Games Don't Need To Sell 1 Million Copies For Success
- Thread starter vansau
- Start date
There is a lot to be said about this. Because you don't make enough to open up a second office studio somewhere doesn't make it a flop. Total units sold is great for telling us how a title did in general, it literally means nothing on a profit making level. Sure, who wouldn't want to make more, but just because you can't buy your own island from the profits of a single thing, doesn't mean it wasn't a success.
I have a business of my own, as long as I make enough money to live and fund the next project, it was a success really. I would love to make more off of renovating a house, but there is only so much to be had, you can't get blood from a stone. I can pay my overhead, live comfortably, and then buy supplies for the next job, I'm a success. On paper and off. I would appear more successful if I had 10 crews of 10 guys doing work for me, but in the end it comes down to the same equation. I must pay my overhead, live comfortably, and have enough money for the next project(s).
Any game company works the same. Unfortunately, so many industries, including this one, borrowed success. And then your overhead is simply more, so you still have to make more. But you don't need to sell a million to be successful, unless of course your awful at resource allocation, then maybe you do. But there is a place for poor business, it's in the gutters.
I have a business of my own, as long as I make enough money to live and fund the next project, it was a success really. I would love to make more off of renovating a house, but there is only so much to be had, you can't get blood from a stone. I can pay my overhead, live comfortably, and then buy supplies for the next job, I'm a success. On paper and off. I would appear more successful if I had 10 crews of 10 guys doing work for me, but in the end it comes down to the same equation. I must pay my overhead, live comfortably, and have enough money for the next project(s).
Any game company works the same. Unfortunately, so many industries, including this one, borrowed success. And then your overhead is simply more, so you still have to make more. But you don't need to sell a million to be successful, unless of course your awful at resource allocation, then maybe you do. But there is a place for poor business, it's in the gutters.
I'm not really sure I follow your reasoning on this one. If a game costs $1 Million dollars to make, and a company get $1.1 Million in sales, it made $100,000. Now, they have made back their initial $1 Million, and unfortunately, that means they don't have much more to work with on their next project, but they recouped the cost of the initial release.ZippyDSMlee said:
Then we have to take into account long term sales of a game. Most people only track what a game does for the first month or possibly two, but the reality of it is that a game still sells for a long while after that. I personally just bought Wrath of the Lich King for the first time. I was out of WoW for a while, then I had friends who got into it, so started playing again, then when I hit 70, I needed Wrath. They don't give a crap about Wrath sales, but the game still needs to be bought in order to enjoy what Cataclysm has to offer down the road. Take into account new WoW players. Someone who was amazed by the ridiculous ad campaign of Cataclysm, but has never invested in it before, has to purchase all other expansions before they can get Cataclysm. They aren't tracking these numbers, but they are selling these products again.
Edit: Basic Math - If you spend $30 million dollars on a game (this of course includes digital production, physical production and advertising), you need to sell 500K copies at $60 each to break even. And none of this breaking it down stuff to decide who gets what. If you spent $30 Million on this game, that is all included into the initial cost of the game. If you follow my reasoning, at 500k units, you have recouped the cost of the game, and you can use it on the next project. It doesn't look good on paper though. The company is in the same spot as if it did nothing at all. But, in real terms, the company has done something. It has produced a piece of software that 500k people have bought. In the future, they want to do better, but if they did not, they are not worse off, and they have lost no money. But on paper and in terms of stock value, it hasn't done anything. In business this is undesirable, in art, this is GREAT. Haha, now people just need to decide what they think the medium is supposed to be.
Well, Frictional Games said they had a good profit with Amnesia and that game didn't sell a million copies.
(Seriously, I'm f**ing sick of ReCaptcha)
(Seriously, I'm f**ing sick of ReCaptcha)
Sgt. Dante said:Therumancer said:To be honest though, the thing is that the industry is claiming failure when they didn't have it. Granted, making a million bucks or so over costs on a twenty million dollar investment is not a huge return, but at the same time it's not a loss either. They covered all their costs, everyone involved got paid, and the producer made more money than he put in. It's a win, just not the massive success they hoped for.Sgt. Dante said:I do see what you mean and i was exaggerating the point as it seemed over simplified. Yes coke costs 10p and sells for £1 meaning 90p profit, but that speaks nothing of the other usually hidden costs and obligations to the process.vansau said:
And altough the game industry seems more and more interested in getting it's money back on a title, wouldn't you be? If you invested $100 Million in a game and ended up making $10 million profit would you see it as worth your while? (Cut off the millions if you want a more, 'indie' level budget) And a lot of companies don't see that kind of return.
