Overview
Franỗois Dominic Laramộe
<francoislaramee@videotron.ca>
Unfortunately treated by many game developers as a necessary evil, publishers are in fact the developer's greatest allies. Not only can publishers open the door to the retail market (and to profitability), but their resources can also shield the developers from many sources of conflicts and mistakes, and thus help them make better games.
This article outlines the work that the publishing company performs at various stages of the production and marketing process.
Selecting a Project
Even the largest publishing house only has the wherewithal to market a tiny fraction of the games submitted to it. Therefore, the process through which publishers select the projects they will invest their precious resources in is extremely crucial.
Publishers evaluate projects with a "profits and losses statement" like the one presented in Case Study 1.4.1;
let us examine the factors that influence this calculation.
Case Study 1.4.1: Estimating a Project's Profitability
Here are examples of profits and losses spreadsheets for a mid-range PC game and a franchise console title.
PC Game
Early Adopter Peak Budget Total
Gross unit price $40 $30 $15
Expected units 0 80,000 40,000 120,000
Gross revenue $0 $2,400,000 $600,000 $3,000,000
Cost of goods $0 $120,000 $60,000
Advance/R&D $1,500,000
Marketing $200,000 6.7% of sales
Direct (total) expenses $1,880,000
Breakeven 62,667
Profitability ratio 1.6
Franchise Console Game
Early Adopter Peak Budget Total
Gross unit price $40 $30 $10
Expected units 350,000 500,000 150,000 1,000,000
Gross revenue $14,000,000 $15,000,000 $1,500,000 $30,500,000
Cost of goods $2,450,000 $3,500,000 $600,000
Advance/R&D $3,500,000
Marketing $2,500,000 8.2% of sales
Direct (total) expenses $12,550,000
Breakeven 313,750
Profitability ratio 2.4
Let's define the line items in this spreadsheet:
Gross unit price: The price at which the publisher sells to retailers. This is usually 50 to 70% of the retail price paid by consumers.
Expected units: Target sales numbers.
Gross revenue: Gross unit price multiplied by expected number of units sold.
Cost of goods: The cost of printing game media, manuals, packaging, and shipping and handling. For console games, this includes the unit royalty paid to the platform owner; for example, $3 to $8 depending on the retail price and the platform.
Advance/R&D: The non-refundable sums paid to a third-party developer, or the money invested in developing the game internally.
Marketing: The sums devoted to advertising the game in print, online, and on TV, plus in-store marketing and promotion. For most projects, this is roughly 8 to 10% of gross revenue, but some publishers will invest much more.
Direct expenses: Advance/R&D plus marketing.
Breakeven: Number of units that must be sold to cover the game's direct expenses.
Profitability ratio: Gross revenue divided by total direct expenses.
Note that indirect costs, including trade show expenses and publisher staff salaries, are not accounted for in the profitability ratio calculation. Neither are profit margins. The actual ratio that the project must generate to justify investment depends on publisher overhead and profit objectives; for a small publisher with limited staff, a ratio of 1.5 might be sufficient, while giant companies traded on the stock market might need a ratio of 3.0 or more.
The Two Risks
Sadly, game development studios are inherently unstable. For every company that achieves long-term success, many close their doors after releasing only one or two games, and even more never manage to ship a single title. Furthermore, the game market is highly hit-driven; according to numbers quoted by [Laramée00], only 3%
of PC games and 15% of console games sell more than 100,000 units in any given year—and 100,000 copies is rarely enough to make a high-budget release profitable. For a publisher investing time and money in a project, these facts translate into a pair of major risk factors:
The risk of cancellation: That the project will never yield a product, because it will be cancelled along the way.
The risk of commercial failure: That the finished product won't find success in the marketplace.
The publisher's decision process must balance these risks against the product's inherent appeal, to determine whether its potential payoff warrants the investment.
