Chapter 7.2Game Industry Rolesand Economics

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Video Game IndustryValue Chain

D e v e lo pm e n t

M o tio n - c ap tu r e p r o v id er

D eliv er y m ed iam an u f ac tu r er

D e ve lo pe r

P ublis he r

P la tf o r m h o ld er

( S o n y , M ic r o s o f t ,N in ten d o )

G am ec o d e

G am ec o d e

D ata

G am e c o d e( m as ter d is k )

F in is h edg o o d s

Bu g lis t

Ar t/an im atio n p r o v id erD ata

D is tr ib u to r o r r ep g r o u p P R f ir m & ad ag en c y

M ed ia ( T V, m ag azin es , I n te r n e t)

G am e s am p les & m ar k e tin g m ate r ia ls

G am e in f o

R eta ile r ( W al- M ar t , T ar g e t , T o y s "R " Us , E B)

F in is h ed g o o d s

C o ns um e r

G am e in f o

C o n tr ac t Q A p r o v id er

G am ec o d e

F in is h ed g o o d s

F in is h ed g o o d s

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Game Developers

Can be independent, or subsidiaries of publishers

Many developers started on PC due to accessibility of tools Console development requires

proprietary development kits and preexisting relationship with publisher

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Game Developers: Full-Service Cover all disciplines: art, animation,

programming, asset management, production

Idea for the game (“intellectual property”) can come from developer or publisher

Work for publisher on contract basis Paid set amounts per milestone completed

Payments are advances against future royalty payments

Royalties are calculated as percentage of publisher’s “net receipts”

Definition of net receipts is frequently obscure

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Motion Capture Used to automate animation

process for more realism in human characters

Magnetic or optical systems Internal mocap studio at publisher

or external service provider Services include accompanying

software and technicians, and post-capture data processing and tuning

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Art and Animation Service Providers Developers can outsource art and

animation assets to external companies Specified at contract and included in

development budget Art houses can become full-service

developers with judicious addition of programming talent

Cost is a function of quality, team location, and volume of assets

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Publishers If developers are the “geeks”,

publishers are the “suits” Various specialties: PC only, PC +

console, mobile, import, web Console/PC publishers handle:

Production process Quality assurance Licensing Manufacturing and shipping to retail Sales Consumer marketing and PR HR, finance, investor relations, legal

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Revenue from $50 Console GameAmount Purpose Paid By Paid To

$3 Cost of goods Publisher Media manufacturer

$7 Publishing license royalty Publisher Platform holder

$13 Retailer profit Consumer Retailer

$3 Markdown reserve Publisher Retailer

$8 Development cost Publisher Developer

$10 Operating cost Publisher Internal(overhead, freight, co-op, bad debt)

$6 Marketing Publisher Ad agencies and media

Items in bold can be converted to profit through careful publisher cost management.

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Quality Assurance Service Providers

Alternative to maintaining team of full-time salaried testers

Established in PC publishing, due to amortization of multiple hardware configurations over multiple projects

Gaining ground in console publishing; security of sharing proprietary console equipment is a perceived concern

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Public Relations Firms, Advertising Agencies, and Merchandising Teams

PR firms communicate with “consumer” media (ie mass-market general

media) “specialist” video game publications

Ad agency prepares creative for marketing campaign good communication ensures alignment of

vision with publisher Merchandising teams ensure all is in

order at store level

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Platform Holders

Revenue comes from: Hardware sales Licensing fees from compatible

peripherals First-party games Licensing fees from third-party games Licensing fees from development

tools Revenues from sales of proprietary

delivery media

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PCs are an Open Platform Intersecting relationships among:

CPU manufacturers, application software providers, graphics chip manufacturers, and box assemblers

CPU (Intel, AMD) and graphics chip (NVIDIA, ATI) manufacturers provide developer support and market their technology benefits directly to consumers

Application software providers (Microsoft) give developers free tools to ensure compatibility

Box manufacturers (Dell, HP) may bundle hot software titles to add value to their sale

Low barrier to entry for developers, but high competition for shelf space

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Consoles are a Closed Platform Console companies (Nintendo, Sony,

Microsoft) control nearly every aspect of games on their platforms

Proprietary development hardware and software Permission to become a licensed publisher License to use console company trademarks in

marketing materials May require permission to start a game Certification of a finished game

Investment in hardware must be offset by revenue from software (around $7/unit for third-party games)

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Delivery Media Manufacturers Delivery media for closed platforms include

anti-piracy technology Engineered by platform holder

Console companies historically manufacture finished goods for publisher

Nintendo and Sony continue to do so Sega pioneered direct relationships under

license between DVD manufacturers and publishers

Microsoft follows this model with Xbox Some publishers only manufacture disks, then

complete assembly at contracted packout companies

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Retail

Brick-and mortar retailers generally earn 30% margin on a $50 game

Sales of packaged goods by internet retailers follow the brick-and-mortar model

Electronic download of games via internet rising in popularity

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Sales Channel:Distributors

Purchase games from publishers, and resell to smaller independent stores and chains

Compete on price, speed and availability

Earn profit margin of around 3% Allows retailers access to many

publishers w/out separate relationships

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Sales Channel: Manufacturer’s Representatives

Establish personal relationships with buyers at national retailers

Compete on credibility and knowledge of retail processes and systems

Beneficial for new product launches from new companies

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Sales Channel: Regional Retailers

Independent store chains with in-depth consumer sales relationships

Compete on product knowledge and differentiated product offering

Buy games from distributors

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Sales Channel: Rental Retailers

Purchase games from publishers at standard pricing, but with no returns

Allows consumer to try a game before buying Boosts sales of good games; kills bad

ones Some rental retailers have begun

selling games

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Sales Channel:National Retailers Familiar names:

Electronic Boutique, Best Buy, Toys “R” Us, Wal-Mart

Publisher bears burden of relationship: Ships games to distribution center, or direct to stores Provides in-store merchandising materials Provides store staff with sales materials Generous payment terms (net 60+) Inventory auditing Perks: concert tickets, business dinners, golf In-store promotional events

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Sales Channel:National Retailers Retail buyer makes all game purchasing

decisions Indifferent buyer = poor sales and

disorganized in-store selection Buyers hold various controls:

Not stock a game at all Stock only in best-performing stores Feature game in weekend circulars Pricing adjustments

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Sales Channel:National Retailers Open-to-buy = amount of money

available in buyer’s budget that month to purchase new inventory Function of sales velocity and selling season “No open-to-buy” = high competition

among new releases for the period Sales data vital to publishers

Weekly and monthly reports called TRSTS provided by company called NPD

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Summary

Roles in video game industry haven’t changed much in 30 years

However, flow of money (ergo, balance of power) has shifted greatly

Balance of power keeps shifting, e.g. as next-generation console project costs skyrocket