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For this blog, I wanted to analyze how many copies a publisher would have sell at certain prices in order to break even. For this analysis I will be drawing heavily upon the research conducted by Noobtubin8er in his great analytical blog which you can read here. In his blog he figured that the amount of money going back to publishers after manufacturing costs, shipping, console royalties and retail markup was approximately $37.50 on a $60 retailed game.
Now this does not figure in overhead costs or marketing which varies from game to game. This is simply because some companies are located in locations with different property costs and taxes for the overhead, while obviously some games are advertised more intensely than others. Additionally, the amount spent on these can be spread across more copies sold, should the game sell well. For the sake of making nice, rounded easy to follow numbers I'm going to apply this cost to the previous amount as a $2.50 minimum per copy, although this might not be indicative of the average game (Battlefield 3 reported had a $100 million advertising campaign, with 10 million copies sold, meaning $10 per unit sold).
With that stated, I will start to look at how many copies would need to be sold for a publisher to break even (I say publisher because publishers pay developers for the work they do). According to Noobtubin8er's blog, the average game costs between $18-28 million. So with the following table, I will show how many copies with different returns a publisher would need to sell to break even. The different return values are to illustrate the effect of additional advertising/overhead costs as well as illustrate the effect of lowering video game prices, which many believe is the answer for revenue issues (I am not among those with this line of thinking).
Now, take into consideration that these are for costs that fall within the average established in Noobtubin8ter's blog. Grand Theft Auto IV had a reported cost of over $100 million and Battlefield 3 had a reported advertising cost of $100 million on top of development costs. The next table, I'll examine the effect these returns would have on some of the AAA games of the industry, examining if costs were $100 million, $120 million, and $140 million. In this instance, the lower returns will reflect if game costs were lowered.
As you can see, there really comes a point where it just isn't feasible lower the price any more. Meanwhile, as these costs are being lowered, the used game market remains and can still undercut the price of a new product. This is why operating game development as a business has become more necessary in recent years so that costs can be managed and maximize the amount made as many games fall short of breaking even.
The next issue I want to examine is the popular belief by many that games should be working perfectly without bugs prior to release. Now I know that people will object to what I have to say here because there is a portion of the gaming community without online capabilities for updates, but according to a 2010 study, that only accounts for about 23% (correction: it's actually 24%) of current generation console gamers (Sorry Nintendo fans, but I don't include the Wii, as their online capabilities are not on par with their competition's).
For this section, I am going to analyze the average cost per month of delayed games for a studio with 100 employees, 200 employees, 300 employees, and 400 employees and how many copies would need to be sold to cover those costs. For this analysis, I am using $40,000 as an average wage per year of an employee working on a video game. For 100 employees it would cost a studio $4,000,000 per year, $8,000,000 for 200, $12,000,000 for 300, and $16,000,000 for 400. Dividing these by the 12 months in a year means a monthly cost of $333,334 for 100 employees, $666,667 for 200, $1,000,000 for 300, and $1,333,334 for 400. The following table will examine the number of additional sales that a company would need make in order to cover the costs of delaying a game by a month at different returns.
Now you might be saying, this doesn't seem that bad, but consider that many games fail to break even to begin with. Now consider that the game has about 2 months from the time it goes gold until the time that it arrives in a retail store for purchase. A company has to make the determination of whether the cost per month of delay is worth it compared to the potential cost of lost purchases for future products. With the number of console owners without internet capabilities being such a low amount, most companies view it as much more cost effective to patch the game for 2 months after the game goes gold, than to delay the game and still have employees on payroll for the extra two months. Is it right or wrong? That isn't the job of an economist to decide.
I hope that you all enjoyed (probably a terrible word for what you were thinking while reading this) or at least found this blog interesting. Let me know your thoughts in the comment section.