Reducing the Risk of Cancellation
Most game project cancellations derive from excessive delays and/or poor quality. Thus, well-established teams with proven track records of success stand the best chance of securing publishing deals. When Sid Meier created Firaxis, the press reported contract signings involving the new company within weeks.
For the typical startup, the situation is more complicated. Some publishers will demand to see a 25 to 75%
complete version of the game as a proof of the developers' credibility before they invest. Others will sign a contract based on a fully functional demo, but for a modest advance only. In both cases, the new team will have to find alternative sources of funding (debt, capital, or sweat equity) for part of the development process.
Reducing the Risk of Commercial Failure
With thousands of games released every year, and room for but a fraction of those on retailers' shelves, publishers will favor projects with built-in target audiences. For example:
A sequel to a current best-seller. If Zombie Rodent Disco Kings sold 3 million copies, retailers and consumers will clamor for Zombie Rodent Disco Kings II.
A game that fits the general parameters of a popular genre. It is easy to assess the potential sales figures for a war game, a shooter, or a golf simulator.
A game based on a popular license. When deciding between two games to buy, the typical consumer will tend to choose the one featuring Star Trek or Sesame Street characters.
While these "franchise games" by no means guarantee success, they are perceived as more likely to make an impact in the retail market than their wholly original or off-beat competitors.
Making the Decision
A variety of strategies are available to publishers seeking further risk reduction:
Cross-collateralization: This is an accounting process that ties together the earnings of several games (or of the same game on multiple platforms) so that the profits made by one have to recoup the losses of the others before royalties are paid to the developer.
Budget games: If a game can turn a profit on sales of 5,000 units, the risk is minimal.
Hedging the bets: Larger publishers might play the odds by acquiring the rights to many high-profile games and hoping that one of them will turn into such a hit that it will more than make up for any losses on the others.
Affiliate label status: Some small and mid-sized publishers will delegate the massive sales and
distribution effort to a larger company to reduce their costs. Strategy First, a PC game publisher profiled in Case Study 1.4.4, is an affiliate of Infogrames.
However, the most important factor in the decision remains the individual game's odds of making it to market and being successful there.
Guiding Development
Funding is not the only benefit that a good publisher provides during development. Others include help fine- tuning the game design for maximum market impact, securing approved developer status from console
manufacturers, equipment loans (those console development kits are expensive), better exposure in the press, and any number of morale-boosting fringe benefits such as free games and invitations to exclusive parties at industry trade shows.
Perhaps most important of all, the publisher will assign an internal producer to your project [McGilvray03]. This person's job is to make it as easy as possible for you to complete the project on time; the producer might provide services such as getting the publisher to pay for an external testing studio, obtaining extra equipment, organizing special training, or applying a little pressure to get your game certified by a console manufacturer in time for a November release. The best internal producers will even shield you from sources of stress emanating from their own companies!
Case Study 1.4.2: How a Publisher Selects a Team for Contract Development
For NewKidCo, a small publisher of console and handheld games based on licenses that appeal to children 4 to 12 years old, choosing a development partner involves considerations of technology, expertise, and cost.
"Since we're small, we have limited financial resources," says Seth Rosenfeld, a producer at NewKidCo. "We also try to match games to developers based on their capabilities. For example, if we want a platform game based on a cartoon license, we will approach a company with strong animation skills and an appropriate 2D or 3D engine."
It is also crucial that developers deliver products carefully tailored to the specific development cycles. "Often, developers make promises that they are unable to fulfill due to schedule or budget restrictions. Tight schedule management, including bi-weekly or even weekly build reviews, will insure that any slippage will be noticed immediately. Developers should be candid with their publishers with regard to risk, so that potential problems can be dealt with at the earliest opportunity."
Preparing for Launch
Some games catch the public eye years before release—sometimes on purpose, sometimes because of schedule slips. However, in most cases, publishers begin to work on a launch campaign approximately six months before release. In the United States, much of this activity happens at the Electronic Entertainment Expo (E3), which takes place almost six months to the day before the most important shopping weekend of the year, Thanksgiving.
