AAA games. A broken business model

I have written about this before, but now some commentators have had their $0.02 worth, so I thought I would revisit the topic.

Game executives and financial people all over the world must be looking at how quickly Modern Warfare 2 romped to a billion dollars at retail and thought to themselves “I want some of that”. They are deluded and misguided even thinking about it and here’s why.

  • There are too many AAA games in the market. Not slightly too many. Vastly too many. And most are making a loss. Just look at the accounts of the big publishers. The ones whose AAA titles miss the mark are making very big losses.
  • There are too many publishers trying to churn out AAA games. We need more industry consolidation so that the production pipeline comes under some sort of control. At the moment Darwin is at work and some publishers who are structurally incapable of making a profit in the current market will find themselves subject to major externally exerted change.
  • AAA games now cost far too much to make. The PS3 and 360 have HD that requires far more content to be hand crafted. So their games consume several times more man hours than previous generation games. Publishers are getting round this to an extent by making some games a lot shorter, but the public are not stupid. Next generation platforms will have the power to run a lot of middleware, considerably reducing the effort needed to make a game.
  • Competition from other gaming platforms. The original Playstation had the market to itself. Now the typical gamer has many platforms to spend their time and money on. Facebook, iPhone, DS, MMOs etc. The average gamer is now promiscuous with their attention.
  • To generate a hit that is profitable requires global marketing and distribution resources. And a huge investment in that marketing. Modern Warfare 2 spent more on marketing than some publishers’ entire budget for a AAA game. This is a big boys game at the top table and very few have the resources to play.
  • Brand dilution. Executives see a game succeed so they just rush in and pillage the brand to make money. Meaningless sequels geared up for maximum exploitation are not the long term road to success. To get it right just look at Nintendo, who are one of the few game publishers on planet earth who understand managing a game brand properly. Their management of their key brands is a lesson that the rest of the industry refuses to learn.
  • Customers who enjoy your game without paying you for it. Piracy and secondhand sales can often be bigger than legitimate purchases. Will Activision even bother putting Modern Warfare 3 on PC? And if they do, how will they protect their IP?
  • Stupid game themes. Interactive computer based entertainment has infinite possibilities, the human imagination is the limit of what can be achieved. So what does the industry give us? Shooting. Then more shooting, then yet even more shooting. Can they not see how limited and stupid this is? Once again look at Nintendo for inspiration. They manage to run some of the biggest AAA gaming brands on earth without shooting in them. Or look at other entertainment media like books, television, the theatre, even the cinema. They all have shooting, but not the incessant, mindless glut that the gaming industry is currently serving up.
  • Too little of retail revenue gets back to where the value was created, in development and marketing. A AAA console retail game has to give the retailer their retail margin, also in many territories give their distributor their cut, then there are the logistics costs such as warehousing and transportation, the game has to be manufactured so there is plastic and cardboard to pay for, finally there is the platform holders’ substantial cut. Not much left for those who have done most to earn it.
  • Games have a very short tail. This is getting a little better with Downloadable Content (DLC) but it is still pretty bad compared with music and film which have multiple revenue streams providing income for years. Decades in some cases.
  • There are far, far better things for a game company to do with their money, brands and human resources. Obviously I am not going to tell the world here and now, when I can actually get paid for the knowledge. Read the nearly 800 articles on this blog and you might get a bit of an idea.

So there you have it. At the current state of the current platform generation AAA games are a very dangerous place to be investing, unless you happen to own one of the handful of “dead cert” global blockbusters.

11 comments ↓

#1 docred on 02.24.10 at 1:49 pm

Some very good points Bruce – especially regarding the ‘shooting’ theme. I’ve got no problem with fps’s personally, there are a couple of them I play, but there are dozens (hundreds?) of them currently out there, most the same as the next.
One point I would comment on is about how little of the revenue makes it back to the core people. In this game development is not alone by a longshot, I think in most or many industries that is the case. For example, I grew up on a farm in Saskatchewan, so I know how little of the ultimate retail revenue made it back to us for our product.

#2 name on 02.24.10 at 9:36 pm

“Piracy and secondhand sales can often be bigger than legitimate purchases.”

This is a confusing claim, as secondhand sales are legitimate purchases.

#3 Trevelyan on 02.24.10 at 10:32 pm

To throw in an idea/opinion, I think theres a lot in the games industry that is buggered up yet totally accepted. “AAA” titles for one. Also the giving a game have multiplayer features which does not necessarily give it longevity. But also take games like Fifa and PES, which are essentially updated versions of each other.

