The Failed Notion of Models in Gaming
The rigged nature of the gaming industry and why we need change to thrive
Ah, the gaming industry. Everyone wants into it. So many people enjoy it. The vision of the big release and the breakout hit drives the new entrants, their passion, and their zeal. An enthusiasm that is ripe for exploitation by an infrastructure and ecosystem that has for a long time, resembled a pyramid scheme more than anything else.
This year, tens of thousands lost their jobs. Dozens of studios closed. Only 1 in every 2000 games even broke even on their cost or made any money at all. These are not the metrics of a healthy ecosystem. We keep clinging to outliers to “prove” that things are going well. If it was going well we would not need the outliers as examples of anything at all.
Let’s break it down into some financial modeling and see where we wind up.
The Bean Counting Nightmare of Selling
Let’s take a basic self-sustaining model:
Indie studio spends £250k building a game. A normal budget for a small UK player. They want to target £1M in sales. These days that requires spending some £100k at least in marketing and PR costs. So the total cost is then around £350k.
Game launches. £1M is made. Sales tax removes 20% leaving £800k. Platforms take 30% leaving £660k.
Dev and marketing costs are deducted leaving £310k. The studio needs another £350k to build and market the next game....so now their total is:
£-40k in the hole
Yet somehow the platforms that did nothing to sell or market the game (which none of them basically do today) have collected more money than the development cost paid for by the studio ..... and the government has cashed in... meanwhile studio the paid for everything and did all the work is scratching its head ...hrm ...what is wrong with this picture?
Let’s take a look at the publisher-financed model:
Publisher spends £1M funding a game, takes two years to build it. They want to target £10M in sales. Publisher spends £1M at least in marketing and PR costs. A common exercise today is for the dev cost to be a 1:1 ratio with marketing cost at premium indie to AA level. So the total cost is then around £2M.
Game launches. £10M is made. Sales tax removes 20% leaving £8M. Platforms take 20% (due to higher revenues) leaving £6.4Mk.
Dev and marketing costs are deducted leaving £4.4M. In the best case scenario Publisher takes its 30% (£1.3M) cut leaving ....so now the development team total is £3.1M. Developer pays cooperation and profit tax in its country which is usually around 20% and therefore has £2.4M left. Barely enough to fund even 24 months of development for the team.
And that is the best-case scenario. In a situation where the Publisher pays a scaled-down % based on cost recovery, the amount coming to the developer is even less.
So the people who did nothing at all (the platform) pocket £2.6M in profit, but neither the publisher nor the developer has a similar net gain. If you scale the operation up to a higher budget, the marketing and user acquisition costs scale linearly as do the development cost - so no matter how big you go - the problem is exactly the same.
As such, there is no way at all for the studio to ever reach a self-sustaining model. The platform and the ecosystem have no reason at all to change this because everything from the marketing company to the PR company, to the supporting players ALL get paid upfront → the studio gets paid LAST. Even before a break-even is guaranteed.
I might, based on the above, go so far as to say, that the break-even is made less likely due to the ecosystem gaining their slice of the money first. The ecosystem is not incentivized to look for or find ways for the studio to be sustainable, because they will win anyway with the next studio if this one fails.
Which is why we never hear about a publisher failing. Or a platform downsizing staff. It’s always the studio that closes and downsizes people. Because:
There is always another studio.
That money that is grabbed by the surrounding ecosystem would have been enough to save the jobs that were lost in studios this year. It would have saved the studios Embracer had to close. It would have done a great deal of things.
Where the Woozle Wasn’t….
Because Winnie the Pooh should inspire us all…
WRKS Games was on a multi-year mission to try to find a completely self-sustaining economic model for an independent game studio. But similar to the Woozle, we too found that the profit was not there but merely a figment of our imagination. Despite an iron control of operational expenses and profit - we barely scrapped together 8% margins.
The reason the WRKS Games video game arm was shut down was not due to a lack of money - but due to it being impossible to envision or calculate a model at any level of the company where it could be self-sustaining without outside funding. The margins coming from one product are not enough to build the next.
It’s time for us game developers and studios to start to look closely at who we are giving our money away to - and what we are actually getting in return for it.
Because everyone except for us - is winning.
Following the Winning Example
If we take a study of the last generation of the game company, the from-scratch-to-market-leader winners of that generation were Activision Blizzard, EA, and Ubisoft. Three companies bucked the trend of platform launches and went straight to customers with their own launchers and built consumer brands. No Steam release, no 30% cut to other people - direct to consumer. They won the last generation and did so comfortably.
Even today, the winning model must be one where game developers are the primary recipients of their profits and wins. Otherwise, you cannot retain your financial control and security and invest in your own future. If that does not happen, the game developers and studios will continue to be treated like the replaceable cannon fodder of the game industry. If we, as the talent and content creator community of gaming, allow that to happen - we have nobody to blame for it but ourselves.
Change Begins with You
Positive moments are afoot. The current dot-com-esque meltdown of the game industry is destroying and challenging some of these outdated pillars. Mediocrity is being forced out as the talent and results bar rises.
Microsoft has single-handedly forced a maturing process at the top and the bottom of the industry by acquiring the top studios of the world and funding support for the small indies at the other end of the ecosystem.
Once the dust settles I imagine we will be looking at Microsoft’s antics in delivering on the GamePass vision and its heavy-handed acquisition strategy as one of the most significant pivot points in maturing the industry that has ever been executed by a single player. Second only to the rise of Tencent.
So how do we approach this with success in mind?
Think long-term. Say no to platforms and build your brand directly with consumers. Ship on your own launchers and market people to your own stores.
Do not fall prey to false data. The idea that consumers will not install another launcher to play your game is false. There is no data to back that up. They will install what they need to install to experience a game they want.
Dare to be different, encourage your mobile gamers to download your game APKs from your own site and side-load them - skip Google Play. The emerging markets of Africa, and Southeast Asia that are huge in mobile have proved this is possible and works.
Publishers: if you are liquid enough to create your own distribution channels and storefronts - do it. Send your traffic there and skip the platforms, keep the profits, and kick back more to the devs. At WRKS Games we built our own store in 12 months at a cost of £200k and we had the same distribution and e-commerce functionality that Steam has. It was not a problem at all.
It is time to leave the pillars of the yester-year generation behind, along with the falseness and hustling that came with it, and move to a mature, well-formed industry that genuinely values the content development ecosystem with majority returns and real profits instead of treating it as a golden goose that can feed everyone else but itself.