FearFearAn Appropriate Response To The Future Of Video Game

Development

An Appropriate Response To The Future Of Video Game

DevelopmentJason Rubin @ Australian Game Developer Conference 2004Jason Rubin @ Australian Game Developer Conference 2004

Copyright © 2004 Morgan Rose, LLC.

There’s Tons of Good News in

the Video Game Industry

There’s Tons of Good News in

the Video Game Industry

We Will Not Focus On It Today

We Will Not Focus On It Today

The Difference Between Successful Developers

and the Rest…

The Difference Between Successful Developers

and the Rest…

[Keep Your] Mind On [your] Money And

Money On [Your] Mind

[Keep Your] Mind On [your] Money And

Money On [Your] Mind– Snoop Dog– Snoop Dog

Business…Business…• I understand and appreciate the

nobility of those that develop for the love of game making alone

• I also understand and appreciate the glory and nobility of Mounted Cavalry.

• But as those riding mounted cavalry against Armor during WWII soon found out…

• I understand and appreciate the nobility of those that develop for the love of game making alone

• I also understand and appreciate the glory and nobility of Mounted Cavalry.

• But as those riding mounted cavalry against Armor during WWII soon found out…

It’s the GameIt’s the Game

The World Doesn’t Ask Permission to Change

When it Does Change, One May Suddenly and Dramatically Lose

the Ability to Do it Their Way

The World Doesn’t Ask Permission to Change

When it Does Change, One May Suddenly and Dramatically Lose

the Ability to Do it Their Way

“One desire was uppermost in our minds... Should modern warfare depose the cavalry, then we would make a dignified exit after just one more glorious tradition of our cavalry.”*

“One desire was uppermost in our minds... Should modern warfare depose the cavalry, then we would make a dignified exit after just one more glorious tradition of our cavalry.”*

*http://www.polishnews.com/fulltext/history/2001/history4.shtml

Times are Changing

So Must the Strategies

Times are Changing

So Must the Strategies

Look At The Facts…Look At The Facts…

Budgets are Increasing

by 4-5x Every Console Cycle

Budgets are Increasing

by 4-5x Every Console Cycle

Budgets are Going UpNaughty Dog Budget BreakdownBudgets are Going UpNaughty Dog Budget Breakdown

Way Of Warrior 1994 3DO $0.1 12 $0.10

Crash 1 1996 PS1 $1.7 21 $0.97

Crash 2 1997 PS1 $2.0 13 $1.85

Crash 3 1998 PS1 $2.2 9 $2.93

CTR 1999 PS1 $2.4 8 $3.60

Jak And Daxter 2001 PS2 $14.0 24 $7.00

JakII 2003 PS2 $15.0 24 $7.50

Jak3 2004 PS2 $10.0 13 $9.23

Next PS2 2005 PS2 $10.0 11 $10.90

Next PS3 2007 PS3 $25.0-$30.0 24-36 $12.0-$15.0

Title Year System Budget MM Months $/Yr Dev MM

Sales are Not Keeping PaceSales are Not Keeping Pace

Budgets Outpace SalesBudgets Outpace Sales

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Mill

ion

s O

f D

olla

rs

Millions Spent Per Month Of DevelopmentSales at 50% Increase Per Generation (From '96)

“Breakeven” is Getting Harder to

Reach

“Breakeven” is Getting Harder to

Reach

Developer Breakevens Developer Breakevens

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

10,000,000

$2 $4 $6 $8 $10 $12 $14 $16 $18 $20 $22 $24 $26 $28 $30Budget In Millions

Un

its

Ne

ed

ed

to

Bre

ak

Ev

en

.

