Why we pay top $ for games.

[The Joker]

Why You Pay $$$ for games.

I’ll approach this from an economics stand point. Most people don’t think about all the costs that go into making a game, and most of the times forget about a couple of stuff. I have never worked for a developer/publishing company so these are all estimates and my personal guesses as I have done no research to substantiate this. I shall also be looking at a company making its first game, let’s have 30 people working on this for arguments sake. If you however see where I am incorrect please correct me So let’s begin.

Development cycle 20 months.
Rent: $1000 per month x20 + Water + Electricity = $200 per month x 20
Salaries: $8000 per month on average x20 x 35
Hardware: 15 High end Nvidia Quadro pc’s for coders and modellers + 20 other pc’s for the rest of the work. About $80 000 (http://www.sybaritic.co.za/store/product_info.php?cPath=74_224&products_id=13368 that’s the kind of graphics card you use)
Software: Now you have to buy windows for all those pc’s and the development tools you will need. http://store.autodesk.com/servlet/C...layHomePage&SiteID=adsk&Locale=en_US&Env=BASE So we need 10 licenses of 3d’s max. That’s $34 950. Vista x64 Ultimate x35 = $1 500. Also we have to office = $1000. That’s another we will be using the Unreal Engine for our game and need 10 copies so that’s another $6000 plus we are doing using C++ so that’s another $5000(http://www.unrealtechnology.com/development-kit.php?ref=order)

We have now reached month 10 and want to have our beta up and running. Now we have dedicated servers and our beta download is 5GB’s 1000 people download it and play on our servers for 5 months. That’s another $20 000 (give or take )

Finally the beta is done. Now we are going to release 500 000 copies of our game.
$500 000 for DVD’s. $2 000 000 for the case and booklet printing( we hired a company to do this and that’s their labour cost worked in). Let’s have a guess that shipping will be about $1 000 000 for everything.(I am not sure that the store or the publisher pays for shipping to the store, but it's going to add to your price somewhere along the line)

Now there hasn’t been any marketing done. And the game has just been released on the pc. If we wanted to release the game on the Xbox or PS3 we would have to buy those development tools and the consoles as well.

Just to release the game on pc we spent $9 272 450. To make our company break even on the game we will need to charge $18.54 per game. But we want a profit and we need to pay back that $10 000 000 loan we got 20 months ago so we need to get $12 000 000 just to break even. So with the loan taken into account it’s $24 to break even.But for our profit margin we sell the game at $35 and we do so worldwide.

Ster-Kinekor in South Africa buys the game as the sole distributer and adds a little bit of profit on that price. To $40. Now look and listen buys the game from Ster-Kinekor and adds its profit And the game sells for $45.

Understand now?

Thanx for the nice breakdown mate!!
Really appreciate it
I still don't give a crap though

There are ways and means to cut costs, its simple, if a business is busy failling you don't push up the prices and ask more for your products..You look at what you can do to keep your current clients happy, while gaining more business by pricing things so that everyone can purchase it!!

Its simpe to improve sales you drop prices while cutting costs, there are ways and means.

 

[phoenix]

Thank you, SpoOkie. This is just what I was looking for.

May I ask why the developers would need to have Vista Ultimate x64 and Microsoft Office?

Would the game suffer if the developers did not use a commercial version of C++?

 

[Jan]

Disputes

Most people don’t think about all the costs that go into making a game, and most of the times forget about a couple of stuff. I have never worked for a developer/publishing company so these are all estimates and my personal guesses as I have done no research to substantiate this. I shall also be looking at a company making its first game, let’s have 30 people working on this for arguments sake. If you however see where I am incorrect please correct me So let’s begin.

Hi SpoOkie, I think you did a good first-order analysis there but I am going to take you up on your offer to correct you where we think we see mistakes .

Now there hasn’t been any marketing done. And the game has just been released on the pc. If we wanted to release the game on the Xbox or PS3 we would have to buy those development tools and the consoles as well.

Just to release the game on pc we spent $9 272 450. To make our company break even on the game we will need to charge $18.54 per game. But we want a profit and we need to pay back that $10 000 000 loan we got 20 months ago so we need to get $12 000 000 just to break even. So with the loan taken into account it’s $24 to break even.But for our profit margin we sell the game at $35 and we do so worldwide.

At some stage I'd like to take a look at including marketing costs because they are important, but I don't want to make this a tldr post.

There are two things that bug me most: Firstly you're trying to recoup your costs and make a 46% profit by selling only 500k units. Secondly you're trying to make a 46% profit! Holy cow!

