Cracks in the business design

February 19, 2009

themoviesAt 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.

Forget it, CJ. It's Vinewood.

Forget it, CJ. It's Vinewood.

Zelfden points out exceptions to the rule such as Rockstar’s GTAIV, but we have yet to know how this investment will pan out for the company. And, as he observes correctly, to assume that every game is the phenomenon of a Grand Theft Auto is a poor presumption. Plus, the business dynamics between developers and the production of games is different than studios purchasing distribution rights from filmmakers, other studios, and theaters.

“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.



  1. Excellent post. I agree that game companies could not make a bigger mistake than trying to follow the Hollywood system, not only because of the apples/oranges distribution process, but also because the game industry is already several steps ahead in terms of digital distribution, support and active community involvement.

    Most of what follows here deals mainly with the console market:

    I think one of the main differences between the business models (Hollywood vs Games) is the entry level price. You can go see a movie for around $8-15 and purchase the DVD for $15-30. This still leaves you a good $15-30 under the going price for a console game.

    Because of this, I think it will be harder for game companies to pursue the episodic content revenue stream, especially if the games are delivered at full price with the understanding that additional levels, maps, etc. will still need to paid for.

    Valve is really the only company that seems to have a handle on this and actually seem to be willing to experiment with price levels to find the consumers’ sweet spots.

    But even with their success (as well as many MMOs), the real challenge is trying to corral the console market. While Microsoft has done fairly well with their XBox Live, Sony and Nintendo lag far behind. Further roadblocks are added by anti-piracy software and the insistence in turning quantifiable dollars into the electronic equivalent of Itchy & Scratchy Land Fun Bucks.

    The more hoops the average console owner has to jump through to get downloadable content (especially content they’ve paid for), the less likely this business model will be successful.

  2. @Capitalist Lion Tamer
    One glaring thing I left out is episodic gaming which is a completely different beast all together. The possibilities are pretty endless. The problem is the majority of the industry is viewing the console market and equivocating it as the market. Much of what is happening on PC is ignored all together which is why those business models are unfortunately seen as an anomaly instead of treated as the norm.

    My biggest fear is the inflation of Wii gamers seen as regular gamers. Whether if Nintendo can hold onto this consumers and if third-party developers are putting too much investment in this new market is troublesome. If none of these new gamers an make to the trek into the next console cycle I’m afraid that this over investment in this current console generation may create another videogame recession the likes of Atari back in the day. But that is all doomsday talk that I need more research on to make any accurate prediction for.

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