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Cost-breakdown of a game title.


Sam P
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Assuming that a typical, new release game costs $70CDN.

 

By any measure, that's steep. I don't think anyone would argue that videogaming is an inexpensive hobby.

 

I've always been curious exactly how that cost breaks down.

 

I'm only certain to the extent that retailers make a pretty pitiful margin on that figure.

 

So, say the retailer makes 5 dollars on it (maybe not even that), where does the rest of the money go?

 

Does anyone here actually know a rough breakdown beyond speculation? i.e. Do we have some industry insiders who have a pretty good idea how it works? If not, educated guesses are still welcome...

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Ok, couple of things:

 

1) The retailer probably makes a bit more than that. A friend of a friend owns a rental store, which is handy for getting hold of weird stuff. This is the UK, and from his end it goes ?40 game - ?6 VAT leaves ?34. He pays around ?25, meaning ?9 profit for him. I get the impression that the distribution chain is taking a similiar margin, so that the actual game company charge the distributors ?15-?18 (depending on what deal they can cut). They in turn are bound to take enough that the developers that cut a deal with the producers are lucky to see the good side of ?7.50 per full-price title sold, at a guess.

 

Working back up from the figure I know, you'll notice that ?25 + VAT is ?29.38 - so when Amazon are selling it to you at ?29.99 with free postage you have to wonder where they get a profit...

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Assuming that a typical, new release game costs $70CDN.

 

Man, buy at FutureShop :P. Most new releases there tend to be $70 but you get a few for $60.

 

I'd be interested in hearing the breakdown too, as noted I'm sure the retailers are making huge profits off this and the developers are getting the shaft. Absolutely ridiculous. I hope shareware makes a comeback :).

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I can offer some insight to the retailer margin.

Typical margin for a new $49.99 (US) game is a very healthy 30%. In other words we make $14.99 on each sale (or $21 in Canada). Some titles have better margins, some have worse but the average is right around 30%. Even value titles (Platinum Hits, for example) still carry such a high margin.

 

It's only the hardware that has a poor margin. On average, retailers make less than $10 on each console sale. The 30% margin on games is very respectable. Accessory margins are even more impressive. I've seen cables with 80% margins, controllers run between 30% and 60%.

 

As far as where the remainder of your money goes I can't be totally sure. There's certainly the console's licensing fee (paid to Nintendo, Sony, or Microsoft for the right to publish games on their system). Licensing fees are probably between $5 and $10. Beyond that I would be willing to bet there is a lot of differences depending upon the publisher. Unlike the music business I suspect game makers are a bit less standardized.

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" Accessory margins are even more impressive. I've seen cables with 80% margins, controllers run between 30% and 60%."

 

I assumed that there is a very small margin on accessories due to the fact that they are nearly the same price wherever you go. In Canada a ps2 controller is sold for $34.99 almost everywhere. You will never see that price drop more than a dollar. To me that is either retailers getting a very small percentage of that or there's a little price fixing going on.

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Nope, accessories are the most important part of the sale for both the retailer and the console maker. The price doesn't change because neither wants to mess with a good thing.

 

Microsoft, Sony, & Nintendo regulate the prices of their 1st party accessories (controllers, memory cards, cables, etc.). Calling it price fixing is a bit of a stretch though. They set a suggested retail price based upon attractive margins and, in a retailer's purchase contract, make arrangements to ensure the price stays fairly level. The fact that so few retailers run unauthorized sales on 1st party accessories speaks volumes about the import of accessory margins.

 

3rd party accessories are a whole different story. Prices vary wildly in this sub category. 3rd party accessories generally have a much more attractive margin so the retailer has a lot more room to play with the price.

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Didn't see this thread until now. As Camp says, on a $49.99 title, the retailer usually pays ~$33-35 for it. Let's say $35.

 

Out of that $35, count a buck or two for the distributor/distribution costs if the publisher does it themself.

 

Out of that $33, count ~$12 to Sony for licencing, materials & printing costs. Sometimes this is less if you're a big company like EA and the licence fee goes down as a title reaches certain sales targets.

 

So after all of the above fixed costs, the publisher usually ends up with ~$20. From that $20, all of the development & marketing costs must be covered before any profit is seen (obviously). For a triple A title, it's fairly common for marketing budget to be well over $1million, frequently getting as high as the development cost if the game was on time. For smaller games, the marketing could be as low as $50k. The analysis I've read says for an average title in the UK to have a marketing budget of $160k - that's UK only.

 

In the early days of the PSX, development budgets were "normally" around $400k-600k. Nowadays, "small" games frequently clock in at $900k, with triple A titles easily clocking up $2-4million once the cost of a licence is taken into account.

 

So, if a game costs $2 million to develop, and gets $1million spent on marketing it (a conservative marketing spend for an AAA product), it will take:

 

3,00,000 / 20 = 150,000 copies needed to break even

 

Of course, if the game sells 300,000 copies, the net is $1.5million

If the game sells 1 million copies, they've generated revenue of $20million, with the only rising cost being marketing/PR.

