How do game company make money (more details inside)

[Chibibar]

Ok... first of, this is just a train of thought I have today and I don't know the details of any business transaction.

I always wonder how can Steam make money with all the "big sales" they have. Then I started thinking, what if only a portion of it goes to the developers? but how big a portion? I use to think 50% but maybe it is really 20%? or even 10%?

why do I think that low? cause how in the world does steam make money doing 75% sales? or even 90% sales (maybe they take a little lost to get rid of "inventory" - serial number hehe)

I know that regular gaming business have a lot of overhead.
Standard overhead for all vendors (stores, steam etc etc)
game development
advertisement (no store related)

now unlike steam the other store has
distribution cost
local ads
inventory cost (having stuff on shelves cost money)

Steam on the other hand have server cost
bandwidth cost

but is that cheaper than a store? more than likely yes since many business prefer to go online since it is cost less than having a physical store (true for many people)

So... I guess the question would be, what is the percentage or fee do developers get per game?

 

[Allen who is Quiet]

Not to mention they tend to happen after initial buzz has died down. They use the sales to recreate demand for a game, getting sales that would not have happened otherwise. It's the difference between getting 1 sale at 10$ vs getting 20 sales at $3.

 

[AshburnerX]

I seem to remember that the guys who made Penumbra had a Steam sale a year or two ago and it literally made them more money in a single weekend then it had the entire time it had been on steam up to that point. It's one of the reasons they decided to put the game series in the first Humble Indie Bundle.

 

[SpecialKO]

Most of the time, big sales mean one of three things.

1) The seller has made their development costs back and now they're trying to grab that last gasp of bargain sales before moving on.
2) The seller hasn't made their development costs back and they're taking one last shot at trying to make ends meet.
3) They're pretending to be going out of business as a marketing tactic, kind of like tourist stores in NYC.

Also, re: developer percentage, it depends on how the game was developed and how it's being distributed. If there's a publisher, like EA or Activision, then most of the time, the developer gets no royalty percentage, they've just been paid for developer costs. This isn't always the case, especially for big developer houses like BioWare and Bethesda and Bungie, but for that reason, publishers like buying developer houses entirely.

If a developer is putting their game on Steam, it's probably not too different a standard distribution deal: Steam and the developer negotiate a reseller license fee based on expected sales with a royalty percentage for sales above that mark. So, most likely, when a game goes on sale on Steam, one of the first two possibilities above applies, only in comparison to the reseller license cost.

 

[Adam]

The difference in revenue between 0 people buying a game at $50 and 100 people buying a game at $10 is still $1000. Game makers make their money, if they're going to make any money, within the first month or so of distribution. Anything after that is just extra bucks.

 

[figmentPez]

I read an article, that I can't seem to find now, that said that profit margin on digital distribution was eight times greater than putting a physical copy on a shelf. I don't know if that's accurate, but I do know that it really is a lot cheaper to sell a digital copy than a physical one.

I did find this article from 2002 A small game startup is gunning for big publishers
"[Gabe Newell] estimates that Valve can realize a gross profit of $30 on a $50 title by releasing a game using Steam, compared with a gross profit of $7.50 by releasing a title through the retail channel with a game publisher."

 

[Chibibar]

Ah. so if that is the case, then Steam can sell for "less" (i.e. sales) and still come out ahead since they are all digital distribution.

 

[ThatNickGuy]

Don't forget other factors, too, as far as game companies go:
-Manufacturing
-Transportation (gotta get those discs from third world countries, y'know)

I'd say the game companies wind up making about the same amount, potentially more, with these sales.

I think it goes without saying that smaller or indie developers have been THRIVING on Steam and digital downloads like PSN. Tim Schaefer said that his company has made more money in the past year with the smaller titles (like Deathspank and Costume Quest) on PSN and Steam than Brutal Legend on a mass market.

