What's Killing the Video-Game Business?

[Dante]

slate.com on video game industry

 

Like pretty much every industry these days, video-game publishing is in some financial trouble. Electronic Arts, the world's largest game publisher, best known for Madden and the Sims, lost $641 million in 2008's fourth quarter. Activision-Blizzard, owners of the cash cows World of Warcraft and Call of Duty, reported losses of $72 million in the fourth quarter of 2008. (They lost $194 million the quarter before that.) THQ, the third-largest publisher in the United States, and known for lucrative licenses ranging from the Ultimate Fighting Championship to Pixar, had $192 million in losses over the holidays and is laying off 24 percent of its work force.

 

News of development-studio closings and layoffs are being reported around the world. And while publishers focus on internal cuts, many independent developers have closed outright. Such gloom, in a normally raucous industry, has set the talking heads, bloggers, and trade press to a quick conclusion: Losses and layoffs are the direct result of an economic crisis (on the premise that "things are tough all over").

 

But that idea, which makes intuitive sense, is completely at odds with recent sales numbers. In reality, video games are selling better than ever. The retailer GameStop announced sales of nearly $3 billion worth of games, hardware, and accessories during the nine weeks around the 2008 holidays—22 percent more than during Christmas 2007.

 

According to the research firm Media Control GfK, game software accounted for more than half of global packaged entertainment sales in 2008, beating DVD sales for the first time. The firm pegs game sales at $32 billion worldwide. (The U.S. market accounts for around 45 percent of the world total.) The NPD Group, which tracks sales for the industry, also reports that game software sales were up 26 percent in 2008.

 

So how can publishers lose money amid such incredible sales and record growth? The answer is simple: They're spending more than they're bringing in. Game development budgets have ballooned, and publishers are reeling because they can't keep the costs under control.

 

Games weren't always expensive to make: In the early days, a boy with an Apple II could rule the world. While there are still scads of cheaply made games on the market, all of today's big publishers employ hundreds of professional developers per game. These projects take years to complete, as each new generation of hardware allows for unprecedented advances in graphics, sound, and everything else. The greater the complexity of the game, the larger the development team. The larger the development team, the bigger the budget.

 

While industry leaders anticipated that budgets would creep higher, the shift to high-definition gaming with Microsoft's Xbox 360 and Sony's PlayStation 3 has proved to be more expensive than estimated. At a conference in the spring of 2006, then-Midway developer Cyrus Lum sounded the warning, telling his audience that game development budgets could rise as high as $15 million to $25 million for a single title—previously unheard-of averages. "We need to rethink how we're financing games," Lum concluded.

 

When a newspaper quoted this frightening view, Lum found himself in hot water with his employer for making such sensationalist comments. It turned out that Lum's prediction was too low: Midway would go on to spend between $40 million and $50 million developing This Is Vegas, an action title set for release in late 2009.

 

That figure is not unusual. Budgets for next-generation development have continued to rise steadily across the board. And while executives and technologists knew that there would be heavy initial investment costs to retool—Electronic Arts spent a record $372 million on research and development during 2008's third quarter—they expected returns on that investment, something that's so far failed to materialize.

 

Production difficulties and product delays continue a full 26 months after Sony's PlayStation 3 reached store shelves. When companies regularly spend $40 million to develop a title and contribute more to the marketing, they need to sell at least 2 million units to break even. While Halo 3 racked up pre-orders of 1.7 million copies, and Gears of War 2 has sold more than 3 million units, only a handful of titles each year do that well. Consider that Will Wright's Spore, which sold 1 million copies in its first 17 days, was supposed to be a big hit for Electronic Arts; but the development cost was so high that that internal estimates now say it will take five years—and a bunch of sequels and expansions—for the company to recoup its initial costs.

 

Rockstar's Grand Theft Auto IV, released last May, is the prime example of a blockbuster game. GTA IV sold 6 million copies during its first week, bringing in $500 million. True to form, it cost Rockstar $100 million to produce, 1,000 people worked on the project, and it took three-and-a-half years to complete. Six months later, sales began to founder—a major setback to a publisher that bet the farm on the title and predicted sales throughout 2009.

 

Despite GTA's declining returns, the initial sales numbers were so compelling that other companies are desperate to follow suit. During Electronic Arts' last quarterly call, CEO John Riccitiello explained that the company would be pursuing blockbuster hits as a primary revenue source. Perennially successful sports franchises like Madden—titles that always come out on time and on budget because the company's bottom line depends on it—have given EA a bit more wiggle room than its competitors. Riccitiello has decided to use that wiggle room to craft expensive games of exceptional quality, products that don't ship until they're deemed perfect.