 

That's why the industry is so "boom & bust" right now like the music industry - that one big hit can generate more than enough revenue to cover the 5 other flops released by the publisher.

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They in turn are bound to take enough that the developers that cut a deal with the producers are lucky to see the good side of ?7.50 per full-price title sold, at a guess.

 

An independent developer working for a publisher is lucky to see ?4 per copy sold if they've gotten upfront milestone payments, and maybe ?5 if they're on a strictly royalty deal. Of course, there's varations to this if you're a huge name or working on a triple a deal etc.

 

And developers are heavily at the mercy of publishers when it comes to late payments etc. Many established & well-known devs are just one milestone payment away from going bust, as shown in the UK industry of late.

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Originally posted by EdR@Sep 11 2003, 12:55 AM

...a few months ago I read that EB raked in record profits, so I think the retailers are getting more than you think...

That's got a lot to do with the very healthy markup on used items, though.

 

Thanks for the great info, iCamp and dogbert!

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That's got a lot to do with the very healthy markup on used items, though.

 

Good point. Imagine how game companies must view used sales? It's got to look like a big black hole in your profits to see a copy of a game sell once, but then go on to sell again and again (sales that could have been a second or third new copy)...and you'll never see anything from those pre-owned sales.

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Great info, Brian. Do you have any insight as to what the current licensing fees are for the 3 major consoles? Certainly the licensing fees can vary based upon volume and such but I was just curious if there's an average dollar amount?

 

Also, do all three players (Sony, Microsoft, & Nintendo) control manufacturing of games (art, disc, etc.) or do some of the larger developers do this themselves?

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Great info, Brian. Do you have any insight as to what the current licensing fees are for the 3 major consoles? Certainly the licensing fees can vary based upon volume and such but I was just curious if there's an average dollar amount?

 

Unfortunately, I've no real recent info on this - I know Ninty dropped their fee a little recently, but I've no idea to what. As I said above, analysts usually give a flat rate of $12 for licencing costs, but I've see it as low as $8 from some sources.

 

Also, do all three players (Sony, Microsoft, & Nintendo) control manufacturing of games (art, disc, etc.) or do some of the larger developers do this themselves?

 

I'm far from an authority on the subject I'm afraid, so I don't know for sure - I believe all three make you use their printing plants, though Microsoft may not, I'm not sure... I do know in Europe, Sony lost a battle on this & technically, other manufacturing plants can be used. The only publisher I can think of that prints their own disks/carts is Codemasters though, and I'm not sure they still do. Sorry I can't be more definite on this.

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There was an article on this circulating the web around a year ago, real interesting. It was from a game house and was basically focused on where the customer's dollar goes and why a game house that makes 1-2 bad titles can go under fast. The upshot of it is that the distributor (and publisher?) take a real lion's share of the profits and the lowest one on the totem is the game house. Supposedly, they make more money off the $10-20 GOTY versions than off the initial run of the game.

 

There were lots of interesting caveats, like why they don't just sell games directly on their website. Basically, a publisher/distributor makes the game house sign a deal that they get the lowest possible prices for the games and that the game maker cannot sell it at lower than reail to anyone, ever. So if you wanted to buy Myth from Bungie it was $49 on their website, even though it was $39 at Best Buy and cost them all of $10 a copy to make it. If they ever tried to sell it cheaper, they would get bliacklisted and never appear on a store shelf again. Hardcore stuff to be sure.

 

The interesting thing is this whole deal Valve is pulling with HL2. They have so much hand they seme to be able to distribute it any way they like and publishers/distributors/retailers would be flat out scared to NOT carry the title when it launches. Will be very intersting to see if they can break the mold a bit and maybe (just maybe) set game makers ahead one notch.

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Well, the Valve deal is different just because it's a PC title. You won't see the Xbox version released in multiple versions/pricepoints. Being a PC game they can totally avoid the restrictions of the console licensing. Their new business model isn't really all that revolutionary when you consider id's history.

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Those breakdowns, especially development costs, certainly help to justify the asking prices of new releases.

 

However, as a consumer, I'm still a little apprehensive paying $70CDN for a game. If we take $70CDN as an average price, that's a little steep (especially on my income :roll:). If it were closer to $50 I'd be more inclined to buy more of them.

 

I wonder if things will become cheaper as the industry grows and more people make regular gaming purchases...

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However, as a consumer, I'm still a little apprehensive paying $70CDN for a game.

 

So am I! It is very rare for me to buy a newly released title at $49.99US, and even rarer for me not to have played it beforehand. I got incredibly spoiled by the Dreamcast towards the end of its life, and I've just gotten out of the habit of buying the "must have" release every other week. The last "risk" I took was KOTOR, which was a pretty safe risk.

 

There are a heck of a lot of games out there that simply do not offer enough value, for me, for the initial price asked for them.

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This weeks Entertainment Weekly has an article titled "Can lawsuits and cheap CDs finally solve the music industry's problems?" by Noah Robischon and includes the following :

 

"...And if selling CDs for about the cost of a movie ticket does boost sales, some say the new public perception of getting more for less could put pressure on the prices of videogames and DVDs, which also use the disc medium."

 

Hmmm.

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