1. The Economics of a Next-Gen Game
Kathy Schoback
IGDA Chair Emeritus
GDC Advisory Board Member
Copyright ©2005 Kathy Schoback. All Rights Reserved.

2. Game Development Budgets Are Exploding! ! ! ! ! ! !
Death of innovation
Death of “two guys in a garage”
Death of publisher competition
Death of original IP
And we’re still not as cool as Hollywood

3. Methodology Basic TRSTS math
Ping developer friends working on next-gen titles
Ping publisher friends who know budgets of next-gen titles
Check with agents on ancillary revenue
Reality check with this audience

4. General Assumptions Sequel sells 70% of original’s unit volume
International versions sell 40% of NA version’s unit volume
Distribution through third party at 50% of net
Digital distribution of PC version sells 5% of packaged unit volume
Greatest Hits version sells 25% of original’s unit volume

5. General Assumptions, cont’d
Original IP
Bulk of licensing revenue comes with sequel
Console version ships on all existing platforms
Overhead not included
All SKUs ship simultaneously

6. Assumptions for Current-Gen Title
All consoles PC
Handheld
Lifetime NA sales
1,000,000
250,000
500,000
Development spend
$5 million
$500K (incremental)
$1 million (incremental)
Developer royalty/unit $8 $6
Marketing spend
$3 million --
Wholesale price
$32
$24
Markdown reserve
10%
30%
15%
COGS/royalty $9
$1.50
Variable cost 5%
International
$1.5 million
$238K
$168K
Greatest Hits
$794K
Digital distribution
$57K

7. Assumptions for Next-Gen AAA Title
All consoles PC
Handheld
Lifetime NA sales
1,000,000
250,000
500,000
Development spend
$20 million
$500K (incremental)
$2 million (incremental)
Developer royalty/unit
$10 $8
Marketing spend
$6 million --
Wholesale price
$38
$32
Markdown reserve
10%
30%
15%
COGS/royalty $9
$1.50
Variable cost 5%
International
$4.6 million
$1.1 million
$1.6 million
Greatest Hits
Digital distribution
$225K

8. Assumptions for Next-Gen AAA Sequel
All consoles PC
Handheld
Lifetime NA sales
700,000
175,000
350,000
Development spend
$14 million
$500K (incremental)
$1.4 million (incremental)
Developer royalty/unit
$10 $8
Marketing spend
$4.2 million --
Wholesale price
$38
$32
Markdown reserve
10%
30%
15%
COGS/royalty $9
$1.50
Variable cost 5%
International
$3.2 million
$812K
$1.1 million
Greatest Hits
Digital distribution
$157K
Licensing
$6 million
$500K

9. Gross P&L comparison
NA console sales = 1m units

10. Breakeven Units* – Base Case
AAA Title
AAA Sequel
All consoles
653,097
285,112 PC
163,274
71,278
Handheld
326,548
142,556
*North America, but international sales are factored in

11. What happens if…

12. “We only sold 800K units!”
(20%) topline revenue impact on console sales (50%) impact on net profit for next-gen title

13. “We only sold 100K units!”
(90%) topline revenue impact on console sales (275%) impact on net profit for next-gen title

14. “We killed it at gold master”
No revenue All costs except COGS Only $5 million worse than shipping 100K units

15. “We sold 2m units!”
2x topline revenue impact on console sales 3.8x impact on net profit for next-gen title

16. “We’re charging $54.99”
Wholesale is $ % impact on net profit

17. “Can we get a deal from Sony?”
COGS+royalty is $5 for console titles +25% impact on net profit

18. “Short the market, guys.
Markdown reserve is limited to 2% across all SKUs +40% impact on net profit

19. Licensed Title SKU forecast remains the same
$15m AAA license amortized across title + sequel
Corresponding reduction in marketing + development spends
No ancillary revenue
Profit impact of ($7.8m) across title + sequel

20. Profit Impact Summary Double your forecast across all SKUs
Raise console wholesale to $42
Secure console COGS of $5
Reduce markdown reserve to 2% for all SKUs
Next-Gen Title
Next-Gen Sequel
Baseline profit
$13.9 million
$16.9 million
+ changes
$77.4 million
$54.2 million
Total profit
$91.3 million
$71.1 million

21. Breakeven Units* – Really Wonderful Case
AAA Title
AAA Sequel
All consoles
449,890
205,863 PC
112,473
51,466
Handheld
224,945
102,932
Note: Console development royalties don’t kick in until unit 2,000,001.
Even in this Really Wonderful Case.
*North America, but international sales are factored in.

22. Revisiting Armageddon
High quality, market relevance and innovation are baseline requirements
The passion of “two guys in a garage” still matters
But, professional project management matters WAY more than it used to
Imagine if it were your mom’s $20 million
Fewer publishers compete for larger stakes
Go big or go home!
Publishers must achieve ISO9001-level execution
Licenses are a wash
Useful if your game won’t sell 1 million units on its own

23. Thank you.