Explaining the gaming economy.
Posted: 2010-10-07 02:03am
This is brought on by the people bitching about game return periods, trade-ins and Steam price fluctuations. It's based on the information that I could immediately recall from my own history with this industry and its affiliates as well as news stories, editorials and interviews I've read over the years. Feel free to correct me if you find a factual error.
Rant begin:
Game developers are not paid by you buying their game. Let's get that much straight.
Game developers are paid by their studio. This studio may be a part of a larger company, such as Microsoft Games Studios or EA or Activision. They may be working on a project which is being funded by one of the larger companies or they might be running on the fumes of their last title until they can sell their current idea to a publisher. Or they might be independent, but for the sake of this discussion we'll assume it's one of the other options.
So, in these cases a larger company, which we'll call The Publisher, is paying The Studio to develop a product which they will publish.
But The Publisher doesn't actually sell the games, nor do they even wholesale them. For that they enter in a distribution deal. Due to the nature of their business distributors are localised, so for any given game there might be tens of distribution deals in place with a variety of different distributors around the world. Some distributors may not be interested in picking up the game in their area, but due to higher level agreements between The Publisher and The Distributor, The Publisher can't shop around for other distribution options. Hence why you can have funky release date differences and even some areas missed entirely. The local distributor is also going to be very influential in setting the price - this will usually be part of the negotiations between The Distributor and The Publisher. The Distributor and The Publisher at this time will also usually agree on things like marketing. Generally a distributor will pick up between 10-25% of the retail sticker price. This is why most companies which own publishers are seeking to vertically integrate their operations and have their own distribution subsidiary as well.
From here The Distributor will sell to the retailers, usually with the assistance of The Publisher and the marketing agreements previously made. Large scale enterprises like EB and the like generally have national purchasing contracts to ensure that they get the best possible price. The scale of these contracts also comes into play when determining other "incentives". At this point things can get confusing. Most distributors aren't willing to work on consignment, where the goods remain their property while on retail shelves and only at the time of sale do they get their cut. Retailers would prefer this though as it would mean that they have no liability if those 20,000 copies of "WW2 Shoot No. 9443" don't sell. But due to business realities for both sides, the non-consigment model works admirably.
Thus a retailers buys how ever many hundreds or thousands of copies of the game, usually at 50% of retail sticker price. This gives them a large margin to cover all of their expenses, as retail will usually be the most expensive stage of the chain.
So the game now is available for pre-order at your local EB. Being the good little soulless puppet that you are, you pre-order the game to get access to the incentivised content which The Publisher and The Distributor have bundled in with a pre-order. By pre-ordering, you are giving The Retailer money in the bank. They've gotten your cash on their books now so they're that little bit more flush, not to mention the advantages such as earning interest on it. And all for nothing outlayed by them. They haven't received the stock yet and they don't pay until it's been delivered. So they're well into the black on this. There's a reason why they push preorders so hard.
So the release date finally comes and you can go in to pick up your game. At this point the economy is looking something like this:
Assuming the game is $100
$50 is staying with The Retailer. As you've already paid them $100 in advance, they've been able to earn interest on and otherwise use the $100 until now.
$50 is the amount that The Retailer paid The Distributor for the game.
$20 of that stays with The Distributor.
$30 goes from The Distributor to The Publisher.
The end.
The game developers already got paid their salary during the development cycle. They might have a bonus clause or some other provisions, but much more likely is that any bonuses will go to the PR and Marketing teams for making sure that hte game sold.
Thus at the end of the day, the money from your games purchase broke down something like this:
The Retailer - $50
The Distributor - $25
The Publisher - $25
The Developer - $0
That's all gross of course, not taking into account any expenses, taxation or anything else.
So now is where it gets interesting.
You trade your game in at The Retailer within the return window for a full price exchange. You might assume that this is a loss for the The Retailer as they're passing you a new full price (again, say $100) game for what appears to be nothing.
Instead, they're making a killing. Have a look at how it breaks down:
1st wholesale -$50
2nd wholesale -$50
1st retail +$100
1st return 0
2nd retail 0
OK, so that's a zero-sum game. But wait. We forgot a step. Let's try this again.
1st wholesale -$50
2nd wholesale -$50
1st retail +$100
1st return 0
2nd retail 0
1st resale +$90
Boom. That's a $90 profit, on this albeit simplified model. Because the re-sale of that returned title is pure profit for them. They've already paid for it from The Distributor, and they don't have to re-purchase or re-license it. Consider the margins that can be made if they can successfully flip a game multiple times.
Now of course The Distributors and The Publishers are shitty about this to various extents. Which is why they're seeking to monetise in other ways. Look at DLC, one-time codes for online access and features and pre-order bonuses. All of these are designed to incentivise the purchasing of a new game, de-incentivise trade-ins/returns and to recoup the "lost" income from re-sales.
To keep elaborating down this road, consider that the delivery channel for DLC is usually much shorter. In most cases it is a direct Distributor to Consumer market, so the 50% bite that a retailer would generally take is ignored. Though the Distributor (such as Microsoft for the XBox Marketplace) will take a much bigger cut (up to 60% have been some rumoured deals), the amount going back to The Publisher is going to be a greated percentage of the whole.
So, the obvious question that most ask at this point is "Why don't the Publishers and Distributors just go for the online delivery systems exclusively and cut out the retailers?" This is especially pertinent when discussing Steam.
Here's a two reasons:
*The vast majority of new game sales are console titles.
*The overwhelming majority of new game sales of console titles are through brick and mortar retailers.
