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 –Distribution through third party at 50% of net 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 consolesPCHandheld Lifetime NA sales1,000,000250,000500,000 Development spend$5 million$500K (incremental)$1 million (incremental) Developer royalty/unit$8 $6 Marketing spend$3 million-- Wholesale price$32 $24 Markdown reserve10%30%15% COGS/royalty$9$1.50$9 Variable cost5% International$1.5 million$238K$168K Greatest Hits$794K-- Digital distribution--$57K--

7. Assumptions for Next-Gen AAA Title All consolesPCHandheld Lifetime NA sales1,000,000250,000500,000 Development spend$20 million$500K (incremental)$2 million (incremental) Developer royalty/unit$10 $8 Marketing spend$6 million-- Wholesale price$38 $32 Markdown reserve10%30%15% COGS/royalty$9$1.50$9 Variable cost5% International$4.6 million$1.1 million$1.6 million Greatest Hits$1.6 million-- Digital distribution--$225K--

8. Assumptions for Next-Gen AAA Sequel All consolesPCHandheld Lifetime NA sales700,000175,000350,000 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 reserve10%30%15% COGS/royalty$9$1.50$9 Variable cost5% International$3.2 million$812K$1.1 million Greatest Hits$1.1 million-- Digital distribution--$157K-- Licensing$6 million$500K--

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

10. Breakeven Units* – Base Case AAA TitleAAA Sequel All consoles653,097285,112 PC163,27471,278 Handheld326,548142,556 *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 $42 +23% 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 Next-Gen TitleNext-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 Double your forecast across all SKUs Raise console wholesale to $42 Secure console COGS of $5 Reduce markdown reserve to 2% for all SKUs

21. Breakeven Units* – Really Wonderful Case AAA TitleAAA Sequel All consoles449,890205,863 PC112,47351,466 Handheld224,945102,932 *North America, but international sales are factored in. Note: Console development royalties don’t kick in until unit 2,000,001. Even in this Really Wonderful Case.

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.