Some current game economics

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Nov 272017
 

Recently I was over on The Ancient Gaming Noob blog, where a discussion broke out on all the recent discussions about lootboxes, game development costs, game pricing, microtransactions, and all the rest. In particular, it was prompted by this video:

Despite the title of that video, games are indeed plenty expensive to make, and more specifically, they’re definitely too expensive to make without the revenue brought in by all this upsell stuff.

But the reasons why are complicated, and worth explaining in more detail. So I did, in comments on that blog, and the replies there suggested that I needed to make a blog post of it.

So here it is, basically a fix-up post, and not up to my usual essay standards, being as it is cobbled together from several impromptu comments. Bold text is comments I was asked or replied to.

First off, to address some of the figures in the video: cost of goods is not the same thing as cost of development. I’ll share some figures for that later on, but I think that by and large the public doesn’t really know how much games take to make.

Is it “too expensive”? Well, that’s a value judgement. We could look back at the history of studios that overextended and failed, and notice that it sure seems to be a high-risk business. But restaurants are a high-risk business too.

So question one: How many studios fail because video games are “too expensive to make” versus having a bad business plan or unrealistic expectations? (Or just a bad game?) 

There is no question that there are plenty of studios that overspend. And yes, restaurants are extremely high risk businesses. But restaurants mostly compete on fixed costs — ingredients are largely the same for everyone, and barring something weird, their prices change at the rate of inflation. Games, not so much; every year a game that is competitive costs more to make.

Data from 2005.

I did a talk back in 2005 about this. It’s here: https://www.raphkoster.com/games/presentations/moores-wall-technology-advances-and-online-game-design/ You can find graphs in there of the rise in costs for games. In short, it’s been an exponential curve for a few decades now. In 1995 it was around $2m to make a top-notch, AAA game. In 2000, it was more like $4m. In 2005, it was $12m. In 2010, $40m. In 2015, $120m or more. The biggest games are costing north of a quarter billion dollars to make. These figures, by the way, are already adjusted for inflation, and don’t include marketing money.

In terms of raw data generated — literally, the number of bytes the game takes up — we can easily see that dev teams have to generate many orders of magnitude more bytes than they used to. Voice and artwork have absolutely skyrocketed.

The result: a game like Assassin’s Creed has a staff of 1500 at seven studios in five countries.

Through it all, games mostly have sold for $60. Which used to be the equivalent of $100, because of inflation. Only today, thanks to Steam sales and the like, games actually sell on average for less than full retail.

The key thing to understand is that the public doesn’t buy B games. A game with stellar gameplay and less than state of the art graphics is generally simply left on the shelf. Yes, indie games with distinctive art have managed to break through so everyone will cite counterexamples, but looked at statistically, it’s something like 99.9% don’t. The average game on mobile makes somewhere between $0 and $100 total ever — and the typical game makes nothing. The average sales across all games on Steam is only 32,000 copies — that’s including all the hits that sell tens of millions. Metacritic scores show that you basically have to be up there at 85+ to be viable, and it’s very hard to get that without state of the art tech and visuals.

“Too expensive” isn’t a measure of just cost though, it’s a measure of risk. As costs have risen, we have seen massive consolidation across the industry. There used to be over 20 publishers of AAA games in the 90s. There also used to be dozens of third-party studios. As costs have risen, third parties have either died when they overextended trying to reach the quality bar, or they were absorbed by the larger companies. Publishers overextended by banking on major franchises, and when one didn’t hit, went away.

This cycle tends to reset only when new technology platforms come along that don’t let you do expensive productions because they don’t have the graphics horsepower. Mobile was like that, so was Flash gaming. But as soon as you can overspend on graphics, it becomes mandatory, and then the spiral starts. Early MMOs was like this — Ultima Online cost only a couple of million, Star Wars Galaxies under $20m, Sims Online and WoW north of $80m. Facebook games like Cityville cost more than UO to make! I wrote some about that in my post “An Industry Lifecycle.”

Basically, there isn’t a good business plan. There aren’t any realistic expectations. Any sane business person would say “don’t make games.” You can see this in MMOs now — where just getting 100k people subbing to something ought to make a highly satisfactory viable business… but go look at player reactions to visuals that aren’t at the absolute top end.

This is why service games — which reduce volatility and drive customer lock-in — help. And why free to play — which lowers marketing costs, hugely expands audience, eliminates price sensitivity, and removes spending ceilings — makes a difference. Bigger bets, fewer games, and try to make a service with microtransactions. It’s the only sensible way to play in the market if you have money.

If you don’t have money, the sensible thing to do is to make as many cheap small games as you can and hope one hits big and goes viral, so you have money and can switch to making a service-based game, or just keep making small ones. Just don’t switch to making a single bigger game that isn’t a service, because if it fails to hit, you’re dead. And it takes money to even make the public aware of your game. Marketing costs are huge. These days, $85m for marketing an AAA game isn’t a crazy figure. That would buy you four SWGs.

None of this is helped by the fact that the overall ecosystem has also changed a lot in many ways, which I wrote about in my post “The Financial Future of Game Developers.”

