Where the Money Goes

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You have to understand where the money goes to be succesful financially making games. There's more to it than making a detailed development budget (although that's very important): you must consider sales of each version (PC, consoles, and handhelds), marketing expanses, unsold copies, and much more.

This article covers in details the profits and losses involved in selling a top-quality next-generation title. It explains everything important and you don't have to be an accountant to understand. It's based in large parts on a presentation given by Kathy Schoback at the 2005 Game Developers Conference.

We'll consider the numbers for a top-quality next-generation title. It's an original title -- it's not a sequel or a licensed game -- released on all major consoles, on the PC and on handhelds simultaneously. Even if your project isn't quite so ambitious, you should still find this a good starting point.

Contents 1 Assumptions 2 Profits and Losses 3 Scenarios 3.1 Only 100K copies sold 3.2 2 million copies sold 3.3 Dream Scenario 4 Conclusion 5 Contribute!

Assumptions

The following table resumes the assumptions we start with: numbers we need to plan, but that vary from project to project. Later, we'll change some of these numbers to see what we get under different scenarios.

There's some technical talk in the following tables, so here's what it means:

• Lifetime NA sales: That's the number of copies of the game sold in North America for the whole time the game is on sale.
• Development spend: How much it costs to develop the game (i.e. the budget of the game). If it's marked as "incremental", it means it's a cost over the base development budget. To work out the total cost you must also include any licensing costs (like middleware or licensing a brand name).
• Developer royalty/unit: This is how much money the developer gets from each copy of the game sold. It can be GROSS (from the money that comes in the door), or NET (the money came in, but the expenses were taken out.) Needless to say, there's a massive difference between 10% of GROSS and 10% of NET. (Royalties tend to range from about 10% to 45% of NET depending on who you are, allowing for a fair definition of net.)
• Marketing spend: How much is spent advertising the game. (Commonly 10% of the project cost)
• CO-OP Advertising: How much money you give retailers to (cough cough) stock your game. (Normally 2.5% of project cost)
• Wholesale price: The price at which the game is sold to retailers. They add some more on top as profits before they sell the game.
• Markdown Reserve: The proportion of all the copies of the game that won't sell at regular price and will need to be liquidated.
• COGS/Royalty: COGS means "Cost of Goods", or the cost of the box, the CD, the instructions manual and everything else that's included in the box. "Royalty" is how much money must be given to the owners of the platform (e.g. Sony, Microsoft and Nintendo) for each ccopy sold. This line is the sum of these two elements.
• Variable cost: This is cost that increases proportionally with the number of copies sold.
• International: The money made from selling outside North America.
• Greatest Hits: The money made from selling the special "best-seller" edition of the game.
• Distribution: The cost of getting the game to the stores. (Commonly 2.5% of project cost)
• Digital distribution: The money made by selling the game online, through a system such as Valve's Steam.
• Licensing Revenue: This is when you make extra money (other than sales) from your game. This can include, for example, strategy guides, OEM bundle deals (where Dell might put your game on every PC they make and pay you 50 cents or $1 per unit), mobile phone deals, action figures, comic books, budget / back catalog deals (selling old games), etc.

	All consoles	PC	Handheld
Lifetime NA Sales	1,000,000	250,000	500,000
Development Spend	$20 million	$500K (incremental)	$2 million (incremental)
Developer royalty/unit	$10	$10	$8
Marketing spend	$6 million	--	--
Wholesale price	$38	$38	$32
Markdown reserve	10%	30%	15%
COGS/royalty	$9	$1.50	$9
Variable cost	5%	5%	5%
International	$4.6 million	$1.1 million	$1.6 million
Greatest Hits	$1.6 million	--	--
Digital distribution	--	$225K	--

Profits and Losses

Based on these assumptions, the following table shows where the money goes.

Packaged goods sales - console	$38,000,000
Packaged goods sales - PC	$9,500,000
Packaged goods sales - handheld	$16,000,000
Digital distribution revenue	$225,625
Licensing revenue	$750,000
Internation revenue - all versions	$7,480,000
Greatest Hit revenue	$1,587,500
Total Revenue	$73,543,125
Prototype	$1,000,000
Development - consoles	$20,000,000
Development royalty - consoles	0$
Development - PC	$500,000
Development royalty - PC	$2,000,000
Development - Handheld	$2,000,000
Development royalty - Handheld	$2,000,000
Marketing	$6,000,000
COGS/platform royalty - consoles	$9,000,000
COGS - PC	$375,000
COGS/platform royalty - handheld	$4,500,000
Markdowns - consoles	$3,800,000
Markdowns - PC	$2,850,000
Markdowns - handheld	$2,400,000
Variable cost	$3,175,000
Total Cost	$59,600,000
Net Profit	$13,943,125

Scenarios

Based on the above information, we can calculate how many copies of the game we must sell to break even (that is, for no loss or profit). For each platform, we get:

• All consoles: 653,097 copies
• PC: 163,274 copies
• Handheld: 326,548 copies

Let's look at a few scenarios. We'll change some of our assumptions, and see what happens.

Only 100K copies sold

Catastrophe! The game sells 10 times less than you thought it would! Sales are 90% lower than above, but costs don't change much -- the game still cost over $20 million to develop, marketing spendings haven't changed and many other costs stayed the same.

The end-result is this:

• Total Revenue: $7,870,563
• Total Cost: $32,110,000
• Net Profit: -$24,239,438

The planned $14 million net profit becomes a net loss of $24 million. Forget about that house in the Bahamas you were eyeing­.

Cancelling the whole project when it's ready for release would only cost $5 million more, since all the expense for manufacturing the actual boxes would be saved.

2 million copies sold

Awesome! You sold twice as much as you expected! Income as doubled, but a lot of costs don't increase (like the development budget): profits almost quadruple.

• Total Revenue: $146,336,250
• Total Cost: $92,200,000
• Net Profit: $54,136,250

Dream Scenario

You got yourself a pretty sweet deal:

• Your sales are double what you expected, at 2 million copies sold
• You did so at a 42$ wholesale price instead of the usual 38$
• You struck a deal to lower your console royalties, so cost of goods are of $5
• You manufactured just the right number of copies of the game, so you only have a 2% markdown reserve for all versions of the game.

What's the result? The base profits of $13.9 million increase by $77.4 million, for a whooping $91.3 million profits.

Here's how many copies you'd need to sell to break even under these conditions:

• All consoles: 449,890 copies
• PC: 112,473 copies
• Handheld: 224,945 copies

As you can see, carefully controlling the factors that affect profits can have a big effect on the profitability of a game.

Conclusion

It's interesting to see that profit does not follow the number of sales directly: doubling of halving sales does not simply double of halve profits. The relationship is subtler, but understanding it is very important now that budgets are rising quickly.

Contribute!

Do you have anything to add to this discussion? Any correction you'd wish to make or additional insight you want to include? Feel free to edit this page to contribute what you can to improve this article (or any other, for that matter).

You can also edit this page and add any questions you might have at the bottom, so somebody can answer you.