Are AAA Studios DOA?

Another year of the game industry has been marked by lower profits and studio closings. Today's post examines the problems facing AAA development and what could be done.

When we look at development studios, there are three categories that we can group them into: Indies, middle tier and AAA studios. Over the last decade, the move to digital has aided Indies and middle tier developers, while AAA has been feeling the burn.

With reports of losses and lower quality titles going around the larger development houses, we need to ask: What is going on with AAA development? 

The Preconception of AAA Studios :

Dead Space 3, originally posted from PCgamer.com

When we talk about the differences between the different studios, there are preconceptions based on the quality of the work that comes through.

A consumer, who buys an indie game, doesn't expect graphic fidelity on par with looking out their window. And at the same time, someone buying an AAA title expects a bug free experience, wrapped up in amazing design and graphics.

In all consumer industries, the quality of the product should be reflected in the price. That is one of the main reasons why people are willing to spend more at 5 star restaurants as they expect a premium product for that price.

However, gamers have been seeing a drop of quality and uniqueness among the AAA studios.  The number of First Person Shooters and online games has increased, with more titles being developed with multiplayer options and DLC.

Even established brands are being affected, with Resident Evil 6 designed more as an action co-op game then a horror title. Then there was a report about Dead Space 3 was going to go the same route with adding co-op to a horror designed game.

Now it's safe to assume that the developers and publishers are reading fan reactions and seeing the criticisms levied at them. But what has happened is that the culture of the industry has changed and AAA studios are not adjusting.

The Cost of Development:

There is a basic rule of any major business: The company has to keep making a profit to stay alive. If you have a day where you're not making money, then you are doing even worse then you may realize.

The reason has to do with operating cost. Every day that your business is running there are daily costs that have to be factored in. Electricity, rent, hourly wages and more are just some of the costs that come up every day.

When you have profit lost or no productivity one day, you are even worse off than before due to operating costs. This is why companies based around selling are so aggressive about daily sales, as they need to cover the operating costs to make a profit.

While a video game studio is considered a consumer product industry, their profit structure is different from other industries while having the same cost. Every day that a game studio is working on a title, is a day where they are losing money due to operating costs. But at the same time, they are not making money every day to cover that.

Instead, the studio expects a massive pay out once the game is released to cover all the expenses and of course, make a profit.  Because of the profit structure, it forces larger development studios into the publisher-developer relationship.

A normal studio does not have the hundreds of thousands or even millions of dollars of savings to cover the cost of development in preparation for that payday.

Publishers have a major say in the development of AAA titles, as if the developer doesn't keep the publisher happy, then they won't have the funding needed to finish the game. This also means that publishers are more adverse to risky or niche titles that may not sell enough to cover the cost of making the game.

There are two scenarios that no publisher wants to see with their titles:

While a fan would consider the 2nd scenario a win, to a publisher they are both failures.

This is part of the reason for the homogenizing of AAA game design. When one publisher sees the success of a game like Call of Duty, Gears of War or World of Warcraft, they want the same results with their series. And that means spending millions of dollars on developing a game with similar design that may or may not make that money back.

But there is one area that has become a huge boon to Indies and gamers and a nightmare to AAA studios: Sales.

The Pricing Paradox:

With the growth of digital distribution from sites like Steam, Amazon and many more, has allowed both designers and the online retailers to introduce sales. Before, retail chains like Best Buy and GameStop had the final say on what a game would cost.

The rate that games have become discounted, has caused many gamers to no longer buy games at release, or what would be considered full retail ($60.)

In other industries, products retain their value due to the quality of the brand and the product itself. For example, I will never be able to buy a brand new Lamborghini for $1000 no matter how long I wait.

skyrim, originally posted on G4TV.com

Likewise, car companies know that they can't make every car like a Lexus or Mercedes as it would just over saturate the market with high end cars.

That's why cars are made and priced at different levels, obviously the more money you spend means a higher quality. But at the same time, lower priced cars still have a standard of quality to them that lets them retain their price.

But in the video game industry, specifically AAA studios, there is no differing value. A $60 price tag can be attached to anything from Halo, to Dead Space or Playstation All Stars Battle Royale. But as we're seeing, the $60 price doesn't come with the same standard of quality, as evident by the review scores games are getting.

There is just more value these days in Indie and mid tier developers then there are in AAA studios. The smaller studios can get away with more out there and unique games, as their costs are smaller compared to the larger studios. The smaller cost means that they can price their games lower and more affordable and still make money.