Why buy Fifa 09 when you can have Fifa 10? And as for multiplayer, what happens when they shut the servers down? So why not have subscription/license based games like this? MMOs have the best business model – subscriptions = players. No piracy or second hand issues; in fact, sharing the game second hand is very much word-of-mouth advertising. You pay for the months you want to play and thats it. You spend ridiculous amounts of cash if you enjoy it but millions around the world do it (and millions more pay $30-$60 for very crap single player games which will not likely last them a month) so why not do the same with all titles that have multiplayer features?

Because the games change; the company works on another game. Halo 2 becomes Halo 3, Halo 2 servers then disappear one day. Fifa 09 becomes 10 etc. MMOs change this this by upgrading the player client or updating the game server. So this makes it a simple case of DLC for the multiplayer aspect right? Perhaps allow anyone on any FIFA copy to play the latest multiplayer part, with a subscription.

So why not extend this also to the single player. This is where the license idea comes in. Instead of buying one copy of a game, you can buy a one off higher priced license (or subscription) for all future products. Lots of issues there obviously but in principle it would be the same as an MMO. You just get the new version when its available, except also with the ability to play any of the others that have come out previously. Its basically the same game anyway!

It makes no sense to make the same game once a year and sell it again in the shops. Essentially a £3-4 a month subscription, except that once a year all your progress is removed in favour for a few extra features and graphical upgrades.

So why not? Everyone loves DLC these days, with GFWL, XBL, Steam and other delivery platforms being happily and easily installed. Just buy a license for a game and get the latest version whenever you want it, using your account to check for purchased privelages. With so little innovation for gameplay these days, most just bore me.

Dragon Age is the biggest offender of them all in this respect as, once youve read all the entries in the game and worked through the story, there is very little to separate it from any other medieval RPG – MMO or single player. The past shows us how much people liked games despite their graphics.

If the hardware existed years ago, that existed today, what would you have wanted more from a game? Better graphics, more dialogue, more CGI cutscenes? More content? More gameplay? More story? Better AI? Bigger environments?

I say go back to DX7 or DX8 graphics and all their limitations and just focus on better stuff. Farcry and Oblivion have fine graphics, who really wants better for now??

#4 T-Boy on 02.24.10 at 11:19 pm

@name: Indeed, secondhand sales are legitimate sales, but they are sales where the profits do not go back to the publisher.

#5 T on 02.25.10 at 12:42 am

@name –

Bruce means that the profit of secondhand sales doesn’t go back to the game manufacturer, it goes to whomever sold you the secondhand game. Example: Infinity Ward sees no money from someone buying a secondhand copy of Modern Warfare 2 at GameStop, GameStop gets it.

Great article and good points. In my unprofessional opinion, it will take a major shift where consumers place their money to change the prevalence of FPS’s in the video game market today. Like you said Bruce, too many developers see how much games like MW2 gross. Many great games underperform sales-wise because of consumers’ disinterest in purchasing and playing different styles of games.

#6 Heron on 02.25.10 at 1:55 am

I agree with name (#2); secondhand sales are legitimate purchases, so your statement is somewhat contradictory.

#7 Joey on 02.25.10 at 10:56 am

@ Heron

Well, they aren’t legitimate in that the original creator sees any benefit. Unless they add after sale support, such as PDLC.
Otherwise….
There a blockbusters like Avatar that require 3d glasses, a huge budget and cost a bit more to see. Then there are on the cheap comedies/drama’s that are just as (if not more so) entertaining/amazing. Gaming cannot copy this. A few reasons.

As a whole, gaming is much more expensive. TV, controllers, console and games. It all adds up.

Competition. The 360, PS3, Wii and PC all target different audiences but at the end of the day all pull from the same pool.

More competition. This week Heavy Rain, Napoleon Total War and White Knight Story came out in New Zealand. Last week it was Star Ocean International and AvP. Bioshock and Mass Effect were just recently too. And do not forget Just Cause and FFXII in March. I plan to buy them all but I cannot afford 2+ games a week!!! As was seen around the time of MW2, games got delayed.

Gamers are too damned fussy. I, like many, may watch a bad movie but I won’t play a bad game. Granted I play almost everything that comes out but I see people consider great games like Star Ocean 4 to be bad. Is it bad reviews? Is it too hard? Is it not streamlined enough? A game gets slammed once and its gone!