When games are cheaper to make, we get indies and creativity and explosions of awesome in the market. When games are expensive to make, we get predatory business models, sequels, and clones. People are complaining about predatory business models, sequels, and clones — so, games are too expensive. 🙂

There is just a small set of publishers who can make such titles. Why haven’t they raised the box price? Why isn’t the latest Assassin’s Creed title $99? Or $120? Or whatever? Or does the box price not matter so much when you have service revenue?

Why haven’t pubs raised prices? For one, price sensitivity. It was tried a bit, quite a few games launch at $69.99 if you recall. And of course, stuff like collector’s editions exist, which basically is a premium price for a few pack-ins that have relatively low cost of goods.

But simultaneously, publishers came around to the upsell model via free to play and microtransactions. Why cause sticker shock when you can get the money anyway via other means? If anything, expect to see sticker price drop as the pubs tilt more revenue towards the serve end of the equation. On mobile, it’s already the case that you can’t sell a game for $0.99 — literally — you have to give it away. Steam average point of sale price has fallen similarly. Discs are likely hanging on only because retail still matters for consoles. Once it’s all digital, games will mostly be free, and you’ll pay entirely through upsells and maybe subscriptions.

The question is unrelated to costs: “why do game publishers prefer microtransactions over box costs and subscriptions” and the answer is sadly: because players like P2W and many players are easily addicted to gambling.

It’s a bit more complicated than that.

Microtransactions, particularly coupled with free to play, greatly open up the available audience and the revenue potential. Here’s the thought experiment:

Someone has a price sensitivity threshold. Say they are willing to try your game for $24. If the game is $24.99, they will pass it up. If you put it on sale for $23, the price is below their threshold, and they will buy it. This is pretty standard. Lowering entry price makes more people willing to take a flyer on the product.

And the gap between $0 and $0.01 is huge — the effect of zero pricing is massively disproportionate to the price difference, because of loss aversion — we don’t want to give up any money at all, even a penny, on a high risk.

So lowering entry price pushes the audience bigger; we’re talking by a couple of orders of magnitude, potentially. Creating $200 games means that the audience that wants $60 as their price threshold isn’t going to be willing to buy even if they would shell out $200 lifetime on upsells.

But then there is the high end. It is completely, and I mean, completely, normal for people to be willing to shell out $1000 or more a year on their hobbies. They might have a one-time price sensitivity of $50 and still spend that much over a year. Think of a golfer and greens fees. They’d walk away if asked to pay $100 for a tee time, but will plunk down $50 every weekend for a year.

To use a very MMO specific example: on average, each player during the heyday of subscriptions was willing to pay more like $40 a month, not $15. We know this, because that’s how many accounts they tended to each have. (This was distorted by higher folks having dozens of accounts, but that actually reinforces my point).

If you only have point of sale revenue, then you are limited to revenue capped at the price sensitivity threshold: meaning, you multiply the fixed price times the number of people, and that is what you get. But if you offer upsells of some sort, then you can tap into the willingness of hobbyists to spend a large amount over time, even though they may not be willing to do it in large chunks. This means that the game can actually extract the full $1000 that the hobbyist was always willing to pay.

If you only do upsell microtransactions, you get a much higher revenue ceiling on average, and a revenue floor of whatever your entry price is. Your audience is capped at whatever that price point is, though; all those $23 purchasers never give you any money. Once you reach saturation of everyone willing to pay that price, your game will never grow again, unless you lower that price or find whole new markets.

If you add free to play on top of microtransactions, you get the higher revenue ceiling, plus you get the incremental revenue of all the people who are willing to pay less than the old entry price. Then you get around fifty times that many people playing for free, but as long as your cost of operation for those free people is less than what you are earning overall on average, you turn a guaranteed profit. The free people basically act as marketing for your game, as available opponents to keep it lively, etc.

If you only do free to play with no upsells, you lose your shirt, because the cost of operating will be higher than your revenue.

What about the gambling and pay to win?

OK, so far we haven’t talked about the method of microtransaction. You cited two: pay to win and gacha (the original term for loot boxes). Let’s start with the first.

Pretty much every physical sport uses pay to win. You buy a better tennis racket, better sneakers, better racecar, better golf clubs, because you think it will get you an advantage. We just don’t like it in videogames because digital in theory frees us of that unfairness. Though of course, we cheerfully buy Alienware computers and Razer gaming keyboards… ahem. Anyway, pay to win is basically one of those things that people are, shall we say, deeply contextual in their disapproval (though they will deny it until the cows come home). There are lines where it’s excessive, but defining them is hard.

Gacha, is absolutely leveraging people’s inability to predict randomness. And yes, it can easily tilt over into tapping into the same brain flaws gambling does. But we have to be careful there too, because after all games use random loot drops of various sorts all over the place. Any policies, regulations, or laws will have to be careful to draw that line in such a way that they don’t inadvertently ban Diablo or coin-op Tetris — which also features random drops on a small repeated transaction basis, as do most arcade games actually!

