The Business of Making Games

Where Does All The Money Go?

           So, I have been hearing a lot of people talking about how the games industry is making tons of money and they don’t understand why developers are complaining so much, or why so many companies are closing down or merging with others. I keep hearing them say “we are bigger than film” and that is simply not true, here is why.

            When you buy a game at a large retailer, like Wal-Mart or GameStop, the publisher only gets about 64% of that. The cost of goods incurred by the publisher is usually around $5 per unit. Co-Op advertising costs for the game are usually around 15% of wholesale. Marketing costs are usually around 8% of wholesale. In addition, the return of goods estimated by publishers is usually around 12% of wholesale. So too break this down;

-          Shelf price = $50.00

-          Retailer (Wal-Mart/ GameStop/ Target/ etc.) keeps $18.00 = $32.00

-          Cost of goods incurred (this is to make the disk and the box) are $5.00 = $27.00

-          Co-Op Advertising cost (cardboard stands and posters in stores 15% of 32) are $4.80 = $22.20

-          Marketing costs (commercials and magazine adds 8% of 32) are $2.56 = $19.64

-          Estimated return of goods (how much we made but did not sell, 12% of 32) are $3.84 = $15.80

           This means that when you buy a game for $50.00, the publisher (people like Activision and Ubisoft) only get around $15.80; that’s only about 32%. Now the developer (the people who actually make the game like Bioware and Bungie) only get 10-15% of that, based on their contract. And that is only after the publishers made back all the money they spent on development. So let’s look at an example;

Call of Duty: Black Ops was developed by Treyarch and published by Activision and it sold 13.7 million copies in the US. It is considered one of the bestselling games of all time.

-          13.7 million times $50 would be $685M

-          Retailers keep 36% of that, so about $246.6M

-          Activision only got 32% of that, so about $219.2M

-          Activision spent $18-28M to make the game

-          Marketing and advertising is usually around twice the development costs so $36-56M

-          So Activision spent $54-84M to get the game on the shelf

-          So at $50 a game they had to sell 1.1-1.7M copy’s just to break even, before Treyarch saw anything.

-          Now Treyarch would make 10-15% of the remainder, so;

-          This means that the company that actually made the game got $13.5-24.8M of the total $685M. That’s not even enough to produce the game!!

What This Means For Us

           Therefore, because of these daunting numbers, on paper it looks like the industry is making a lot of money but in reality, we have a very thin profit margin. This means that companies now have to rely completely on the publishers being willing to fund their projects, and the publishers want to “guarantee profit.” This leads to publishers releasing fewer games, trying to sell more of them, and trying to reach a larger market. This means that the top 20 games make 80% of the industry’s revenues, while the other hundreds of titles make up the remaining 20%.

            Since the publishers are so reliant on just a few games, used game sales really hurt them. That is why they are trying so hard to prevent them and why SONY sued GameStop over it. Now I do not think there is anything inherently wrong with selling used games, but if it is a game that just came out in the last couple of months, then that severely hurts the overall profits of both the publisher and the developer, reducing their willingness to make another one of the genre or series.

            Looking at the huge costs, thin profit margin, and extreme risk in making games the industry has seen vary little innovation or new intellectual property in the last decade. Compared to the 90’s when it was rare for a company to release a game that had anything to do with its previously released games, today all the industry focuses on are series, franchises, and remaking older IPs. This has stagnated and is some cases reversed the progress of our industry.

How Do We Fix It?

           As you can see with the numbers I laid out above, the biggest thing that is sucking our profits is retail. If we could avoid the retailers then we would double our profits, which would make us more willing to risk making new IPs or innovative gameplay. The best I have seen is Steam’s digital download system. We can sell a game on there and avoid the retailers, cost of goods, and return of goods. So all we have is advertising and marketing, so we can sell a game on Steam for $30 and make $23 as opposed to selling in GameStop for $50 and making $16. This not only increases our profits but allows us to sell the game to the player for cheaper, Win-Win all around.

            The other huge thing that’s killing our profits is used game sales. If you buy a used game at GameStop for $30 GameStop made $30, we don’t see anything from it. That means that even though GameStop’s records say they sold 10M copies of a game, if half of them were pre-owned then we lost half of our profits right there. This is why GameStop and others like them give huge benefits for trading in games because they can turn around, sell them for marginally cheaper, and make 100% profit instead of selling a new game and making 36%.

            The video game industry is falling apart around us, they cost too much to make, everyone except for those whom make the games are making all the money, and very few games succeed. We, the gaming community, need to help reduce pre-owned game sales and help support digital downloads so that the people that make the games we love can continue to make games we love.

           If you want more information about the production side of making games, there is a great article on ZippyGamer.com; http://www.zippygamer.com/2010/03/the-costs-of-game-development-and-publishing/ or the book “Game Design Workshop: A Playcentric Approach to Creating Innovative Games” by Tracy Fullerton is very good. I hope this gave you some insight into the business of making video games and help you to realize why so many companies are struggling right now. If you have any questions, or would like me to clarify any of my points please leave a comment.