07-09-2007, 07:29 AM
Here is a short but interesting look at the potential costs and factors going into developing a game for a console and what it takes to make a profit.
Quote:
GameDaily Biz quotes Lazard analyst Colin Sebastian as saying publishers will flock to the Wii because of "favorable economics":
"Why is Wii so attractive? According to Sebastian, the answer's simply in the economics: "Based on the typical front-line retail price for Wii titles, we estimate that publishers need to sell approximately 300,000 units per title to break even. Specifically, using $49 front-line software pricing, the wholesale price is about 80% off retail, or $39. Third-party software publishers pay royalties and disk and packaging costs of approximately $9, with license and distribution fees costing another $7 to $9, leaving a contribution profit of $22 to $23. Assuming development and marketing expenses of about $7.5 million, we reach the estimated break-even unit total."
That's by contrast to a predicted break-even point of 600,000 for PS3/XBox 360 titles.
You know, when I do a back-of-the-envelope for a Wii title, I get to a roughly 300,000 break-even, too. But the specifics of Sebastian's analysis are so wrong that it needs to be looked at in detail.
"$49 front-line software pricing"--but with a $7.5m development AND marketing budget? That's a high premium price to pay for what is not a AAA title. But okay, let's assume a $49 price point.
"The wholesale price is 80% of retail.." leaving $39 to the publisher. Yes, except: this neglects MDFs (market development funds), what Dan Scherlis calls "channel bribery"--the upfront money publishers pay for store placement. It's not unusual for retailers to make more off MDFs than they do off the retail discount. So a better assumption is that another 20% goes away in MDFs, leaving $29 to the publisher.
"Third-party software publishers pay royalties and disk and packaging costs of approximately $9..." In what universe? Look, actual cost of goods--that is, the disc, the plastic case, a small manual--is probably $3 or less. Zero royalties are paid to the developer until development funding is recouped, so we can absolutely neglect royalties to developers; they only start earning some money after we've already reached breakeven (actually, usually until long after we're in profit, but never mind). In other words, for a pure breakeven calculation, developer royalties are neglectable.
Now there may be some royalties due other folks for use of an engine or other software, but no way in God's creation this adds up to $6 a disk. And of course there's assembling and shipping, so adding all this to cost of goods, maybe we get $4 total per unit, bringing the publisher's gross to $25 per unit.
"Assuming development and marketing expenses of about $7.5 million..." I don't know where this comes from. $7.5m is a modest development budget these days; marketing would be on top of that. I think you need to budget $10m total.
Under my assumptions, then, you have to sell a tad over 400k units--not that far from the 300k from Lazard. But the point, really, is that the whole business model is much friendlier to retailers than his analysis suggests--and must less friendly to developers.
The question (not clear from the article) is why Sebastian thinks this favors Wii over other platforms; my impression is that he's saying development costs are lower for the Wii. That's probably true, if only because it's comparatively under-powered, and therefore you don't need as complex and detailed graphic assets as you do for Xbox 360 and PS3. But if you're making that argument, the retail dynamics are irrelevant, because the retail dynamics are basically the same for all three platforms--same retail discount structure, same basic cost of goods, comparable platform royalties. The only advantage Wii could have in this scenario is development cost.
Of course, it's easier to do a cross-platform game if you're developing for Xbox 360/PS 3, because their controls and processing power are similar, so a Wii project probably has to be Wii-specific, meaning you can't easily amortize your risk over multiple SKUs--something that works against the Wii.
In reality, when you come down to it, the real thing publishers look at when deciding what to develop for is simply user base plus tie ratio--that is, how many boxes each manufacturer ships, and how many titles the average user buys for that box. This, and not a putative cost advantage for Wii over other platforms, is what's working in Wii's favor at the moment--it's selling better than its competitors. And while historically the tie ratio for GameCube was lower than for PS 2 and the original Xbox, this was largely due to the paucity of third-party games for GameCube--and the fact that many GameCube buyers were buying it as their second platform specifically to play Nintendo titles, and tended to play crossplatform games on their primary device. I expect there will be a flood of third-party games for Wii, that the advantage PS 2 and Xbox had over GameCube in this regard will not be true for the current generation: the tie ratios will look much more similar.
