Analyst: Developer profits to suffer until 2008

by Kyle Orland { Feb 28th 2007 at 3:28PM }

It might seem odd to suggest that the games industry is struggling in light of recent sales reports that show healthy growth in both software and hardware revenue. But a recent report from media analysts Screen Digest seems to do just that, saying most game developers will have trouble turning a profit until 2008.

The analysis, as reported by the BBC, suggests that rising development costs, long production timelines and small, fragmented user bases for the newest generation of systems means sales often don't make up for production costs. The end result? "Sequels to popular games or those based on films are now the focus." Say it ain't so.

The article goes on to contrast Microsoft's strategy of buying up exclusives to Sony and Nintendo's focus on home-grown hits, but it doesn't really address how to solve the core problem of runaway budgets and overwrought game design. If developers can't streamline and simplify their design processes, the industry may be doomed to a hard-to-escape downward spiral of increased costs and increased reliance on proven brands and unoriginal ideas.

Tags: business, developers, profit, profitability

Reader Comments (Page 1 of 1)

Gamer Jay @ Feb 28th 2007 3:36PM

Chicken Little says the sky is falling

Kizzle @ Feb 28th 2007 3:39PM

Microsoft is one of the few companies that is making NEW quality home grown franchises (Crackdown, Mass Effect, Viva Pinata, GoW, etc), so I'm not sure what that guy is talking about in that regard.

Jake @ Feb 28th 2007 3:43PM

I don't know if that is totally true. The 360 is getting a lot of original IP. And it has already had a lot of million sellers, despite being early in its cycle.

Mr Khan @ Feb 28th 2007 3:47PM

This certainly seems to be rather false

EA says profits are up
Ubisoft says sales are up

Sony, Microsoft, and Nintendo are all making new IPs (Crackdown, Resistance, Disaster: Day of Crisis), while they are all getting new IPs (Dead Rising, Lair, Elebits)

and if a game as bad as Wii Play can be a million seller, i don't think people should worry about good games not being profitable

False

Graison Swaan @ Feb 28th 2007 3:49PM

Profit, what an outstanding show.

Darryl @ Feb 28th 2007 3:50PM

Is that a picture of Nathan Petrelli from Heroes?

Sean @ Feb 28th 2007 3:55PM

Wow, I loved that show. That, and Kindred: The Embraced.

Both didn't last long, unfortunately.

Dave @ Feb 28th 2007 3:59PM

re: Darryl, that's what I thought too!

Jason @ Feb 28th 2007 4:00PM

"and if a game as bad as Wii Play can be a million seller, i don't think people should worry about good games not being profitable"

Don't forget that Wii Play was $10 more than just buying a Wiimote. I bet a lot of people bought it just for the Wiimote, I know I did.

Intentless @ Feb 28th 2007 4:02PM

That has to be either the twin of the actor or the guy that is in heroes.

Sean @ Feb 28th 2007 4:02PM

Darryl and Dave:

Yes, that is the actor Adrian Pasdar who plays Nathan Patrelli in Heroes (another great show that keeps getting better).

More info on Profit here: http://en.wikipedia.org/wiki/Profit_(TV_series)

Dizzy @ Feb 28th 2007 4:06PM

http://www.bittersense.com/video-games/is-next-generation-the-spoiled-child-of-previous-generations/
I guess this article explains a bit more why next gen games are not making profit though I guess that's just hype. Another excuse not to drop price tag on games, which is rather nonsense.

Sean @ Feb 28th 2007 4:07PM

grrr, my link doesn't work.

Add a closed parenthesis to the address.

Dave @ Feb 28th 2007 4:14PM

DNF is skewing the results.

32_Footsteps @ Feb 28th 2007 4:14PM

"Sequels to popular games or those based on films are now the focus."

Someone's going to have to tell me how this is different than any other time in the last 15-20 years.

mike @ Feb 28th 2007 4:54PM

Id say Epic games 12m budget for gears of ward was pretty small concidering the $240m revenue it has generated

Thomas @ Feb 28th 2007 5:16PM

It's all in the numbers. Last year the Wall Street Journal reported that the development costs of a "next-gen AAA title" would be about US$20M. Of course, the initial titles were more expensive because they had a longer cycle, say 3 years instead of 18 or 24 months, especially when developing on simulators and prototypes because the consoles weren't ready at the beginning of the cycle, and the toolchains weren't there.

When you hear that the average team size for a next-gen AAA title is now up over 100 people, instead of the 50-75 for a PS2/Xbox title, I guess that adds even more credibility to the $20M number.

So, for a US$20M title to break even, it has to sell at least 333K copies, assuming a US$60 street price. *Lots* of titles, even "big" and famous ones don't see those kinds of sales in their first year. Some franchises don't even take off until the second title. Some might be a great hit, but still not recoup their costs on the first title. Only be establishing a franchise do the enable a (later) financial success.

Oh, and did you want some marketing with that? Add a few $million, which means you need to sell even more copies.

steve17 @ Feb 28th 2007 5:19PM

i think this guy is dead wrong when he says production cost and long dev times make it unprofitable. look at crackdown, LoZTP, resistance.

then look at garbage like red steel, (i cant think of others, u fill in the blank)

but my point is. if developers make a good original idea it WILL sell well. when they use unoriginal garbage then it WONT. this guy is backwards.

just one more "professional" that think they know everything about the industry.

LaughingTarget @ Feb 28th 2007 6:20PM

mike, revenue is a meaningless number all on its own. It just adds up the sales price*total sales volume and ignores everything else. $12 million is a considerable amount of money when the total contribution margin (the amount above the variable costs associated with each unit) runs at $15 per game (break even is around 1.2 million copies). This means they can't decide to just spend $100 million on a game because the revenue is $240 million.

Adam540 @ Feb 28th 2007 7:51PM

Skyrocketing dev-costs are soon going to crash to the ground. The dev-time will also decrease. Its all about the streamlining. Game developers and publishers might not have time to work on streamlining but other companies are doing it now. Look at NaturalMotion and their Endorphin and Euphoria programs. Both of these will significantly decrease the time and money it takes to make games. Also look at Pixelux and their Digital Molecular Matter. Creating art assests has always been costly and time consuming. DMM is going to decrease both very quickly once people pick it up. Also look at how everyone is jumping on Epic's Unreal Engine 3. I'm a student in University taking Game Development and I know that if I had these programs and tools to mess around with I'd be one XNA Creators Club pass away from creating my own NewGenGame. Sure it probably wouldn't be Gears of War but I wouldn't be too surprised if it turned out to be pretty sexy looking and very cool to mess around with.