Slimebeast said: Damnit, I write long posts to try to explain what I mean, and here comes a guy from the business world (!) and misunderstands the whole thing. Remember the prerequisites by the OP for this discussion:
My answers are in green. This rich text editor is buggy as hell in Opera... Ok, sorry if I came on too hard but you were stating things that are not true, at least from a business sense. Your points have been already addressed by others, but I'll throw in my two cents as well. First of all, you explain dividends for no use. Because from a laymans perspective that's basically the same thing as making money by trading stock. Perhaps, then, I'm not a layman, but it seems to me there's a great big difference in money being paid to my bank account as dividends, without me needing to do anything except own the stock, and actually selling stock, which requires a tiny bit of effort in my part and means that I don't anymore own them. Next, the part in red. "Fixed costs (in which you include R&D costs, administrative costs, salaries of R&D) are called fixed because they do not depend on the revenue". Are you insane? Yes, that is true for how the numbers are structured in each Fiscal report, but not in the real business world over time. R&D and all the other factors you listed are tied to revenue first and foremost. Or are you suggesting that Ford Motors has, or will have, a smaller budget for R&D than BMW, just because the former hasn't shown profits in a decade, while the latter has a 15% profit margin? I see where you're coming from, and yes, in the long term all costs tend to be correlated to the revenue. However, within a fiscal year, which is what we're talking about here, fixed costs do not depend on the revenue. There is a reason why they are called fixed costs. Ford is a HUGE car-maker and a $200 billion company, but one that just doesn't seem to be able to make profits no matter what they try, while BMW is one of the most profitable car-makers and a $60 billion company. Yes, BMW makes $10 billion in profits each year, and Ford makes $0. Every single year. But tell me which of the two has the biggest R&D budget, which has the most car models released each year, which has the biggest advertisement & sponsorship expenses (including Formula-1 and Rally)? (no, it's not BMW) I honestly fail to see how this is relevant to what we're talking about. Unless you want me to believe that Ford is more succesful a company, which, to a degree, is true. After all, they have managed to grow to where they are now, even though if current the trend continues they will face a downward spiral. Blue part: You think Google, Amazon and Skype became world-leaders in their fields by being profitable? Nope. Generally companies grow by doing investments with external capital, at least nowadays when the risk capital mechanisms are so well-developed in the business world. This point was very well covered by bdbdbd already, so I'll just reiterate: the companies you mention started their operation, as pretty much all companies do, by raising external money. They financed their growth with that external money. For those three, there were thousands and thousands of other, similar companies that went bust. And anyway, being the world leader in the internet economy does not mean you need to have high revenue. What's the turnover of youtube, or what it was before it was bought? According to this site, it's 85 million $, though I'm not at all sure where that number comes from and if it actually means youtube or Chad Hurley. Anyway, your statement that companies generally grow by raising external capital is correct, but what you leave out is why the company is actually able to attract investors? Investors don't throw away money for no reason, they expect return on their investment. If a company were to forecast that it will not make profit for, say, the next 5 years, it's highly unlikely to be able to attract investors. Let's take an example from real life game-related stuff, and start with the profit perspective. Every once in awhile you see an article about some obscure PC-game dev claiming they had success with their strategy game selling 100-200,000 copies and that it made a profit. Like Paradox (Europa universalis) and Stardock (Galactic Civiliz). But what do we make from this really? Yes, it secures them a sequel, I'll give you that. What else? 200,000 copies and $25 from each copy translates into $5mill. Let's say the profit margin was 30%. So they made $1.5 mill extra and can put that into the next game. But it will still be a game in the $5 million ball-park. And no one will know that the sequel exists either. So low revenue means low budget and very little to talk about. No matter the profit. I care to disagree with you here. For Stardock, for example, if the game brings in profit, it's a success regardless if the general gaming populace even knows about their game or not. And a good thing, too, because it means we can hope to see small devs make games for niche markets in the future as well. And, like I said before, if they are profitable, they can grow, spend more money on marketing, hopefully get more sales and so on. Now we'll take an example from the revenue perspective. We have EA, which currently is showing no profit (and according to the experts on the Ninty forum, EA has a bad business model and will continue to develop high budget HD games showing no profits). EA makes strategy games too. The difference is that they sell in the millions raking high revenue. 1 million copies of C&C3 means $20 million in revenue (actually more because EA is both the dev and the publisher, but thats not the point here). But 0 profit. What do we do with this revenue number, $20 mill? Well, it secures them a sequel too (they didnt lose money, so we'll sure see a C&C4). Also, it means that the next game will have at least a $15 million budget with hired actors, FMV between levels, high-end graphics, persistent online support etc. Further, C&C4, but not Galactic Civs 3, will be on the cover of gaming magazines, in the ads, in the mindset of us who discuss games, included in speculations about impact of console game libraries/sales and so on. Now you're just cherry picking data to support your point of view. How did C&C become so succesful as a series? How big a budget did the previous installments have? I'm not disagreeing that bigger revenues are good for a company, they generally are. Bigger revenue means that the development budget of one game constitutes a smaller percentage of the total, which means that the overall risks for the company are smaller as well. In addition to making profit, it's important to make profit at a reasonable margin. That's how small things can grow to big things naturally.
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