Thursday, June 05, 2008

Hit or miss dead?

Before this decade, the games market was largely "hit or miss" driven. One hit would pay for a dozen failures. The reason was that games cost less than a million dollars to make and hits made tens of millions in profits. The unpredictability of success in the market worked with this model.

Over the past dozen years the cost of making games has skyrocketed. Mass market games can cost 10-30 million dollars. While sales has grown very well, it hasn't kept pace. Even the price of a game to the consumer has remained the same in real cost.

The following chart compares the average cost of developing a mass market titles (in millions) versus industry sales (taken/projected from various sources):

The result is that the ratio of hits per titles developed needed to maintain a profit has dropped. How many $10 million failures can a hit really pay for?

If this trend continues the industry for mass market games, will no longer be sustainable. How do we avoid this?
  • Increase market size
    • We've been talking about this for years. Games that appeal to a larger audience than the core gamers. Nintendo has been doing this fairly well on the Wii. Their only limit is making enough hardware!
  • Increase prices of games
    • Not going to happen. There are too many alternatives for our market to spend their money and the rental market is already an example of the push back on prices by consumers.
  • Low cost games / online distribution
    • This model is growing slowly. It's not a short term (5-10 year) solution.
  • Reduce cost & risk of mass market games
    • This has been a main focus of developers and publishers for awhile. Unfortunately this has led to reduced quality (shorter gameplay, more derivative titles and less innovation). Outsourcing, once seen a major area of saving, turns out to not save much cost. This has also raised discussion of improved development and production methodologies such as agile.
The industry as a whole won't fail. Not as long as there is a market and demand. The only question is what the market growth will be and what the development community will look like ten years from now.


Darius Kazemi said...

Hey Clinton,

I like where you're going with this, but what does your chart actually mean? You're comparing cost in millions to sales in billions--when normalized, that "ratio" hasn't actually changed appreciably at all!

Clinton Keith said...

Hi Darius,

I don't know how you're normalizing the chart to arrive at that! The cost of making games has increased by a factor of 40 over the past 12 years. The market has grown by a factor of 4. You can't normalize an entire magnitude away...

Taking a straight ration of cost to 1996 it was 500k/4 billion which is 1/8000. Today it is 20 mil/12 billion which is 1/600. The idea is that a title has to take a far greater portion of the entire market's sales to break even.

Rob Zepeda said...

By online distribution, I assume you mean bypassing the retail channel (selling directly to consumers)as a means to saving money?

What about microtransactions? Instead of looking at a game as a closed product, developers should view their games as platforms to sell additional content/services. Just look at Rock Band and Guitar Hero. Or even Halo 3 and Call of Duty's map packs. Or World of Warcraft and all of it's expansion packs.

By keeping a game fresh and relevant, developers can gain much-needed loyalty in an industry where triple AAA titles are coming out every other week. Selling content updates seems like a natural evolution. The question becomes, can you sell enough extra content to offset the certification costs and production costs (although this would probably be relatively low)?

Clinton Keith said...

Hi Rob,

I'd include micro-transactions as well. I see this model hopefully growing over the next decade to include a significant number of episodically released games as well.

I don't think this will impact us much in the short term.