Cost of games, slice of the pie, and business opportunities

This is more of a biz dev(ish) post, because I want to talk through the cost of games, and use this post as a possible launching point for some other biz dev topics.

Since I think some of the industry numbers I have may not shareable, I'm going to use some public numbers, like those from Dave Thomas ("The Crispy Gamer").

Dave digs into the $60 game -- a price point I've railed against repeatedly in this blog. It's kind of an arbitrary price point, I would argue it should go down to $50 (for consumer and economics reasons), and the PC gaming side seems to "get" this, with the same newly released games routinely being available on console costing $10-20 less on the PC side.

Anyway, for purposes of discussion, I'm going to use Dave's numbers for who gets what pieces of the retail pie. Assuming a sixty-dollar game, Dave (citing Jesse Divnich over at Electronic Entertainment Design and Research) argues $12 goes to "Retail", $5 goes to "Marketing", $10 to "Cost of Goods", and $33 goes to the "Publisher", looking something like this (using my own charts and graphs):

And it probably helps to understand three quick things:

1. Each of these areas would have a breakout underneath them (e.g., "Retailer" has facilities overhead, employee salary / benefits, etc.) that defines their monetary success criteria.
2. What these categories include.
3. How this percentage breakout varies on a case-by-case basis (which is partially why the numbers bother me).

Assuming the first item is pretty self-explanatory, here's a brief description of each of the categories, and representative costs associated with them (some from Thomas, and some from me):

• Retailer: The (usually brick-and-mortar) establishment from which you buy your game -- so think of it as the money Best Buy gets when you by a $60 game.
• Marketing: Discounts, game returns, and retail cross-marketing (Toys "R" Us gift cards and exclusive action figures, etc.).
• Cost of Goods: Cost of getting the goods sold, which includes making the game disc, shipping the games to the store, translation, and anything else directly related to production, and distribution of the game package.
• Publisher: According to Thomas, "It is generally accepted that most publishers receive $30 to $35 per game sold before they run into overhead, development and marketing costs."

Now, this varies widely, and the devil is in the details.

For example, in an interview with Wired Magazine, Epic Games' Mark Rein talked about Gears of War ostensibly being cheap to make:

"We spent less than $10 million to make Gears of War. Somewhere between nine and ten million dollars. People are always saying that making next-generation games is really expensive, and we’re saying, you should license our technology."

The interesting part of this is I would argue, in this context, Epic wasn't using licensed tech. Since they're the makers of the Unreal Engine, this was basically the equivalent of using internal tech, and reduced the cost to Gears significantly, because it they didn't have to bear the license fee that an external studio would have to bear. So maybe their cost of goods was down (or at least in line with) that 17%. (Now, the "unfunded" R&D expense that went into adding features to UE for Gears would be another interesting piece of the puzzle.)

But what about marketing? I think Mark is just talking cost of development --not Microsoft's hefty marketing part of the pie.

Remember those excellent "Mad World" and "Rendezvous" prime time NFL Football commercials? Those weren't cheap in licensed content, production, or placement, I'm sure easily blowing an 8% marketing budget, and/or eating heavily into publisher Microsoft's 55%. Add to that limited editions (expensive and small-run metal cases, art books, music CDs, etc.) and promotional deals like the radio controlled Centaur Tank that shipped with special editions of the game at Best Buy, or Fallout 3's lunch box / bobblehead / making of DVD / art book, and you can see costs for each of the categories eaten away at pretty quickly.

(Quick caveat is that I own the special / limited editions of a bunch of games, including those listed above, because I'm a passionate gamer, I like to vote for good games with my consumer dollars, and as an industry guy, the "making of" DVDs alone are worth the price of admission.)

As another example, MMOs don't fit into the breakout above nicely at all (I get very frustrated with people trying to shoehorn older industry models onto newer business that frankly isn't that new).

Look at a game like Warhammer Online: Age of Reckoning. Where does the ongoing server cost, or the forum / community infrastructure and personnel overhead that is part of these games get wrapped into the above model? (Often times, "Community Management" comes out of marketing dollars, and are not well accounted for between developers and publishers.)

Exceptions aside, the numbers above give us an interesting launching point to explore return on investment (ROI) for game titles.

So, assuming the base numbers are OK (!?), and a game with a $10M overall budget, you would hit a break-even point for the publisher at an MSP of $60 ($33 publisher portion) after selling 303,030 units (303,030.3, to be exact):

But "break-even" isn't enough -- because there's no profit. If your publisher's profit target is, say, $5M, you're $5M "in the hole" when you "break even" -- and you need to move an additional ~150,ooo units (~454.5K total) to hit that profit target (and, probably, to realize developer royalties):

So, looking at a game like the recent Halo 3: ODST (and totally making up numbers), let's pretend the budget was a "mid-range" $25M -- Microsoft would need to move 757.5K units -- just to break even at the same $5M profit target. Of course, ODST moved 2.5M units in the first two weeks, so even without know their profit targets, it feels like "they did OK":

Now, I acknowledge these numbers are a little problematic, in that they're theoretical, and there's a bit of an apples-to-hand-grenades comparison of the $60 MSP price point of a title, and the $33 publisher portion of the pie placeholder I'm using.

But that's intentional, as I'm setting this up for some follow-on posts.

More later. Comment below.