First off, to understand the problem and how it came about,
it’s helpful to look to other, similar mediums. Music, books, movies, and
television all have similar problems to those of the game industry. They get no
portion of used media sales, they’re subject to piracy, and the digital age has
forced them to change their business models radically in order to stay afloat.
Each is dealing with these problems differently. From online solutions like
iTunes and Steam to DRM to Netflix and Gamefly, companies are trying everything
they can to stay relevant and appealing to consumers while simultaneously
protecting their assets. But what happens when all that is not enough? When
developers of games like Dead Trigger have to radically
change their pricing and game structure based off of piracy rates, what is
a company to do? I’m sure large companies in each of these industries have had
many all-hands meetings to discuss how to increase their margin, faced with
losses quarter after quarter. In the cases of most other mediums, used item
sales are most likely not an indicator for potential profit growth. Most
retailers who support used media sales aren’t nationwide corporations wallowing
in the money they make from resales. The majority of stores who rely heavily on
used item sales are resale shops, pawn shops, or stores that are hardly
franchised. To my knowledge, there’s no major, nationwide store that everyone
knows to go to for used CDs. In fact, the only such store that comes to mind is
Half Price Books, but the novel industry seems to continue chugging along
through the digital age without having to hit up HPB for a cut of the sales. However,
video game stores do have a massive
corporate store — one huge, monolithic company that all gamers know to go to
buy, sell, and trade their used games.
It’s easy to see why publishers and developers would look to GameStop and say, “Why am I not making anything off of this?” When looking at their steady revenue increase through the economic downturn, managing to still turn a 7 billion dollar profit in 2008 and an 8.8 billion dollar profit in 2009, and realizing that developers close their doors every day due to lack of funding and sales, it’s not difficult to point the finger at them. Though GameStop’s business practices are morally questionable, and that’s an article in and of itself, it’s not solely their fault that developers and publishers are failing. As I’ve said, other industries get along just fine without used media sales, so what is different about the game industry that makes it so difficult to stay in the black?
Well, for one, though the mediums are similar, they are not
identical. In terms of investment to make a fantastic entry in any given form
of medium, gaming may be the highest. In 2010, the
average cost of making a game for a next-gen console was $18-$28 million.
And that’s up between 3 and 4 times what it was in 2005.
This figure is beaten out handily by movie studios, spending
an average of $74.8 million to $106.6 million in 2008. Movies are released
for a much lower price to the consumer since they apply to such a wide
audience, and as a result of development costs for a product that’s being
market and sold to a much narrower audience, the cost is 5-10x greater. Faced
with these numbers and the average cost of a next-gen game being $59.99, a game
must sell at least 300k copies at full price before it starts to turn a profit
for anyone. That figure is still off,
however, because that’s assuming MSRP, which is what a retailer is charging,
not what the developer or publisher is making. Though the exact numbers are
hazy, it’s safe to say that it’s difficult to turn a profit with just the game
alone.
So how do you get more money out of your product? Some
solutions are gaining popularity, especially DLC. With downloadable content, the
developer can spend much less time and effort creating new content for an
existing product and earn a presumably higher profit margin since there’s no
more discs to ship, less marketing, and less time and effort spent creating it.
Other solutions include incentivizing preorders to drive sales sooner or having
collector’s editions of a product which feature more things that cost less
effort to make, but still provide value to the consumer. So the solution to the
problem of shrinking margin is to increase how much money you can make off of a
given product, clearly, but it seems companies are doing that by increasing the
investment cost of a game. For Skyrim alone, the cost of buying the game and
first expansion pack is almost $80, with more DLC on the way.
But how is it that indie developers can still turn a profit?
How can a team of 7 individuals program, write music, create art, and market a
game like Bastion and sell
over 500,000 digital copies of their game, effectively turning a profit
while giant companies like Square-Enix have multi-quarter losses of millions of
dollars? The obvious answer here is lower development cost. To produce a game
like Final Fantasy XIII, it takes a large team of programmers, artists, people
to do compression, video sequencing, story writing, script writing, marketing,
managing, and design. That’s on top of computers for all those people, license
fees for the platforms, development consoles, and perks like healthcare, 401k,
and stock options. So it’s obvious that Square-Enix spends far more money than
Supergiant Games and must not only sell their games for a higher price, but
likely have to sell more copies of the game to start turning a noticeable
profit.
