The Price of Entertainment - Noobtubin8er Blog - www.GameInformer.com
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The Price of Entertainment

The other day, a coworker of mine divulged how he got his gamer score so high. I was shocked to learn it was because he was pirating his video games. His justification was that games like Modern Warfare 3 make $450 million in a single night, why should he add to their coffers. I took a moment to consider the comment and we have discussed the concept a bit since then, but I feel this is a lesson we all need to learn as we complain about paying $60 for a video game while a movie only costs $15. So, as a trained accountant, allow me to explain where it all goes, and what happens.

Development
Developing a game takes time and resources, and generally a lot of them. You have to hire and pay a large force of employees: a director, concept artists, writers, designers, programmers, animators, translators, and quality assurance testers. Just look at how long the credits go on for some of the games you play. In the end, the developer is generally paying for their salaries, payroll taxes, and benefits for these people for somewhere between two and three years per game, at that adds up real fast.

We also should not forget the soundtrack for the game. If you have ever played a game with no music behind it, you will understand just how important a soundtrack is to a game, some of which are amazing. But amazing comes at a price, somewhere around $500k.

When all is said and done, a research company called M2 research conducted a study in 2010, showing that the average multiplatform game cost $18 - $28 million just to develop. But development is not where it ends.

Overhead


No, not THAT kind!



Very few people think of this concept, but every company has what is called overhead. This expense consists of those expenses that are linked to the making of the game, but not directly and the costs would be spread across any other games being made by the developer. These costs include:
- Accountants
- Building lease or depreciation
- Utility bills
- Receptionists
- Office supplies
- Depreciation on office equipment, computers, and furniture
- The list goes on

These costs can be difficult to quantify because it depends on how many games the developer is working on to spread the costs out and the size of their staff. But it is important we recognize this as an actual cost to make a video game. Failing to recognize it would be folly on our part.

Marketing
The cost of marketing varies by game and how well the publisher and developer feel it will do. They also must consider, for each dollar spent in marketing, will they see at least another dollar of revenue. These companies invest millions in magazine ads, billboards, television spots, release parties, radio ads, internet ads, posters in retail outlets, etc… In some cases, retail locations will share some of the burden for marketing, but most of this cost is taken on by the publisher and covered by their share of the sales of the game.

Manufacturing
Each game that is produced requires a disk, packing, instructions, additional advertisements in the game, and a cover/back. These are then security tagged and shrink-wrapped. Estimates on the cost to actually manufacture the game vary, but I would wager the cost is right around $3 per game.

Shipping
Games don’t just magically appear on game store shelves nor do they teleport there. Companies have to pay distributors to get the games from the manufacturer to the retailer or wholesaler. This costs about $.60 per game shipped.

Console Royalty
We have all heard it dozens of times, the cost to develop and manufacture a console is higher than the amount it is sold for. This is not a lie and these costs need to be recuperated. Additionally, Major Nelson doesn’t work for Xbox for free; he makes money and has to be paid. So, the console producers charge a royalty for any game sold for their consoles to make up for these costs and to turn a profit for their shareholders (like me). The cost of these royalties is about $7 per game sold.

Retail Markup
Retailers like Wal-Mart, Target, and Game Stop have to pay their employees and turn a profit as well (remember this is capitalism and not socialism or communism). Retailers are generally purchasing the game for about $48, thus marking it up $12 to cover their costs.

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The Numbers
After the manufacturing, shipping, royalty, and retail markup costs are taken into account, only $37.40 per game is left. Of that, about half is taken by the publisher to cover its costs and to make a profit on the money it spent to get the game started (the publisher’s principal job is to bear the burden of the initial cost to develop the game). This leaves the developer with a mere $18.70 to cover its development costs. Not looking at the overhead costs, that would mean a developer would need to sell nearly 1 million games just to cover its expenses and make no profit if they only spent $18 million to develop the game. (Figures from the above were obtained from a combination of a study done by Forbes, simple mathematics, reasoning, and common sense.)

What Happens to the Extra Cash
Sometimes games are successful and make a lot of money (Battlefield 3, Modern Warfare 3, etc…), what do they do with the money? Every business has to think ahead to the future and what they will do to continue this success. This is accomplished by expansion, stockpiling, and holding onto the successful workforce.

Expansion
If a company succeeds, they want to expand and do more. That means more equipment, newer equipment, larger buildings, more staff and new technology. All of this requires capital (money). So, companies will take a lot of their profits and reinvest that in the next game they will make.

Stockpiling
Uncertainty is a dangerous enemy in business, especially in the entertainment industry. If your game flops, you could lose millions of dollars without batting an eye. Therefore, it is key for a properly leveraged company to hedge their bets and either invest in other designs or to have cash to absorb any future losses. Failure to do so can easily lead to bankrupt developers and producers.

Workforce
A lot of people don’t realize this, but hiring personnel is costly. Ads have to be taken out, interviews conducted and weeks of training. This is lost money and lost time. So, it makes sense to keep your existing workforce. What is the best way to do that? The answer is incentives. People wonder why CEO’s, CFO’s and others get such large bonuses; it is because you bought the game. When people work hard, the most logical method to pay them back is a percentage of the added profits. Doing this just makes sense and keeps your workforce happy.

Perspective
In the words of an Incubus song: “Perspective pries your once weighty eyes and it gives you wings.” Years ago, a Super Nintendo game could cost up to $60, about the same price we pay today, right? Wrong. To compare apples to apples, we need to take into account inflation. For example, my father used to go to the corner store when he was a kid and would pay five cents for a soda. Now, for that same soda, in the same size, I pay $.75. Does this mean the soda company has gotten greedy and taken more money from me than they did from my father? Of course not, it just means a nickel isn’t worth what it once was.

If we used the concept of inflation on the Super Nintendo games that used to cost $60, we would be paying about $85 for them in today’s money. Given that information, we actually pay less for games today than we once did. Think about that for a second.

So, next time you start to complain about paying $60 for a video game, consider where it all goes and why you have to pay $60. In the end, it makes sense.

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