Selling to Retailers
At E3, publishers meet buyers from all of the retail chains and show them the games of the Christmas season in almost-finished form. (Demos of the next year's releases are also shown, often behind closed doors.) The publishers' goal is to guarantee that their games will be available in as many outlets as possible, in sufficient quantities, and on the best shelf space. Therefore, they spare no expense; the high-tech booths and hundreds of thousands of square feet of floor space that publishing giants buy at E3 cost them millions of dollars for the three-day event.
[Laramée03] discusses the retail market in more detail.
Selling to the Press
At the same time, game magazine reporters receive previews and interview the games' developers.
Most print magazines have lead times (e.g., delays between writing and publishing of articles) of about two to three months. Therefore, E3 previews appear in print in August or September—just in time to condition consumers for Christmas shopping. Full reviews follow a few months later, to coordinate their appearance in print with the game's release.
Marketing Campaigns
It is no secret that magazines tend to give better and more favorable coverage to publishers who fund their business through advertising purchases. Retailers also want to know how much advertising a publisher will buy to support a game, when it will appear, and in which publications.
A print advertising campaign for a typical game will cost about $150,000 to $350,000. That amount will buy full- page and two-page ads in several major magazines for three to six months. Television ad support is usually reserved to flagship titles and brands (e.g., Tomb Raider or EA Sports) and can easily cost 10 to 20 times as much.
Other major marketing expenses include:
Store promotions. These include preferential pricing and rebates granted to a specific retail chain, in-store displays, and advertising in a store's fliers.
Online marketing. Publisher staff members discuss upcoming games with consumers in chat rooms, on Web sites, and so forth. Once marginal, this labor-intensive practice now sometimes accounts for half of a game's marketing budget.
The Final Countdown
Once the game is complete, the publisher runs final testing, manufactures copies of the game and packaging (sometimes in-house, usually through subcontractors), stores the boxes in its warehouse, and ships orders to
retailers.
For a PC game, this sequence takes approximately one month. For console games, it often takes three times as long, for two reasons:
Since it is impossible (for now) to release a patch for a console game, the platform owner must certify that the game is bug-free. This makes the final testing and approval period much longer.
Platform owners usually retain the exclusive right to print copies of game media, using special formats and processes to minimize the risk of piracy. If the platform owner has limited manufacturing capacity, which is typical during a console's first year on the market, it might take a while for them to fulfill orders.
Case Study 1.4.3: Self-Publishing (Continued)
Kutoka Interactive, the publisher of children's games profiled in Case Study 1.3.1, relies on effective press relations to offset their competitors' larger advertising budgets. "When a magazine like MacHome writes that our animation is as good as Pixar's and better than Disney's, consumers notice," says Kutoka vice president Tanya Claessens.
Aggressive brand promotion also helps ensure market penetration. "We have bundled the games with plush dolls, created a complete line of ancillary products such as backpacks, puzzles, and action figures, and we are going to expand the license into children's books and television as well."
But ultimately, it all comes down to sales. "Stores only stock best-sellers, so we have to move more units than the competing product that could replace us on the shelves."
Case Study 1.4.4: A Publisher Profile
One of the world's leading publishers of strategy games for the PC, Strategy First has marketed such titles as the Disciples and Europa Universalis series. When evaluating a game proposal, the company adopts an iterative approach.
"Anyone in the company can submit a design treatment," says Chuck Kroegel, Strategy First's vice president for product development. "If it is approved by our executives, the project advances to the proof of concept phase, during which a brief design document and a playable demo are created. After another review, a promising project is assigned to a team of six or seven people who develop a prototype, a technical design, and better gameplay specifications. Only if there is a strong hook in the prototype will the game progress to full-scale development."
As a result of this iterative review, about 50% of the projects that pass the proof of concept stage eventually reach store shelves. "I have seen hundreds of games in my career," says Kroegel, "and many get waylaid because they lose their core vision. We work hard in the early stages of our projects to avoid the mistakes that lead to cancellations."
