Monday, October 30, 2006

Ramblings on Next-Gen Game Budgets

I'm going to make some gross generalizations in this post and it may ramble towards the end. Be forewarned.

I think it is pretty safe to say that game publishers prefer to invest in the development of a quality experience when the market allows for it but similarily have to watch costs and hedge bets when it doesn't. I don't have access to the production budgets of games outside my own company but I would guess that last year's top PS2 titles had, on average, the highest development budgets of the console's life cycle. Potential for sales grows with the console install base. When you know you can potentially reach so many it is easier to make the business case to invest the extra million or two for polish and help distinguish your title from the competition. Some might say the business case demands it.

In these transition years to "Next-Gen" the publishers are faced with two unfortunate realities. First, sales of current-gen games dropped off far quicker then many anticipated, and second the widespread adoption of next-gen hardware (for the sake of this post, 360 and ps3) has been delayed by multiple factors. Shipping only on the 360 & PS3 within the next 6-8 months creates a challenging financial reality for publishers. If they aren't particularily careful with development budgets there will simply not be enough consoles on the market to reach the critical mass needed to break even. Three games for the 36o have so far sold more then a million copies. The rest were probably either: (1) cheap to develop (due to existing assets or code from a previous installment in the franchise) (2) waiting for the PS3 to hit the market so a 'cheap' port can help improve the ROI or (3) not profitable.

My guess is it could be a couple of years before there are enough NG consoles on the market that games other then the absolute top sellers (or sequels) are comfortably profitable. In the meantime I think you'll see some publishers being extra careful.

Now, as I said when I started -- there are huge generalizations here. Publishers will create loss leaders to establish brands, they'll recoup the significant R&D costs on the 1st generation of NG titles when the sequels hit, etc. Additionally I'm not implying that the quality of the first-gen-next-gen games is necessarily low -- just that publishers generally have to be even less forgiving of the 'quality at all costs' mentality.

In a conversation with an employee on my team today, this subject came up, and we tried to find a parallel in another entertainment industry but failed. I can't think of any evidence of the movie industry (as an example) going through phases of 'profitability confidence' tied to anything other then, perhaps, the global state of the economy. Even with a component of their revenue tied to hardware sales (VHS, DVD) I would bet that the transition period between the two platforms saw steadily increasing average budgets for hollywood movies, a trend that seems to be continuing.

What other industries have their sales (and therefore the content production budgets) limited by the distribution of a 'player'? I have a hard time imagining a record executive refusing to sign off on an expensive accompanying orchestra because (hypothetically) sales of the iPod are slumping -- music revenue is too spread out to be limited by a single factore like that. ABC may be cutting costs on one of the most expensive shows in its lineup, but even if DVD player sales started slumping in anticipation of HD-DVD and/or Blue-Ray (again, hypothetical) the number of DVD players on the market creates a completely different economy of scale. They can probably "afford" to weather a slumping market for DVD sales for a season.

Thoughts?

6 Comments:

Anonymous Anonymous said...

The problems you describe aren't new. Each new console generation brings those effects to our industry.

We have a 5 year cycle and each year has specific market changes.

When the old one drops of the shelf sales of software is usually lower of course. The new gen isn't boig enough (yet) to counter the loss of sales.

It takes a year or two until profitability is there (with a few exceptions for launch titles) and year 3 in the 5 year cycle is the most profitable until the shelf is so crowded that its hard to place your game.

Year 4 is interesting because your back catalogue does make sales and your sequels will do too, if you established a cool IP or brand in the first year, but who can do this?

Year 4 you need already to invest into the new console coming up in 2 years time. It takes that long to develop your tech and games for launch. Everyone want to be there atlaunch because thats where you can place your IP or brand and continue selling it each year of the console life cycle. The investments are huge though (dev kits 20k? wow) and not everyone can actually do this.

The cycle also ha san influence on the PC market as publishers who invest millions in a new console gen which hasn't even appeared yet play conservatively on the PC. This means sequels, sequels, sequels ... which don't sell as well as they should be.

I once analysed the 5 year cycles and did a talk on a german dev conference but unfortunately the powerpoint is all german :/ It clearly shows very regular rules each cycle has. If you know these you can actually save a lot of money you would otherwise waste.

Example: When the console generation is most profitable many devs and publishers turn to this generation (they couldnt afford first or didn't believe in a specific platform). Of course thats too late: you add the development time and approval times to that date and your game is just ready when the current gen is turned into a budget machine :/ That happened 3 times now even with other industries who saw the profits in our industry: Hollywood once founded like 10 game studios (only one is left), and the toy industry did the same (remember Hasbro, Mattel etc. buying all sorts of companies?). If you analyse when that happened you will see that they did this much too late. No one is left from those.