$3/unit Royalty$6/unit Royalty$9/unit Royalty

The Pie is Being Split InMore Ways

The Pie is Being Split InMore Ways

More Slices to the PiePushes Revenue DownMore Slices to the PiePushes Revenue Down

Publisher

DeveloperLicenses

MusicTalent

2005

1999

PublisherDeveloper

Sales are More Hit Driven

Sales are More Hit Driven

The Hit CurveThe Hit Curve

0

1

2

3

4

5

6

Sal

es In

Mill

ion

s O

f Un

its

1081 Titles Released In USA on PS2, Xbox, & GameCube 2000-2004

Source: NPD Funworld, June, 2004 NPD Toy Research Tracking (TRST) data

The Hit Curve ZOOMEDThe Hit Curve ZOOMED

0

1

2

3

4

5

6

Sal

es In

Mill

ion

s O

f Un

its

Top 100 Titles Released In USA On 3 Consoles

Source: NPD Funworld, June, 2004 NPD Toy Research Tracking (TRST) data

Squeeze

Squeeze

This is Causing a

This is Causing a

The SQUEEZEThe SQUEEZECOSTS

– Development Budgets Are Increasing Quickly

– Marketing Budgets Are Increasing In Lock Step

– More Parties Demanding Their Share

REVENUE– Reliance On Hits

– Total Unit Sales Increasing Slowly

– Unit Price Is Steady or Dropping

– Retailers Are Stocking Fewer

Titles & Demanding Price Protection

Faster

Fewer New IP’s are Being Created

Fewer New IP’s are Being Created

TYPE OF TITLETYPE OF TITLE

Squeeze

SqueezeRESULT #1

CONSIDERCONSIDER75 of the Top 100 US Current

Generation, Non-Sports Video Game Console Titles are Sequels to Video

Game Properties*

15/100 were Movie/TV/Other Licenses**

15/100 were New Unlicensed Video Game Properties - Originals

75 of the Top 100 US Current Generation, Non-Sports Video Game Console Titles are Sequels to Video

Game Properties*

15/100 were Movie/TV/Other Licenses**

15/100 were New Unlicensed Video Game Properties - Originals

*Ranked By unit Sales; Source: NPD Funworld, June, 2004 NPD Toy Research Tracking (TRST) data**Can Also Be Counted As A Sequel If There Was A Previous Iteration Of the License On A Console

CONSIDERCONSIDER40% of Activision’s Publishing

Revenue for Fiscal 2003 & 2004 Came from Just 2 Titles*

2005 is Guaranteed to Be the Same

40% of Activision’s Publishing Revenue for Fiscal 2003 &

2004 Came from Just 2 Titles*

2005 is Guaranteed to Be the Same

*Source: Activision Annual Reports ForFiscal Year 2003 And Fiscal Year 2004

CONSIDERCONSIDEROver 30% of the Revenue in the Industry is Derived from Fewer than 3% of the Total Stock Keeping Units (SKUs)*

Over 30% of the Revenue in the Industry is Derived from Fewer than 3% of the Total Stock Keeping Units (SKUs)*

*Edward Williams, Harris Nesbitt “Managing the Transition”, November 2004

The Greatest Amount of Value Comes from the Launch of Original Evergreen IP

But– Costs to Launch New IP are Prohibitive– Sales are More and More Hit Driven– Steady Revenue Creates Stock Stability– There aren’t Enough “Great”, “Available” Developers

So

Publishers are Not Investing in Enough New IP

VALUE IN THE FUTURE WILL COME FROM NEW IP CREATION

The Greatest Amount of Value Comes from the Launch of Original Evergreen IP

But– Costs to Launch New IP are Prohibitive– Sales are More and More Hit Driven– Steady Revenue Creates Stock Stability– There aren’t Enough “Great”, “Available” Developers

So

Publishers are Not Investing in Enough New IP

VALUE IN THE FUTURE WILL COME FROM NEW IP CREATION

CONSEQUENCESCONSEQUENCES

Two Distinct Developer Models

Two Distinct Developer Models

WHO MAKES ITWHO MAKES IT

Squeeze

SqueezeRESULT #2

The Quality/Cost SpectrumThe Quality/Cost Spectrum

Two Types Of DeveloperTwo Types Of Developer

“AAA”