One of the reasons why we've seen a decline in single player AAA titles is the issue of value. A typical single player game is usually designed around 8 to 10 hours of gameplay (not counting side quests and extra content.) But even with that low number of playtime, they are still being priced at $60 new.

Instead of lowering the price and to create more value, designers have been adding more multiplayer and DLC gameplay to extend the play-time. What ends up happening is that instead of getting an amazing single-player game or an amazing multiplayer game, we get an average single player with a possible above average multiplayer.

Last year my two most played games were The Binding of Isaac and Dungeons of Dredmor. Between the two I've spent over 100 hours combined playing them. Buying them both cost me a total of $10 at launch. Now if I could get all that value out of two $5 games, why should I spend $60 on an AAA title?

The answer sadly, is that I and most gamers shouldn't. There are very few games being released at $60 that are actually worth that amount in terms of player value. Only a few studios like Bethesda, Bio-Ware and Rockstar for example makes games that match the price tag.

These games are either huge in scope and production values (Skyrim, Red Dead Redemption), or a massive story carried across multiple games (Mass Effect). But that doesn't stop every publisher from pricing their game at full retail and saturating the market.

Now you may ask yourself:" Then why don't publishers just lower the retail price?” The problem is that they financially don't have the option.

As game engines become more powerful, so does the cost of using them. Art, music, voice acting, graphics are all additional costs to making a title. What ends up happening is that publishers have no choice but to release games at $60, if they want to have any chance of recouping the development cost.

Besides the cost of game development and maintaining a studio, there are also advertisement costs. AAA titles are commonly seen on TV, websites and magazines. And the cost can be huge.

But a middle tier and Indie developers have a lower development cost allowing them to price their titles cheaper and still turn a profit. This lower cost gives the developers wiggle room when it comes to sales that the big developers don't have.

Darksiders 2, originally posted on G4TV.com

Helping matters further is that most indie and mid tier developers don't spend much on advertisements and rely on word of mouth and positive reviews to drive sales.

Both don't cost the designers any money and can be in some cases just as powerful (if not more so) as advertisements.

The Impact of Sales:

Because the price of a game has less relation to the quality of the title, we don't see the variety of pricing when it comes to video games. Because of that, the concept of sales is the same for every video game as a way to get a title to the price point of the spender. The lower the price of a video game, the more people will be interested in buying it.

Raise your hand if you ever bought a $2 game for no other reason then it was cheap. We all have an impulse buy threshold when it comes to games, for me its $10 or less.

The closer a game gets to our perceived value raises the chance that we're going to buy it. That doesn't matter if a game was originally priced at $15 or $60, but what it is priced at now.

Because of the lower development cost, it allows smaller developers the ability to make money with their games on sale. If a game was released for $15, dropping that down to $5 will still help them thanks to the increase in sales and lower cost of development.

But if a $60 game that cost several millions to make is dropped to $5, the developers have a very hard time recouping the cost. Recently THQ announced problems with Darksiders 2. Even though the game was reviewed positively and sold around 1 million copies, THQ needs it to sell at least another million for them to break even.

Dead Space is also feeling the burn, as EA reported a few months ago that in order for the series to be considered viable, the next game will have to sell at least 5 million copies for them to justify continuing the series.

Something Has To Give:

AAA development is in dire straits, if publishers are asking such huge numbers to continue smaller series. Publishers are looking at advertisements, DLC and other monetization as a way of improving profits. It's hard to tell from the outside at what point greed is taking over necessity.

As more studios are closed and publishers are reporting losses, something has to change. AAA studios are still operating the same way as they did in the last decade. But with the rise of cheaper, more accessible titles and the move to digital, the marketplace has changed.

It has become very difficult to justify spending $60 on any game these days, but that is still the standard retail price publishers are asking. And with the rise of monetization, gamers are getting less for the same amount of money.

With the next wave of consoles fast approaching, it can only mean further raising the cost of AAA development. This is not good for the publishers who have to invest the money and the gamers who are still feeling the effects of the economy.

We need to ask how much longer large studios can sustain the costs and development under a publisher-developer relationship. Further complicating matters is the rise of Kickstarter this year, allowing developers to fund a game of their choosing without a publisher's intervention.

My prediction is that either publishers will have to find a way to cut costs and hopefully lower the price barrier of games, or they will have to switch focus to smaller budget titles. The last decade could be summed up with the description "the rise of the digital market", if publishers aren't careful this decade could become “the crash of AAA development."

- Josh Bycer

Reprinted from my site: Game-Wisdom