(Edited by nullnullnull (1473), Mar 20, 2007)Why Forbes has its Head up its Ass
nullnullnull (1473), Mar 20, 2007
Forbes recently ran the most irresponsible piece of journalism , "Why Gears Of War Costs $60", I have ever seen from a supposed financial publication. In it they breakdown the cost of making a game. According to Forbes, publishers make about $1 per unit or 1.5%. However a quick look at Electronic Arts , Activision or THQ shows a gross profit margin of 35-60%. What gives?
Well Forbes lumped everything into variable cost. Variable cost is what the publisher pays for each game unit it makes. Using Forbes own numbers, and I am being generous here, after the retailer takes it 20% cut, variable costs are only 42%. The publisher sells more games its got to pay more to produce boxes, DVDs, fees paid to Sony and Microsoft to use their hardware etc etc. I've even lumped marketing costs as a variable costs even though most of the marketing dollars are sunk way before the game ever hits the shelves.
What's left over, 58%, is pure profit AFTER development costs are recouped. That's the big trick. It is no secret that the next-gen games are bigger, better, longer and that requires bigger teams and more money. That money is spent well before launch. If the publisher sells five games or five million, it has little impact on the development costs. However once those costs are covered it's payday for the publisher. Nearly 60 cents per dollar. Publishers that can crank out hits make lots of money. Way more than 1.5%.
A title that sells for $60 means that the publisher has to sell less titles to cover the cost and will get into the profit zone quicker than a title that sells for $50. Somewhere some accountant at Microsoft decided that $60 games will mean more profits than $50 games. Sure some people may not buy as many games, but the higher price will more than make up for the few lost sales. That is why Gears of War costs $60.
Note: The percentages are of wholesale revenue that the publisher receives AFTER the retailer takes it cut. In the case of Xbox 360 and PS3 games this would be $48 or $60 - 20%.
Wow, that's interestrrrgfggggggffzzzzzzzzzZZZzzzZZzzzZZzzzzZzz... |-O
Dr. M. "Schadenfreude" Von Katze Wrote:
haha. point taken. hey i went to business school. these things bother me.
More bothersome to me than the accounting used here is the economics of all this. Even if you count all of the ways Microsoft, Sony, etc. are hiding the costs to the consumer (selling peripherals separately, etc.), $500-600 for a console and $60 per game just isn't that bad when you consider that the overall price level has doubled in the last 20 years.
The numbers... they make my head hurt!
(Sorry Doc, I know this bores you..)
I'm very confused of the way you look at the numbers. So what if they make a profit *after* they have recouped all their expenses? I mean, aren't they *supposed* to do that? How long would a business live if it didn't recoup them?
Gross profit and what they make of a single sold unit are not comparable. Look at Microsoft's numbers, or about any other software business, gross margin can be as high as 80-90%. But that's because what actually costs is the R&D (or writing the software in the first place), not what it costs to produce it.
For those unfamiliar with the terms, gross margin is calculated as the margin between the money received in sales minus the cost to produce them. And that cost does not involve costs such as R&D or marketing because these are the variable costs Flipkin talks about. Naturally majority of costs involved in SW business are variable costs.
So a gross margin of 35-60% doesn't seem unusual. What you should look at is net profit margin.
I don't think flipkin's issue is with publishers making money, but Forbes being boneheaded about it. It only makes sense to talk about a percentage of a game's price going to development costs if there was a predetermined and unchangeable number of copies produced and sold.
Joshua J. Slone Wrote:
Taken literally it doesn't make sense, but calculated for the "average" game, I think this does make sense.
Flipkin's right, though...costs don't determine price, supply and demand do. Gears of War costs $60 because it's the profit-maximizing price. Anyone who says otherwise is pulling a fast one on you.