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Cost/Benefit Analyses

Dean Takahashi recently gave a speech questioning why it's so hard to fund videogames (Why is it so *****g hard to fund videogames) and brings up some interesting points about why the videogame sector, whose software market is worth 18 billion dollars a year worldwide, should be funded in a proportional manner to the film industry (which Dean pegs at 60 billion dollars). He especially wonders why it is that the mobile games industry seems to gain a lot of attention, despite the fact that its market is currently a good deal smaller.

Firstly, I think that Dean's got his figures for the game/film comparison wrong. It is very difficult to gauge accurately, of course, but I've read that over 3000 films had been released worldwide in 2003, and figured the size of the market to be somewhere on the order of 180 billion dollars worldwide. Dean's figure of 60 billion is, I think, the size of the Hollywood chunk of the market. So what he's doing is comparing the worldwide games industry to the American film industry, and this creates a false impression, much like comparing the games industry's total hardware and software does when comparing it only to box office revenue or something similar.

It seems that the worldwide film industry dwarfs the worldwide game software industry by a factor of ten. So that might be one reason why films get funded and games do not. On three thousand titles, the film industry makes ten times the income that maybe half the titles across all console and PC formats do.

On the other end of the scale, the mobile industry may be much smaller, but the games themselves are very cheap to produce. Mobile games are a return to retro in many ways, in quite a few cases literally through ports of old games. This allows for wide portfolios of cheap product which the consumer can then buy for what seems to them to be a small fee, yet which in reality translates to an awful lot of business for the mobile provider. It is therefore potentially a hugely profitable sector of the market, and that's why investors love it.

The key phrase here in understanding why mainstream console and PC games have it so hard is “Cost/Benefit Analysis”. It's the central phrase under which all business operates in the world today. What does the product cost? What is the potential benefit? Does one justify the other? Simple.

The cost/benefit analysis for films is a good one. Contrary to popular opinion, most films do make their money back in the long run. If you only read the popular press, it would be easy to derive the impression that a film which tanks at the box office is effectively a dead duck, and that the film industry operates on the basis of trying to score one big hit in order to pay for nine loss-makers. This used to be the way that the film industry worked back in the seventies and early eighties, but the arrival of home movie formats (like DVD, pay-perview) changed all that.

Every film that hits the cinema, no matter how bad, will then make its way onto DVD and pay-per-view. Once films have been produced, they become and eternally recyclable property, and that long view approach is the reason why films can have budgets of 200 million dollars and be considered unexceptional. A lot of films from the fifties, sixties and seventies are still making money for their owners today.

The videogame industry's problem is that their cost/benefit analysis does not work for any sort of outside investment model. Videogames are not eternally recyclable properties because the hardware formats keep changing. Videogames need to be updated, ported or emulated if they are to be kept current, and this costs too much for too little return for most publishers. The market for videogames is small, yet the costs of the games has pushed very high compared to the size of that market. This creates a cut-throat and risky market where games which get released and sell 500,000 units are in fact considered to be failures. This is why licenses and other properties hve become so important.

The film industry can turn 3000 titles a year on budgets that are unlikely to average more than 10 million dollars (think of all the Bollywood, B-Movie, Asian cinema and so on) and rake in 180 billion off the back of that.

The games industry, whose market is only ten percent of that size, should be looking to work with equivalent budgets. The average cost of a game in the PS2/Xbox/Cube era should in fact be no more than 1 million dollars. Mobile games are cheap, budget games are cheap, casual, indie and web games are cheap, and all those sectors show vitality. Console and PC games, however, are sickly, strained and increasingly pressurised because they simply cost too much to make. The cost/benefit analysis in those sectors is very bad.

If we look back to the PS1 era, it was a happier time. Game development was still a good busines to be in, with good prospects. It resulted in a lot of games, both good and bad, and a liberal investment culture where publishers were far more easily disposed to funding odd ideas and seeing what stuck. The cost/benefit analysis was good because the costs were cheap.

Today, though, the cost/benefit analysis works against us, not for us. Costs have raised 300% while the market has increased maybe 50%. Whereas companies could afford to take the hit on a couple of loss making games just to see which ones became hits, now they are terrified because every release that doesn't score big is likely to bust them. Any investor worth his salt knows a bad deal when he sees one, and the mainstream games industry of today is a bad deal.

So what's to be done?

Two things:

1.Costs must come down
2.Games must become eternally recyclable

The cost and benefit must improve.
The big question is HOW?