With the cost of development going up in the next generation, Screen Digest estimates that only about 80 games a year will end up actually being profitable. With such low odds of making a profit, it would seem that making a game is more akin to playing Russian roulette with your company's future. Luckily other ways of making additional revenue are available.
According to a new report from the researchers at U.K.-based Screen Digest called Games Software Publishing: Strategies for market success, while the majority of games released by major publishers in 2004 and 2005 will have been profitable, the number of profitable video games per year could fall to as little as 80 in the next generation.
Consolidation city
In 2004 the ESRB assigned more than 1,000 ratings to video and computer games, meaning there were roughly 1,000 titles released that year. Right now, according to Screen Digest, the cost of current-gen console games development typically ranges between $3 million and $6 million per title. With the next-gen consoles starting to hit the market, that figure is expected to rise to between $6 million and $10 million on average, with "extreme cases surpassing $20 million." This is set against Screen Digest's forecast growth of 9-10 percent for the industry over the next four years.
[ "Games companies must complement their formidable creative and technological achievements with strong business planning and analysis in order to reap the benefits of the next phase of console market growth," Marc de Gentile-Williams, Screen Digest ]
Imagine if fewer than 100 games a year are actually profitable for publishers and developers. Companies that spend $10 million or more (plus marketing costs) on a particular game and can't recoup their losses will be facing some very difficult times. Although it's been said before, this research is yet another indicator that the industry will be facing far more consolidation in the near future.
Screen Digest says that "games publishers will have to choose their development strategies carefully as the cost of a failed title becomes even more pronounced," and the firm "predicts continued industry consolidation and the demise of smaller publishers which lack viable growth strategies."
Risk averse
If you were already sick and tired of the "sequelitis" and constant licensed content this industry is currently dealing with, it doesn't look like that's about to change anytime soon, as developers will be far more averse to taking risks with new and creative ideas. This means we'll likely be seeing more movie-based games and sports titles, as well. "Titles which are based on third party IP such as that owned by the movie studios, sports associations and sports personalities have traditionally been considered a safer bet than original content titles which are more volatile, either selling very well or very poorly," explains Screen Digest.
Looking at the three major global video game markets, Screen Digest believes that the U.S. is best prepared to brave the next-gen waters: "Currently, the large American publishers seem best placed and most capable to succeed. Japanese and European publishers, although creatively successful, will need to get their houses in order and focus on other key aspects of running a games business - strategy, marketing, finance, licensing and human resources."
Although licensed content would appear to be a safer route for most companies to take—titles based on licensed IP sold 23 percent more units than titles based on original content in the U.S. during 2004—Screen Digest cautions that licensing costs are also on the rise, as the holders of valuable IP start to recognize the value of their properties to the game industry. Consequently, short-term revenue gains from licensed IP might not automatically result in greater profits.
Additional revenue streams needed
Because of this changing landscape in the game industry, developers and publishers will likely need to seek out additional ways of generating new revenue streams, such as in-game ads, digital distribution, online gaming and mobile downloads. According to Screen Digest, the online PC games market topped $1 billion in the West in 2004 and it's expected to surpass the $2 billion mark by 2007.
Marc de Gentile-Williams, the author of the Screen Digest report, sums up the current state of the industry as follows: "At 30 years of age, the games industry still suffers from an endemic lack of professional management compared to less mature industries such as the mobile telephony and the internet industries. The high number of bankruptcies - despite favourable market conditions - is testament to this fact. Games companies must complement their formidable creative and technological achievements with strong business planning and analysis in order to reap the benefits of the next phase of console market growth."