Now the wound has been fully revealed. Some development
studios have grown too large to sustain themselves with less sales. Their
margins have been eaten up by either higher investment cost to develop on a
next-gen system, or their games aren’t popular enough to meet the quotas they
need to, or world events like the economic downturn of 2008 makes sure everyone
has bad luck. The fault lies with no single entity. Some developers don’t have
enough innovation, appeal, or polish to attract customers. Some publishers deny
developers the ability to innovate. Sony and Microsoft most notably push
graphics to their limits and make sure that to have a realistic, striking game,
a large team of animators and programmers are needed to keep the visuals
looking great, and I’m sure the cost of development kits and licensing doesn’t
help either. In order to create a true AAA title in the gaming ecosystem we
have now, millions upon millions must be spent without the guarantee that your
game will be well received, or that a competitor won’t beat you to the punch.
It’s a risky business and it’s now easier than ever to point the finger at a
company like GameStop and say “You’re taking what’s mine, and I need that.”
But like I said to start this off, that’s only staving off the inevitable—rising costs in game development. Next generation’s consoles are going to have better graphics, which means more people, higher investments, higher cost to the consumer and publisher, so where does it end? Signs point to it ending here, as large, long-time players in the market post huge losses while Mom-and-Pop dev studios scoop up enough money to keep making their games. The message to developers and publishers alike is this:
But like I said to start this off, that’s only staving off the inevitable—rising costs in game development. Next generation’s consoles are going to have better graphics, which means more people, higher investments, higher cost to the consumer and publisher, so where does it end? Signs point to it ending here, as large, long-time players in the market post huge losses while Mom-and-Pop dev studios scoop up enough money to keep making their games. The message to developers and publishers alike is this:
Learn how to make
great games for a lower cost or face bankruptcy.
It’s no more simple or complicated than that, and again,
this isn’t their fault entirely. The blame doesn’t matter, but what does is the
future. Indie developers are gaining steam and an ability to connect to an
audience without all the red tape. Just like writers have found a connection to
their audience through outlets like Kindle, so too have a programmer and sprite
artist found their market with Steam and XBLA. Not every game has to be an eye-opening
emotional journey, or an interesting
spin on a market most thought dead, but they do have to be worth our time. Call of
Juarez: The Cartel was an abysmal game and the graphics alone tell me that
millions of dollars were spent churning it out. Developers and publishers alike
must get comfortable with the idea that maybe they should try something
radically new in order to get new audiences or more sales. Maybe instead of
spending a few million on making the world look realistic, develop an interesting
art style that’s still pleasing to the eye, but costs less money to
create. Or if online multiplayer for
your game doesn’t make sense, don’t continue sinking time and effort trying to
make it work. I’m not a developer and I do not have first-hand experience
making tough decisions like this, but they’re choices that must be made or
continue facing quarter after quarter of red numbers. And if it takes making
exclusive titles for the platform with the smallest up-front investment cost,
switching your distribution model, or changing game engines, so be it.
Looking to the used market for more money to continue
keeping doors open is a temporary solution for a much more deeply rooted
problem. It’s one that has grown as the market has, and it’s not going to be solved
overnight by demanding a percentage of second-hand sales. Though the cost of
making AAA titles are be high and options may seem limited as gamers expect a
certain level of quality and polish on a given system, games don’t have to be
frightening money pits. A combination of creative thinking, better planning,
and leaner execution offers a solution to this problem. Though many studios with great ideas fail,
that doesn’t mean it’s not time for a change in business as usual. Continuing
down the path of raising the cost to the user or retailer is like trying to fix
a leaky boat by throwing out water—it may help for a while, but you’ll sink
eventually.