Several Asian nations ended up with tight regulations against gacha exploitation, but they were years ahead of the US on it. Nothing in AAA games is anywhere as egregious as Zhengtu Online was, or the stuff that hit Japan five years ago. I’m all for smart regulation here.

Gaming seems to be the only industry in existence that can get away with using the excuse of “games are expensive to make” as they figure out new ways to monetize the consumer beyond a set price point.

Actually, this is happening with all software, not just games. I have to pay a subscription to Photoshop now, I notice. Probably a consequence of Myhrvold’s Law: “Software is a gas, it expands to fill its container.”

The inclusion of multiplayer into titles that could obviously do well as a stand-alone single-player title also boggles the mind if “games are so expensive to make”. I’ve seen reports where the added cost of multiplayer is inexplicably high.

You have this backwards.

First, multiplayer anything is a new game and one that can be 2-3x as expensive to make as single-player anything, if you are doing it at AAA scale (Servers! Bandwidth! Uptimes! Matchmaking!)

Second, single player cannot drive ongoing revenue. Therefore by definition given today’s costs, they cannot “do well” in comparison to titles that can drive ongoing revenue. This is part of why you see less single player stuff getting made. It doesn’t offer a good enough return. Expect this trend to continue, with all single player stuff gradually becoming the “bonus value add” in a multiplayer-first game, getting wrapped in multiplayer trappings, etc.

The term is “opportunity cost.” Given two games that cost $10 to make, one which earns $50 and one that earns $250, which do you choose to make if you only have $10? Making the first one is equivalent to passing up $200.

I told you all that this would happen back in 2006. 🙂

I reiterated it in 2013.

It’s not that I like this world, mind you. But I think that it is important to have context when debating the games business.

  37 Responses to “Some current game economics”

  1. i feel like you are missing a trick here. and maybe the innocuous restaurant example highlights a greater underlying issue. restaurants not only face fixed costs, but they also face variable costs. variable costs being per unit/per meal. in addition their business also has a marginal cost per unit. at some point if demand is high enough, the restaurant will need to hire another chef or expand the kitchen. this is where they compete. the problem with comparing to modern, digitally distributed games, is that they are (with some exceptions?) zero marginal cost and zero variable cost. they are almost entirely fixed costs outside of servers, bandwidth, community management etc that scale with uptake. it makes perfect business sense to be priced at zero for exactly the reasons you wrote about above. the market forces involved mean if they are able to reduce the price to gain competitive advantage then they will. it seems like there is very very little stopping the drop to free in terms of market forces. perhaps the only thing inhibiting this transition is the risk of transitioning monetization models, slowness to adapt, building the knowledge required to adjust profitably, and customer backlash. i think games are just one example of the inevitable shift in capitalism as marginal cost approach zero.

  2. Well said, Raph.

    I wish I could say I pioneered freemium back in 1999 because I was smart, but it was more because I was lucky.

    I do think it’s ironic that everyone assumed “free to play = pay to win and gambling” when our first major FTP game, which has earned many times its original development costs, had no pay to win and no random lootboxes. Just optional cosmetic features. It’s not the only business model, but it is a real business model.

    I’ve worked on a number of other types of free to play games since – builders, idle games, slot machines, and others. The number one rule for a designer, I think, is “The game has to be FUN for all the people who choose never to spend a penny”. Some people don’t design that way, and it’s a costly mistake. Since the vast majority of your players won’t pay anything. And even the ones that do, the game has to start feeling fun to them BEFORE they spend anything.

  3. Jamie, games face variable costs too, the most notable of which is customer support. If demand is high, they have to grow live teams and produce more content, if they are a service.

    In fact, it’s a well-known trap for a service game to make a modest hit, which then consumes 100% of your company resources just in keeping it alive — while not earning enough money to permit the creation of a second game!

  4. Thanks for writing this.

    There’s another key point that isn’t raised because this whole issue is taken negatively, not positively. Games as a service, with an ongoing revenue stream, get improved and expanded on.

    This future can be very bright. If you love a game, and it can transform into a healthy service, you don’t have to wait for the sequel any more. Publishers know that they have to keep players engaged to keep the game growing. And they know that means ongoing good experiences for all of their community. That they have to invest back into their products and listen to their fans.

  5. I ask what I asked on TAGN: the film industry doesn’t just make superhero movies and porn. They make family dramas and child movies too, despite these are much less profitable. You answered opportunity cost. But the same opportunity costs exists in the film industry, yet some director says “hell with $2B income for making Thor 8 or Star Wars 3rd offshot part 8, I make a family drama that is filmed in 3 rooms and makes $18M profit” and there is a publisher who gives him production costs. Why no one gives money for such games? Both are entertainment industry!

    Another question: why there are no subscription-only servers of the SAME game? I mean it would cost next to nothing to set up a special server of the SAME game where everyone must pay $15/month but no one can pay more. The unique selling point of that server would be fairness. The other servers would be as is: whales slaughtering free players. But the $15/month people who now has no reason to play would play.

