Challenges and Oppotunities in the Videogame Industry

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Challenges and Oppotunities in the Videogame Industry

  1. 1. Michael Schmalz @mpschmalz November 17, 2011 Challenges and Opportunities in the Videogame Industry, a Console Developers Diary
  2. 2. My Goals for this Presentation <ul><li>Examine the business of making large budget videogame, past present and future. </li></ul><ul><li>Review the environment in the game industry and some of the decisions that we have made these past few years in response </li></ul><ul><li>Discuss the current state of the game industry. What are the pressures and how is it evolving in response. </li></ul><ul><li>Examine issues around large budget content creation, innovation and creativity </li></ul><ul><li>Review some trends we can expect to see in the upcoming years in the high end videogame marketplace. </li></ul>
  3. 3. Six Generations of Consoles & Razor & Blades Marketing Source: The Economist
  4. 4. Game Economics – Retail Console Games <ul><li>Development cost of a console game $15-$20 million. </li></ul><ul><li>Retail Cost $60 per unit (full price) </li></ul><ul><li>Less… </li></ul><ul><li>Retail Cost $8 </li></ul><ul><li>Platform Fee $8 </li></ul><ul><li>Less CoGS $5 </li></ul><ul><li>Marketing and other fees $9 </li></ul><ul><li>Net Revenue $30 </li></ul><ul><li>Publisher (75%) – $22.50 </li></ul><ul><li>Developer (25%) - $7.50 </li></ul>
  5. 5. Game Economics- Console DLC <ul><li>Downloadable Content on XBLA, PSN and PC portals. </li></ul><ul><li>Development Cost – variable but say $3-4 million </li></ul><ul><li>Marketing Costs - ? </li></ul><ul><li>Cost $10.00 </li></ul><ul><li>Fees $0 </li></ul><ul><li>Net Sales $10.00 </li></ul><ul><li>Platform Fee 30% $3.00 </li></ul><ul><li>Developer revenue $7.00 </li></ul>
  6. 6. Economics of Used Console Games <ul><li>Consumer buys new game $60.00/unit </li></ul><ul><li>Consumer Sells new game back to retailer $35.00/unit </li></ul><ul><li>Retail Sells used game $55.00/unit </li></ul><ul><li>Retailer profit $20.00/unit </li></ul><ul><li>Publisher revenue $0/unit </li></ul><ul><li>Developer revenue $0/unit </li></ul><ul><li>Final Cost to consumer $25.00/unit </li></ul>
  7. 7. Timeline 2003-2004 <ul><li>Console software sales surpass the PC for the first time </li></ul><ul><li>Consoles (Xbox, PS2) are now the #1 platform for interactive entertainment. </li></ul><ul><li>Console development costs $3M-$6M </li></ul><ul><li>Break even point 300,000 unit sales </li></ul><ul><li>Console industry is healthy/profitable/expanding </li></ul><ul><li>Industry is making about 400-500 games a year in North America </li></ul><ul><li>Digital Extremes begins exploring different financing options </li></ul>
  8. 9. Timeline 2004-2005 <ul><li>Next Generation Consoles announced and introduced </li></ul><ul><li>Development costs $15M (min.) </li></ul><ul><li>Team size triples </li></ul><ul><li>Crisis ensues for skilled developers </li></ul><ul><li>Break even point required >1M units. </li></ul><ul><li>How many games hit that mark? </li></ul>
  9. 10. Timeline 2006-2007 <ul><li>Console sales for Xbox360/PS3 very slow due to high introduction costs </li></ul><ul><li>Next Gen game are pretty awesome, though </li></ul><ul><li>PS3 is still losing +$100 unit at introduction </li></ul><ul><li>Hiring skilled developers still very tough </li></ul><ul><li>Videogame Industry continues to grow in sales and in workforce </li></ul><ul><li>Electronic Art Stock Price $60/share </li></ul>
  10. 11. Timeline 2008-Present <ul><li>Global financial crisis </li></ul><ul><li>Overall sales still holding or increasing in most genres – Video game industry dubbed as recession-proof. </li></ul><ul><li>Many projects cancelled, studios closed, publishers downsized </li></ul><ul><li>Analysts finally realize the game industry has not figured out how to make money in this console generation </li></ul><ul><li>Labor market softens, industry sheds or repurposes 20% of its workforce </li></ul><ul><li>EA stock price drops to $15/share and has stayed flat. </li></ul><ul><li>Social media and casual games become key growth areas and major unknowns </li></ul><ul><li>New business models emerge: subscription, free to play, micro transactions, cloud computing solutions. </li></ul>