3:41 AM  
Anonymous Anonymous said...

Hm, I went through the hassle to translate that old talk I did back in 2001: see http://www.teut.net

Remember I held that talk in 2001, so some info is old and some predicitons I made are already here or happened in the last 3 years.

Some reasoning in the talk doesnt come over well as its not part of the slide, but you get the principle. Target audience were developers.

5:09 AM  
Blogger kim said...

Couple thoughts:

- The problem with the '5 year cycle' arguments is that they assume interpolation doesn't break. There are (valid) arguments for the next cycle staying the same, going longer (e.g. 360/ps3 good enough for next decade), or going shorter (progress in silicon, design, etc means whichever manufacturer is trailing can up the ante and shift to a 3-year hinge point)

- I'm also having problems thinking of examples in other media, but I wonder whether certain segments of print have some parallels. Things like dictionaries and large technical books are moving from the old platform (print) to the new one (digital), but still have one foot in the old model. I'm stretching things a great deal here, I realize.

- At GDC 2 years ago, Kathy Schoback did an awesome presentation on next gen budgets and strategies for publishers. Nice back-of-the-envelope modeling of a number of different approaches. The conclusion was more or less "ship on every platform". The idea being that the cost of porting the title - even if re-authoring the bulk of the art - was insignificant compared to the total cost of developing the title for any one platform. Once you've bought your REALLY expensive 'lottery ticket', paying incremental amounts for 'extra chances to win'. (my analogy, not hers - I know it's a poor one).

- Finally, I can't find the link, but I'd seen a list of movie budgets adjusted for inflation AND for TAM (just budgets adjusted for inflation you can find on wikipedia - but that's only part of the story if you don't look at risk/reward - i.e. total available market). If I could find it, it would be interesting at that point to look at two 'platform transitions' - silent to talkie, and B&W to color. In both cases, audiences grew with the new platform (silent to talkie doubled theatre attendance in one year), but there was a transition time where theatres didn't have the new tech yet. To a lesser degree, perhaps 16->32->72 mm film.

3:24 PM  
Anonymous Anonymous said...

I talked to some people in the music business about cycles and they came up with their 10 year cycle. It seems that the music style changes or adapts every 10 years, but thats more due to artistic move and countermove, not due to media (like tape to cd to dvd to internet).

As for the cycle getting longer: I agree, some cycles had 6 years, but mainly due to the fact that the consoles has been launched not at the same time in all markets. There is no indication that the cycle has been broken (yet).

I wonder why you think that the ps3/360 can hold out any longer than 5 years time. If we think about what we have in terms of hardware, internet and interfaces in 5 years the current consoles might look dated as usual. The price wars will do the same.

I think the reset of the cycle by launching new platforms is actually important. It cleans out the shelf, drops waste. The reset also gives everyone a new chance toi establish their IP or games.

Also each new console cycle gives us a new toy, or establishes one. This one gives us internet by default. It usually takes one console to find th eidea, and the next cycle will adapt it as standard (so it takes 5 years). Think analogue stick, rumble packs, internet, etc.

3:34 AM  
Blogger Ben Mattes said...

Kim,

I want to quickly comment on your point re: supporting as many consoles as possible to buy the all the 'bonus numbers'. ;)

I haven't done a detailed hardware analysis but common sense leads me to believe that this gen has much greater technology fragmentation then last. The PS2, Xbox, GC, PC and, to a certain extent, PSP could all be supported from a single common denominator without lowering the quality standards of any SKU in particular beyond a market-acceptible level. Of course there were textures upgrades for the Xbox and '30% additional content' for the PSP, but those truly belong in the incremental costs category, imo.

With NG those incremental costs are increasing significantly and when 'porting' a 360 or PS3 title to the Wii, hardly quality as incremental in my book. Sure the budget for developing the Wii SKU once the 360 is done will be less then you spent on the master SKU, but it is no longer just a matter of having someone downsize all the texture resolutions. Publishers are using fundamentally different engines to power games on Wii then on 360/PS3.

8:13 AM  
Blogger kim said...

The point about "incremental costs" goes more like this:

If you are spending all the money to create and market a franchise, doing a complete re-write may be seen as incremental cost.

i.e. If you are doing something like "Tomb Raider 8: Breasts in Bolivia", and market it as the most killerest next gen title, then do one for GBA, DS, PSP, PS2, Xbox, cell phone. So what if one is 2D, another is 3D, etc.

Case in point, Madden, Tony Hawk, ...

1:58 PM  

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