    The final question: I would pay $100/month for a subscription of a “fair EVE” or “fair WoT” or “fair Albion”. I’m currently not paying a SINGLE cent on games, I’m playing PUBG which is a buy-only + cosmetic microtransaction game. I’m sure I’m not alone. Why no one makes games for me? Why does the industry leave $100/month in my pocket?

  6. Worked on a few AAA titles in my time, Assassin’s Creed among them, just wanted to add that although you seem to have fixed costs in gaming, budget and everything there is such a pesky thingy called bugs – the sole biggest source of variable costs in gaming.
    Another sad truth which explains the “milking” franchises and diluting brands in the gaming industry is the responsibility to shareholders. Once you enter that arena you lose one hand and one eye just trying to keep them happy at the cost of creativity and fresh ideas.

  7. video doesn’t show up. Can you add the title of the video or a URL?

  8. Restaurants are a bad analogy because you have a realistic customer base of a 10km radius at any given time – whereas video game companies can sell from and to anywhere in the world for very little cost. A market of 10s of millions instead of 10s of thousands with a next to zero delivery cost. In 1995 I would sell a sandwich for $5 – by material costs were 35%, my labour was 20%, and my fixed costs were 20%. Now I sell that same sandwich for $8.50 BUT the % margin is the same. Because there isn’t a physical good with games it’s hard to use retail comparisons.

  9. Hi Raph,

    This was a great read. I’m the author of the video you linked, and seeing more discussion on the topic of game cost is always a great thing in my view. Ultimately, the point of the video was to show that microtransactional design is an enabling factor, not a consequence. I certainly don’t disagree that games are very expensive to make, merely that microtransactions are not the only way forward. Often in online debate the argument will be phrased such that gamers should support microtransactions because without them the industry is untenable, and that’s the position I feel is incorrect.

    From a business perspective, I certainly see why they did it, and indeed commented on this in the video as it’s a risk reduction play. Though recent issues surrounding loot boxes could in turn, depending on how quickly this goes south, turn some very high budget projects into potential failures.

    I think the only critique that would level at this piece is that I don’t agree with the point on B games, or more correctly, I don’t agree with the reasoning. To my eyes, this is predominantly a marketing issue, rather than a game quality or player enjoyment one, as B games lack the marketing budget of their Triple A cousins. While a title like Hellblade may not be used as a direct case study for future success, because it received a fair bit of free viral marketing for being a standout in a sea of brown, I do think there is a market for those titles which is currently under-served in a big way and exposure for titles gamers would love is the hardest part to come by with a small budget.

    Loved the piece and found it through folks letting me know you’d posted a piece on work I’d done. Will keep an eye here in future.

    Cheers,

    -T

  10. Interesting article.

    I was wondering if you might be able to expand more on the subject of “b games”. I’ve not really seen this issue be brought up much / at all in the context of payment models but your reasoning kind of makes sense (i.e. I can see how the lack of market for B games would lead us to where we are now).

    However, I’d like to see more reasoning around why there isn’t a market for B games.

    I had assumed that we no longer got many B games because all the studios that made B games have either dissolved due to some bad games, or more likely been swallowed up by the giants of the industry. Most of my childhood was spent playing B games, they were the normal rather than the rule. Bioware, Westwood, Bullfrog, Codemasters, hell, even modern big boys like Bethesda were still producing B games up until recently. We seemed happy with that balance between experimental gameplay and graphics and were happy to pay a premium when a genuine AAA game came out, like Ocarina of Time.

    I have often lamented the demise of the mid-tier games market. For me, they were critical in pushing the boundaries. The budgets weren’t so great that they couldn’t take risks, but were big enough that plenty of gamers saw it. It was how I saw ideas make their way from experimental indie games into AAA titles – by being “proven” by the mid-tier. As I said, I always assumed they disappear due to bankruptcy and corporate giants swallowing them up, but from the sounds of it, the consumer market just stopped enjoying them?

  11. I’d like to see more reasoning around why there isn’t a market for B games.

    Sure.

    Let’s start by defining a B game. The primary determinant is basically polish — not genre, not art style. Content volume is often a polish factor, and of course art direction. Two RPGs may well be basically equivalent but one is polished like mad and one isn’t. (BTW, your list of B game developers is full of AAA game developers!)

    In the market, two comparable RPGs might cannibalize each other’s markets, let’s say they split it 50/50. Let’s assume for the sake of the argument that this even split generates enough revenue for both to make another game (if not, they both die).

    If one spends more on polish, they start to pull buyers away from the less polished game. The polished game gets enough revenue to make another game. The less polished one does not. They die.

    In practice, polish can pay off disproportionately because the benefit accumulates over time. People are more likely to buy the second game from the brand that has a reputation for polish, etc.

    So what happens? Larger companies do indeed acquire smaller ones. And smaller ones have to reduce their budgets next time, if they got outcompeted. Which means they are sure to be outcompeted again.

    Now, in practice, making a game is a roll of the dice. So it doesn’t proceed with mathematical inexorability. Sometimes the less polished one is just more fun, and wins anyway. But precisely because it’s a roll of the dice, you need your game to make more than “enough to make one more.” The target for a studio has to be “enough in the bank to make 3 to 5 more” or else they are on the knife edge of disaster all the time. This is true for big and small studios. If Ubisoft had several major fails in a row, they too could fold.

