Forbes on game costs

 Posted by (Visited 9216 times)  Game talk
Dec 202006
 

So Forbes has an article on why games cost so much breaking down where your $60 goes when you buy a game. (Be sure to click on the graph at the bottom of the article). But there’s a lot of stuff off with this analysis.

To start with, you don’t take 20% on every box sold for the programming cost. Once you have made the game, the costs are known and fixed; you recoup, and then this chunk turns into publisher and developer profit (mostly publisher). Same goes for the art costs and so on. In fact, in general, this graph tends to mix the categories of costs in this way.

It also ignores the fact that this isn’t really how the business works. There’s a portfolio of titles; not all will have the same mix. You rely on tentpole titles to carry the losers — which are most games made, really. And major tentpole titles often have far higher programming and art costs.

It’s also curious that this doesn’t actually give the story as regards how developers get paid…

  17 Responses to “Forbes on game costs”

  1. Raph points us to the Forbes article on breakdown of costs of ‘next gen titles’ (using Gears of War as the case study). As he points out, there’s a gross oversimplification here. All of these percentages(for an individual title, as well as over a portfolio of titles) dial up/down over the lifetime of a title, as does teh ASP of the title. ALso, there’s a tradeoff of risk/reward that

  2. Discussion: Joystiq, CyberNet Technology News, TechSpot, The Tech Report, Raph’s Website, Xbox 360 Fanboy and digg

  3. More arguments for digital distrobution and open sourced platforms and engines.

    “Then the console maker, retailer and marketers each get a cut. Add in manufacturing and management costs, and depending on the type of game, a license fee.”

    Fixed for (general, Im not an expert) comparative purposes:

    “Then the record label, retailer and marketers each get a cut. Add in studio time and management costs, and depending on the type of artist, a license fee.”

    Macroeconomically DD of music proved that attempts to control market share by controling the platform of distrobution fail when broadband penitration reaches a critical mass, for non-atomized media. What enables distruption is removing the barriers to creation (YouTube) and distrobution (iTunes).

    Meanwhile RIP Tower Records…..failure to adapt and evolve causes exstinction

    I sense another Container vs Content arugment on the horizon…

  4. Developers get paid?!

    😉

  5. Digital distribution has problems too…

    As soon as you deal with digital distribution you’ll find that people who are just “browsing” end up costing a lot of money. A typical shareware program has only 1-2 people pay for every 100 downloads. Online services have both bandwidth and customer-support costs.

    People don’t tend to pay as much for insubstantial (or small) things, like downloaded software. They’ll pay more if it comes with a CD and manual.

    Piracy becomes more of an issue too, although a subscription service has fewer problems with piracy.

    With digital distribution, people pay before they play. How many games have you bought that you quickly shelved? 25%-50% of them? Online, you’d never have paid for such lemons, and the developer would never have gotten the income either.

    Only 100(?) games appear on a game store shelf at any time. That means that if your game gets on the shelf, it only has 99 competitors. With digital distribution, there are 10K+ competitors listed on many game sites. (So the big challenge is to be listed on the main page.)

  6. Interesting points on the digi distrib model. However, it’s becoming quite clear (at least here in the UK) that the early adopters, including Valve’s Steam, are out to make a profit on the rush to get into downloads. Let me give you some examples of how the system appears to work here in the UK, with GBP quoted for clarity:

    Call of Duty 2 in Game (the UK “EB”): £9.99

    Call of Duty 2 on Steam $39.95 / £20.00….that’s a 100% price hike.

    Battlefield 2142 from Play.com: £17.99

    Battlefield 2142 from EA Downloader: $34.99 / £34.99…also a 100% price hike.

    Now that’s an interesting figure. Theoretically, the boxed price and the price in dollars are almost exactly the same. But do EA allow UK gamers to take advantage of the good exchange rate? No, they charge what they think the market will bear and yet again impose a 100% price hike.