Third-party developers seeking a publishing agreement with Strategy First go through the same process, but they have to create the proof of concept on their own. "We usually act as a publishing partner, paying more in royalties than in advances, although we plan on funding more development in the future."
As an affiliate of Infogrames in North America, Strategy First handles advertising and online marketing for its games, while Infogrames takes care of sales, distribution, manufacturing, and store promotions. The company begins a game's pre-launch campaign three to six months before the planned release date. "War games are one of our specialties, and they don't require much advance warning. We know who and where the consumers are, so reaching them is straightforward." For this type of niche product, online promotion is key, and accounts for 50% of the marketing budget and 70% of the labor.
Thanks to its low overhead, Strategy First can turn a profit on games that bigger publishers must decline.
Kroegel concludes: "We can often break even on sales of 50,000 units and earn significant profits if we reach 100,000. That makes us an attractive outlet for developers whose games target smaller but well-established
niches."
Beyond the Launch Campaign
The publisher's job isn't done when the game ships. To maximize earnings, the publisher must extend the title's life cycle.
Support
First, the buying public must receive the support they need to enjoy their purchase. For classic retail games, support involves little more than a Web site, an e-mail address, a telephone number, and possibly a few patches to correct the bugs that have slipped through the quality assurance process. However, massively multiplayer online game customer support [Perkins03] requires dozens or even hundreds of people monitoring the happenings in the game world around the clock to foil hackers, stifle aberrant player behavior, and solve transient bugs.
Price Reductions
Highly anticipated games are released at premium prices ($60 or $70), so that the publisher will generate as much income as possible from early adopters. This is standard marketing strategy: DVD players, microwave ovens, and a host of other devices cost much more when they were introduced than they do now that they have reached mass market acceptance.
Unfortunately for publishers, early adopters account for only 20% of the population. Therefore, premium sales drop off within a few weeks or months of release. At that point, the publisher will stimulate demand by lowering the price to $50. (Games that do not justify premium release prices start at that level, or even lower.)
The price reduction process will be repeated periodically, as long as reports show that the drop causes an increase in sales. A highly successful game's retail price can go from $60 to $50 to $40 to $30 to $20 over a period of 12 to 18 months, before remaining stock is liquidated at $5 to $10 once demand has all but vanished.
If the game fails to find an audience, retailer pressure might drive the price down to budget or liquidation levels within 6 to 12 weeks.
Add-Ons
For many types of games, an expansion pack containing new quests, new levels, or new units is a quick and relatively inexpensive way to generate additional income from the existing user base.
In the future, some games might be sold with minimal content included, and additional "episodes" be distributed online by weekly or monthly subscription. This way, publishers will be able to exploit a successful franchise for several years, much like the creators of a hit television series do now. (A potentially even more appealing benefit is that they will be able to cancel unpopular games before millions of dollars are sunk into development.)
Bundles
Once a game reaches the end of its retail life cycle, the publisher can entice additional consumers by bundling the game and several add-ons into a single budget-priced package. By adding special features to the bundle (e.g., a metal box, cloth map, action figure, music CD, etc.), the publisher might even turn it into a "lifestyle purchase" that consumers who already own the game might want to buy or receive as a present, much in the style of "greatest hits" music compilations.
Finally, once a game is completely out of the retail channel, the publisher might want to bundle it with hardware, books, or even include it in cereal boxes. Revenue generated from such bundling agreements is minimal (often less than $0.25 per unit), but volume and/or visibility might be sufficient to justify the deal.
Sequels
And of course, a successful game creates a built-in audience for a sequel, which might be easier to sell to retailers and consumers than a brand new product. In fact, it might be easier to make money on a sequel, even at lower sales volumes, because the sequel costs less to market—and possibly to develop as well, if assets can be reused, although the rapid evolution of game technology has made this unusual to say the least.