    But it’s also true that the winner who has some extra cash can choke out competitors. Zynga, for example, spent its money buying up all the ad inventory, driving the prices up. The result was smaller shops couldn’t afford to get their ads seen. Which meant less customers discovered the game even existed. Which meant less revenue… you get the idea. The same is happening on mobile today. Every customer for a free game on mobile cost that publisher around $5 to get.

    All these dynamics (which are not different from any other market) contribute to whoever gets ahead early basically consolidating their position, unless they overspend and then have a run of bad luck. Through just standard processes, you end up with middle sized studios being “attacked” by the big guys. If a big guy doesn’t care about your genre because it’s too small, then you’re fine. But if a big guy wants in, you may well be dead. There are usually only three big guys in a market.

    You can survive by going smaller. But of course, that has its own issues. And you can survive by going to a genre that AAA doesn’t care about — either a new one, or a higher risk one. This is how we got Minecraft, PUBG, etc.

  12. I certainly don’t disagree that games are very expensive to make, merely that microtransactions are not the only way forward. Often in online debate the argument will be phrased such that gamers should support microtransactions because without them the industry is untenable, and that’s the position I feel is incorrect.

    I think the way I would phrase it is “without them the industry of games you currently buy and enjoy is untenable.”

    There are definitely version sof the industry that are tenable without microtransactions. But the games that are possible to make will be very different.

  13. Restaurants are a bad analogy because you have a realistic customer base of a 10km radius at any given time – whereas video game companies can sell from and to anywhere in the world for very little cost. A market of 10s of millions instead of 10s of thousands with a next to zero delivery cost. In 1995 I would sell a sandwich for $5 – by material costs were 35%, my labour was 20%, and my fixed costs were 20%. Now I sell that same sandwich for $8.50 BUT the % margin is the same. Because there isn’t a physical good with games it’s hard to use retail comparisons.

    Restaurants weren’t my analogy in the first place, they were the questioner’s. 🙂

    That said, it is an error to think that because there is no physical good that there are no other costs.

    First off, take 30% off the top for every storefront.

    Second, it’s inaccurate to think that there is very little cost to selling anywhere in the world. Leaving aside localization which can be tremendously expensive, the primary overseas target is China, and there are regulations there which basically demand a local partner (giant slice gets cut off right there) plus you end up with local taxes… etc. In fact, except for the truly big guys, most international deals involve local partners who take cuts.

  14. @Gevlon, the game industry makes less profitable things, too. They just don’t come from shops like EA and Ubisoft.

    I still pay a flat 10$/mo for A Tale in the Desert. Yet, there’s a decent chance that the game will go under in the next year because operating costs are too high.

  15. I ask what I asked on TAGN: the film industry doesn’t just make superhero movies and porn. They make family dramas and child movies too, despite these are much less profitable. You answered opportunity cost. But the same opportunity costs exists in the film industry, yet some director says “hell with $2B income for making Thor 8 or Star Wars 3rd offshot part 8, I make a family drama that is filmed in 3 rooms and makes $18M profit” and there is a publisher who gives him production costs. Why no one gives money for such games? Both are entertainment industry!

    As I said there, genre diversity is a much more complicated problem.

    The short answer is “creatives don’t have the power they do in Hollywood.” Those movies get made because

    a) Hollywood uses indie film as a breeding ground for new talent.

    b) Hollywood creatives are independent, not employees.

    c) Therefore deals get cut on the basis of “one for you and one for me.”

    d) Hollywood uses “prestige” as a means of marketing, and has done so since the 1930s with the Oscars. It’s in large part to attract talent. So they make prestige stuff and give talent awards to get them to do commercial work.

    e) Hollywood has way more means of monetizing old content than games do.

  16. And in this whole discussion where is the art, the creative part, or has today become more about finding out how to trick others to give you their money?

  17. It’s been a business-first world since Atari was bought by Warner, at the least.

  18. Koster – I work for a AAA as a project manager. Our games are aimed at PC and HD consoles with visuals on par with other AAA’s including Assassin’s Creed. We have an art department of over 150 people, but the rest of our teams haven’t grown much (unless you count technical artists but they are among that larger art department I already mentioned) and development costs have only gone up from ~$10 million to ~$15 million in the last 10 years (a significant increase, but one that our profits more than cover). What are the developers who you say are spending ~$120 million (not including marketing) spending their money on? I’ve played Assassin’s Creed games and I don’t see 1500 artist’s work on the game. Our art department is easily larger than every other department combined with less than 100 other employees and that includes our campus maintenance, HR, and IT departments. Even with marketing costs, we keep our budget below $50 million. Our break-even is at about 1.4 million launch sales and our market data shows that our games will sell for 3-6 million based on the IP’s popularity and the product quality – which is an excellent ROI for even this high an investment over 3 years. That’s how I see *most* AAA’s who aren’t doing loot boxes budget, so I wonder where you are getting your information – especially on risk.

