The Game Industry

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The Game Industry

• INFO111/MAS111
• Week 12

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2009

• game hardware sales in the U.S. fell 6 percent to
  472.3 million in September. Overall industry
  revenue including software and accessories rose 1
  percent to 1.28 billion, ending six consecutive
  months of decline.

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Video Game IndustryValue Chain
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Game Developers

• Can be independent, or subsidiaries of publishers
• Many developers started on PC due to
  accessibility of tools
• Console development requires proprietary
  development kits and preexisting relationship
  with publisher

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Game Developers Full-Service

• Cover all disciplines art, animation,
  programming, asset management, production
• Idea for the game (intellectual property) can
  come from developer or publisher
• Work for publisher on contract basis
• Paid set amounts per milestone completed
• Payments are advances against future royalty
  payments
• Royalties are calculated as percentage of
  publishers net receipts
• Definition of net receipts is frequently obscure

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Development teams

• May be long term or project specific
• May change size radically during project
• Can make for high staff turnover

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Art and Animation Service Providers

• Developers can outsource art and animation assets
  to external companies
• Specified at contract and included in development
  budget
• Art houses can become full-service developers
  with judicious addition of programming talent
• Cost is a function of quality, team location, and
  volume of assets

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Publishers

• If developers are the geeks, publishers are the
  suits
• Various specialties PC only, PC console,
  mobile, import, web
• Console/PC publishers handle
• Production process
• Quality assurance
• Licensing
• Manufacturing and shipping to retail
• Sales
• Consumer marketing and PR
• HR, finance, investor relations, legal

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Revenue from 50 Console Game
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Quality Assurance Service Providers

• Alternative to maintaining team of full-time
  salaried testers
• Established in PC publishing, due to amortization
  of multiple hardware configurations over multiple
  projects
• Gaining ground in console publishing security of
  sharing proprietary console equipment is a
  perceived concern

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Public Relations Firms, Advertising Agencies, and
Merchandising Teams

• PR firms communicate with
• consumer media (ie mass-market general media)
• specialist video game publications
• Ad agency prepares creative for marketing
  campaign
• good communication ensures alignment of vision
  with publisher
• Merchandising teams ensure all is in order at
  store level

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Platform Holders

• Revenue comes from
• Hardware sales
• Licensing fees from compatible peripherals
• First-party games
• Licensing fees from third-party games
• Licensing fees from development tools
• Revenues from sales of proprietary delivery media

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PCs are an Open Platform

• Intersecting relationships among
• CPU manufacturers, application software
  providers, graphics chip manufacturers, and box
  assemblers
• CPU (Intel, AMD) and graphics chip (NVIDIA, ATI)
  manufacturers provide developer support and
  market their technology benefits directly to
  consumers
• Application software providers (Microsoft,
  Silicon Graphics) give developers free tools to
  ensure compatibility
• Box manufacturers (Dell, HP) may bundle hot
  software titles to add value to their sale
• Low barrier to entry for developers, but high
  competition for shelf space

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Consoles are a Closed Platform

• Console companies (Nintendo, Sony, Microsoft)
  control nearly every aspect of games on their
  platforms
• Proprietary development hardware and software
• Permission to become a licensed publisher
• License to use console company trademarks in
  marketing materials
• May require permission to start a game
• Certification of a finished game
• Investment in hardware must be offset by revenue
  from software (around 7/unit for third-party
  games)

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Delivery Media Manufacturers

• Delivery media for closed platforms include
  anti-piracy technology
• Engineered by platform holder
• Console companies historically manufacture
  finished goods for publisher
• Nintendo and Sony continue to do so
• Sega pioneered direct relationships under license
  between DVD manufacturers and publishers
• Microsoft follows this model with Xbox
• Some publishers only manufacture disks, then
  complete assembly at contracted packout companies

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Retail

• Brick-and mortar retailers generally earn 30
  margin on a full-price game
• Sales of packaged goods by internet retailers
  follow the brick-and-mortar model
• Electronic download of games via internet still
  in infancy

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Sales ChannelDistributors

• Purchase games from publishers, and resell to
  smaller independent stores and chains
• Compete on price, speed and availability
• Earn profit margin of around 3

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Sales Channel Manufacturers Representatives

• Small companies with personal relationships with
  buyers at national retailers
• Compete on credibility and knowledge of retail
  processes and systems
• Beneficial for new product launches from new
  companies

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Sales Channel Regional Retailers

• Independent store chains with in-depth consumer
  sales relationships
• Compete on product knowledge and differentiated
  product offering
• Buy games from distributors

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Sales Channel Rental Retailers

• Purchase games from publishers at standard
  pricing, but with no returns
• Allows consumer to try a game before buying
• Boosts sales of good games kills bad ones
• Some rental retailers have begun selling games

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Sales ChannelNational Retailers

• Familiar names
• Electronic Boutique, Game, Toys R Us, JB Hi-Fi
• Publisher bears burden of relationship
• Ships games to distribution center, or direct to
  stores
• Provides in-store merchandising materials
• Provides store staff with sales materials
• Generous payment terms (net 60)
• Inventory auditing
• Perks concert tickets, business dinners, golf
• In-store promotional events

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Sales ChannelNational Retailers

• Retail buyer makes all game purchasing decisions
• Indifferent buyer poor sales and disorganized
  in-store selection
• Buyers hold various controls
• Not stock a game at all
• Stock only in best-performing stores
• Feature game in weekend circulars
• Pricing adjustments

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Sales ChannelNational Retailers

• Open-to-buy amount of money available in
  buyers budget that month to purchase new
  inventory
• Function of sales velocity and selling season
• No open-to-buy high competition among new
  releases for the period
• Sales data vital to publishers
• Weekly and monthly reports called TRSTS provided
  by company called NPD

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Current Situation Example, EA

• Eliminating 6 of positions to save 50
  million/year
• Still forecasting profit, but down to 1-1.30
  from 1.40-1.70 forecast in July
• Forecasting 5 billion in sales
• Stock has fallen 52 this year
• However stock space for games increasing in big
  chains
• Game industry has been resilient in past
  recessions

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Other figures

• Blizzard-Activision 4Q 2008 lost 71m, but in
  profit for the year
• Sony lost money 2008-2009 financial year
• Nintendo's profits down 52 percent dive in the
  first-half of 2009
• still 766 million in profit.
• profit forecast for the fiscal year ending March
  2010 down from 3.3 billion to 2.53 billion.
• Nobody can predict what the current financial
  events will do to the industry, but it will
  survive

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Whats Big?

• Last quarter 2008
• 7.86 million DS
• 7 million Apple handhelds
• Approximately 11,000 games on the Apple download
  store
• Have sold over 200 million copies

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