As Enslaved seems to be the popular example here lets look at some numbers; (if you'll indulge me)
(x)Cost to make; Uncomfirmed, estimated between $20-30 million
Copies Sold; 460,000
(z)Price New; $60
Now hopefully y*z>x
460,000*60 = $27,600,000
So if every copy was sold at full retail it would hopefully make about $7.6Mil. however harldy a month after release it was selling for £20 here (approx $32)
So looking at the figures if a generous half sold at $60 and the other half sold at $35 (not very accurate i know but this should account roughly for the numbers that sold between these marks) then
(230,000*35)+(230,000*60) =
8,050,000 + 13,800,000 = $21,850,000 Approx
So to look at the tl;dr it made somewhere around $1.85 million profit. For a presumed $20million budget. About 8% profit on thier investment. And that's before you consider how much of the selling value the publisher actually see's, a game selling at $60 will not make the publisher $60, not even close.
Now again, to consider this from a small buisness point of veiw imagine that for every $20,000 you invested in a buisness you could make $1,850 profit. But you were limited to this amount once a year, at best. Would you consider this a successful buisness venture? Yes it's a profit, but it hardly seems worthwhile when you consider that black ops wouldn't have cost significantly more to make but has SO FAR pulled in £360 million dollars, that's over 10x the investment or 1000% compared to enslaved's 8%.
And yes that kind of sucess is limited to exceptionally few games and isn't to be expected from many titles, but whatever Modren Warfare is doing you can be damned sure that other companies in the buisness would like to do as well. And yes this can lead to stagnation in the market with too many games being released in a hurry that are too similar to the status quo and that don't innovate and whatever. But whatever game is popular will dictate the trends in gaming today. When a game does come out that can match Modren warfare's sales figures you can be damned sure that other publishers aren't going to want to chase a 8% return when there is a potential 1000% they could be making. It just doesn't make sense. They will almost alwasy go for a 'safe' option rather than risk losing out on a much higher profit margain, and i think that is probably the reason the games market seems so stagnent at the moment. In a risk/reward enviroment, especially coming out of a recession the lower the risk (whilst retaining the potential reward) the safer the investment.
Along with everything else, I think the industry is also too hung up on what other people are doing and getting. The success of a "Modern Warfare" is a good example, but as far as gaming goes you also see it with consoles. People, including those from Sony, act like the PSP is some kind of failure simply because it's not doing as well as the DS, yet it's still got millions of units out there and has been making major bank. It's pretty much an attitude where being the best, or seeing a ridiculously massive return is the only success, and anything short of that is a huge failure.
I'll also be honest in saying that I think part of the problem is that the industry's corruption is it's own undoing. Simply put the way most games are reviewed nowadays amounts to advertising. The sites/critics that are supposed to be critical of games tend to wind up singing their praises and generating hype based on the money they receive. This kind of came to a head with the whole Gerstmann/Kane and Lynch fiasco. The problem with this is that one o the biggest safeguards for the industry itself is gone. When money largely determines what people are going to say and tell you about your product, it means that nobody is going to call a turd a turd when the checks arrive. I mean nobody cares what the product is like if they are getting paid off of it, and three months after release you'll have already hyped a couple of other games and few people are going to really care or even remember what you were saying about the last games unless they REALLY follow things, and anyone who calls them on it is usually pressured right down.
I think "Enslaved" was one of those projects where I'm surprised they made money off of it, and that's probably due to the advertising. While it sounded like it might have had some interesting ideas, the basic concept seemed both contrieved and retarded. It was also trying to make a loose connection to a literary classic that has been sort of beaten into the ground over the last decade or so. I mean it was kind of "cool" when you find out that Dragonball Z's "Goku" is loosely based on the character from that novel (especially in the regular "Dragonball"), then of course you had Saiyuki which did pretty well for anime, and of course "Soul Hunter". The fandom community overlaps and most people who would be drawn to the idea have probably already seen variations on the premise up the wazoo. Heck, even David Carridine did a movie called "The Iron Circle" based on this. So basically it's drawing from a fringe source (in the western market) that has been oversaturated among those to whom it would matter, it features a pretty weak and contrived premise, some generally unappealing characters, and it's major point of discussion has been gender politics due to the whole idea of a girl forcing a guy into slavery as her personal war-mook.
The point here being that it's not innovative despite what they were trying to claim, and it was just a ridiculous mess. Many years ago, impartial reviewers and critics probably would have said "this is stupid" as it was being developed and saved them a lot of trouble. In comparison what actually happened was you had reviewers doing the usual "Oh yeaaah, I'm really looking forward to this innovative new game called "Enslaved" coming out in a few months. It just absolutly oozes awesome and style" (counts money), that did cause the thing to more than recoup it's costs, but at the same time I think whomever expected that to be a huge success was fooling themselves the whole time, and really needed to be called on it.