 

The industry has long discussed going with this "Hollywood model," in which a few games/movies turn a profit, those hits more than covering the other losses. The analogy between the Hollywood blockbuster model and the games business falls apart, however, because of the huge difference in overhead costs. Electronic Arts steadily employs 7,400 developers. The industry standard is a $10,000 man-month, meaning the company burns through more than $74 million for development each month. The big Hollywood studios, by contrast, make movies by giving money to temporary production companies, which then hire temporary crews with one-project contracts. The temporary entity will make the film from start to finish. And once production is complete, the studio receives a finished product that it can distribute to theaters—without the continued overhead expenses that game publishers often face.

 

Companies like EA and Activision are two kinds of businesses at once, making games themselves while publishing the work of other developers. It was a natural evolution: Publishers built distribution and marketing networks for themselves, grew successful, and found that they could use that same pipeline to sell somebody else's games. Though publishers rake in more profits when they own the titles they're releasing, working with outside firms enables them to put out more games.

 

Of the 48 titles EA released last quarter, eight were from other developers—mostly in the Rock Band series—while 40 were developed internally. If a publisher is looking to do blockbusters, that figure needs to be reversed. Using an external production company means you don't have to bear the burden of overhead, and when the game inevitably slips and needs more time, it isn't a problem for the publicly traded publisher needing to meet a quarterly window. But, perversely, EA's Riccitiello has said the company plans to cut the number of titles it's developing, hoping that releasing fewer games with even more effort will generate more blockbusters. That means costs will rise above the $40 million mark, an extraordinary gamble.

 

It's unrealistic for a company that employs many thousands of developers to abandon internal production immediately. In the short term, Electronic Arts should consider copying the old Hollywood "studio system." During the Great Depression, a movie could be made in two weeks—and people would go to see a new movie each week. EA could make games that cost less. How? Change the scale and scope of the world. Make the story shorter. Use lower-quality graphics. Recycle proven tools and technology.

 

Consider the case of Portal. The first-person puzzle game began as a student project before it was scooped up by Valve Software. Valve polished the game up and took it to EA, which distributed the game at retail as part of its "Orange Box" collection. As of two months ago, they'd sold 3 million copies. Electronic Arts, though, doesn't seem to have absorbed the lesson of this success story. EA doesn't need to find its own Grand Theft Auto—it needs to let 1,000 Portals bloom.

[Dyson]

tl;dr. In response to your thread title: recession, and the new slant towards the casual market. The hardcore devs are dying, casuals are thriving. It's the way the video games market is going to go from now on.

[Dante]

tl;dr. In response to your thread title: recession, and the new slant towards the casual market. The hardcore devs are dying, casuals are thriving. It's the way the video games market is going to go from now on.

 

Read the topic please!

 

"According to the research firm Media Control GfK, game software accounted for more than half of global packaged entertainment sales in 2008, beating DVD sales for the first time. The firm pegs game sales at $32 billion worldwide. (The U.S. market accounts for around 45 percent of the world total.) The NPD Group, which tracks sales for the industry, also reports that game software sales were up 26 percent in 2008."

 

"While industry leaders anticipated that budgets would creep higher, the shift to high-definition gaming with Microsoft's Xbox 360 and Sony's PlayStation 3 has proved to be more expensive than estimated. At a conference in the spring of 2006, then-Midway developer Cyrus Lum sounded the warning, telling his audience that game development budgets could rise as high as $15 million to $25 million for a single title—previously unheard-of averages. "We need to rethink how we're financing games," Lum concluded.

 

When a newspaper quoted this frightening view, Lum found himself in hot water with his employer for making such sensationalist comments. It turned out that Lum's prediction was too low: Midway would go on to spend between $40 million and $50 million developing This Is Vegas, an action title set for release in late 2009.

 

That figure is not unusual. Budgets for next-generation development have continued to rise steadily across the board. And while executives and technologists knew that there would be heavy initial investment costs to retool—Electronic Arts spent a record $372 million on research and development during 2008's third quarter—they expected returns on that investment, something that's so far failed to materialize."

[Dyson]

But it's full of really long words and it's basically a wall of text. None of it is sinking in no matter how much I read it. Figures all over the place. Since you've read it, care to summarize it?

 

I skimmed it again. It appears to be saying "Ahh! Look at all these companies that have lost a lot of money!" and that's about it.

[Dante]

But it's full of really long words and it's basically a wall of text. None of it is sinking in no matter how much I read it. Figures all over the place. Since you've read it, care to summarize it?

 

I skimmed it again. It appears to be saying "Ahh! Look at all these companies that have lost a lot of money!" and that's about it.

