As a result, their cash position in this analysis is over-stated, meaning they actually have even less cash in every conceivable scenario. So this shortcut actually makes Star Citizen look more viable than it is. 

Another thing I left out is subscriptions. The eagle-eyed Bruce Clark pointed this out in my last article. The reason for this is I have virtually nothing to go on as far as calculations. I'm not sure whether this is being included in the funding totals already. I don't know how many are subscribed or even have industry rates to compare to, and I don't know the trends for growth/decline in subs. If anyone has any data or relevant info on this please let me know.