Basically the game industry's own profiteering and information control seems to do damage along with it helping.
Of course then again since I'm not a troll, I generally don't go around saying games under development look retarded since as one of the masses that generally isn't well received (even if that's what I think). Occasionally I think about doing it, but resist the temptation.
Okay, but, the thing is, even though the bottle costs 10 pence worth of material and is bought by a pound, it took a long time trying different flavours to figure out what is the right amount of the 10 pence worth of stuff that will taste the best. In fact, let's say it cost, say, 100 pounds to figure that out. So even though technically you make a 90 pence profit on each bottle, you'll only get your money back when you sell 100 bottles (well, if my math serves me 110 when you factor in the cost of the material). That is why people usually say that. If not, well, this is a magical bottle that you can put on the internet for virtually no cost; if any sale was a profit you could just sell it for a penny and watch yourself get rich.
You are of course talking about R&D, and that can be included in budget. Think about it in these terms: A company decides it wants to try out a new product before releasing the final product, so it puts together a team to get random groups and of people to try it out. They knew that they were going to try to put out a new brand of soda for example. So, they make a cola flavor, a cherry flavor, a lemon lime flavor, and a dog crap flavor. And they test it out to the groups to see who likes what flavor. This is kind of the equivalent to Alpha testing and is included in the budget. In video games for example, you employ a staff of people that do this, so they are included in my previous $30 million budget.The Random One said:
Because at the top, the Publishers are gauging long-term investment potential whenever they publish a title.Wicky_42 said:
In plain words, I can summarize the practice as "Not profitable enough", but in Economics, there are two separate types of profit.
"Accounting Profit" (which is what you're referring to) and "Economic Profit", which is how much money you made compared to what you could have made; in the long term it's a measurement of how well your company is performing compared to your competition.
In extreme cases (like Microsoft in the 90s) it can become a measure of how much of the market you are gaining/losing control over. This is especially noticeable in the cases for Oligopolies and Monopolies (the mainstream gaming market would definitely fall under the former category).
Let me use an older, real life gaming example.
Back in the mid to late 90s, there was this company called "Westwood". They made this little series called "Command & Conquer". They made profits; enough to continue to make more titles.
However, their economic profit was not strong enough to keep them from being bought out by EA; they were turning a profit, but EA was turning more, and they wanted to bring Westwood's profit-potential into their fold.
If you want a direct "Oranges-Oranges" comparison, then I offer up the late Sierra Entertainment as another example. Vivendi Universal picked them up around 2003 and acquired all of their intellectual properties. Today, Sierra is effectively dead, and their IPs went to Activision.
Why? "Not Profitable Enough". They got bought out, dissected, and ultimately dissolved for business reasons.
That's the mindset these investors are seeing their projects from. Once you break into the AAA publisher territory, you do not have a choice. It's "Eat or be eaten."
Ideally, developers would make enough money to self-publish (and so they would have actual control over their IP rather than having to beg their superiors into let them use something they created) but that obviously isn't the case and barring most of the smaller indie-games market, it never will be.
In my opinion, the business side of the gaming market has expanded the market, but will ultimately choke to death on its own bloat. (That's precisely the driving force behind today's Sequel/Remake-Exploitation. It's no coincidence that we're seeing knock-offs and sequels greatly outnumber new IPs.) No market can expand forever, and heads will eventually roll. Sadly, I can see 2-3 publishers owning most of the gaming market in 10 years (probably Activision-Blizzard).
Just as a final word on the article; I agree with the sentiment wholeheartedly (the 1 million unit mark is completely unreasonable; niche markets rarely hit that number even today), but at the same time I also understand the business side of things.
Good post, Atmos. Still.. Modern Warfare proves that anything can be sold in masses if you just advertise enough for it, and organise the feedback to the press in the right way. In that sense, the economic profit for games in the largest niches (fps) is not dependent on the game at all, but exclusively in the willingness of the publisher to commit resources to achieve the success they want. Case in point - MW2 has an advertisement budget that's bigger than most blockbuster movies. And it sold a lot of units, in spite of the game being pretty average as a shooter.
What it means is that games that make a steady profit is much more desirable from a business-perspective, simply because they do not require you to commit as many resources, or succeed so thoroughly with the media-operations.
Just imagine what it would take to copy MW2 again now. You can see a lot of people trying, even going so far as creating a game about invasion from North Korea, etc. But it's just not doable to do a repeat, simple as that.
So the real question is why publishers believe it's possible to churn out MW2 titles over and over again, while anything original and new means death, basically...
What it means is that games that make a steady profit is much more desirable from a business-perspective, simply because they do not require you to commit as many resources, or succeed so thoroughly with the media-operations.