 

[Adam]

Also, those goddamn boxes and manuals that the game comes with are expensive. A full colour print of those 20 page manuals? You'd be shocked.

 

[Chibibar]

Also, those goddamn boxes and manuals that the game comes with are expensive. A full colour print of those 20 page manuals? You'd be shocked.

Yea even mass printing (with discount) it adds up!

 

[@Li3n]

A game is 50$+ because they need to recoup all the money they put into making the game... when they do each extra copy is extra money... distribution and printing are probably not that much of the cost, or they'd never make enough money to pay for development...

And with digital the only costs are the money that goes to the distributor, and i'm guessing without the need to pay for a physical place the distributor has less costs, so he can take less.

So selling more copies = more money for both Steam and the Devs.... so if sales slow then having a sale is the best way, plus the extra players invigorate the game, especially for an MP game, and then more word of mouth praises the game which might lead to more sales etc...

 

[figmentPez]

This video has some info. Jump to ~3:27 for stuff on the cost of retail vs digital distribution


In short, the video says:
Retail game that sells at $60
was bought from the publisher at about $48
The publisher makes about $18 - $25 depending on how well the game sells

A digital game can make a publisher about $42 on a $60 game.

Obviously this is digital propaganda. Telltale Games was showing this video before a recent event (and Telltale hasn't put out any $60 that I know of.) However it is interesting.

 

[@Li3n]

When i saw that a few days back i was thinking that the 25$ thing was for console games, as they are 60$ most of the time.

So, 25$ x 500.000 units = 12.500.000$

And yet that's considered a flop... WTF.

 

[AshburnerX]

That's considered a flop because it barely covers development costs if it's a AAA title, let alone advertising. You also need to remember that every game isn't just trying to pay for itself, it's trying to pay for itself and starting capital for the sequel or another project at the company.

500K units for an indie game would be astounding. But for an EA title that wasn't a new franchise it would be abysmal.

 

[@Li3n]

Yeah, advertising i get, because costs there are always crazy...

But 12 mil. to make a game... are they paying an entire team of john romero's from the Ion Storm Dallas era?

 

[AshburnerX]

Yeah, advertising i get, because costs there are always crazy...

But 12 mil. to make a game... are they paying an entire team of john romero's from the Ion Storm Dallas era?

Actually, the average cost of a game is between $18 million to $28 million, with high profile games often exceeding $40 million.

Average salary for people just starting out is between 40-50k for the first 3 years and around a 10k raise after that, with the potential for more later on. People involved in the sound design generally make more, between 50k-60k. Benefits are generally decent but not overwhelming.

 

[@Li3n]

Actually, the average cost of a game is between $18 million to $28 million, with high profile games often exceeding $40 million.

Straight link: http://www.develop-online.net/news/33625/Study-Average-dev-cost-as-high-as-28m and it's for multiplatform games, so i'm assuming 3 teams working on it, or one team 3 times, and that's if we ignore Wii and other platforms which need a game made from the ground up for them. One platform is at 10 mil there.

Seriously though, MW2 as high as 50 mil. $ (without advertising)... for what, 5-6 hours in SP and a slightly modified version of MW1's MP...

Something's rotten in Denmark i tell you.


A normal dev team is lets say around 100 people, lets say they all make 100k a year, that's what, 1.000.000 a year, 3 years development time is 3.000.000... no way hardware costs are more then that unless they buy only alienware or supercomputers each year (100k per person in computers). So that's 6 mil... what exactly gets them to 10 mil for a run of the mill project?

 

[AshburnerX]

A normal dev team is lets say around 100 people, lets say they all make 100k a year, that's what, 1.000.000 a year, 3 years development time is 3.000.000... no way hardware costs are more then that unless they buy only alienware or supercomputers each year (100k per person in computers). So that's 6 mil... what exactly gets them to 10 mil for a run of the mill project?

