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The Game Effect Editorial

The Used Game Conflict Pt.1 - The Cost of a Great Game

Introduction To The Cost Of The Video Game Industry

By Nick Schneider on 2/14/2012
In 2009 Gamestop, one of the world's leading video game retailers estimated their used game revenue at almost two billion dollars, and in the following two years the secondary games market has become an issue that very few gamers can avoid. Publishers and Developers have taken notice of these figures and are trying to find a way to cut into a piece of the pie with the ever more common Online Pass. Whether you stand firmly for or against the online pass, the supply side of video games is on the verge of a major face lift. There are misconceptions and misinformation on both sides, and those in support of the pass champion the measure as merely being fair to the developers, and those against it feel that the consumer is paying for inflated budgets. In this series we will take a look at the business side of the industry as it relates to distribution and profit sharing. We'll track a game from developer pitch to retail distribution, and ultimately into the consumers hand and where that money is going through each step.

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Before a publisher makes any decision on funding a game to be developed, a development team has to come up with a pitch. This process usually involves a development team working on several documents that detail the concept, and the production plan to be used. It is essential to developers that their proposals be profitable or at least show how they can be profitable for a publisher before funding can begin. During this time, unless the development team is tied directly to a publishing company, the studio pitching the game are the ones funding this project, because of this the pitch process is crucial to most independent studios survival. Typically the costs at this time covers artists and writers salaries as the developer provides the necessary concept art and story points to prove a game can be profitable. However many developers are often working on multiple projects, or cycling through staff to keep the process rolling, as time from pitch to publication can usually take from one to three years. Once a studio has provided a clear concept with a production plan for a marketable game, the publisher is then ready to begin funding a project based on the needs of their company and the development team.
The budget for a video game is decided on several factors, but primarily these numbers are based on what the developer needs to accomplish the established goals, and how profitable the game seems to the publisher. In the 1990's a budget that exceeded 200,000 dollars, such as with Doom II in 1993, was considered extremely expensive for a video game. Then, game budgets primarily paid for the artists and developers, however in today's market this is not always the case. The most expensive game to date prior to Star Wars: The Old Republic which came in at 130 million dollars, was Grand Theft Auto IV   at 100 million dollars. The budget for this game went to the artists, level creators, testers, etc. but also was used for marketing, licensing of music, and voice actors.

The shift in game development is less a process of technology exceeding the price points of the 1990's and early 2000's, but is more of a standard of quality that gamers have come to expect in this day and age. Compare the following two videos, the first is from the Sega CD and 3DO 'classic' Sewer Shark and is an early example of developers aiming for a cinematic experience.

The acting and talent behind games has increased proportionally with the advances in hardware and the growing popularity of the medium. This flourish of technology has given way to more robust and interactive worlds; the experience from top to bottom for a player is derived directly through immersion into those worlds, and quality voice acting helps bring that to the consumer. Gamers have benefited from this increase in quality just as well, consider the opening scene to Uncharted 2: Among Thieves on the Playstation 3.

The quality of product from Sewer Shark to Uncharted 2: Among Thieves is evident, and that increase in technique is expenisive. During the process of programming a game, the developer, with the budget given or financed, provides the pay for its employees. The studio hires or locates talent to projects in a way that will make the game come in on time and under the desired budget to produce the expected deliverables. Publishers and developers are both taking a risk at this point, if the studio falls into a position where their goals were out of reach of the budget, or begin to miss a deadline, then publishers begin to push back on further increases to budget. With the cost of AAA games consistently on the rise, publishers and developers are seeking to reap as much revenue as possible from the sale of those games (naturally), and the used-game trade can effectively kill that mission.
In the case of Activision, heavy hitting series such as Call of Duty are often used to counter balance any games published that may not reach the levels of desired sales. Because of the money generated off of one series, which has consistently set sales records, the company is capable of generating games such as Prototype and Prototype 2. New IP's are typically riskier ventures, but with a living "cash cow" Activision is more free to take chances. As well, Ubisoft has found an unexpected financial success in what has become their biggest franchise of late, allowing them to distribute that wealth to other properties. Indeed, this past holiday season alone Just Dance 3  sold far more copies than Assassin's Creed: Revelations, placing second overall in sales compared to the tenth place Revelations. Meanwhile, some studios behind functionally sound games have been forced to close down in recent months.

Even industry giants such as Activision and EA would not go unscathed in 2011 despite their status at the top of the publisher market; Activision was forced to close Bizarre Creations after their James Bond title Blood Stone failed to reach expectations, and following a disappointing outing for Blur prior. Surprisingly EA had to shut down the Visceral Games Melbourne studio after the company felt that profitability from the studio wasn't as great as it could have been. This move however, had less to do with poor sales from the studio's games and more to do with maintaining a more profitable infrastructure.

Also of note is that Kaos Studios, the team behind Homefront, couldn't survive the onslaught of poor sales that accompanied their most recent release, and in this day and age it is crucial that a studio have as many new game sales as possible to maintain their ability to perform. In the case of Kaos Studios however, there was more than just mediocre sales at the core, as they were directly tied to THQ and that company's current financial meltdown. The crisis at THQ also saw two studios that headed the MX Vs. ATV series, Digital Studios Phoenix, and the studio in Warrington, which handled smaller downloadable compliments to series such as Warhammer 40,000 and Red Faction, close down as well.

The headlines of today involve THQ in dire straits as the uDraw tablet failed to reach the lofty goals the studio had established for the device. This slip in profitability has lead to massive studio layoffs, and even their CEO has taken a 50% pay cut in an effort to keep the studio up and running. More and more studios are forced to downgrade as budgets continue to increase, and sales figures for their projects slide into dangerous lows. Publishers too must carry the risk, they have given money to a studio to make a game, and if that game isn't profitable then the chance of making up their money begins to shrink. Often times today though companies like Activision and EA act as umbrella corporations when it comes to video game publishers. The two giants of publishing are often financing and distributing multiple types of games that cater to a wide audience spanning nearly all platforms and genres.

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The industry is still struggling, and many games are not instant hits. Some publishers have taken significant measures to counteract piracy, including DRM's and Online Passes. These methods are even used to entice gamers to purchase new copies of games, or avoid missing out on content if they don't pay for those rights. In part two of this series we'll take a look at the retail distribution model for the games industry, and how used games factor into these equations of increasing budgeting concerns. With these costs in mind, we'll look at online passes, and consumer internet availability, as well as what rights consumers have to content on the disc at time of purchase.
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Elleyena on March 30, 2012
Great article. Definitely looking to see more of this series.
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MrGame on February 22, 2012
I do not see what's wrong with buying used games. It can be a cost effective, and the world has nothing to do with your purchase.

P.S: Great article.
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sunsedrengen on February 22, 2012
i would love to follow up on this article
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KrazyTaco1 on February 17, 2012
Great article
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MikeDeas879 on February 15, 2012
Looking forward to seeing more of these.
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Dualsmg14 on February 15, 2012
Very good article, looking forward to the next one. Also, great cover picture on the article, made me laugh.
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