Just imagine what it would take to copy MW2 again now. You can see a lot of people trying, even going so far as creating a game about invasion from North Korea, etc. But it's just not doable to do a repeat, simple as that.
So the real question is why publishers believe it's possible to churn out MW2 titles over and over again, while anything original and new means death, basically...
Only 1 problem with everything he said : The Conduit sucked balls, regardless of how many copies it sold. I bought one, then I traded it in the next day because it was so terrible. Did that count towards his sales figures? I guess, but I'd have to be out of my mind to buy the sequel.
(I mean seriously, how do you not put Local Split Screen Multiplayer in an FPS, especially one for the Wii, a console that was made for people to come over and enjoy in the SAME ROOM? I digress.)
(I mean seriously, how do you not put Local Split Screen Multiplayer in an FPS, especially one for the Wii, a console that was made for people to come over and enjoy in the SAME ROOM? I digress.)
Atmos Duality said:
But Atmos' theory on "Economic Profit" is disturbing as if the company is broken up for not making ENOUGH Profit then it will make even less profit or suffer a loss! What sense does that make? Surely that goes against the very principals of Capitalism that it must be profit based, as in follow the profit.
Atmos, you have described it but you have not explained WHY any investor would ever want this. EA made a huge loss from the way they handled Westwood, their drive to "maximise profits" did the EXACT OPPOSITE!
'"Economic Profit", which is how much money you made compared to what you could have made'
My issue is how can anyone know how much a game "could have made" that sounds like baseless speculation on the part of the executives, the market is incredibly large, complex and unpredictable. Surely the only way to know what is the maximum amount of profit you could have made is all the profit you did ACTUALLY make.
Sure a Publisher Executive can ASSUME if a game had released a few months sooner it might have made more money, but changing that variable would have compromised the game quality. This seems like asinine and simplistic logic that shows zero understanding of games that doesn't appreciate the reason people bought the games in the first place.
Sgt. Dante said:Therumancer said:FYI the 3rd party Publishers only get about $16 for every game sold, as they sell the discs to the retailers/middle-men for about $30 each but each disc has costs:Sgt. Dante said:I do see what you mean and i was exaggerating the point as it seemed over simplified. Yes coke costs 10p and sells for £1 meaning 90p profit, but that speaks nothing of the other usually hidden costs and obligations to the process.vansau said:
And altough the game industry seems more and more interested in getting it's money back on a title, wouldn't you be? If you invested $100 Million in a game and ended up making $10 million profit would you see it as worth your while? (Cut off the millions if you want a more, 'indie' level budget) And a lot of companies don't see that kind of return.
As Enslaved seems to be the popular example here lets look at some numbers; (if you'll indulge me)
(x)Cost to make; Uncomfirmed, estimated between $20-30 million
(z)Price New; $60
Now hopefully y*z>x
460,000*60 = $27,600,000
So if every copy was sold at full retail it would hopefully make about $7.6Mil. however harldy a month after release it was selling for £20 here (approx $32)
So looking at the figures if a generous half sold at $60 and the other half sold at $35 (not very accurate i know but this should account roughly for the numbers that sold between these marks) then
(230,000*35)+(230,000*60) =
8,050,000 + 13,800,000 = $21,850,000 Approx
So to look at the tl;dr it made somewhere around $1.85 million profit. For a presumed $20million budget. About 8% profit on thier investment. And that's before you consider how much of the selling value the publisher actually see's, a game selling at $60 will not make the publisher $60, not even close.
-packaging/disc
-console manufacturer licence fee
-Royalties of other licensing (music talent etc)
http://vgsales.wikia.com/wiki/Video_game_costs
So with Enslaved selling 450'000 global that works out to effective income as $7'200'000 to offset all the lump costs of development and marketing.
IF they spent $20 million on this game (I doubt) then they made a significant loss. More likely this game cost closer to $10 million, there certainly was very little spent on marketing as everyone seemed to miss it entirely and for reference Killzone 2 was made for about $20 million.
BUT it's not game-over yet as Enslaved has only been out for 4 months, there is a long tail on this and DLC and Ports to be factored. DLC on PSN/XBL sells with 30% of selling price going to Microsoft/Sony respectively, so they can actually make almost as much per DLC pack as from the full retail disc!
There is also the ongoing likelihood of a PC-port, where in store they get a much higher cut (less licensing costs) and on Steam there is the same 70%-30% profit deal, so selling the game for $30 they'll take home $21 per game. Even if it was cut down to $10 in a Steam sale (where I suspect Valve takes a smaller cut of the price) they'd be taking home a lot. Oh before you ask, PC ports are relatively cheap, studios usually do it for a couple 100k if the game has been co-developed on PS3 and 360 as then you have central assets that can be compiled for any system.