    If any of this came off as hostile, I just spent the afternoon talking down an executive who read your blog and wanted us to add loot boxes. It took 3 hours and going over boring expense and sales reports when I’d rather have been at a design meeting. Please don’t spread misinformation. Be specific with your examples and share your sources.

  19. Ack. Reading that and there are some big mistakes. Our total budget for development on a single game with an ~2-3 year development is ~$50 million but most of that is development cost because our yearly cost is around around $15 million. We keep most of our marketing in free media. In any case, I am less ranty and regret the rant though I’m still very curious who is spending that much and what they are spending it on. You mentioned AC having 1500 artists, but that’s because they are a perrenial and some of those teams work on video for multiple Ubisoft products. That’s still a ridiculous amount even over a number of teams, but that isn’t the norm.

  20. Oof, not 1500 artists, 1500 STAFF total. That includes all the non-dev support that we both know is vital to getting the game made. And for a big title, there’s a TON of “piecework” where portions of the game are farmed out to teams in self-contained ways — so they aren’t on the game for the entire dev cycle, not even close. And yes, of course that sort of really high point is for an established franchise — it’s not the norm at ALL. I don’t know even know any other pubs who can pull off that kind of coordination.

    The numbers given for budgets are for the top blockbusters. Most of AAA isn’t a top blockbuster, obviously. Genre has a huge huge effect — the more content-driven the game, the more costs tend to rise. Engine re-use, a huge factor. What games are spending the top end of money? Some of the COD titles, Destiny, Disney Infinity (toys drove this ofc), GTA, Final Fantasy… the usual massive blockbuster suspects.

    That said, the curve trend is very clear. From 1985 to 2005, games multiplied the content load in bytes by 125x. Costs went up 22x. So we got 6x better at making bytes. All of those figures continue to rise: we’re getting even better at making bytes, but cost is still rising faster.

    I’m sorry that the exec tried to use this as an argument to add loot boxes. I don’t like loot boxes. 🙁 And I don’t like hearing that is wasted your afternoon. Tell that exec I said so! I think they are often unethical. Plus, as should be evident from what I described, it’s actually a long-term trap.

    That said, the risk question is very real. AAA is going to be the MOST insulated from it — risk eats away from below, not above.

    And it’s also very real that games as a service is slowly swallowing single player games too. I’m sure you have seen that too. Games as a service have implications on business models — ongoing support means ongoing revenue channels, means (these days) drift from DLC to microtransactions and thence to lootboxes for those who go down the slippery slope.

    If your studio management is holding the line — good! That’s actually the HEALTHY thing to do.

  21. First, thanks for the professional response to my belligerent rant.

    >The term is “opportunity cost.” Given two games that cost $10 to make, one which earns $50 and one that earns $250, which do you choose to make if you only have $10? Making the first one is equivalent to passing up $200.

    This is probably the biggest factor in all of this. There are AAAs out there, like us, who are making money creating single player games. The issue from a publisher standpoint is that creating and managing development studios with not only talented developers but the business acumen to function profitably is the greater challenge *behind* the challenge of profitability. For the most part, once a developer shows they can make great games on time and on budget, they’re going to continue to do so. The point being that publishers understand this and that the result is that they “only have so many bullets in their gun” and want to make as much profit as they can from every game. Opportunity cost is the argument that is pushing even profitable AAA studios into having to consider loot boxes or, at the very least, DLC season passes and aesthetic a la carte microtransactions (both of which I do not mind.)

    I’m even okay with loot boxes with a game that has a F2P model and that sells non-aesthetic loot-box items a la carte like Warframe, Marvel, and Star Trek Online because then I feel that most users are given the option to not gamble – though I don’t think I’d want to work for them and feel responsible for the stories of whales who are choosing to buy loot boxes instead of diapers and food for their kids. The $60 price-tag keeps me up at night worrying if our games are good enough to be worth that high entry price, so I even hate season passes on our games. The idea that we then need to produce DLC that will not make our customers feel cheated on top of the game just adds to this stress, guilt, and worry. My point is that my ethics about this are different as a consumer than they are as a creator.

  22. So I have helped finance several games over the years so I have seen hard data and the original assassins creed had eighty people working at ubisoft. The current one may need all that over head but I seriously doubt it. ubisoft is fighting off hostile take overs so likely that is the reason for 1500 employees that whose salaries would have to be addressed by any company attempting a hostile take over.

    The marketing of a game has to deal with reality the largest section of gamers have about forty to fifty dollars a month for a gaming budget. Most of the people in the USA make less than fifty thousand dollars a year. two thirds of those are below the poverty line due to working for minimum wage or less. phone games made a staggering amount of money because they targeted people paying less than ten dollars a month by millions of people, basically a candy bar in the check out line at the grocery store. That is the reality not a bunch of whales spending a thousand dollars a month on a game or even a thousand dollars a year.

    So example A
    10,000 people spending 1,000 dollars equals 10,000,000 dollars.

    example b
    10,000,000 people spending 2 dollars equals 20,000,000 dollars.

