Brilliant Sean Mastrom's blog entry

[Squilliam]

noname2200 said:

Squilliam said:

Sky Render said:
Your statement, Squilliam, takes nothing into account for budgets of games. Under your assumption, "profit" has a constant target value for all games, which just isn't true. Some games (such as GTA4) have enormous budgets, but most games are made for sub-$20mil. Unless you wish to analyze each individual game's budget to show precisely how much each individual game has made or lost for a developer to prove your point, I don't really see how you can maintain the argument. And odds are, you would prove mine instead; it's bad business to stay in an industry where you only take losses, and only a very poorly run company keeps at a losing prospect when they cannot make a profit.

As I realized that I could not count profit I switched to revenue which is freely available information. 80% of games make 20% of the revenue. Or 20% of games make 80% of the revenue.

As development costs are fixed once a game is produced essentially, if you get 30 million in revenue from a game which cost 20 million your return on investment is 50%. If that same game nets you 60 million in revenue, your ROI is 200%. Double the revenue, quadrupel the profits.

Furthermore I showed that at retail the top 10% of games made 120 million in revenue or likely 60 million in the hand for publishers. If the average cost of marketing and development is 30 million then the average ROI for the top 10% of games is 100%. Furthermore I counted the sales/revenue from just one console, I excluded the PS3 from this and if it was included it would just further strengthen my point.

I make 600 widgets, and it cost me $950 to make them. If 550 widgets are stolen but I can sell 50 widgets for $20 each, I make $1000 so im still profitable even after I lose money on 550 of them. 

 

I see what you're getting at, but there are some major and unwarranted assumptions you're making here. First, you're assuming that the publisher will get every dollar that the customer pays at retail: that is demonstrably untrue.

http://www.forbes.com/2006/12/19/ps3-xbox360-costs-tech-cx_rr_game06_1219expensivegames.html

"For the companies that do put next-generation titles out early, making a profit is tough. Namco Bandai president Takeo Takasu said his company needs to sell at least 500,000 copies of each PlayStation 3 game it creates to make a profit. Analysts predict that some other publishers will need to clear 1 million units to get in the black--and start making about $1 per game sold."

If a publisher is really only making a profit of one dollar after they've broken even, your return on investment figures go straight out the window (Note: I'm uncertain just how long that holds for. You're widget example is a perfect example of the flaw in your thinking: you're not going to sell widget at $20 a pop (competition being what it is) but even if you magically do, retailers and shipping are going to be taking large bites out of your numbers.

No, if we're to continue this discussion, we'll be needing profitability numbers, rather than trying to exptrapolate them from revenue. That, obviously, is going to take a lot of work (slogging through financial records).

 

I wasn't assuming that every publisher got every dollar at retail. I was trying to prove that a vast majority of revenue is made by the top 20% of games. The margin of uncertainty supports my point because most games sell the majority at full retail and the best selling games maintain their prices/margins for longer than the games which are quickly discounted and withdrawn from market.

As games are essentially a fixed cost once developed, therefore its quite a safe assumption to believe that the higest selling games are vastly more profitable, or that the games that sell the least lose the greatest amount of money.

You missed the point I was trying to make with the widgets. Its not about competition its the fact that a company can lose money on other endeavers but still come out ahead overall. A profitable company is a prosperous one.