And lets not forget the most important thing that this can be used as a springboard for later works, either sequels or "from the team who made the critically acclaimed..." for another non-sequel. If everyone game up at the first hurdle no one would achieve anything. I hope Namco realises that they are more likely to have success continuing with Ninja Theory than sending this horse to the glue factory.
I get that, but not why unit number rather than total profit is the big published figure. Sure, it's great to sell a million units, but if someone's managed to sell just 200,000 at ten times your profit I'd say that they're doing better. That doesn't show if the only comparison we're having is on units shifted, rather than profits over all - and arguably over-all profits should be more important to a business.Atmos Duality said:
I apologize in advance for this titan of a post, but this is a topic I dedicate considerable thought to on a regular basis.
However, the goal of any true capitalist is not to just turn a profit, but to turn the most profit they can. Money can be described a man-made substitution for time when you think about it; we all have a limited time, so a capitalist is in a way, one who attempts to maximize their efficiency with their time (towards whatever goal they might have).
Economic Profit is concerned only with measuring (in either predictions or hindsight) how much profit you made vs what you COULD have made. It's assumed that in any given context, a capitalist investor is trying to maximize Economic Profit given his/her current circumstances.
I must preface this with the bleeding obvious: NO INVESTMENT IS RISK FREE.
Circumstances change, and economics is by no means an exact science (it's regarded as being second only to Meteorology in terms of being unpredictable).
Incentives as to why you would want to take such risks: Lets continue with the Westwood example. Now, EA obviously screwed the pooch with Westwood, but even when Westwood failed to meet expectations (and this could very well mean not turning enough profit. See: C&C Generals) EA still accomplished two things:
1) They own the rights to the name of a well-known IP/franchise. (Command & Conquer)
2) They kept other firms from possibly capitalizing on Westwood's prior success.
In the case of #1, you can later resell the rights of the IP, even though its creators are long gone. A more recent, and curious example of this is the Fallout franchise. There's a good reason that both companies want Fallout. Bethesda revived the franchise after years of Interplay committing financial suicide, but now they have one last chance to stay relevant.
Westwood is long gone, but Command & Conquer 3 came out anyway.
Now, in the event of a firm being shut down despite turning a profit. These are almost exclusively economical-profit-driven choices. Your firm might be posting strong sales now, but suppose in 2 years, PROFITS (still in the black) for that franchise suddenly plummet. What now?
1) Trends might suggest that you reinvest before you start taking losses. You look at other more promising/stable investment opportunities.
2) Stay the course and hope the market stabilizes. Enjoy your small profits.
Neither outcome is guaranteed. However, #1 always has the freedom of diversification. #2 is assumed to be playing it safe. #1 can take their business elsewhere, or fund other investments.
Then there's the factor of Marginal Benefits vs Diminishing returns. If your game series stagnates for too long, demand will eventually go down unless you have some sort of sustaining factor (high quality, variable content, network good, to name a few.)
Why? People just get bored. Hell, as a personal example, I'm royally tired of Pseudo-Realistic First Person Shooters. The rest of the market isn't, but they eventually will be.
Knowing all of that, eventually, #1 has to come up (I discuss franchise milking later). Those who take action via #1 sooner and profit more are the ones who will generate the most economic profit.
Finally, there's the well known adage that sharp rates of change and variance spook/encourage investors.
That's the economics definition, and it's one that initially seems counter-intuitive, but believe me, it's not baseless. A major portion of the competition in capitalism is in knowing when and where to invest in a market.
And you're correct in inferring that Economic profit can only be truly measured in hindsight (well, so can all profit, technically, though there are reasonable predictions that can be made with revenue streams vs costs).
Those investors that fund these mega-publishers don't want to just turn a profit, but they want to turn more profit than their competitors, lest they be bought out and ruined. If you can gain control of the market, your firm has to work less to turn maximum profits, and you get to dictate which direction the market goes.
They are motivated to force their company to succeed. If it means cutting low-yield projects to fund projects with greater potential, they probably will. It's not all conservatism; the goal of the most motivated companies are to ultimately become a monopoly and take over the market (or skirt the boundary in the case of government intervention).
Why else do most of these multi-(b/m)illionaires continuously demand more money out of their investments? Any sensible person could theoretically live very well off for decades on such fortunes. Why do they not leave the market once they've made their (b/m)illions rather than risk losing it all on one poor investment/business?
Sadly; the only answer I can provide is "Capitalism".
More topically: Some (with a superb memory) might notice that I occasionally refer to gaming publishers chasing "Golden Geese". My rather poor analogy is simply a description of these companies chasing domination over key titles/genres.
Those are just the most notable examples of Golden Geese. These sorts of titles attract investors, and motivate them. We're witnessing the slow death (and even slower rebirth via Indie-developers) of niche' markets because of this.