 

You know game companies are going bankrupt. Midway have gone bankrupt and they were wasting money developing This Is Vegas which was between $40 million and $50 million.

[Zechs Merquise]

What is killing developers is quite simple: A lot of developers are producing what they want to produce - not what will sell.

 

Producing extremely expensive HD games which have massive development costs is exactly what many developers want to do. It flatters their ego and is a matter of indulgence. However there is only so much space in the market for the next 'block buster'. Thusly for every Gears of War or Halo there are countless over blown flops that fail to recoup their costs - hence so many developers are now standing on shaky ground.

 

Developers need to start realising it's a business - they have to produce what will sell and make sure they actually cost things out before hand.

 

So yes, some developers are going to be killed off. However the industry itself is fine, because some developers will adapt, behave like businesses and make sure they cover their costs.

[david.dakota]

Dyson, it makes perfect sense. Its not advocating developers start developing casual games per se, its saying smaller, cheaper, more projects- yes, casuals fall into this, but even core games- like Overkill or Portal can be made with a fraction of the budget of GTA, Assassins Creed or Resident Evil 5.

[darksnowman]

tl;dr. In response to your thread title: recession, and the new slant towards the casual market. The hardcore devs are dying, casuals are thriving. It's the way the video games market is going to go from now on.

 

Yeah I'm kinda tl;dr too, but he underlined the answer. Not that your response is a bad one. It won't forever be slanted towards casual, cheap to make games. That will wear itself out just as the big budget games have become not so profitable for the time being.

 

What is killing developers is quite simple: A lot of developers are producing what they want to produce - not what will sell.

 

A quite sad way to look at it. Who do artists work for if not themselves?

 

Big companies were highlighted like EA and Activision Blizzard, who it says rely on their cash cow franchises for their income. Don't game series become cash cows because they are safe bets as titles that will sell like hot cakes? So its not like they are riskily making new inventive games which is killing them, its the opposite. They are stuck in a rut.

[Emasher]

Part of what's killing it is the fact that AAA games are $60 now. When games were around $40 people might spend $80 on two games, but people are more likely to spend $60 on one game now and not bother buying anything else at the same time. It just crosses that invisible boundary for a lot of people.

[Guest Captain Falcon]

3 million copies of The Orange Box? Any article I've ever seen in the past has quoted substantially lower numbers than that.

 

I don't think all the heavy discounting at retail, which plagued the tail end of last year, helped too.

 

It's one thing if you're introducing a niche title to the market, but for established franchises, I don't see need. I guess EA can be forgiven a little as they were trying to bring new IP into play, but it affects the confidence of your target consumer when you are cutting prices so soon and you generate a downward spiral of people waiting for price drops.

 

Developers are going bump because the publishers can't risk funding them and if you are going to try and create a blockbuster, you are going to want to retain all of the technology and assets involved so you can make use of it in the future, not farm it out to somebody else.

 

Maybe less devs, less games, less competition will see some larger scale games not ending up hemorrhaging publishers' money this coming holiday season.

[dazzybee]

Games have got a lot CHEAPER in the UK over the years!

 

Surely all this is eating into Nintendos hands? Surely Nintendo are just going to be even more successful and then Sony and MS will just follow suit next time. But probably too little too late.

[Guest Captain Falcon]

Games have got a lot CHEAPER in the UK over the years!

 

Surely all this is eating into Nintendos hands? Surely Nintendo are just going to be even more successful and then Sony and MS will just follow suit next time. But probably too little too late.

 

And then what happens if Nintendo introduce a more powerful console capable of HD graphics? I can't imagine devs going, "well we could could do 1080p, but we'll limit it to 480p and cap all textures at a file size of 0.5MB in order to keep costs low".

 

Whilst they could do, it would seem unlikely, so there has to be another way - like Zechs says, for some, it's a power trip.

 

Nintendo's own answer has been in finding markets for it's less development intensive titles to fund others - I wonder how much Zelda: TP actually made given it's long gestation period over two consoles or even something like Brawl for that matter.

 

As for games being cheaper, you're defintiely bang on the money there. I remember N64 and SNES games costing £60 new (the first Turok was £70 even if it was crap) - no idea how much NES games were though, my memory isn't that good.

 

I'm not sure what that would equate to if adjusted for inflation, but it sure as heck wouldn't be cheap. In that sense, we've never had it so good, but now publishers are in a hole, and if we want top tier games, I suspect we will end up paying for it properly.

[jammy2211]

The article has alot of sensationism, and misses out alot of facts. The general theme rings true but it should be taken with a pinch of salt.

