the game industry - financial aspects

What is the biggest selling game of all time?

GTA V Minecraft Pokemon Red/Blue

Tetris Mario Kart Wii COD: Modern Warfare 2

Super Mario Bros. Wii Sports Resort Wii Sports

New Super Mario Bros.

To understand financial issues in the gaming industry.

What is the biggest selling game of all time?

1. Wii Sports (Wii) – 82 million

2. Minecraft (various) – 54 million

3. Super Mario Bros. (NES) – 40.24 million

4. Mario Kart Wii (Wii) – 35.53 million

5. Wii Sports Resort (Wii) – 32.37 million

6. Grand Theft Auto V (360/PS3) – 32.5 million*

7. Pokémon Red/Blue (GB) – 31.37 million

8. New Super Mario Bros. (DS) – 30.38 million

9. Tetris (GB) – 30.26 million

10. Call of Duty: Modern Warfare 2 (360/PS3/PC) – 28.5 million


1. Best-selling action-adventure videogame in 24 hours

2. Best-selling videogame in 24 hours

3. Fastest entertainment property to gross $1 billion

4. Fastest videogame to gross $1 billion

5. Highest grossing videogame in 24 hours

6. Highest revenue generated by an entertainment product in 24 hours

7. Most viewed trailer for an action-adventure videogame

Which game broke these records?


What is the most expensive game of all time?

Final Fantasy VII

Call of Duty: Modern Warfare 2

Destiny

Star Wars: The Old Republic

Grand Theft Auto V


What is the most expensive game of all time?

1. Destiny $500 million

2. Grand Theft Auto V $265 million

3. Call of Duty: Modern Warfare 2 $250 million

4. Star Wars: The Old Republic $200 million

5. Final Fantasy VII $145 million


Learning Objectives

P1describe current financial issues in the games industry with some appropriate use of subject terminology M1Explain financial issues in the games industry with reference to detailed illustrative examples and generally correct use of subject terminology D1comprehensively explain financial issues in the games industry with reference to elucidated examples and consistently using subject terminology correctly

To be able to…

business models budgetary systems financial responsibilities preparing a budget evaluating performance against

budgets budgeting periods management and reporting

systemsbreak-even analyses funding groupsLicensorsFranchises Milestones


Financially, the games industry is a very risky businuess. Only the top 5% of games released make a profit, and due to the high costs involved in making a game, and the way the money made from the games is dispersed between those involved, a failed game can often mean a small developer declaring bankruptcy, while the larger companies report huge losses, especially against projected profits for a game based around a popular franchise with a strong fanbase.

Its not uncommon for games to cost $12 million to develop, with top end games costing up to $30 million.

This budget does nothing more than cover the costs of getting a game to the store. Virtually no profit is made, and it is entirely up to the public whether a game succeeds or not.


Business Models


In the early stages of development before production begins, a developer will put forward their concept to a publisher in the hope of receiving financial backing for the development of the game. The publishing agreement will usually stipulate that the advances paid to the developer must only be used for the development of the game, and not cover the overhead costs of the studio itself. As the developer may not see any return from the game until after completion, this can put great strain on the studio.

Upon completion of the game and its move to retail, the publisher will retain all of the games income until the income exceeds the advances paid to the developer. Once the advances have been repaid, the developer will begin to receive royalties from the games sales. However, the publisher will still retain a large percentage of the income.

Budgets


In a contract whereby a game may have multiple sequels, the publisher may ask that the royalties the developer receives from one game would pay back the advances from a recently released sequel. This is known as cross-collateralization. The downside to this is that the developer may not see any return for its efforts until all advances to the publisher have been repaid.

Should there be complications during the development process, the developer will have the option of paying the publisher a kill fee. This kill fee will usually cover the cost of any advances the publisher had made to the developer during the development of the game. The value of the kill fee is determined by how far into the development cycle the game was before termination.

Budgets

http://arstechnica.com/gaming/2012/02/why-dont-more-game-developers-see-royalties-from-their-work/


Royalties

http://www.gamesradar.com/why-next-gen-consoles-can-and-must-save-middle-budget-gaming/

Milestones are in place in the development stage of the business to ensure that no financial issues or deadlines are a problem. They keep the business organised so that every step of the way the project is at the stage it needs to be.

During the negotiation of a publishing agreement, a milestone schedule will be drawn up; outlining a set of milestones the developer must meet in order to receive further advances of payment and not breach their publishing agreement. This document usually consists of around eight to fifteen milestones.

Although most milestone schedules will contain milestones relative to the game, there are a few standard deliverables that appear in all. The first of these would be the design document; this document would contain the game’s story, key features, gameplay mechanics, technical specification and concept art.

The delivery of a prototype is also another common milestone. This would be a rough demonstration of the game in its earliest playable form with placeholder geometry and textures. Often, the project may not even be given the green light until a prototype has been delivered.

MilestonesTo understand financial issues in the

gaming industry.

The final three milestones are typically alpha, beta and gold stages of development. All three of these stages occur in the production stage.


gaming industry.

The Alpha stage typically states that the game is around 95% complete. Some levels, geometry and textures may be incomplete, and the game will most likely contain bugs. This gives the publishers an idea of what stage the game is in and gives them a rough idea on when it will be completed.

Beta indicates the game is ready to go to quality assurance testing to uncover any last acceptable bugs and make final tweaks to gameplay mechanics. As it’s impossible to remove all bugs, the developers should take it upon themselves to make an agreement with the publisher as to what defines an acceptable bug. At this stage it may also go to public testing, which can aid with marketing.

During the agreement of the milestones the developer should ensure the milestones set are realistic and achievable, as any delay on deadlines could cause a breach in contract and push back any advances to the developer.

Should the publisher reject a delivery, it’s in the developer’s best interests to ensure the publishers concerns are met and the delivery is re-submitted, as again, any delay on deliveries could result in a breach of contract and delay advances to the developer.


gaming industry.

Gold Master generally pertains to the game’s code being complete and ready to go to the publisher for manufacturing and distribution. All unacceptable bugs will be removed at this stage.

the game industry - financial aspects

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