Why else did EA launch their Modern Warfare ripoff? Why another Medal of Honor when Call of Duty is already satisfying the market?
Because they want those returns; those mega-margins. If they can make more profit on that one game vs filling out the rest of the demand curve, they will; even if it means making investments that make no sense to the average gamer (Medal of Honor demonstrated the law of diminishing returns/market saturation in an almost textbook manner).
Sometimes it's best to stick to your guns (WoW hasn't really changed its original formula since it launched, yet it's still the biggest MMO around), and sometimes it's best to diversify. The ultimate goal is to try to make your investments work for you the best you can (not to just turn "A profit" but to turn "the most profit" you can).
Keep in mind, I'm trying to hit you with the investor/executive committee's point of view. They can take these seemingly stupid risks to establish themselves, but if they DO succeed, they will often make far more profit than if they kept with the smaller investments. Likewise, they might keep investing in the same product as long as the sales figures satisfy (again, CoD4).
The problem with incorporation at this scale is that the investors have absolutely no connection with the products they are selling or their customers. They don't have time for that; they have businesses to run.
This is why we keep seeing "safe" investments in sequels. These investors look at the sales figures and go "Well, that sold well. Make more." without considering the diminishing returns or the cost of further development.
6 years ago, I honestly believe that the publishers were small enough to own maybe 3-7 major franchises tops rather than 20-30 apiece. We saw more diversity because these Publishers were more closely associated with their product; in terms of simple math, there were fewer companies/developers to (mis/)manage.
Over these last 6 years, we have watched these publishers snatch up the rights/ownership of the majority of previously established studios, and the number of publishers has even shrank (Sierra and Midway are both gone now). It's effectively become an oligopoly at this point.
So, what makes sense to your average gamer (in terms of what they want) ceases to matter to the investor because the investor is only interested in the business side of things.
The developers and marketers act as a go-between, and that's where we get this formulaic slop from; a combination of the gamer's demands (as interpreted by marketers) with the mandate from the investors to "Do another one of those, it made a lot of money".
Put them together, and voila'. You have the explanation for today's rampant Sequel-exploitation.
*Whew* This post has gone on for far too long, but I'm hoping this is making sense.
"Economic Profit" is no theory of mine; it's a textbook definition from Economics itself; and it's more firmly rooted in Capitalism than Accounting Profit.Treblaine said:
Every investment; every single one of them has risk associated.
However, the goal of any true capitalist is not to just turn a profit, but to turn the most profit they can. Money can be described a man-made substitution for time when you think about it; we all have a limited time, so a capitalist is in a way, one who attempts to maximize their efficiency with their time (towards whatever goal they might have).
Economic Profit is concerned only with measuring (in either predictions or hindsight) how much profit you made vs what you COULD have made. It's assumed that in any given context, a capitalist investor is trying to maximize Economic Profit given his/her current circumstances.
I must preface this with the bleeding obvious: NO INVESTMENT IS RISK FREE.
Circumstances change, and economics is by no means an exact science (it's regarded as being second only to Meteorology in terms of being unpredictable).
Incentives as to why you would want to take such risks: Lets continue with the Westwood example. Now, EA obviously screwed the pooch with Westwood, but even when Westwood failed to meet expectations (and this could very well mean not turning enough profit. See: C&C Generals) EA still accomplished two things:
1) They own the rights to the name of a well-known IP/franchise. (Command & Conquer)
2) They kept other firms from possibly capitalizing on Westwood's prior success.
In the case of #1, you can later resell the rights of the IP, even though its creators are long gone. A more recent, and curious example of this is the Fallout franchise. There's a good reason that both companies want Fallout. Bethesda revived the franchise after years of Interplay committing financial suicide, but now they have one last chance to stay relevant.
Westwood is long gone, but Command & Conquer 3 came out anyway.
Now, in the event of a firm being shut down despite turning a profit. These are almost exclusively economical-profit-driven choices. Your firm might be posting strong sales now, but suppose in 2 years, PROFITS (still in the black) for that franchise suddenly plummet. What now?
1) Trends might suggest that you reinvest before you start taking losses. You look at other more promising/stable investment opportunities.
2) Stay the course and hope the market stabilizes. Enjoy your small profits.
Neither outcome is guaranteed. However, #1 always has the freedom of diversification. #2 is assumed to be playing it safe. #1 can take their business elsewhere, or fund other investments.
Then there's the factor of Marginal Benefits vs Diminishing returns. If your game series stagnates for too long, demand will eventually go down unless you have some sort of sustaining factor (high quality, variable content, network good, to name a few.)
Why? People just get bored. Hell, as a personal example, I'm royally tired of Pseudo-Realistic First Person Shooters. The rest of the market isn't, but they eventually will be.
