"Death of the £50m game?"
Thursday, 1st January 1970 at 1:00 am
Triple-A margins are under pressure, Frontier founder says
We’ve just had the excellent film BAFTA and Oscars awards, with a healthy spread of high budget epic films and low budget hits.
Over the last few years film production budgets have ranged from $100k to $300m (Avatar), and on average they make good money for those creating them. Games revenues are comparable, and a list of the top grossing entertainment events include a comparable number of games and films.
At the same time we hear rumours about the death of the $50m game. EA made a loss for yet another quarter (is that ten in a row now?), and is blaming big console game budgets for this failure. We also hear that Activision might be in a similar position if it weren’t for Blizzard, and its perhaps wounded cash cow, the Call of Duty series. Along with this there is the closure of numerous in-house studios (particularly in the UK).
So why is there such a difference in their financial success?
A CLEAR DIFFERENCE
Some differences are clear; most films spend a long time in the script/pre-production stage, and many are canned at this inexpensive stage. Few are canned after filming starts. Even less successful films have a long revenue tail beyond the theatrical release. After a month or so, DVD and rental/online revenue starts (and they don’t suffer pre-owned as they police their ‘not for rental or resale’ requirement – with a separate ‘for rental’ version). Then later they earn again from the TV revenue. This tail can last decades for the more successful film – with a new round of sales as a new medium, like Blu-ray, comes along.
Film publishers get a roughly equivalent share of the box office takings on average (40-to-45 per cent after deducting box office share and residuals) as the publisher does of a new shrink-wrapped game.
Added to that, many films have already come close to break-even before their first box office receipt, because of product placement income. In addition, films are usually funded and bonded externally – and in most territories this is done tax-efficiently so the risk becomes attractive – leaving little risk to the publisher.
With a typical $50m shrink-wrapped ‘core gamer’ title, perhaps $20m is spent on development, $15m on marketing and $15m on cost of goods, and this doesn’t include the large overhead of many publishers.
All this before a single penny is earned back. Within two or three weeks of release pre-owned re-sales will ravage new sales, destroying the long ‘tail’. Retailers already take a big cut of the retail price for new games, meaning with all these factors considered, break-even can occur at 1.5m units without online (which can already halve the break-even level).
So few would argue against the fact that our model is broken, but we have an opportunity to change it. The upfront ‘cost of goods’ exposure will ease as we move to online distribution, but what about the revenue streams?
Controversially, part of the problem is one of control. If you want product placement, external funding and bonding, then once development is started there must be a commitment to publish. Product placement and external funding have to be agreed long in advance, and this is not practical if a publisher insists on retaining the right to stop development; something that happens a lot in our industry.
Though this desire is for understandable reasons (if there is a belief that revenues will not cover marketing and cost of goods, or if the publisher does not have the funds, or because of anticipated competition), the knock-on effects – the inability to use external funding or product placement – are often not considered.
Games are better suited for product placement and advertising than film – in games it can be done regionally and contemporaneously as the graphics are rendered on-the-fly, and since a smaller proportion of the $50m is spent on development – because of the cost of goods – it could be even more significant than in film, when you consider the same $50m game will now cost $35m up-front to develop online.
Online offers us many other options too. We should think creatively about whether we might have an equivalent to the box office. For much-anticipated games perhaps an exclusive online-only premium (charged by time) multiplayer play could be made available before the full release of the game? Building a game over time, starting with the minimal playable is perhaps another way of doing this – as already happens online in the ‘social’ space.
We have an opportunity to shape expectations for big budget games online. Yes, retailers are prematurely killing off shrink-wrapped games by gouging most of the revenue, but ‘shelf space’ is much less of an issue online, so the long tail becomes more viable even without these changes.
With these changes, the $50m game makes a lot more sense. So the $50m game is not dead, but perhaps it is taking a nap. Roll on online.
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