Developers

• Huge Budgets

• Quality First

• More Original IP

• Few Teams

• People Over Price

• Profit From

“Backend”

– Unlimited Upside

– Hi Risk

– Can Get Rich

“AAA”

Developers

• Huge Budgets

• Quality First

• More Original IP

• Few Teams

• People Over Price

• Profit From

“Backend”

– Unlimited Upside

– Hi Risk

– Can Get Rich

“WFH” Developers

• Strict, Limited Budget• Deadlines First• Reliance On Licenses• Economies Of Scale• Price Over People

• Profit From “Margin”– Fixed Amount Per Title– Lower Risk– Can Be Profitable

“WFH” Developers

• Strict, Limited Budget• Deadlines First• Reliance On Licenses• Economies Of Scale• Price Over People

• Profit From “Margin”– Fixed Amount Per Title– Lower Risk– Can Be Profitable

You Have To Choose Your Business Model… And Your Potential Earnings Level

•Don’t Get Caught In The Middle!

•Don’t Suck!!!

You Have To Choose Your Business Model… And Your Potential Earnings Level

•Don’t Get Caught In The Middle!

•Don’t Suck!!!

CONSEQUENCESCONSEQUENCES

Development Will Move To Developing

Countries

Development Will Move To Developing

Countries

WHERE IT IS MADEWHERE IT IS MADE

Squeeze

SqueezeRESULT #3

Reasons Salaries in “Primary” Markets will Continually Increase

Reasons Salaries in “Primary” Markets will Continually Increase

• Demand For Talent Exceeds Supply– Especially In Programming

• Maturing Industry Labor Issues– The “EA-Spouse”, Labor Litigation, and Unions– The Naughty Dog “Solution”

• That Damn Annual Raise– Labor Cost per Man/Year Doubles Every 10 Years

• Demand For Talent Exceeds Supply– Especially In Programming

• Maturing Industry Labor Issues– The “EA-Spouse”, Labor Litigation, and Unions– The Naughty Dog “Solution”

• That Damn Annual Raise– Labor Cost per Man/Year Doubles Every 10 Years

Comparable Monthly Per Employee Average Costs Incl.

Overhead

Comparable Monthly Per Employee Average Costs Incl.

Overhead

*For Similar Employee, BA or Masters In Computer Science, Like Quality Artist

USA $10,000-$15,000

Canada/W. Europe/Japan $7,000-12,000

Australia $6,000-8,000

USA $10,000-$15,000

Canada/W. Europe/Japan $7,000-12,000

Australia $6,000-8,000

Korea $5,500-6,500

Eastern Europe $4,000-5,000

South America $4,000-5,000

USA $10,000-$15,000

Canada/W. Europe/Japan $7,000-12,000

Australia $6,000-8,000

Korea $5,500-6,500

Eastern Europe $4,000-5,000

South America $4,000-5,000

China $700

The “China Will Never Make ‘AAA’ Titles” Mistake

The “China Will Never Make ‘AAA’ Titles” Mistake

USA “AAA”

MODEL 2009

($15,000

man/month

x 100

employees

x 1 year)

=$18,000,000 /

year

CHINA “AAA” MODEL 2009($1,000 man/monthx 300 employeesx 1 year)+($500,000 man/yearx 10 Foreign Employeesx 1 Year)

=$8,600,000 /year

Is There Any Good News?Is There Any Good News?