Considering that you've worked in the costs of new PCs and software licenses for every employee as well as the salaries of all the employees you really only need a 15-20% markup.

Then keep in mind that every sale after that initial run of 500k is basically clean profit. Instead of a 'Cost of Sales' of roughly $22 per unit (excluding shipping), the cost drops to roughly $5 per unit (excluding shipping) by your guesstimations. This of course doesn't take into account the effect higher or lower quantities might have on production costs (except for the shipping costs I've stripped out) but this is all just first-order, trying to compare apples with apples.

Anyway, all of a sudden every unit beyond the initial 500k that you sell at $26 ($22 with just less than 20% mark-up) is sold at an equivalent mark-up of roughly 80%. Or in USD you profit $21 per unit sold after the initial run of 500k instead of the mere $4 during the initial run.

Now considering that companies sell a million or more of copies of a good game I'd say that they could make a tidy pile of money off a game that falls within the parameters set here.

I hope what I've written is at least understandable to some .

 

[lilDeath]

Thanks SpoOkie for taking your time to post that.

However, that is a very basic lifecycle of what happens with any new product, especially the development cycle, the Operational costs (salaries, water, elec, etc) and then Capital expenditure (pc's, hardware, software, furniture, etc). It doesn't just apply to gaming.

Also, companies do not spend all this money on just one project / product. If they do, it is a very risky product from the very beginning. These initial monies are enough to last for several projects, which in the end reduces the initial outlay and total cost of ownership. This means if anything, the cost on the original and subsequent product release must actually be less.

Of course, this is dependent on the different products and their lifecycles, in addition to how often assets / software must be recycled. Especially if you must stay ahead of your competition and technology.
But lets not forget, all these businesses talk to other businesses and they come to an agreement about costs and sharing intellectual property.
An example of this is the way Crysis was developed. The developers worked very closely with MS on this (DX10) and I doubt they paid for this, or in the least they received a nice discount and in return MS was being mentioned and having their technology being punted in the process. It's a win-win for both companies. Such agreements are commonplace and good business practice.
Think about it - Why must you reinvent the wheel if someone else have already done it for you?

Is it a coincidence that the other car manufacturers are buying Totoyta's hybrid motor and using it in their own cars? Hell no! The same logic applies to gaming.
So many games are using the same game engines. Why? When compared to a tried-and-tested technology, it saves money in the long run (decreasing the dev cycle for instance, reducing total costs, etc) instead of having to design your own.

So, I am not saying SpoOkie is incorrect in his economics101 post, but it in no way does it explain why the game publishers are over charging for their games by such a huge margin.

I simply don't believe that. If the costs are indeed the reason for the high prices, then they had a terrible business plan from the beginning. Especially for games that are in development for 5 years and more (and there are a few of those we know of).

 

[SpoOkie]

Well to put it for you in perspective i did say it was just a way of looking at things.

EA pays their developers $10 000 a month. And on a single project they have 50 people working on it. I read an article earlier this month where they said they are making game studios more like movie studios and will contract out the developers. Which will reduce costs by a significant margin. BTW, GTA IV's development costs were over $100 million, which to me is absurd for a pc game.


One thing I do want to say is though that over the last 10 years of me buying a game. the price has increased R100 for pc games. That's not a lot compared to movie tickets But then again the games industry exploded

@Extremist, you forgot about TAX

The top 10 best selling games of 2008 sold more than a million copies. So 90% of the games never get there. Will give link later (local only now)

 

[Jan]

Also, companies do not spend all this money on just one project / product. If they do, it is a very risky product from the very beginning. These initial monies are enough to last for several projects, which in the end reduces the initial outlay and total cost of ownership. This means if anything, the cost on the original and subsequent product release must actually be less.

...

Of course, this is dependent on the different products and their lifecycles, in addition to how often assets / software must be recycled. Especially if you must stay ahead of your competition and technology.

Exactly. I gave it some thought while I was responding to Spookie's post and figured that Spookie's guesstimates of buying everyone a new PC at the start of every new game's development cycle is probably not that far off. You also typically have to buy new engine licenses for every new game.

Think about it - Why must you reinvent the wheel if someone else have already done it for you?

One word: Ownership. It's all about trade-offs in business. Do the (financial) benefits of development and ownership outweigh those of licensing/cross-licensing/nip-and-dip? For each project the answers are different.

