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Aug 3 / Ozymandias

Fun Times: Economics of Game Development and Publishing

Wrote a post earlier discussing an interview with Michael Russell of Ritual Entertainment. In that interview he talked about software piracy and some of the effects it has had upon his company.


I’ve had some good conversations with Michael recently, and he pointed me to new post he wrote which I thought was worth sharing. In it he discusses some the economics of PC game development and publishing from a developer’s perspective, or as he puts it: “why does it take $15 million for a PC game with a $2 million development cost to break even?” While I can’t confirm any numbers (which are PC-centric), I will state that console publishing numbers are often worse, and that the overall description of where the money goes is accurate. It’s pretty sobering.


As you read, take into account the fact that the vast majority (think 98%+) of games simply don’t make money. The only reason the industry continues is that the hits at the top of the pyramid make up for all those losses. This is one of the reasons so many industry folks feel a great deal of angst about the effects of piracy and the rising cost of development. We wonder how many of those edge-case titles that just barely lost money might have been profitable otherwise. It’s one of those things we’ll never really know since it’s pretty much impossible to accurately quantify the effect of piracy, but it does make one wonder.


Makes me think there might be a post about ESD, or Electronic Software Distribution, and what the ramifications of that might be down the road (say 10 years from now). Let me mull it over a bit….

Related posts:

  1. Humanizing Video Game Piracy
  2. Break with the Past, Bright New Future: Windows Phone Application Development Platform built on XNA and Silverlight
  3. NPD: Game Software sales up 15% in June
  4. PS3 Blu-Ray and Game Discs being Ripped
  5. The Problem with Game Journalism

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  • OSpazX

    While (estimated) numbers are like statistics…they can be played in different ways to give different results, there is something I didnt see mentioned.

    The retailer takes his/her portion.  10-30% of the retail price.  And that’s just one of the many hidden costs involved.

    There’s no doubt, that what may "cost" $2m to develop, costs alot more to produce.  But, is it just me who noticed that the majoritory of the additional costs is advertising.  In print media.  In store brochures.  In store merchandising.  Of course, your subscription to your gamer magazines that is costing $1 or $2 per month is part of the reason for those advertising costs.

    It’s like a no win-no win situation.

  • imaginedbug

    I recently heard on TV that a game’s costs of €60 breaks down into:

    10 – production cost

    10 – developer

    10 – distributor

    10 – shipping etc.

    10 – store

    10 – taxes (19% Value Added Tax over here)

    Sounds about right according to the article, correct?

    But what’s the approximate cost break-down of XBLA titles? 800 MP for a game like Street Fighter breaks down to…?

  • Aedrin

    "A standard marketing campaign (TV, websites, magazine ads, etc.) runs about $4.5 million. It may seem like a lot, but if nobody knows about your name, nobody is going to buy it. $4.5 million is about average nowadays for a marketing budget."

    I don’t care about seeing ads everywhere. I don’t read game magazines or read game websites, yet I end up buying games. Why? Because they develop a good game and interest me with either a live demo in the store or great packaging.

    "training copies for employees so they’ll actually know about us"

    I’ve never seen knowledgable game staff in any store (general retail as well as game stores) besides the people who are game fanatics themself (besides PS2 fanboys so that they actually know other games besides NFL 2192). So I’m curious what is meant by "training copies".

    "space on end-caps"

    To me it doesn’t matter if a game is on an end-cap or not, it is the same game. And usually games on the end-caps are ones no one cares about but had enough marketing budget to put it there anyway (usually games like those from EA).

    I think Micheal Russel doesn’t understand that people already know piracy is theft. But comparing piracy to stealing a DVD, etc. is apples and oranges.

  • http://www.romsteady.net Michael Russell

    Aedrin:

    The mass market does care about ads.  A game with zero advertising simply will not sell.  I’m sure you can think back to games that were completely atrocious, but sold well because of their marketing.  While it is an unfortunate truth that the best games will not always sell the most, not advertising simply increases the gap.

    As for training copies, there are some titles where not-for-resale copies are provided to retail chains for distribution to stores.  These copies are used for demo kiosks and title training.  However, the number of these copies being sent out has been being reduced over the years.

    Again, you may not care about endcaps, but it does help significantly for impulse shoppers.

    Given the sheer inanity of the piracy-backing comments that I’ve been seeing lately, I’ve had it with discussing piracy for now.

  • imaginedbug

    Andre, do you know if the security features of the 360 have a positive impact on the willingness of developers to create such expensive games for the 360 compared to taking the risk on other platforms that are known to be "compromised"?

  • WiNG

    "The mass market does care about ads.  A game with zero advertising simply will not sell"

    Not to sound picky, but God of War did pretty well (although its surely just an exception)

  • http://www.romsteady.net Michael Russell

    Last I had heard, "God of War" had an advertising budget that was in the low eight-digits.

    Of course, selling 500,000 units at full price (before the first tiered price drop) tends to help offset that slightly.