    Now the average gamer tends to be fairly well educated and doesn’t take much convincing that paying twice as much to download a game isn’t worthwhile. And we’re expected to believe that downloading is for OUR convenience? Pull the other one!!

  7. I keep hearing this figure of $5 million as the minimum number you need to even start making a small game that will be a MMORPG. Is that true?

  8. Indies will see and use DD as an enablers. More established companies who already have retail distribution will be tempted to use it as a money-maker.

    As for the breakup of the cost of the box, Raph is right. The portfolio model is the right one to use as the box cost it doesn’t even include the backend allocations and money flows between titles. For example, losses on one title is tax writeoff for another.

    VCs and movie production/publishing biz know model well as they use it in their business. As cost increases, the risk increases too. So all the content businesses move into the portfolio model to spread the risk like all good mom-and-pop investors should do 🙂

    And as for Mike’s concern, if games are created with 25-50 hours of content in mind, then yeah the competition, piracy, and distribution issues are valid. However, if you “release rapidly and often” say scenario by scenario, then the DD system will benefit both the players and the creators. It then leverages on the “Long Tail” and “Wisdom of the Crowds” and other Web 2.0 principles and subsequent results.

    As a creater, I would rather bootstrap my way with the likes Counterstike or Battlefields and refine my scenarios as I get real player feedback. Dropping $10m into developing an AAA title to find that it sucked in the marketplace after the fact sucks big time 🙁

  9. Ok, here’s some fun questions.

    1) How much does this cost model shift if you’re making PC games? I’d assume this waives the BS fee that console makers get to charge people making the games, but how much extra programming is required to support all possible PC configurations?

    2) How much leeway would indie developers have with console systems? I can understand what people are suggesting about digital download, but in my mind, the best money would be made if you could point Wii’s, X-boxes and PS3’s at independant download sites, bypassing the “company store”. In other words, how long will it be before we have an open market for downloadable console games? And which console manufacturer seems like they would be most likely to take that step first?

    The more I read about retail, the more convinced I am that companies should be constantly researching ways to avoid it entirely.

  10. I think people tend to pay more for physical things because non-physical things haven’t been around that long, so its a relatively new idea. I think people will get over this as the entire world becomes more ensconced with virtuality.

    At the risk of sound naive, if publishers can see a clear pattern in the history of portfolio performance, where most games are stinkers, why don’t publisher’s distribute their risk across more highly innovative titles, knowing they’ll get a similar hit/miss ratio as if they stuck with generic titles, but with a higher exponent for when hits do occur?

    I think digital distribution puts pressure on 3rd Party Publishers to diversify. Is that reasonable observation?

  11. @Mike

    “With digital distribution, people pay before they play. How many games have you bought that you quickly shelved? 25%-50% of them? Online, you’d never have paid for such lemons, and the developer would never have gotten the income either.”

    If I understand you correctly, then I’m getting ripped off 25-50% of the time. When supply meets or ourstrips demand in a buyer-beware vs. Free trial/low barrier scenario, FREE always wins….no opprotunity cost, elastic demand etc.

    Furthermore any business model/company that supports providing a customer a low quality product dosnt deserve my money. Call me a crazy libertarian consumer if you like….:)

    @Kevin R.

    I got no idea, I dont even pretend to understand how pricing models work in the UK. I mean you pay a lic. fee to watch TV there, OTOH you have like 7min/hour on average of advertising, whereas we have like 25/hour, I read recently. Economic studies indicate UK citizens seem to have a lower price sensativity, meaning thier more conditioned to accept higher prices (taxation) as are most EU citizens

    “If you take a walk I’ll tax your feet…”~Beatles kind of thing

    @magicback

    “As a creater, I would rather bootstrap my way with the likes Counterstike or Battlefields and refine my scenarios as I get real player feedback. Dropping $10m into developing an AAA title to find that it sucked in the marketplace after the fact sucks big time”

    @10m per title, I can only imagine 🙁

  12. Frank (magicback) wrote:

    “It then leverages on the “Long Tail” and “Wisdom of the Crowds” and other Web 2.0 principles and subsequent results”

    Oooh! Oooh! BINGO! What do i win?