Your math is wrong. 100 people making 100k would be 10 million, not 1 million. Your also forgetting things like office space rent, utilities, bonuses, benefits, advertising, manufacturing, shipping, advertising, convention space, licensing fees, travel fees, bandwidth, catering, entertainment, and just plan old unforeseen accidents. All of those things drive up the price considerably.

Even assuming 10 million flat, assuming you'd sell all of a 500k game run (and lots of games don't even sell that many) , you'd still need to make $20 bucks a game to break even... and breaking even isn't enough to sustain yourself. You need to make profits in order to finance your next game, even if it's only long enough to attract more investors.

 

[TheBrew]

You also have to consider that when games are made on a tight cycle like the COD games, there is going to be additional costs for OT.

 

[@Li3n]

Shipping and all that isn't part of the 25$... and i was kinda thinking of office rent and that stuff when i said hardware...

But yeah, i did get it wrong on the math about salaries...then i guess that's where most of the money goes...

ven assuming 10 million flat, assuming you'd sell all of a 500k game run (and lots of games don't even sell that many) , you'd still need to make $20 bucks a game to break even... and breaking even isn't enough to sustain yourself. You need to make profits in order to finance your next game, even if it's only long enough to attract more investors.

As pointed out above, they get 25$ per game, so they would make more then 10 mil...(2.5 mil more).


Anyhow, i was kinda going for the fact that they seem to be spending too much money on something...
Added at: 13:29

You also have to consider that when games are made on a tight cycle like the COD games, there is going to be additional costs for OT.

Yeah, but MW2 wasn't exactly a whole new game either...

 

[strawman]

Benefits (health insurance, etc) often cost an additional 50% of a person's salary, so a rough estimate of total employee cost is $150k per employee who is getting $100k of that via a check, and the other $50k via other benefits.

Overhead (office, utilities, administrative support, computer equipment, training, etc) can cost another 20-50% above the salary per employee as well. For instance HR, accounting, executives, advertising, sales, support, etc do not contribute much to the game development directly, but they support the game in ways other than development.

The typical game development process is, I suspect, a lot more complicated than many people assume, and it takes 2-5 years to develop an a-list game starting from concept until release:
Begin with an idea or concept - some defining aspect of the intended game
Convince the developer (say, EA) to pursue it
Developer gets producers
Developer and producers get investors (the developer may be an investor, and may be the only investor)
Development is started
- Storyboard
- Project estimation
- Decide on game engine
- Start creating digital assets (often outsourced to smaller firms)
- Create character models
- Create object models
- Start creating maps
- Textures
- Rigging (putting "bones" in models)
- Animation
- Lighting
- Physics
- Technical elements (new features, such as waves in water, wet hair, vehicle physics, etc)
- much much more
Then you start on advertising, production, sales, support, etc

Each of the above takes a team of several people months to perform the task, then for several months after that they are tweaking things. There is a huge effort involved in integrating everything so it all looks good together and works well. While it would be nice if they could use the same rigging, animation, and character models they already have from previous games, they often do not because players can tell that this main character moves differently than that one guy in the other video game. Further, time is limited. If they start with one game engine, they have to release within 18 months or so before they are eclipsed by other games with a tighter development cycle. This forces them to spend more in order to get the work done faster, again, often by sending out some of the work to smaller firms.

In other words, producing a video game with even only 2 hours of gameplay is not much different in terms of time and effort as it takes to produce a movie, or even a new drug (drug companies are often lambasted for the cost of a tiny pill, but many people don't realize how much it cost to get them there).

Then you have to go back and remember that the investors at the top of the list want more money back than they put in originally. So even if the game only cost 12 million to develop, the game company needs to make 24 million just to break even because they have to pay back the investors. It's more complicated than that, as the investors do assume some of the risk, but the concept is generally that "development costs" are not a fixed figure.