  • An Optimist

    This is why digital distribution can’t get here fast enough. There will be nothing healthier for the industry than to cut out the entire distribution pipeline. Costs go down, profits go up,  studios are willing and able to take more risks – everyone wins (except maybe retail stores and publishers). Plus, I think things like downloadable demos (like on Live! today) help cut down on traditional advertising costs and are far more effective, to boot. One only has to look at the margins and the incredible content coming down the pipe for XBLA to see what a difference digital distribution can make. Now imagine if we could get that for full size games, too! The aforementioned Live demos have already proven that the file sizes are not a significant hinderance – get it out there already!

  • WiNG

    "Last I had heard, "God of War" had an advertising budget that was in the low eight-digits.

    Of course, selling 500,000 units at full price (before the first tiered price drop) tends to help offset that slightly."

    It still had absolutely no publicity in quite a few european (due banning) countries in which it became a top selling title, that is what I was referring to, sorry if I wasnt more clear

  • WiNG

    By the way, since we have experts around, Gears of War Vs PS3 on November the 12th: GoW to be sacrified in vain, PS3 with a starting struggle or too much hype for both getting their expected sales?

  • WiNG

    November the 17th, sorry

  • Ozymandias

    Re: "Andre, do you know if the security features of the 360 have a positive impact on the willingness of developers to create such expensive games for the 360 compared to taking the risk on other platforms that are known to be "compromised"?

    I think it’s fair to say our partners expect us to work hard to protect their IP, but I think they expect the same of Sony, Nintendo, and any other platform provider. So it’s a bit of an even wash – ie, it’s a cost of doing business.

  • Aedrin

    "These copies are used for demo kiosks and title training."

    Thanks for the clarification.

    I didn’t think they’d actually get some sort of "training" on new titles. 80% of the time when I ask someone about a game, they will not have a clue or try to sell you the game by telling pure lies (I suppose that was my fault for asking an older woman at a Gamestop about a title).

    And I understand that the masses simply buy what is on TV. It is just sad, considering that 90% of the games I buy I enjoy because I inform myself and don’t get it because it’s version 2010 of the game.

    That’s another thing I don’t understand, how do people keep buying all those Football/Icehockey/etc. titles that EA ‘produces’?

    I understand your point of view about piracy. I just think that people don’t see it as serious because 1) there is too big of a disconnect between the retailer and the product 2) it has been done so much that it has become "normal" 3) the sheer lack of quality games (and music+movies for that matter) makes buying all your games just too expensive.

    I also just wanted to point out that I actually don’t pirate games..

  • bean

    It sounds like developers, well actually publishers, need to do a better job on the business side of things.

    There have to be less expensive and more rewarding ways to do business.

    1.  Why doesn’t Xbox Live become a game purchasing point-of-sale with a complete library of all of the system’s software – not necessarily for download because the HD is too small for that, but perhaps you could download the first two levels while the game is being shipped and have the save game transfer?

    This could lower the amount needed for marketing by at least half.  If game developers knew that they would have an online market that their game would NEVER go off, then they’d probably reduce their budgets for inserts and shelf-space at game stores.

    There would of course be additional warehousing and shipping costs, but Microsoft should cover that because they are the game’s retailer.

    2.  4 million for production costs?  That is just freaking ridiculous.  Someone needs to look closely at this and lower that $10/DVD and box down to $2 to $5.  I can’t believe that this is done here in the U.S.  My guess is that publishers probably do it themselves and since the numbers are all invented internally, they estimate the cost at about $10/unit when it is actually much, much lower than that.  I’ve seen $25 intricate toys made in China using incredibly intricate equipment that cost their companies around $2 in labor, materials, and licensing fees and construction and maintenance of the equipment.  $10 is either price-gouging by the publisher or incredibly poor business.

    3.  There is something very wrong when development and design of a project is less than 15% of a project’s actual budget.  Movie studios sometimes make movies like this. . .  they are called independent movies and they do them for  prestige with an expectation of losing money.  

    This leads me to beleive, again, that the developer/publisher relationship with game creation is completely messed up.

    It’s like being a sharecropper where the Master gets free rein in cooking the books, and maintaining the status quo to maximize profits.

    Publishers want to make money, and they must make money somewhere.  My guess is that they have several inventive ways to "make money".  I bet the publishers all have marketing departments and that a large amount of the "marketing fee" is paid to the publisher for their in-house work.

  • RaZoRsharp1987

    I think the only way to combat piracy is to either: make a game give an excellent "woooo i got this – i feel proud of myself" customer satisfaction rating or lower the price to get more units sold.

    For the satisfaction part, limited edition metal cases and content is a very good way to ensure this.

    In terms of price i can only think of getting retailers a lower cut of the profits or getting publishers to universally lower RRPs while keeping their cut. This is probably more difficult for pc games but if microsoft gets a royalty for every xbox 360 game sold its can force a lower RRP. After all its not like Shipping and Factory-Line Producing games is eating too much of the money pie.

    In reality i cant see any remance of game piracy industry over here in the UK honestly – the copy protection works. Piracy has all moved toward Backup DVD movies and Key Unlocked software rather than games. Nevermind the fact that pc gamers tend to buy one game that lasts half a year, and budget pc games that yeild a low income because current harware cant handle the newest fully priced games.

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