Knowing all of that, eventually, #1 has to come up (I discuss franchise milking later). Those who take action via #1 sooner and profit more are the ones who will generate the most economic profit.
Hellgate: London showed tremendous promise and initially turned a profit, but the sales figures ultimately fell on its face. EA pulled support entirely because in their eyes, it was a sinking ship.
At the time of announcement, demand for Hellgate: London was strong.
Who was right? Was the game DOA because EA pulled their investment too soon and forced an early launch, or was the project doomed in the long run anyway due to development costs?
At the time of announcement, demand for Hellgate: London was strong.
Who was right? Was the game DOA because EA pulled their investment too soon and forced an early launch, or was the project doomed in the long run anyway due to development costs?
Finally, there's the well known adage that sharp rates of change and variance spook/encourage investors.
Ahh, but economic profit is a definition of who made the MOST. By simple logic, whoever gained the most in your specific market sets the bar (think margins, not raw numbers). If you had invested in Activision compared to EA in the last 3 years for example, you would be making economic profit.
That's the economics definition, and it's one that initially seems counter-intuitive, but believe me, it's not baseless. A major portion of the competition in capitalism is in knowing when and where to invest in a market.
And you're correct in inferring that Economic profit can only be truly measured in hindsight (well, so can all profit, technically, though there are reasonable predictions that can be made with revenue streams vs costs).
Those investors that fund these mega-publishers don't want to just turn a profit, but they want to turn more profit than their competitors, lest they be bought out and ruined. If you can gain control of the market, your firm has to work less to turn maximum profits, and you get to dictate which direction the market goes.
They are motivated to force their company to succeed. If it means cutting low-yield projects to fund projects with greater potential, they probably will. It's not all conservatism; the goal of the most motivated companies are to ultimately become a monopoly and take over the market (or skirt the boundary in the case of government intervention).
Why else do most of these multi-(b/m)illionaires continuously demand more money out of their investments? Any sensible person could theoretically live very well off for decades on such fortunes. Why do they not leave the market once they've made their (b/m)illions rather than risk losing it all on one poor investment/business?
Sadly; the only answer I can provide is "Capitalism".
As a key example: Microsoft used their massive profits in the mid-90s to buy out software companies, gut them for their name, tech, patents, and key personnel, then fire everyone else. They suffered large short term losses, but they were eliminating the competition by forcing them to start from scratch. It came to the point where the federal government had to intervene because they could practically dictate where not only the software, but also where the hardware market could go.
More topically: Some (with a superb memory) might notice that I occasionally refer to gaming publishers chasing "Golden Geese". My rather poor analogy is simply a description of these companies chasing domination over key titles/genres.
Activision has essentially released Call of Duty 4 three times now (in terms of tech, theme, and multiplayer, it's virtually the same game with minor improvements/changes between them). Why? They have their Golden Goose. Other firms want it, or want to diminish its potential lest they be driven from the market. Those are the titles that set insane returns margins; any investor worth their salt will see that and want in on it.
Nintendo has 4 globally-recognizable franchises, and they milk the sin out of them.
Blizzard has World of Warcraft, and every major MMO that has tried to come to unseat it has failed, either passing into mediocrity or slowly dying due to a lack of subscribers.
Nintendo has 4 globally-recognizable franchises, and they milk the sin out of them.
Blizzard has World of Warcraft, and every major MMO that has tried to come to unseat it has failed, either passing into mediocrity or slowly dying due to a lack of subscribers.
Those are just the most notable examples of Golden Geese. These sorts of titles attract investors, and motivate them. We're witnessing the slow death (and even slower rebirth via Indie-developers) of niche' markets because of this.
Why else did EA launch their Modern Warfare ripoff? Why another Medal of Honor when Call of Duty is already satisfying the market?
Because they want those returns; those mega-margins. If they can make more profit on that one game vs filling out the rest of the demand curve, they will; even if it means making investments that make no sense to the average gamer (Medal of Honor demonstrated the law of diminishing returns/market saturation in an almost textbook manner).
I'm curious as to how much EA actually made on Medal of Honor in terms of their marginal returns to see how it compared to Black Ops. They're in the top 5 Xbox Live games, though those numbers are certain to have diminished by now. Was it worth it for EA?
I completely agree with that statement. You describe one balance of risk vs investment, again, stressing that nothing is guaranteed.
Sometimes it's best to stick to your guns (WoW hasn't really changed its original formula since it launched, yet it's still the biggest MMO around), and sometimes it's best to diversify. The ultimate goal is to try to make your investments work for you the best you can (not to just turn "A profit" but to turn "the most profit" you can).