 

Anywho, what is causing publishers to lose money more then most is just trying to use last-gen sales trends and practises this generation. The market has changed, consumers buy products in different ways now, EA and Activision need to understand that. They're in the process of adjusting to the new model, then figures will pick up.

 

The articles skips around companies like Capcom, Konami and Ubisoft, who despite the strong Yen, Global Recession, no behemoth HD hits for the year and heavily supporting HD developement are reporting fiscal year profits thus far.

 

Revenue is at an all time high, just profits arn't. Costs of making games are higher, true, but when revenue is highest then profits are potentially highest, it's just a matter of time until EA and Activision's finances reflect this.

[Grazza]

EA could make games that cost less. How? Change the scale and scope of the world. Make the story shorter. Use lower-quality graphics. Recycle proven tools and technology.

 

This bit strikes a chord with me, because I'd like to see more asset sharing - engines, modelling resources etc. As games head closer towards realism, it seems unnecessary that every developer has to model, say, a blade of grass, when everyone's trying to model the same thing - a realistic blade of grass.

 

After all, we do want games to get better, don't we? I certainly do. OK, Microsoft and even Sony may have been a bit too early with the Xbox 360 and PS3 respectively, but I would say the games on those machines now look exactly like games "should" in the year 2009. I remember very similar concerns about business models when the PS2 was new, and companies still worked out how to afford the development of games on that machine.

 

Another thing, and this is just my personal taste, but I find the HD games market - Xbox, PlayStation etc - a tad adolescent. This is a big reason I haven't got an HD console yet - because there isn't really a "must have" game if you don't particularly like crime, guns, violence etc. I'm not being a moral guardian here, I just find them boring.

 

Nintendo, of course, have largely gone too far the other way - the other type of mainstream. Athough credit where credit's due, they have still provided traditional games, and they've certainly been proven right about hardware efficiency, business models etc.

 

That's the thing, this is the first generation where every single machine is purely aimed at one type of mainstream or the other, not the "keen" gamer. You'd think they'd all be succesful...

 

Personally, I just want to play the next Zelda or Shadow of the Colossus, but improved a generation, that's all.

[Shino]

The problem is people taking 5 fucking years to make a game everybody thinks they want and in the end the "core" gamer and media poo-poo it. That's one game per generation that quite probably won't sell what it needs.

[david.dakota]

(the first Turok was £70 even if it was crap)

 

You, Sir, you are wrong. Turok is a highlight of the N64.

 

Nintendo seems to keep RRP consistent, NES, SNES, N64 and Gamecube RRP were usually £39.99, same as Wii (barring a few discount ranges).

[jammy2211]

Nintendo 64 Games launched with a £70 price tag 0_o. Even late games like Donkey Kong 64 and Conkers were £60.

[david.dakota]

Yes, there were a few exceptions, but most were within the £40 region. I'd wager my hat on it. Not that i own one.

[darksnowman]

N64 games were £60 at launch and for a while after. Turok was £70 when it came out because I remember looking at it (in Comet...?) and wishing I could afford it! The pricing gradually came down to £40.

 

DKC on the Snes cost £60!

[david.dakota]

Hmm... I'm sure i paid no more than £40 for Goldeneye, Ocarina of Time, Super Mario 64, F-Zero X, and more. The only game i recall spending more than that was Turok (and my point was Turok was a great game).

[Pit-Jr]

Well apparently the 360 and PS3 are ahead of their time.

 

I was watching the end credits for the latest Prince of Persia (the pinnacle of the game:heh: ) and thought, how in the hell can they afford to pay these hundreds and hundreds of people credited in the game and why does it take this many people to make it. So considering this, the article isnt too far off.

[Zechs Merquise]

I can remember all the N64 games being around £49.99 - however Turok was £64.99+ and some others were £59.99. The price of games has come down slightly, especially with Supermarkets and online stores selling them.

[Pookiablo]

I can remember all the N64 games being around £49.99 - however Turok was £64.99+ and some others were £59.99. The price of games has come down slightly, especially with Supermarkets and online stores selling them.

 

Agreed. Whoever says that N64 games averaged around £39.99 is wrong - I've got numerous game boxes downstairs that say otherwise.

[dazzybee]

Yes, there were a few exceptions, but most were within the £40 region. I'd wager my hat on it. Not that i own one.

 

Shnope! N64 RRp was 49.99. Some being more.

 

Maybe you bought your games years later on ebay, hence the confusion, I heard this what happens when you get old

[david.dakota]

Shnope! N64 RRp was 49.99. Some being more.

 

Maybe you bought your games years later on ebay, hence the confusion, I heard this what happens when you get old

 

All brand new games, no eBay at that time. Maybe it is the onset of dementia.... I'll hide under my tartan blanket.