    So by that example I should only make two dollar games that are easy to buy by every person in the world with a smart phone. Then you realize that the same two dollar game in India costs four point five cents. The same game but different country costs a small fraction of the cost. So why sell the game in India at all? One because once development costs are paid for why not sell a digital copy for more than the cost of the bandwidth?

    So then we look at the what you get from making a game like wow verse some random phone app that sells a million copies.

    wow has fans that travel all over the world to show up conventions cosplaying the characters created by blizzard. where’s my water has fans that will buy the plushies for more than the cost of the game. wow fans if they have kids so the same. So both have merchdaizing like hollywood that makes more money to play for development costs but it really is about the look in fans eyes when they get to be part of something they themselves find special.

    That moment when you realize how many people lives are just a wee bit brighter that is why people make video games.

    The numbers can be played with until time ends but if you don’t have share holders but a company owner you have someone that can say they have a nice houses, a nice car, a nice boat, nice food and they still have money left over they can say they have enough money you don’t need to squeeze that rock any harder.

    Developers need to look at what is fun and how much it costs to make that fun and be happy with the career they have found. As long as the money coming in pays the employees bills and makes enough profit to cover for any droughts when the game direction goes in a direction other than fun to their existing fan base they should be fine if they are selling the game at twenty or forty or a hundred dollars a buy in price. They should be happy if they can develop the game they want to make and it only generates an extra ten dollars a month per customer if it pays the bills. That is not the bills of the company or corp but the bills of the people that work there.

  23. What about the Nintendo factor? Nintendo’s graphics are nice for their systems, but clearly are inferior to the other consoles, which in turn are often not as good as what you can get out of a high end PC. Their online games lack subscriptions and micro-transactions, if there’s any online multiplayer at all (not just in traditional Nintendo games like Zelda and Fire Emblem, but multiplayer ones like the Mario Party series. Couch co-op games, like the staple Mario platformers, can’t even be played online with a friend ala Playstation’s SharePlay. Their mobile titles are showing that they’re sliding a bit, but in general, is Nintendo just more fiscally/socially responsible, or is something else happening here?

  24. What gets me the most about this entire debate is the origin of the need to balance time with money in games. Gamers revolted due to the insane time requirements in a game like WoW or EQ. The industry basically answered with alternatives to the subscription model because, as we’ve seen pointed out, is that gambling addiction is basically considered no less an evil as huge grind requirements are. Gamers agreed that someones wallet should be able to offset their lack of time, and the industry moved in that direction. Gamers were fine with F2P and cosmetic fluff, and were even fine with lootboxes that contained such. This basically prefaces a question I have for Raph:

    Raph, in the context of the time versus money debate and the various monetization schemes we have seen, do you feel that game developers are making a mistake when trying to develop games where time-rich gamers are being pitted against gamers with bigger wallets?

  25. Well, to start, I think that there’s a lot about upsells that isn’t just about trading time. It wasn’t entirely true even clear back in the early MMO days. Cosmetics was always there, and it wasn’t because of time per se, just scarcity sometimes. Houses in UO sold because of scarcity, not time. I guess you could see time as a proxy for that (having to wait for an IDOC?)…

    I am also not sure that one “tries” to develop games pitting time vs wallets. It’s hard for a game NOT to do it, outside of entirely player-skill-driven games. Anything with any sort of RPGish advancement is going to develop that a bit.

    So… is it a mistake? Overall, I would prefer that money not be in the mix at all. I’d also prefer that all hidden info in the game stay hidden, but strategy guides exist nonetheless. We could call it all a mistake! 🙂

  26. I generally agree, although I know costs could be substantially less. Plus, the AAA industry has and will continue to miss major evolutions in the industry. Opportunities for smaller companies to do well.

    Why I think costs should be less is because the PC game industry has consistently lagged behind where it should be in the approaches and tools they use to solve problems. At certain points literally around a decade behind current known approaches used by other industries to solve the same set of problems.

    We also have a problem with how we structure companies, specifically startups. We are still creating companies that give little to no equity and pay sub par salaries. While it’s true some people are willing to take a pay cut to work on games, smart people don’t do that outside of significant equity. The end result is that our startups look nothing like most silicon valley startups. We don’t attract the best talent, and we aren’t really even trying to solve the hard problems that could reduce costs significantly.

    In the web industry, where granted there are a lot more people working on problems generally, we have seen evolution after evolution that has reduced the cost of content creation. But the game industry has not done the same. And if you dissect what has made other industries able to keep driving down costs, I think you find that the key things are not industry specific (within the realm of high tech generally).

    I think what we see now with the middle of the PC games industry basically not being there, is simply the lag time in catching up with better ways of producing value. It’s not entirely specific to our industry, it’s happened in other tech segments also that were in some way isolated from the mainstream.

  27. Quote: “When games are cheaper to make, we get indies and creativity and explosions of awesome in the market. When games are expensive to make, we get predatory business models, sequels, and clones. People are complaining about predatory business models, sequels, and clones — so, games are too expensive.”

    I don’t quite agree with this statement. Predatory business models are not something that are only brought up at times of production getting too expensive; history to my knowledge just doesn’t back this up, and that statement I base on the fact alone that payment models like this weren’t a problem before recent times.

