The problem with hit based models

This article from Slate captures the problems with the games industry brilliantly.  It describes how despite record sales of around $32bn last year all the leading games publishers are now losing money (including Activision-Blizzard, owners of World of Warcraft).  Then comes the (obvious) explanation:

So how can publishers lose money amid such incredible sales and record growth? The answer is simple: They’re spending more than they’re bringing in. Game development budgets have ballooned, and publishers are reeling because they can’t keep the costs under control.

As we know, this wasn’t always the case, I remember when my uncle wrote a flight simulator game for the ZX Spectrum in his spare time, made £5k and bought a new car, or as Slate puts it:

Games weren’t always expensive to make: In the early days, a boy with an Apple II could rule the world.

As has happened across many different games genres and formats development costs went up as publishers and developers looked to compete on quality.  No news there, but reading the Slate article got me thinking if there is a weakness in the human psychology which makes us over estimate the chances that our pet projects will be one of the big winners, one of the few blockbuster successes.  That would explain why games companies have let development costs spiral out of control.

The latest format to go down this path is browser based casual games where average costs are rising from the low sub $50k to $700k for Bookworm Adventures.  iPhone games are the new black though, and people are releasing games that cost next to nothing to make and bring in thousands of dollars per day – it won’t last long though as big games companies pile into the market and games industry vets form startups in this space that I’m sure will soon be venture backed.

  • Similarities to the VC market?

  • A lot of parallels, yes 🙂

  • Likewise, recognise that Apple has been great in driving product design but the closed environment they have created for music creates an enormous digital divide. iTunes is still essentially a 'shrink wrapped' model and reduces demand for / increases suspicion of all other download and sharing based models to the detriment of consumers and content producers alike.

  • MatthewWarneford

    It will be interesting to see if casual game budgets continue to rise. I have a theory that casual gaming can be immune to the forces that drove the up the immense budgets for 'hardcore gaming'.

    I think there are two main factors, the audience and the ROI. For such a long time games have competed with horse power, whether thats expressed through better graphics, bigger worlds, more enemies, AI, etc. I'm guessing thats been an effective strategy because of the type of people who became 'gamers'. As a broad generalization these tend to be early adopters, techies, etc.

    As games have followed Moore's Law so have the production costs… But unlike typical TV or mainstream media the games industry only wants big hits, the huge successes. Where its common for small (a couple of million dollar) films to be commissioned (keep in mind this is small in comparison to the cost of producing a blockbuster) its almost unheard of for small independents to get an xbox title commissioned.

    So we see the film studios happy with a 2-3x return on a small budget, while the games guys swing for the fences.

    Swinging for the fences makes sense when the audience expects bigger and better. But what we're seeing with casual gaming and social gaming is a completely new audience with new definitions of what makes a game fun.

    Suddenly throwing money at the game doesn't necessarily help. The article you link to says pretty much the same thing, all we're seeing for this $700k is better graphics (im summarizing…) but not significant innovation.

    Its much like the production budget for a book makes little effect on the final quality of the book. What's engaging is the content, not flashy effects.

    Without trying to sound like I'm just pitching what we're building, I think we're going to see a commoditization of the technology to create social gaming, virtual worlds, etc. These games are not about the technology battle, they're about game play, story, and narrative, which means its a perfect opportunity for technology standardization.

    Until that day the technology is a hurdle, but once the media guys can give their creatives simple tools we'll see them move rapidly into the 'gaming' space and apply their skills to build mass market experiences with ROI expectations well below the hardcore games.

    I apologize if it sounds like I'm comment pitching! Its just we're seeing more of our customers/partners come from the media sectors as they follow their audience online and into social gaming spaces. So I'm hopeful that I'm offering something useful to the discussion, backed up by what we're seeing 'on the streets', rather than sound like I'm just waffling on about what we do!

    Matt

  • Thanks Matt – a very interesting and insightful comment. I hadn't thought previously about the relative performance of raw content versus other production qualities and how that plays out across different types of game.

    That said your point reminds me of something Kristian of Playfish is fond of saying – that it is unclear to him whether licensing brands will be important for social games given people look at whether their friends are playing as the primary source of validation.

  • MatthewWarneford

    I think I fall on the fence about the role of licensing too. Certainly licensing confers some consumer validation – and in the tween sector a recognizable brand gives some degree of reassurance to parents that their children will be safe.

    For the players, I think the existing brand is less important than friendship recommendation.

    But I think the real opportunity is for the existing media players to launch new brands far cheaper that they might through TV alone. These media guys already have incredible creative talent, writers, dramatists, etc. With the right tools I think they can take those skill and translate them into a casual gaming with a real mass market appeal.

    And suddenly, they're not tied to advertising only revenue, they have a direct relationship with the customer.

  • MatthewWarneford

    I think I fall on the fence about the role of licensing too. Certainly licensing confers some consumer validation – and in the tween sector a recognizable brand gives some degree of reassurance to parents that their children will be safe.

    For the players, I think the existing brand is less important than friendship recommendation.

    But I think the real opportunity is for the existing media players to launch new brands far cheaper that they might through TV alone. These media guys already have incredible creative talent, writers, dramatists, etc. With the right tools I think they can take those skill and translate them into a casual gaming with a real mass market appeal.

    And suddenly, they're not tied to advertising only revenue, they have a direct relationship with the customer.