August 1, 2006

[Games] Why $40 million?

Okay, now it's time to look at third-party deals, and why it takes $40 million in retail sales before the developer sees a penny above their advance.

Let's say that Publisher A signs Developer B to make a game for a $2 million advance against earnings. Developer B is going to get 10% of net on wholesale.

Publisher A gives the $2 million to Developer B over the course of the game being developed to cover expenses, etc. This puts Developer B's current earnings on the game at -$2 million. (They've received $2 million against their earnings, so they're in the negative.) At this point, the publisher is also at -$2 million on their balance sheet. (This part is important...)

So, the game is done, and Publisher A starts their marketing push, manufacturing, etc. As you may remember from before, this puts the publisher at -$15 million total.

At first, all money that comes in from the title goes to the publisher so they can recoup the $15 million loss they have incurred. Why doesn't any go to the developer? Because the money is against net earnings, and the $15 million is expenses directly related to the title that the publisher has incurred.

Once the publisher has earned back their $15 million, 10% of each copy sold at wholesale starts going towards the advance against net profits. So if this is one of those games that was selling like gangbusters, and the wholesale price is still $40, that means that for this example $4 out of each unit would be going towards the -$2 million hole that the developer is currently in. Most games have already undergone a price drop at this point, so you're looking at between $1.50 and $3 per unit going towards the hole.

In practice, it takes about $40 million in retail sales to refill the $15 million hole the publisher is in and the $2 million hole the developer is in.

This is the primary way that day-0 warez hurts developers. Initial sales are crucial on any title. The more sales before that first price drop, the more likely that the publisher will break even early and the more likely that higher dollar amounts will be applied to the developer advance. The longer it takes for the publisher to break even, the harder it is for the developer to earn out against their advance. Every sale taken away early on makes it harder for the person behind the title to actually make any money off of it.


Tom said...

Here's another question for you (feel free to respond in the form of another blog post if you prefer).

As a developer, how do you feel about the forthcoming "Games for Windows" push by Microsoft (idea being that MS will, pretty much with Vista's release, go nuts with the store presence and branding of PC games the same way they do with Xbox games or Sony does with PlayStation presence). Their incentive is to keep gamers on Windows (as opposed to abandoning the platform for consoles) since they realize that if gamers leave Windows then there goes a big chunk of why Windows is dominant.

I personally think it's great and I assume Ritual agrees on some level since the Games For Windows bit was at the beginning of a SiN: Episodes trailer. But I wonder if you think this will really help things or not.

guyal said...

(So I have my rant "The MPAA/RIAA/ESA shouldn't be so concerned about piracy b/c Americans are already spending every conceivable dollar we can on discretionary entertainment and your rootkits and DRM gardens only make us shift our dollars towards less complicated consumables." Nonetheless, I'm really enjoying detailed, experienced comments on the subject that fill in knowledge gaps without resorting to FUD. Same for the region encoding post. Good stuff.