    Instead of blaming these practices on games being too expensive to make, I would argue that what we’re observing is simple capitalism. Those who sell games have discovered a way to gain more profit and they’re now using it the best they can. That’s all there’s to it.

    I agree, however, that the cost does affect the amount of indies and other people that make games not solely for the purposes of profit – that I think is quite evident.

  28. > Every year a game that is competitive costs more to make.

    There’s a distinction to be made here, I think, between competing WITH another product and competing FOR an audience. So while the cost to compete with other games goes up exponentially (with quasi-resets for new platforms like you mentioned), the cost to reach an audience doesn’t behave that way. In the social-media age, that cost always approaches zero as the chance of someone recommending your game approaches 1.

    That’s how indie games, regardless of budget (or even quality/polish, really) are able to be come huge successes.

  29. Fascinating discussion. Would love to see your thoughts on that bonkers financial anomaly, Star Citizen. I know all the devs I’m friendly with love gossiping about it, and it’s incredible seeing some sort of mutant MMO being assembled without anybody with relevant MMO experience or even much of a design worked out in advance. For someone who spent so much time and effort designing game systems, it must raise a few eyebrows.

  30. Anthony, in the social media age cost to reach an ear is not trending towards zero. Those costs from an actual marketing level have been rising. It is true that things go viral with zero cost, but engineered virality is actually quite expensive to create (ask mobile or Facebook studios! Indie studios that really work social media spend enormous time and effort on it) and accidental virality is, well, an accident and can’t be counted upon. So it’s not really a strategy.

  31. None of this addresses the numbers of people who are sitting it out (not paying anything or hardly anything). People who’d pay more than they are IF they had a product they really liked.
    Yet the industry’s reported numbers are a mashup of flat numbers (playing for free) and whales (total revenues).
    People like me who have walked away are unaccounted for. And evidently out of view and consideration.
    I’d rather eat at a steak house than McD’s, happy meals be damned.

  32. Yeah, Still Waiting, your point is very valid. But the audience as a whole has grown with so many new audiences that in net it has worked out as growth. But there’s definitely specific older audiences who are less served than they used to be.

  33. Ok, Raph, so you see that. I’m sure many do. No one can say how large that un-served audience is. but one think is very likely about it. They would pay more to have games they like and aren’t full of the all the negatives.

    But I think you are missing something. It’s not just older gamers. There’s also all those players who don’t pay, but get their gaming fix in FTP games due to lack in the overall industry.
    Not all of them play FTP because they are cheap. What percentage simply don’t see what they really want?

    I understand there’s a lot of uncertainty and a company can’t build based on uncertainty.
    But there’s a market out there to provide room for a change to quality for a price.

    It’s funny how a very small percentage of gamers are mostly the only voice heard, too. Is that what folks in the industry rely on? The hardcore that beat down the competition and control the talking points? Hardcore that also seem inclined to be RMTers, by the way. A stake in the perceptions around the industry.
    Do you think that just because many gamers buy shop items, that that’s what they prefer? Or is it because that’s the way the games are and not doing so leaves them running in slow mo.

    I know there’s a huge market for the current stuff. But it’s beyond saturated. There’s another market out there waiting, and there’s no competition in that one if someone can build it with quality. .

  34. And let me say another thing. Explorers, the number one gamer “type” if I recall, are way under served. Discovery has never been served well. It’s been primarily based on quest goals. You know how much players like to discover things. Look at UO where players sought out discoveries, in rares, locations, etc. Mostly served by bugs, yet they became powerful incentives for play (yes, including for Ebay money, but earned through play all the same.)

    And the social game play that was so prevalent in those old games, replaced by buttons. There’s something wrong there. I know the problems involved, but incentives for social groups to play nice can be effective, That’s something the gaming industry seems poorly equipped to deal with but it doesn’t seem that hard to figure if the effort is made.
    Outcasting vs. social group rewards, effects, kinda like a simulation of RL where “social” comes naturally. But entirely broken in gaming.

  35. NoGuff says:
    “What gets me the most about this entire debate is the origin of the need to balance time with money in games.”

    I don’t think this has ever been a real debate. If you play on line games, you spend a lot of time doing it, and you’re doing it because it fulfills some entertainment need of yours. You are NEVER at a disadvantage to someone who spends more time, because they’re just like you. The “debate” has always been a false one, fostered by people trying to take some advantage.

    That said, Yes, I have a problem with the current environment. I grok the AAA developer’s position, they’re just delivering what will be accepted by most players. At the same time, most players want AAA games… but in the flavor that they want to see. Who’s going to be disappointed? Oh! I know! It’s the players who’s wants are outside the AAA developer’s market analysis.

    At the same time? There is no “fair.” There never was. I started playing online games in 1992, the first online RP game I played was “Dragon’s Gate.” It cost AT LEAST 6 bucks an hour to play. As the cost of bandwidth and connection dropped, the price to connect dropped. Over time, That reduced the cost per hour of that online connection. The increase of users drawn by the simple market factor of the lower price of connection drives markets to the more common denominators.

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