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Chapter 7.2 Game Industry Roles and Economics

Chapter 7.2 Game Industry Roles and Economics. Video Game Industry Value Chain. Game Developers. Can be independent, or subsidiaries of publishers Many developers started on PC due to accessibility of tools

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Chapter 7.2 Game Industry Roles and Economics

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  1. Chapter 7.2Game Industry Rolesand Economics

  2. Video Game IndustryValue Chain

  3. 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

  4. 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 publisher’s “net receipts” • Definition of net receipts is frequently obscure

  5. Motion Capture • Used to automate animation process for more realism in human characters • Magnetic or optical systems • Internal mocap studio at publisher or external service provider • Services include accompanying software and technicians, and post-capture data processing and tuning

  6. 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

  7. 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

  8. Revenue from $50 Console Game

  9. 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

  10. 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

  11. 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

  12. 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) 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

  13. 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)

  14. 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

  15. Retail • Brick-and mortar retailers generally earn 30% margin on a $50 game • Sales of packaged goods by internet retailers follow the brick-and-mortar model • Electronic download of games via internet rising in popularity

  16. Sales Channel:Distributors • Purchase games from publishers, and resell to smaller independent stores and chains • Compete on price, speed and availability • Earn profit margin of around 3% • Allows retailers access to many publishers w/out separate relationships

  17. Sales Channel: Manufacturer’s Representatives • Establish 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

  18. 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

  19. 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

  20. Sales Channel:National Retailers • Familiar names: • Electronic Boutique, Best Buy, Toys “R” Us, Wal-Mart • 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

  21. Sales Channel:National 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

  22. Sales Channel:National Retailers • Open-to-buy = amount of money available in buyer’s 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

  23. Summary • Roles in video game industry haven’t changed much in 30 years • However, flow of money (ergo, balance of power) has shifted greatly • Balance of power keeps shifting, e.g. as next-generation console project costs skyrocket

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