If the costs are indeed the reason for the high prices, then they had a terrible business plan from the beginning. Especially for games that are in development for 5 years and more (and there are a few of those we know of).

If anything's come out of this it should be that the economics of game development is far from the simple.

One thing I do want to say is though that over the last 10 years of me buying a game. the price has increased R100 for pc games. That's not a lot compared to movie tickets But then again the games industry exploded

TBH I don't even know what movie tickets used to cost 10 years ago... R18? R20? I think 10 years ago you could get PC games for between R200 and R299, depending on the publisher and distributor. Now games cost anywhere between R315 (Pre-order price for Demigod) and R500 (F.E.A.R.2).

This isn't an entirely equal comparison but comparing lowest with lowest and highest with highest we're looking at a price increase of between 50% and 67%. Not as much as movies, no, but still quite high.

@Extremist, you forgot about TAX

I can't tell if that's a sarcastic tongue smiley or not :S.

The top 10 best selling games of 2008 sold more than a million copies. So 90% of the games never get there. Will give link later (local only now)

Yeah I know, but games that sell less (I saw that the original Homeworld sold 500k copies in it's second year of release) need to be done on a smaller budget (*much* less staff, for instance).

 

[The Joker]

This is turning out to be an excellent thread.
Thanx for the great response guys!!
I think all the info we have gathered thus far has been excellent and very informative.
I'll stick to my opinion though, games are expenssive because gaming companies know we'll just keep coughing up the dough for their products!!
"The rich keep getting richer"

 

[lilDeath]

Exactly. I gave it some thought while I was responding to Spookie's post and figured that Spookie's guesstimates of buying everyone a new PC at the start of every new game's development cycle is probably not that far off. You also typically have to buy new engine licenses for every new game.

It won't be true for all of them. Like you said below, it will be different between projects. On the licensing aspect, there are ways around this as well, by making deals with the software vendor for instance, etc.

One word: Ownership. It's all about trade-offs in business. Do the (financial) benefits of development and ownership outweigh those of licensing/cross-licensing/nip-and-dip? For each project the answers are different.

Exactly. You have to do the calculations in business. Assumptions are the recipe for failure.

If anything's come out of this it should be that the economics of game development is far from the simple.

That I also find to be just wrong. It shouldn't be. The only reason I see it being that way is due to the industry making it so. The whole cycle is extremely convoluted and everyone wants their piece of the pie, which means it is us (the customer) that suffers.

Movies and games have gone up by a substantial amount over the last few years. There are definite comparisons to be made.

I agree with Joker too - The gaming companies know what they are doing and ripping the community a nice big one in the process. Everybody is doing it. Car prices, food prices, bread, milk, etc. Everyone is loading their prices, middle men are raking it in. The consumer is the one taking the biggest hits. Vaaking sad

 

[The Joker]

It won't be true for all of them. Like you said below, it will be different between projects. On the licensing aspect, there are ways around this as well, by making deals with the software vendor for instance, etc.



Exactly. You have to do the calculations in business. Assumptions are the recipe for failure.



That I also find to be just wrong. It shouldn't be. The only reason I see it being that way is due to the industry making it so. The whole cycle is extremely convoluted and everyone wants their piece of the pie, which means it is us (the customer) that suffers.

Movies and games have gone up by a substantial amount over the last few years. There are definite comparisons to be made.

I agree with Joker too - The gaming companies know what they are doing and ripping the community a nice big one in the process. Everybody is doing it. Car prices, food prices, bread, milk, etc. Everyone is loading their prices, middle men are raking it in. The consumer is the one taking the biggest hits. Vaaking sad

Exactly, there is no excuse for them charging us R1000 for a game!!
We support the gaming companies and this is how they thank us
Its pathetic!!

 

[nuyork]

I will never pay R700 for a game, nevermind R1000.

I usually try find a trade or find someone who is selling the game I want second hand.

If that doesn't work, I usually import my games at MUCH cheaper prices. Lots of people do it:-

http://www.xbox-360.co.za/forum/xbox-360-shopping-deals/47436-importers-anonymous-thread.html

People have imported brand new games at around R300. And I've ordered 5 XBox 360 games totaling R1000. Importing is the way to go...instead of being raped by the local market.

 

[shadowfox]

Here's a solution to driving the prices down Put the development houses in places like India and South Africa

Drives down production prices and we won't have to pay import duties (if in SA anyways). Win-win

 

[SpoOkie]

TBH I don't even know what movie tickets used to cost 10 years ago... R18? R20? I think 10 years ago you could get PC games for between R200 and R299, depending on the publisher and distributor. Now games cost anywhere between R315 (Pre-order price for Demigod) and R500 (F.E.A.R.2).

