Cracks in the business designFebruary 19, 2009
At the start of the week Slate Magazine’s N. Evan Van Zelfden posted an article called “What is killing the videogame business?” In it, he provides many interesting numbers on the massive growth of videogame sales the past year adverse to the numbers of massive layoffs we have seen within the industry during this recession. He concludes that the fault lies on the major development houses transitioning their financial production models to the Hollywood business model. High production costs and low returns are the culprit. I have posted about this subject previously, but not with the same level of specificity and investigative research that Zelfden has done in his article. But he is missing an aspect of the Hollywood studio business model that is glaringly absent in his article.
What Zelfden misses is that the business model for the Hollywood studio system heavily relies on numerous release windows for a single film. Only a moderate percentile profits for a film come from its initial domestic and foreign release in theaters. The other majority of the percentile come from various other windows of opportunity from the market. There is Pay TV being the premium cable services to purchase films, network cable, syndication and, of course, DVD release. DVD release makes up 60% of the profits for a single film. As new avenues of digital distribution and monetization occur the lifespan of a film is fairly larger than that of a videogame. And just like classic films have made a return to home release, so have classic videogames returned to this generation of consoles.
But videogames do not have the luxury of these various windows of release. And it has been widely criticized that companies do not get any profit from the resale of the product. For the videogame industry to take on the same business model as the Hollywood studio system is financially absurd. The way the media is distributed is not compatible, similar to how the music industry cannot follow the Hollywood model as well. The way the media is consumed and sold to the audience reveal completely different purchasing attitudes and windows of opportunity to monetize the product for profit.
“Companies like EA and Activision are two kinds of businesses at once, making games themselves while publishing the work of other developers. It was a natural evolution: Publishers built distribution and marketing networks for themselves, grew successful, and found that they could use that same pipeline to sell somebody else’s games. Though publishers rake in more profits when they own the titles they’re releasing, working with outside firms enables them to put out more games.”
As I have blogged before, the games market has become overrun with too much content that is all worthy of our time. Inflating developments costs and diminishing returns on these blockbuster games are the early stages on how the business of making videogames has to change in the next five years. I have discussed the game model of consistent and periodic returns on a game where a developer will stick to adding compelling downloadable content for the consumer. This does not only battle against the questionable controversy of used-game resale, but by focusing on a fewer number of games and reiterating improvements with additional content will strengthen the relationship of not only the developer and the costumer, but also between the costumer and the product.
Both Criterion and Valve have reported phenomenal returns and growth by continuing to add to a single game. Gabe Newell of Valve recently stated at the DICE keynote, “Team Fortress 2 sales go up by over 100% when there’s a free update on the PC.” Stardock’s Sins of a Solar Empire consistently draws a profit with its low production and requirement costs to the consumer, with an expansion pack right around the corner. And MMOs have consistently relied on continuous content to remain viable. The age of the two-week AAA game is not going to disappear, but for companies to stay afloat there has to be a new way business is done. Following the path of another industry will not suffice as a viable solution.