Possible ReliefPossible Relief• Increasing the Average Selling Price (ASP)

at the Start of Next Generation– More Revenue even with Additional Retailer

Margin and COGS/Platform Royalty

• Online Distribution– Cut Out The Retailer– Lower The COG & Distribution Costs– Reduce Impact Of Piracy, Rental, Resale

• Subscription Based, Pay Per Play, Etc.– Multiple Revenue Options

• Increasing the Average Selling Price (ASP) at the Start of Next Generation– More Revenue even with Additional Retailer

Margin and COGS/Platform Royalty

• Online Distribution– Cut Out The Retailer– Lower The COG & Distribution Costs– Reduce Impact Of Piracy, Rental, Resale

• Subscription Based, Pay Per Play, Etc.– Multiple Revenue Options

SQUEEZESQUEEZE

Some ThoughtsOn Australian

Game Development

Some ThoughtsOn Australian

Game Development

My Extremely Unscientific Survey of American Publisher Attitudes Towards Australian

Development

My Extremely Unscientific Survey of American Publisher Attitudes Towards Australian

Development• Methodology

– Small, Semi-Random Sample Size– Leave Question Open Ended– Show Subject No Recording Method– Prepare Subject with a Few Drinks– Don’t Tell Subject about AGDC Keynote

Hence: They Must Remain Anonymous

• Methodology– Small, Semi-Random Sample Size– Leave Question Open Ended– Show Subject No Recording Method– Prepare Subject with a Few Drinks– Don’t Tell Subject about AGDC Keynote

Hence: They Must Remain Anonymous

Australian Strengths(Reasons To Expand/Invest)Australian Strengths(Reasons To Expand/Invest)

• Reputation for Quality, Reliability, Value, and Smooth Relations

• “40%” cheaper than US Development– This May Expand with US Labor Issues

• Common Language and Culture– Doesn’t Feel Like International Business– Game Content is Culturally Compatible

• Capable and Willing to Fill Out Roster of Last Generation & Licensed Titles

• Reputation for Quality, Reliability, Value, and Smooth Relations

• “40%” cheaper than US Development– This May Expand with US Labor Issues

• Common Language and Culture– Doesn’t Feel Like International Business– Game Content is Culturally Compatible

• Capable and Willing to Fill Out Roster of Last Generation & Licensed Titles

Thinking PointsThinking Points• Currently, the “WFH” Approach is Paying

Off for Aussie Developers

• As China et al. Come Online, “Low Cost” Production will Move Elsewhere

• At That Point “AAA” Developers will do Well While “WFH” Developers will Find Themselves Incapable of Competing with the New Low Cost Providers

•“Australian Development is a Good 5 Year Investment”

• Currently, the “WFH” Approach is Paying Off for Aussie Developers

• As China et al. Come Online, “Low Cost” Production will Move Elsewhere

• At That Point “AAA” Developers will do Well While “WFH” Developers will Find Themselves Incapable of Competing with the New Low Cost Providers

•“Australian Development is a Good 5 Year Investment”

The 5 Year PlanThe 5 Year Plan• Move Up The Development

Ladder– Move Toward IP Creation– Go Current Generation– Be Competitive With “AAA” World

Standards– Outsource To Keep Prices Down

Sell Management And Creative Skills Over Manufacturing Advantages

• Move Up The Development Ladder– Move Toward IP Creation– Go Current Generation– Be Competitive With “AAA” World

Standards– Outsource To Keep Prices Down

Sell Management And Creative Skills Over Manufacturing Advantages

In ConclusionIn ConclusionThe Old Developer Model is Being

SqueezedThis Has Caused Or Will Cause:1. An Increase in IP Value but Less original IP

being Made2. A Bifurcation of Development Models to

“AAA” and “WFH”3. A Movement of Game “Manufacturing” to

Cheaper Locals

Developers Must React And Find A Comfortable Place Within This New Dynamic

The Old Developer Model is Being Squeezed

This Has Caused Or Will Cause:1. An Increase in IP Value but Less original IP

being Made2. A Bifurcation of Development Models to

“AAA” and “WFH”3. A Movement of Game “Manufacturing” to

Cheaper Locals

Developers Must React And Find A Comfortable Place Within This New Dynamic

Keep Your Mind on the Money

Keep Your Mind on the Money

For Cash or The Prize Of Being Able To Do

What You Love

For Cash or The Prize Of Being Able To Do

What You Love

Questions?Questions?