So… for a moment, let’s put aside the fact that the purpose of a publicly traded company like most AAA game publishers (Nintendo, Ubisoft, Take Two, EA, Activision, Sony, Microsoft, etc.) is to earn money for its shareholders. Let’s also ignore that nobody can ever really agree as to the exact amount of money that crosses from “not greedy” to “greedy” actually is. Putting all that aside for a moment, let’s break down just how many sales it takes for the publisher to break even. In your “simple example”, we spent $60 million on development. At $60 per game, that’s just 1 million units that need to be sold, right? What else is there?[[MORE]]
Consider… how does the game-buying public learn about the game’s existence? Beyond that, how do you convince them that your game is worth spending $60 on? Are you going to advertise it somehow? Have you ever considered that distributing interviews, previews, television commercials, internet banner ads, cross-promotions, trade shows costs money? Marketing a game requires a team of full-time employees to put together the content designed to get attention and garner interest. These don’t come free. Getting a good web presence costs money. Putting ads anywhere costs money. Having a booth at E3 costs money. Getting a spokesman or celebrity to help sell your game costs money. Marketing AAA games is expensive. Quite often, the marketing budget for a game is equal to, if not greater than, the development cost of the game itself. For some games, it isn’t quite as much - for The Witcher 3, “only” about $35 million was spent on marketing compared to the $65 million spent to develop the game itself. The marketing cost is enormousfor some games - Call of Duty: Modern Warfare 2 cost around $50 million to develop, but Activision spent $200 million on the marketing campaign. For the sake of our “simple example”, let’s clock it in at a 1:1 ratio. For our AAA game, we’ll spend $60 million to market it in addition to the $60 million development cost, for a total of around $120 million. We’ll roll small expenditures like facilities, physical production (disc, boxes, manuals, etc.), distribution, and other miscellaneous costs into this total. That’s not too bad, right? Only two million games sold at $60 a pop to break even. Or is it?
Let’s switch to the consumer perspective now. You’re totally into this new AAA game, so you pick up a brand new copy for $60 at your favorite local game store. The publisher gets 100% of that $60, right?
No they don’t. Retailers get to keep about 20% off the top of any game they sell, or roughly a $12 cut from the $60 price tag. They take it and use it to pay their employees, keep the stores open, and so on and so forth. Of the $48 that was paid to the publisher, platform takes around 30%. “Platform” is the loose term to mean Sony, Microsoft, Nintendo, Steam, Origin, Google, or Apple for the use of their specific platform. Every game developed and distributed through their services pays them for it. 30% of $48 is $14.40, leaving $33.60. This might be the end of it, but it doesn’t always end here.
Sometimes you’re using a licensed property - Batman, FIFA, Lego, Lord of the Rings, Harry Potter, Star Wars, James Bond, Tony Hawk, etc. are recognizable names that bring significant built-in audiences who buy video games. Developing a game based on an intellectual property that the publisher doesn’t own costs money too - the owners of the property get anywhere from 10-20% of the revenue for the use of their property. The more well-known and popular the property, the bigger the take. For something as huge as Star Wars, you can bet that they take around 20%. 20% of the $48 post-retail per-game revenue is $9.60, which cuts down the remaining $33.60 (after paying 30% to the platform) to $24 from the original $60.
That’s our final tally - about $24 of every $60 retail game sold makes it to the publisher. $120 million in costs divided by $24 per game comes out to 5 million units sold to break even. Not even a profit yet, just to break even. That’s a far cry from the 1 million in sales from the original ask!
We can try to dodge the licensing and retail cuts. If we are lucky, we can get away with using our own home-grown IP (Tomb Raider, Warcraft, Mass Effect, Street Fighter, etc.) and distribute the game digitally instead of retail. If we do that, we can raise the publisher’s take by the 20% that would have gone to the license holder, and the 20% that would have gone to the retailer. Platform is good with going digital too - they get more money per sale this way too (30% per $60 digital sale is $18, rather than the $14.40 they got from retail sales before). Thus, a $60 digital sale of our own AAA game with no licensing or retail fees can earn as much $42 per sale for the publisher. That lowers our break-even target number to about 2.9 million sales needed, assuming 100% digital sales. In reality, the target sales number is usually somewhere in between because a large portion of game sales are still through retail. And, lest we forget, 3 million in sales is a huge number for new games. Typically, only sequels to well-received games will reliably sell in those numbers.
This is why the publishers have been pushing digital distribution and paid DLC - whatever we sell digitally avoids paying the retailer that 20% off the top. We still have to pay the 30% platform cut and any licensing fees, but it’s still less overall than platform, licensing, and retailer. It’s also why we’ve moved away from selling boxed expansion packs for games too - they have all of the same costs associated with retail. If we sell things digitally, we’re getting a bigger slice of the pie.