1. The Game Industry INFO111/MAS111 Week 12 1

2. 2009 game hardware sales in the U.S. fell 6 percent to $472.3 million in September. Overall industry revenue including software and accessories rose 1 percent to $1.28 billion, ending six consecutive months of decline.

3. 2009 Total 2009 revenue in US 19.66 billion 10.5 billion software 9.16 billion hardware Slightly down on 2008 – 21.4 billion

4. 2009 Playstation – 5.1 billion Xbox 4.8 billion Nintendo 6-7 billion PC 500 million What about mobiles?

5. PC And before you start writing off the PC… That was just US retail figures Boxed retail sales account for less than 20% of PC of total revenue Worldwide PC gaming revenue in 2009 was 13.1 billion, up 3% from 2008 Includes subscriptions, digital downloads, virtual items

6. PC Which would you pay more for?

7. Video Game Industry Value Chain

8. Well At least that’s how it works if you’re a big company selling boxed games At least that’s how it works if you’re a big company selling boxed games 8

10. 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

11. 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

12. Development teams May be long term or project specific May change size radically during project Can make for high staff turnover

13. 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

14. 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

15. Revenue from $50 Console Game AmountPurposePaid ByPaid To $3Cost of goodsPublisherMedia manufacturer $7Publishing license royaltyPublisherPlatform holder $13Retailer profitConsumerRetailer $3Markdown reservePublisherRetailer $8Development costPublisherDeveloper $10 Operating cost PublisherInternal (overhead, freight, co-op, bad debt) $6MarketingPublisherAd agencies and media bold Items in bold can be converted to profit through careful publisher cost management.

16. 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

17. 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

18. 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

19. 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, Silicon Graphics) 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

20. 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)

21. 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

22. Retail Brick-and mortar retailers generally earn 30% margin on a full-price game Sales of packaged goods by internet retailers follow the brick-and-mortar model Electronic download of games via internet still in infancy

23. 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%

24. Sales Channel: Manufacturer’s Representatives Small companies with 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

25. 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

26. 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

27. Sales Channel: National Retailers Familiar names: Electronic Boutique, Game, Toys “R” Us, JB Hi-Fi 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

28. 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

29. 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

30. What’s “Big”? Last quarter 2008 7.86 million DS 7 million Apple handhelds Approximately 11,000 games on the Apple download store Have sold over 200 million copies

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34. However That represents a total of 20 million That represents a total of 20 million Compare that to the 60 million that play Farmville Compare that to the 60 million that play Farmville 34