July 29, 2006

[Games] Why $15 million?

When people weren't defending their thieving ways over this last week, one of the biggest questions being asked was why does it take $15 million for a PC game with a $2 million development cost to break even. Remember, that was for a first-party title, where the game was developed by the publisher.

So, let's do the math and see what goes into getting that money back. We're going to assume a title initially sold wholesale for $40 per unit, licensed engine with a $500,000 base and a percentage per unit wholesale, a $2 million development budget above that, and a standard marketing campaign.

A standard marketing campaign (TV, websites, magazine ads, etc.) runs about $4.5 million. It may seem like a lot, but if nobody knows about your name, nobody is going to buy it. $4.5 million is about average nowadays for a marketing budget.

Now we're up to $6.5 million. Now we have to get the game actually manufactured. Average cost of goods sold (pressing the media, packaging, staff to handle the line, shipping, etc.) per unit is approximately $10. Experience shows that it takes about 400,000 units to break even (assuming a tiered price drop over time), so that adds an additional $4 million to prepare the number of units necessary to break even.

We're already up over five times what it cost to make the game itself...$10.5 million. Now it's time to pay the piper for the engine. On 400,000 units above base, the engine licensor will usually bring in $1.5 million, and now we're up to $12 million. The $1.5 million is usually worth it for a proven engine, though, because you save money on development costs, config testing, and early production headaches.

You know those wonderful advertising circulars that you see every weekend for Wal-Mart, Target, etc.? If we want to be featured in there to get Joe Average looking at us (you know, the 90% of game buyers who don't read game magazines or gaming websites), that's $300,000 a week per circular. Assuming we do three circulars for two weeks each, that's another $1.8 million.

We're now up to $13.8 million, and finally we have the graft...er...market development funds. This is money we pay to the retailers so that they won't bury our title in the middle of nowhere. We have to pay for space on end-caps, point-of-purchase materials, training copies for employees so they'll actually know about us, etc., etc., etc. For a normal title, this works out to about $1.2 million for a total of $15 million.

This doesn't account for the reserve account publishers have to have to handle stock returns for low-selling titles, warehousing copies, or a lot of other expenses. But as you can see, getting a game to people via retail isn't cheap.

3 comments:

Acetone said...

How does Steam enter into the equation? Without getting into specifics protected by NDAs and such, is Steam a much better platform to release your game on than retail stores?

Michael Russell said...

Steam gets rid of COGS for a Steam-only release or reduces them in the case of a retail and Steam release.

A Steam-only gets rid of circular expenses and graft, er, Market Development Funds.

Beyond that, you still need pretty much everything else.

Francois said...

I can feel your pain. I'm also in QA and do support for Groove Games, I can only imgine what your going through, it would be horrible. On one hand you have to make sure to uphold the best service your doing and on the other you hate knowing that most people contacting you aren't there with a legit copy :(