This isn't an entirely equal comparison but comparing lowest with lowest and highest with highest we're looking at a price increase of between 50% and 67%. Not as much as movies, no, but still quite high.

I can't tell if that's a sarcastic tongue smiley or not :S.

I went to the movies for R15 when I was in Gr.7 that's 8 years ago.

For Unreal Tournamet 2004 I paid R249. For Unreal Tournamet III I paid R349.

Fear 2 is the exception when it comes to price, and still it's a shit game. Most games these days are priced between R300-R400.

I was being sarcastic and serious. You have to factor in the 40%/35% tax that you will pay on your profit, and you didn't.

 

[SpoOkie]

People have imported brand new games at around R300. And I've ordered 5 XBox 360 games totaling R1000. Importing is the way to go...instead of being raped by the local market.

What local market? We don't have the number of people buying games or the number of distributors to get us low costs. It's just a fact of life.

 

[Jan]

I was being sarcastic and serious. You have to factor in the 40%/35% tax that you will pay on your profit, and you didn't.

Not that I'm an economist or anything, but you pay dividends on your before-tax net so that's what the shareholders want to see at between 12% and 16%. Then after the shareholders are paid (and all other expenses are taken into account) you pay tax.

 

[lilDeath]

What local market? We don't have the number of people buying games or the number of distributors to get us low costs. It's just a fact of life.

That is exactly why the local companies / distributors can ask what they want. THEY have the power and is dictating to the community, BECAUSE our local numbers are so low.
This will not change very easily, since there will always be desperados that are willing to pay the price for a game, no matter how much it costs.

These desperados make the companies / market inherently happy, since they think the games are good and fairly priced. NO pressure on them here to reduce prices, right?
While in the meantime - It works against the people trying to make a stand on high prices and not buying the games. Because of our the low penetration / SMALL / NO local market of the gaming community (when compared to INTERNATIONAL numbers) the percentages can easily misrepresent the real influence of high prices.

An example:
There are 10 gamers, 5 refuse to buy due to high prices, 5 buy because they don't care and / or mommy daddy buys it for them. This looks like 50% of the gaming community is happy and buying games. That's a relatively high percentage.
(just to make sure I am not being misunderstood with the example, I am illustrating how easy low numbers affect percentages and perceptions, i.e. in SA's case.)

^ I touched on this slightly in my 1st post in this thread. MS is not being pressured enough to sort XBox Live out due to SA being such a small market - read: fu

When SA get bigger, we will have more buying power.
However, sadly I do not think this will change anytime soon. Our Internet is simply not good enough and internet penetration is still very low - 80%+ of SA does not have the access or means to broadband or even knows what the Internet is. (Thanks Telskommel)
Sad but true.

A global effort is needed, so go... Facebook FTW!

 

[Isengard]

Here's a solution to driving the prices down Put the development houses in places like India and South Africa

Drives down production prices and we won't have to pay import duties (if in SA anyways). Win-win

Yes, what we need are game development sweatshops! Game making on the cheap!

This thread has become real informative btw, keep it up.

 

[The Joker]

Ok i did a couple of calculations now.

Grand theft auto 4 R700 X360
Gears of war2 R700 X360
Motorstorm pacific rift R900 Ps 3 (December)
FEAR 2 R485 PC
Dead space R600 X360

That's over 3 months, so if I had to carry on buying at this rate I would end up spending R1200 a month just on games..That's insane!!
I think its time to start curbing the gaming habit!!
Stuff them..they can milk someone else!!

 

[phoenix]

I don't think you should cut back on your Gaming Habit, Joker. Just shop around like I do, ;-)

 

[The Joker]

That is exactly why the local companies / distributors can ask what they want. THEY have the power and is dictating to the community,

I walked into 2 different shops at the same mall.
Gear of war 2 was priced R900 at the one and R700 at the other
So your absolutly correct lildeath. The mofo's charge what they want!!

How can these 2 shops that are practically next door to each other have a R200 price difference on 1 game
The thing that really got to me was that people were actually buying the more expenssive 1

 

[SpoOkie]

http://www.take2.co.za/news.php?id=11853&type=2

http://www.take2.co.za/news.php?id=11852&type=2

That's why you have that. Took 3 business days and R365 later, I had soul caliber IV at my door.