Wednesday, September 5, 2012

Do Used Game Sales Hurt the Gaming Industry?

Last week, Apprentice Casey posted an insightful article about the state of the used games market and how we can use that existing market to help further fund developers. Though this point of view is no less valid than the one I am about to present, I feel it is necessary to provide an alternate viewpoint on the situation. I believe that providing developers with a cut of used game sales acts as a bandage to temporarily patch a hemorrhaging wound—some game studios have grown too large to sustain themselves.

Sniper Elite V2 Headshot

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.

GameStop Bro

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?
Explore more GME Data at Wikinvest

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.

Duke Nukem Forever BustSo 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.

Supergiant Games Team

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:

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.
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