  11. 12. Current Challenges <ul><li>Struggle against piracy </li></ul><ul><li>The pressure of the rental and resale market </li></ul><ul><li>New devices and platforms. Tablets, smart phones, mobile devices, set top boxes… </li></ul><ul><li>Confusion in the digital marketplace. 300K apps in the Apple Apps store. </li></ul><ul><li>How do you choose? Or more importantly, how do you invest in this marketplace and know great content will not be lost in the noise? </li></ul><ul><li>Branded content rules, risk aversion discourages innovation in new content IP. </li></ul>
  12. 13. Crisis of Content <ul><li>The internet will continue to grow beyond most of our ability to imagine in the next 20 years </li></ul><ul><li>Most of the discussion currently is about 1) the platform or 2) the delivery portals (which part of the internet are you going to?) </li></ul><ul><li>These are global fights with companies like Apple, Google, RIM, Microsoft (investment models exist) </li></ul><ul><li>Very little attention currently being paid to the “Content Creators” </li></ul><ul><li>North American investors are not prepared to either understand this marketplace or invest in it. </li></ul>
  13. 14. Revising the Long Tail and Videogames and Content <ul><li>How are we going to receive new content in the digital age – what will it look like </li></ul><ul><li>Go back to 2006 </li></ul><ul><li>Long tail theory is about economics of abundance in the digital age. </li></ul><ul><li>Managing large digital inventories, music, TV, movies exploiting the efficiencies and connectivity of the internet. </li></ul><ul><li>“ Long tails exist everywhere” </li></ul><ul><li>Satisfying latent demand for existing content </li></ul><ul><li>But should you invest in the long tail? Anita Elberse a Harvard Researcher asked the right question. </li></ul>
  14. 15. Cross Media Content <ul><li>The migration of intellectual property across different media </li></ul><ul><li>This is the application of the long tail </li></ul><ul><li>Think of this media trend in music, motion pictures </li></ul><ul><li>Even today, I hear investors advise developers “develop for all platforms” </li></ul><ul><li>Music has grown by selling its content across media – LP, cassette, 8 track, CD, Internet. </li></ul><ul><li>Impacts diversity and creativity </li></ul>Now, Its also the migration of traditional brands and IP over social and digital networks.
  15. 16. Transmedia Content <ul><li>Concept first coined by Henry Jenkins. </li></ul><ul><li>The use of multiple, complementary media to tell a story </li></ul><ul><li>Has the potential to create greater diversity in story telling and media experience </li></ul><ul><li>Game consoles provide a format for immersive experiences- at home, large screen, several hours </li></ul><ul><li>Mobile devices provide a format for “quick distractions”- anyway you go, short duration, small screens. </li></ul><ul><li>Computers, laptops, tablets all bring different platform characteristics </li></ul><ul><li>“ transmedia has the potential to make characters more compelling and create distinctive understanding and affect” </li></ul>
  16. 17. New Business Models <ul><li>We desperately need new business models! </li></ul><ul><li>From Wired – The future of (digital media) business is $0.00- Freeware and “free to play” </li></ul><ul><li>Software as a service or a subscription – World of Warcraft, now proposing Call of Duty Elite </li></ul><ul><li>Episodic games, smaller scoped game, different price points all via the internet. </li></ul><ul><li>Monetizing audiences (social media). What is the value of a tweet when you have 1 million followers? </li></ul><ul><li>Advertising – Google (targeted, non intrusive) </li></ul>
  17. 18. What can we Expect in console videogames? <ul><li>Heavy Monetization of existing hardware, software and content and the resulting crisis in content and creative constraints. </li></ul><ul><li>New consoles will have to come soon. </li></ul><ul><li>Increasing polarization between top tier and budget console games </li></ul><ul><li>Increase in transmedia story telling. </li></ul><ul><li>Intellectual Property leakage will continue to have significant impact on the way videogames are created, consumed and deployed. </li></ul>
  18. 19. Thank you for listening! <ul><li>Questions? </li></ul>

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