Keep in mind, I'm trying to hit you with the investor/executive committee's point of view. They can take these seemingly stupid risks to establish themselves, but if they DO succeed, they will often make far more profit than if they kept with the smaller investments. Likewise, they might keep investing in the same product as long as the sales figures satisfy (again, CoD4).
NOTE: The rest of this is just my personal thoughts, sans pure capitalism, since I've already addressed that.
The problem with incorporation at this scale is that the investors have absolutely no connection with the products they are selling or their customers. They don't have time for that; they have businesses to run.
This is why we keep seeing "safe" investments in sequels. These investors look at the sales figures and go "Well, that sold well. Make more." without considering the diminishing returns or the cost of further development.
6 years ago, I honestly believe that the publishers were small enough to own maybe 3-7 major franchises tops rather than 20-30 apiece. We saw more diversity because these Publishers were more closely associated with their product; in terms of simple math, there were fewer companies/developers to (mis/)manage.
Over these last 6 years, we have watched these publishers snatch up the rights/ownership of the majority of previously established studios, and the number of publishers has even shrank (Sierra and Midway are both gone now). It's effectively become an oligopoly at this point.
So, what makes sense to your average gamer (in terms of what they want) ceases to matter to the investor because the investor is only interested in the business side of things.
The developers and marketers act as a go-between, and that's where we get this formulaic slop from; a combination of the gamer's demands (as interpreted by marketers) with the mandate from the investors to "Do another one of those, it made a lot of money".
Put them together, and voila'. You have the explanation for today's rampant Sequel-exploitation.
*Whew* This post has gone on for far too long, but I'm hoping this is making sense.
*Double post for formatting purposes*
That is, Economic Profit is driven in part by by Accounting Profit. In a perfect market, you wouldn't have to worry about Economic Profit at all or your competition; there would be a flat formula for supply and demand. However, this isn't the case; in the case for video games, what your competition produces (and when) can dramatically impact your own sales.
Also, not all firms have the same cost.
By striving for economic profit, you are attempting to mitigate the effect of your competition's products by improving on them or more closely meeting the market's demands.
This is where we derive the concept of "Progress from Adversity".
Overall profits are part of economic profits. It's a direct factor.Wicky_42 said:
That is, Economic Profit is driven in part by by Accounting Profit. In a perfect market, you wouldn't have to worry about Economic Profit at all or your competition; there would be a flat formula for supply and demand. However, this isn't the case; in the case for video games, what your competition produces (and when) can dramatically impact your own sales.
Also, not all firms have the same cost.
By striving for economic profit, you are attempting to mitigate the effect of your competition's products by improving on them or more closely meeting the market's demands.
This is where we derive the concept of "Progress from Adversity".
Er no I am talking about AAA tiles sold in retail stores, the dev gets are best 30% that 60$ the retailer gets around 6-10$ the pub gets the rest. Its its a more indie game they get most of the final price.Baresark said:
So you have a game that was made for 10-30M it needs to sell 500K-1M titles (15-30M) to break even or make some money back, the more money you make the more you can expand the studio, tho pub owned studios the pub tends to get most of the money with the dev getting paid off and may have a chance to make another game or 2 before being disbanded and reformed under a new studio.
Anyway for AAA games they need to sell nearly 500K units in order to break even, the sooner you do that the better.
For smaller devs you need only a few grand up to 100K in sells to gain a profit.
The lower your over head is the less units you need to sell to break even, the sooner you break even the sooner you make a profit.
I understand what your saying, but that is not how business works. A developer either picks up a contract or creates an original IP and sells it to the publisher for a set price. So, what happens is by the time a game gets released, the developers have already been paid. All the programmers, artists, sound guys, etc., are already paid what they are paid. The development studio has been paid by the publisher. That is why when a game does excessively well there is all kinds of griping about how the publisher gets everything and devs don't get shit.... well they don't get shit because the developers signed a contract to do it for so much money. The only time this model changes is when a developer publishes it's own games. Business in this sense is all about risks. The publisher assumes the largest risk, so it reaps the most benefits.ZippyDSMlee said:
The thing about a development house being successful is this: When they create a game that is exceptional or sells really well, they look better and can charge more for their contract in the future. Also, if they have a good or great track record, they can add to the ability for a game to sell.
I guess my point is that the breakdown that a lot of people demonstrate for game development may be reality for some titles, but not all, and I would say not most. A studio is paid already for the work that has been done to get to release. That is why EA is crying the blues about revenues being down, despite having a nearly perfect track record for the year, but none of the studios that develop games for them are being axed.
Edit: This business model can be compared to the music industry. A developer is an artist, a publisher is... well a publisher. Artists sign a contract for a set amount of money, just like the developers do. They they jump through the hoops that publisher asks them to, to earn the money for the project they worked on. Then the publisher reaps the majority of benefits from the success because they have the largest portion of risk.