Put those two together and you have a scenario where the brick and mortar retailers control an overwhelming majority of the marketplace. Which gives them power that The Distributors do not really want to have directed in a destructive manner. In addition, most distributors are only geared towards the physical model. As such, most distributors have as much to lose as the retailers should The Publishers push for a move to an electronic retailer format.
Rant begin:
Game developers are not paid by you buying their game. Let's get that much straight.
Game developers are paid by their studio. This studio may be a part of a larger company, such as Microsoft Games Studios or EA or Activision. They may be working on a project which is being funded by one of the larger companies or they might be running on the fumes of their last title until they can sell their current idea to a publisher. Or they might be independent, but for the sake of this discussion we'll assume it's one of the other options.
So, in these cases a larger company, which we'll call The Publisher, is paying The Studio to develop a product which they will publish.
But The Publisher doesn't actually sell the games, nor do they even wholesale them. For that they enter in a distribution deal. Due to the nature of their business distributors are localised, so for any given game there might be tens of distribution deals in place with a variety of different distributors around the world. Some distributors may not be interested in picking up the game in their area, but due to higher level agreements between The Publisher and The Distributor, The Publisher can't shop around for other distribution options. Hence why you can have funky release date differences and even some areas missed entirely. The local distributor is also going to be very influential in setting the price - this will usually be part of the negotiations between The Distributor and The Publisher. The Distributor and The Publisher at this time will also usually agree on things like marketing. Generally a distributor will pick up between 10-25% of the retail sticker price. This is why most companies which own publishers are seeking to vertically integrate their operations and have their own distribution subsidiary as well.
From here The Distributor will sell to the retailers, usually with the assistance of The Publisher and the marketing agreements previously made. Large scale enterprises like EB and the like generally have national purchasing contracts to ensure that they get the best possible price. The scale of these contracts also comes into play when determining other "incentives". At this point things can get confusing. Most distributors aren't willing to work on consignment, where the goods remain their property while on retail shelves and only at the time of sale do they get their cut. Retailers would prefer this though as it would mean that they have no liability if those 20,000 copies of "WW2 Shoot No. 9443" don't sell. But due to business realities for both sides, the non-consigment model works admirably.
Thus a retailers buys how ever many hundreds or thousands of copies of the game, usually at 50% of retail sticker price. This gives them a large margin to cover all of their expenses, as retail will usually be the most expensive stage of the chain.
So the game now is available for pre-order at your local EB. Being the good little soulless puppet that you are, you pre-order the game to get access to the incentivised content which The Publisher and The Distributor have bundled in with a pre-order. By pre-ordering, you are giving The Retailer money in the bank. They've gotten your cash on their books now so they're that little bit more flush, not to mention the advantages such as earning interest on it. And all for nothing outlayed by them. They haven't received the stock yet and they don't pay until it's been delivered. So they're well into the black on this. There's a reason why they push preorders so hard.
So the release date finally comes and you can go in to pick up your game. At this point the economy is looking something like this:
Assuming the game is $100
$50 is staying with The Retailer. As you've already paid them $100 in advance, they've been able to earn interest on and otherwise use the $100 until now.
$50 is the amount that The Retailer paid The Distributor for the game.
$20 of that stays with The Distributor.
$30 goes from The Distributor to The Publisher.
The end.
The game developers already got paid their salary during the development cycle. They might have a bonus clause or some other provisions, but much more likely is that any bonuses will go to the PR and Marketing teams for making sure that hte game sold.
Thus at the end of the day, the money from your games purchase broke down something like this:
The Retailer - $50
The Distributor - $25
The Publisher - $25
The Developer - $0
That's all gross of course, not taking into account any expenses, taxation or anything else.
So now is where it gets interesting.
You trade your game in at The Retailer within the return window for a full price exchange. You might assume that this is a loss for the The Retailer as they're passing you a new full price (again, say $100) game for what appears to be nothing.
Instead, they're making a killing. Have a look at how it breaks down:
1st wholesale -$50
2nd wholesale -$50
1st retail +$100
1st return 0
2nd retail 0
OK, so that's a zero-sum game. But wait. We forgot a step. Let's try this again.
1st wholesale -$50
2nd wholesale -$50
1st retail +$100
1st return 0
2nd retail 0
1st resale +$90
Boom. That's a $90 profit, on this albeit simplified model. Because the re-sale of that returned title is pure profit for them. They've already paid for it from The Distributor, and they don't have to re-purchase or re-license it. Consider the margins that can be made if they can successfully flip a game multiple times.
Now of course The Distributors and The Publishers are shitty about this to various extents. Which is why they're seeking to monetise in other ways. Look at DLC, one-time codes for online access and features and pre-order bonuses. All of these are designed to incentivise the purchasing of a new game, de-incentivise trade-ins/returns and to recoup the "lost" income from re-sales.
To keep elaborating down this road, consider that the delivery channel for DLC is usually much shorter. In most cases it is a direct Distributor to Consumer market, so the 50% bite that a retailer would generally take is ignored. Though the Distributor (such as Microsoft for the XBox Marketplace) will take a much bigger cut (up to 60% have been some rumoured deals), the amount going back to The Publisher is going to be a greated percentage of the whole.
So, the obvious question that most ask at this point is "Why don't the Publishers and Distributors just go for the online delivery systems exclusively and cut out the retailers?" This is especially pertinent when discussing Steam.
Here's a two reasons:
*The vast majority of new game sales are console titles.
*The overwhelming majority of new game sales of console titles are through brick and mortar retailers.
Put those two together and you have a scenario where the brick and mortar retailers control an overwhelming majority of the marketplace. Which gives them power that The Distributors do not really want to have directed in a destructive manner. In addition, most distributors are only geared towards the physical model. As such, most distributors have as much to lose as the retailers should The Publishers push for a move to an electronic retailer format.