    This is just like management meetings.

  13. Alan:

    Nevertheless, it irks a great many of us that despite almost identical sales taxes a product which costs $34.99 will inevitably when released in the UK cost £34.99. Given that $34.99 is aproximately £16.08 at today’s rates, we’re getting ripped off.

  14. @Cael

    The only thing I can think of would be related to import duties on entertainment SW, if thats the case then the importer is going to pass on the cost. I’m not an expert by any means but you know whats fascinating is the whole games dsitrobution model world wide. I read a thread somewhere, the person was from Ireland, I believe the going rate for a PS3 was the equivalent of 968 USD! Yikes!

  15. It still amazes me that games cost the same today as they did over 20 years ago. In 1984, $45 would have gotten you Ultima III. Today, $45 gets you Titan Quest.

  16. […] binarystream (binarystream) wrote,@ 2007-01-10 15:05:00      Entry tags:tech Digital Downloads So, I had a… discussion with a friend. He doesn’t agree with me, which I don’t mind. Anyway…I have an Xbox 360. So far, I’m enjoying the games. What really surprised me is how much I like the dashboard interface. From it, you can play games, listen to music, and watch movies. It’s a slick and easy-to-use interface. The dashboard has a lot of potential. One idea: I think Microsoft should consider allowing users to buy or rent games, and I don’t mean the arcade games. This is where my friend and I disagree: I think that digitally downloaded (DD) games should be sold for a discount.Back in December, a number of sites commented on an article published in Forbes: Why Gears Of War Costs $60. This is their cost breakdown summary:Art Design: 25%Programming and Engineering: 20%Retail: 20%Console Owner Fee: 7%Marketing: 7%Market Development Fund: 5%Manufacturing: 5%Licensing: 5%Publisher Profit: 1.5%Distributor: 1.5%Corporate Costs: 0.3%Hardware Development: 0.05% Brass tacks: publishers make about $1 from every game sold. It takes a lot of games sold before one becomes profitable. Ralph Koster also had some good comments on this article. In particular, about how most publishers depend on tentpole, or very profitable, games to make up for the losers.Back to the argument: A digitally downloaded (DD) game would immediately save the publisher money by avoiding manufacturing costs. For 100k units sold that adds up to $300k. Without the retailer markup or manufacturing cost, a DD game could be discounted by as much as 25%, selling for $45 instead of $60. However, it doesn’t make sense to discount by that much. Instead, if the game was sold for $50 (about a 17% discount), an addition $5 in profit could be split between Microsoft and the publisher. Let’s just assume that they split it 50/50. So, for 100k units sold the publisher would receive $250k.I also believe a discounted DD game would probably sell more units, though I have no idea how many. Gears of War, for instance, has already sold 1 million units. Let’s use that for a wild-ass guess. Assume 10% of buyers would download, and that we’d get only a 1% boost in sales due to the discount. So, for 1.1M games sold there would be 110k downloads. This would mean the publisher would make almost $1.6M instead of $1.1M, an increase of $500k. Rentals could be done in a similar way; the download would simply expire after a certain time or number of plays. Microsoft does this with movies, so why not with games?This is all a moot point, however, since Microsoft doesn’t allow games to be digitally downloaded and might never allow it. Also, there is no obligation to discount the game at all. The publisher and Microsoft might just decide to take as much profit as they can. Which is the stance my friend took.I personally believe that a discounted DD game would result in more profit, but it’s just my guess. So far, I haven’t seen any digital download provider, such as Steam, discount games this much. A good idea or not? I guess we’ll see.(Post a new comment) […]

  17. […] Forbes article on breakdown of costs of ‘next gen titles’ (using Gears of War as the case study).As he points out, there’s a gross oversimplification here. All of these percentages(for an individual title, as well […]

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