 

[Piotyr]

To add, also keep in mind that the developer and the publisher are (often) two completely separate entities. Speaking from personal experience...let's say you are an independent developer and you have a design for a game you want to develop. Here is the process:

1) Develop a demo for your design for free (or covering development costs yourself, basically)
2) Pitch the demo + design to publishers at either an event specifically geared for such or via existing connections.
3) A publisher agrees to fund development, on the condition that you also develop a game for this license they own. First, of course.
4) Spec out a design for the license game and submit to licensor for approval.
5) Licensor rejects design, offers own design (by offers, I mean orders). Design full of holes.
6) Develop game exactly according to licensor design, and submit to licensor for approval.
7) Licensor rejects game as being not fun and full of design flaws.
8) Fix design flaws on own, but make it seem like licensor's idea.
9) Submit approved game to publisher for testing and approval.
10) Receive massive list of publisher-demanded changes that will need to be fixed at developer's cost, since publisher only offered to cover standard development.
11) Complete changes, release game 3 months behind "schedule".
12) Release and sell game. Each sale nets about 10 dollars of profit.
13) Every dime of profit is taken by publisher until they redeem full cost of development and licensing.
14) After that, receive a share of the profits.

So, all in all, on a personal level, I spent about a year developing two games, got paid for about 2/3 of my work, and saw not a dime of the sales.

 

[@Li3n]

Benefits (health insurance, etc) often cost an additional 50% of a person's salary, so a rough estimate of total employee cost is $150k per employee who is getting $100k of that via a check, and the other $50k via other benefits.

Actually i went with 100k instead of the 50-60k because of those things...

But it's pretty clear that the reason costs are up is because there are more people working on one game...

To add, also keep in mind that the developer and the publisher are (often) two completely separate entities. Speaking from personal experience...let's say you are an independent developer and you have a design for a game you want to develop.

Any info you want to share about how much the development cost where?! Don't have to be exact.

 

[Piotyr]

Any info you want to share about how much the development cost where?! Don't have to be exact.

This was a bare-bones portable development house, so the costs were as pared down as possible.

Developer costs:
- 1 producer/designer ~ $7k per month
- 1 sound engineer ~ $7k per month
- 2.5 programmers ~ $12k per month
- 2 graphics artists ~ $10k per month

Publisher costs:
- License - no clue, but probably thousands of dollars
- Producer/designer - who knows, but paid more than us
- Executive producer - paid more than the producer
- 3rd party studio for artists - since license was being used on multiple platforms, they'd use their same artists for all platforms

Licensor costs:
- Just my sanity.

So for our part, a year's worth of development cost just the development studio about $430k, and the publisher paid us about $300k. That's about as pared down as it gets for development costs, too. So, it would have taken at least 50,000 in sales to break even just for our development costs, and that doesn't include any marketing, packaging, licensing, or publishing costs. So, really, it could easily require 100-200k in throughput to break even on a project as barebones as this.

 

[Chibibar]

Piotyr: Wow. That is pretty good stuff there. So when a game cost like 50 millions we are looking at LEAST 10milion unit sales just to BARELY cover publisher (assuming they gave you 50 million) and then cover the other cost and maybe you may get profit afterward (assuming 10$ profit per games)

 

[Piotyr]

Piotyr: Wow. That is pretty good stuff there. So when a game cost like 50 millions we are looking at LEAST 10milion unit sales just to BARELY cover publisher (assuming they gave you 50 million) and then cover the other cost and maybe you may get profit afterward (assuming 10$ profit per games)

This is also why so many of the bigger games go after merchandising as well. Easier to make profits that way.

 

[Frank]

That sounds exactly like what Kevin Smith has recently been rallying against. How broken the current distributor/film maker is. He's angry about how a film he and company self financed or raised the finances for (Red State, 4 million) can be sold to a distributor (at best 6 million, most likely 4 million) where the distributor will spend 20-25 million marketing said small movie thus requiring the movie to make at least 50 million to see any sort of profit at all. He talked about how it took 8 years for them to see any sort of profit on Clerks, and it only cost 25000 to make.