"Why is Wii so attractive? According to Sebastian, the answer's simply in the economics: "Based on the typical front-line retail price for Wii titles, we estimate that publishers need to sell approximately 300,000 units per title to break even. Specifically, using $49 front-line software pricing, the wholesale price is about 80% off retail, or $39. Third-party software publishers pay royalties and disk and packaging costs of approximately $9, with license and distribution fees costing another $7 to $9, leaving a contribution profit of $22 to $23. Assuming development and marketing expenses of about $7.5 million, we reach the estimated break-even unit total."
That's by contrast to a predicted break-even point of 600,000 for PS3/XBox 360 titles.
You know, when I do a back-of-the-envelope for a Wii title, I get to a roughly 300,000 break-even, too. But the specifics of Sebastian's analysis are so wrong that it needs to be looked at in detail.
"$49 front-line software pricing"--but with a $7.5m development AND marketing budget? That's a high premium price to pay for what is not a AAA title. But okay, let's assume a $49 price point.
"The wholesale price is 80% of retail.." leaving $39 to the publisher. Yes, except: this neglects MDFs (market development funds), what Dan Scherlis calls "channel bribery"--the upfront money publishers pay for store placement. It's not unusual for retailers to make more off MDFs than they do off the retail discount. So a better assumption is that another 20% goes away in MDFs, leaving $29 to the publisher.
"Third-party software publishers pay royalties and disk and packaging costs of approximately $9..." In what universe? Look, actual cost of goods--that is, the disc, the plastic case, a small manual--is probably $3 or less. Zero royalties are paid to the developer until development funding is recouped, so we can absolutely neglect royalties to developers; they only start earning some money after we've already reached breakeven (actually, usually until long after we're in profit, but never mind). In other words, for a pure breakeven calculation, developer royalties are neglectable.
Now there may be some royalties due other folks for use of an engine or other software, but no way in God's creation this adds up to $6 a disk. And of course there's assembling and shipping, so adding all this to cost of goods, maybe we get $4 total per unit, bringing the publisher's gross to $25 per unit.
"Assuming development and marketing expenses of about $7.5 million..." I don't know where this comes from. $7.5m is a modest development budget these days; marketing would be on top of that. I think you need to budget $10m total.
Under my assumptions, then, you have to sell a tad over 400k units--not that far from the 300k from Lazard. But the point, really, is that the whole business model is much friendlier to retailers than his analysis suggests--and must less friendly to developers.
The question (not clear from the article) is why Sebastian thinks this favors Wii over other platforms; my impression is that he's saying development costs are lower for the Wii. That's probably true, if only because it's comparatively under-powered, and therefore you don't need as complex and detailed graphic assets as you do for Xbox 360 and PS3. But if you're making that argument, the retail dynamics are irrelevant, because the retail dynamics are basically the same for all three platforms--same retail discount structure, same basic cost of goods, comparable platform royalties. The only advantage Wii could have in this scenario is development cost.
Of course, it's easier to do a cross-platform game if you're developing for Xbox 360/PS 3, because their controls and processing power are similar, so a Wii project probably has to be Wii-specific, meaning you can't easily amortize your risk over multiple SKUs--something that works against the Wii.
In reality, when you come down to it, the real thing publishers look at when deciding what to develop for is simply user base plus tie ratio--that is, how many boxes each manufacturer ships, and how many titles the average user buys for that box. This, and not a putative cost advantage for Wii over other platforms, is what's working in Wii's favor at the moment--it's selling better than its competitors. And while historically the tie ratio for GameCube was lower than for PS 2 and the original Xbox, this was largely due to the paucity of third-party games for GameCube--and the fact that many GameCube buyers were buying it as their second platform specifically to play Nintendo titles, and tended to play crossplatform games on their primary device. I expect there will be a flood of third-party games for Wii, that the advantage PS 2 and Xbox had over GameCube in this regard will not be true for the current generation: the tie ratios will look much more similar.
22 bucks of profit potential per disc! that kinda explains the deluge of crappy ports we have been seeing.
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