1. Chapter 7.2 Game Industry Roles and Economics

2. Video Game Industry Value Chain

3. 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

4. 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

5. Motion Capture
Used to automate animation process for more realism in human characters
Magnetic or optical systems
Internal mocap studio at publisher or external service provider
Services include accompanying software and technicians, and post-capture data processing and tuning

6. 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

7. 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

8. Revenue from $50 Console Game
Amount
Purpose
Paid By
Paid To $3
Cost of goods
Publisher
Media manufacturer $7
Publishing license royalty
Platform holder
$13
Retailer profit
Consumer
Retailer
Markdown reserve $8
Development cost
Developer
$10
Operating cost
Internal
(overhead, freight, co-op, bad debt) $6
Marketing
Ad agencies and media
Items in bold can be converted to profit through careful publisher cost management.

9. 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

10. 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

11. 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

12. 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

13. 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)

14. 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

15. Retail
Brick-and mortar retailers generally earn 30% margin on a $50 game
Sales of packaged goods by internet retailers follow the brick-and-mortar model
Electronic download of games via internet still in infancy

16. 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%

17. 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

18. 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

19. 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

20. Sales Channel: National Retailers
Familiar names:
Electronic Boutique, Best Buy, Toys “R” Us, Wal-Mart
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

21. 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

22. 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

23. Summary
Entities in video game industry haven’t changed much in 30 years
However, flow of money (ergo, balance of power) has shifted greatly
Balance of power will shift again in 2005 – 2006 as next-generation console project costs skyrocket