Tastes. People at the moment like online shooters. So everyone makes their games shooters and online. Someone does it best, why bother with anything else? The market gets flooded and sooner or later the consumer pool is bloated. Resistance 2 and Killzone 2 came out too soon around the same time as an example.

Fanboys. FFXIII is soon. Yet in the last few months there have been some great JRPG’s. Yet no one is interested. They just want FFVII again. Sad really.

#8 Heron on 02.27.10 at 12:56 am

Joey, would you argue that secondhand book sales are “illegitimate”, because the original publisher doesn’t see profit from the used book sale?

Used game sales are a non-issue. The book and movie industries have obviously survived healthy used goods markets, and the video game industry will be no different. In fact, they’ve already solved it – online activation, DLC that requires a non-preowned key, etc etc. No, if the AAA game publishers die, it won’t be due to used game sales.

#9 AR on 02.27.10 at 4:23 am

Yes, I missed the era of games when they were simply amazing and the only flaw was graphics. Prime examples like Diablo series, Deus Ex, Baldur’s Gate series. But graphics are half the game these days. Now it’s all shoot this and shoot that, and good graphics. Piracy is the people’s own demise, they take the games for free and the developers and publishers suffer, so they will close down.

#10 JDoran on 03.02.10 at 3:16 pm

There’s nothing either wrong or immoral about secondhand games sales, and for the software houses to try to stop them is morally wrong. Secondhand games are like secondhand consoles, secondhand cars, secondhand houses, secondhand DVDs, etc. In none of these cases do the original creators get any money for the second (or third or subsequent) sales of an item, and there’s no reason why a software house should.

The reason why secondhand games sales are more prominent now is that games have so little replay value (especially when compared against the cost of buying them new) that people don’t feel the desire to replay them, once they’ve finished the (ever shortening) single player campaign. More and more, games on the XBox 360 (the only current platform I have much experience of) are relying on their online modes, to the detriment of the single player experience, and online gaming brings it’s own problems (finding good opponents of a skill you like, sometimes you get racist or offensive players, sometimes other players cheat, etc) and whilst online playing is great, to many people it’s no substitute for a well written, well paced and challenging single player game.

There has never been a time when commercial games were (on average) so lacking in replay value – it’s not uncommon for people to comment after finishing a modern game that they only finished it to say that they could, or to accumulate more achievements, which speaks volumes for the lack of fun in the game, when games are first and foremost meant to be fun.

If the software houses want to reduce the sale of secondhand markets they have two workable solutions as far as I can see:

1 – Make games with more replayabilty. Not exactly what the software houses want to do, I know, as this involves both more work for the people working on the game (which makes the game more expensive and takes longer to produce and test), and also although potentially having the desirable effect of making the game more popular and resulting in higher sales of said game, it would also have the undesirable effect of potentially making following games sell less since some gamers would still be playing the very replayable current game.

2 – By all means stop secondhand games sales, by using digital download distribution instead of physical media, but REDUCE the price of the game to something that’s both realistic for the people who make the game, and easily affordable for the people who play the game. Since a £40 game gives less than £5 to the actual software house, then when the software house bypasses the distributor/commercial shop/disc manufacturer, etc, then the software house could charge just £5 for the digital download and still make the same profit from each sale of the game, and if games cost £5 to purchase then they’d be cheap enough to be impulse buys, and they’d sell far, far more than they do now.

And of course, innovative games would be far less of a risk for both he authors and the purchasers, if games only cost £5 each. That way, we could see more originality and innovation in the range of commercial games, instead of the current choice of Halo-style, GTA3-style or Need For Speed-style games that we’re currently stuck with.

Either of these methods would work in vastly reducing the sales of secnd hand games, but instead the software houses will (I expect) decide to continue their policy of overcharging for inferior products with little replayability or innovation. After all, if they’re getting fat on the profits, as they are, then why should they care about the desires of their customers.

#11 NubCakes on 03.03.10 at 12:27 pm

Sorry but why do you think PC gaming will die given that:

Famicom (NES) released: PC gaming was going to die due to piracy, cost and convenience.

Super Famicom (SNES) released – PC gaming was going to die due to piracy, cost and convenience.

PSX (Playstation) released – PC gaming was going to die due to piracy, cost and convenience.

Nintendo 64 released – PC gaming yada yada.

… and so on. Repeat until present.

You provide arguments, most of which sound reasonable and plausible. But the reasons in the past also seemed reasonable.

Sorry, I’m having trouble believing this claim after thinking that “PC gaming is dead” about 20 times in the last 20 years or whatever… see what I mean?

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