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.