Last week I wrote about some of the trends in the console wars. I asserted that the console wars have changed due to a shift in the power from the console makers to the developers and publishers. This article will explain how the basic economics of releasing a game have changed and why larger console makers can no longer sway publishers and developers to provide exclusive content for their systems.
Imagine that the total cost to create a video game for a single system is “c” and that the total anticipated revenue of a single system video game is “r”. This gives us a very simple equation to determine whether a game is worth developing (in economic terms. I make no judgment on other forms of value). If the cost (c) is higher than the revenue (r), then there is no profit and the game isn’t worth making. If it’s lower, then the game can turn a profit. See the representation below:
c > r = lose money
r > c = profit!
r – c = total profit
Now, let’s say you want to port a game over to a new system. We’ll represent that cost at “o”. Let’s also say the anticipated revenue of the port is “p”. If the cost to port a game (o) is higher than the anticipated revenue (p), the game isn’t worth developing.
p > o = port too costly
o > p = port profit!
p – o = port profit
If a console maker wants to buy an exclusive title, they must cover the developer or publishers anticipated total profit of porting. Now, if you’re a smaller developer, this might not be difficult. Small developers may not have the money to port their game or may need to risk their profit on the original copy in hopes of getting more money on the port. Since anticipated profit is difficult to predict, they may go for the console maker’s offer as a way to take guaranteed money over the risk inherent in porting a game. Still, they may decide it’s better to take the risk. If that’s the case, then they’ll need to assess the potential profit of porting. The potential profit is the revenue (p) minus the cost (o). Let’s represent console maker’s offer as “f”.
f > p – o = game makes more money as an exclusive
f < p – o = game makes less money as an exclusive
From the console maker’s perspective, the whole idea behind making a game exclusive is to sell consoles and receive a console owner’s fee for each copy of the game sold. As a result, there is a quantifiable value to making a game exclusive. Let’s make the anticipated profits from selling consoles as “e” and from console owner’s fees “d”. If the console maker’s offer (f) costs more than the anticipated profits from consoles (e) and fee (d), then exclusivity from the console maker’s perspective appears not to be worth it. However, we must also consider that each console sold will encourage its purchaser to buy more games for that system. The number of games sold per average system is represented by “#”. Therefore, the console maker must also consider the future value of console owner’s fees. The equation looks like the following:
f > e + d + #d = Exclusivity loses money
f < e + d + #d = Deal is profitable!
If we bring it all together, we have two scenarios. The first is the console maker anticipates making more profit off of game exclusivity than the developer anticipates losing. Therefore, the console maker offers more money than the anticipated loss in not porting a game:
e + d + #d > p – o = Game exclusivity
Alternatively, if the console maker believes they will make less profit off of game exclusivity than it will cost the game maker to not port, then the console maker does not make an offer and the game is ported.
e + d + #d < p – o = Game non- exclusivity
So, what does this all mean? It means that the console makers no longer anticipate making more money via exclusivity than the game makers do by porting. Not modeled here, but I think quite relevant, is that game makers also are more comfortable with the risks of porting than they were in the past. Working off of years of sales data and flagship franchises, the big game makers now have a very clear idea of how much their games will make on a given system. The certain gain or reduced risk that might make an offer from Sony or Microsoft attractive is offset by a clearer idea of how anticipate, deal with, and manage the risk. As a result, I would anticipate console exclusives to be the domain of small game makers and new properties where risk is harder to manage and harder to anticipate, respectively.