The Economics of a The Economics of a Next-Gen GameNext-Gen Game

Kathy SchobackKathy Schoback

IGDA Chair EmeritusIGDA Chair Emeritus

GDC Advisory Board MemberGDC Advisory Board Member

Copyright ©2005 Kathy Schoback. All Rights Reserved.

Game Development Budgets Are Game Development Budgets Are ExplodingExploding! ! ! ! ! ! !! ! ! ! ! ! !

• 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

MethodologyMethodology

• 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

General AssumptionsGeneral 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

General Assumptions, cont’dGeneral 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

Assumptions for Current-Gen TitleAssumptions for Current-Gen TitleAll consoles PC Handheld

Lifetime NA sales 1,000,000 250,000 500,000

Development spend $5 million $500K (incremental) $1 million (incremental)

Developer royalty/unit $8 $8 $6

Marketing spend $3 million -- --

Wholesale price $32 $32 $24

Markdown reserve 10% 30% 15%

COGS/royalty $9 $1.50 $9

Variable cost 5% 5% 5%

International $1.5 million $238K $168K

Greatest Hits $794K -- --

Digital distribution -- $57K --

Assumptions for Next-Gen AAA TitleAssumptions for Next-Gen AAA TitleAll consoles PC Handheld

Lifetime NA sales 1,000,000 250,000 500,000

Development spend $20 million $500K (incremental) $2 million (incremental)

Developer royalty/unit $10 $10 $8

Marketing spend $6 million -- --

Wholesale price $38 $38 $32

Markdown reserve 10% 30% 15%

COGS/royalty $9 $1.50 $9

Variable cost 5% 5% 5%

International $4.6 million $1.1 million $1.6 million

Greatest Hits $1.6 million -- --

Digital distribution -- $225K --

Assumptions for Next-Gen AAA SequelAssumptions for Next-Gen AAA SequelAll consoles PC Handheld

Lifetime NA sales 700,000 175,000 350,000

Development spend $14 million $500K (incremental) $1.4 million (incremental)

Developer royalty/unit $10 $10 $8

Marketing spend $4.2 million -- --

Wholesale price $38 $38 $32

Markdown reserve 10% 30% 15%

COGS/royalty $9 $1.50 $9

Variable cost 5% 5% 5%

International $3.2 million $812K $1.1 million

Greatest Hits $1.1 million -- --

Digital distribution -- $157K --

Licensing $6 million $500K --

Gross P&L Gross P&L comparisoncomparison

AAA Title AAA Sequel Current-Gen

Packaged goods sales - console $38,000,000 $26,600,000 $32,000,000Packaged goods sales - PC $9,500,000 $6,650,000 $8,000,000Packaged goods sales - handheld $16,000,000 $11,200,000 $12,000,000Digital distribution revenue $225,625 $157,938 $190,000Licensing revenue $750,000 $6,500,000 $0International revenue - all SKUs $7,480,000 $5,236,000 $5,625,000Greatest Hits revenue $1,587,500 $1,111,250 $1,587,500Wireless revenue $0 $500,000 $0

Total Revenue $73,543,125 $57,955,188 $59,402,500

Prototype $1,000,000 $0 $1,000,000Development - console $20,000,000 $14,000,000 $5,000,000Development royalty - console $0 $0 $0Development - PC $500,000 $500,000 $500,000Development royalty - PC $2,000,000 $1,250,000 $0Development - handheld $2,000,000 $1,400,000 $1,000,000Development royalty - handheld $2,000,000 $1,400,000 $0Marketing $6,000,000 $4,200,000 $3,000,000COGS/platform royalty - console $9,000,000 $6,300,000 $9,000,000COGS - PC $375,000 $262,500 $375,000COGS/platform royalty - handheld $4,500,000 $3,150,000 $4,500,000Markdowns - console $3,800,000 $2,660,000 $3,200,000Markdowns - PC $2,850,000 $1,995,000 $2,400,000Markdowns - handheld $2,400,000 $1,680,000 $1,800,000Variable cost (non-overhead) $3,175,000 $2,222,500 $2,600,000

Total Cost $59,600,000 $41,020,000 $34,375,000

Net Profit $13,943,125 $16,935,188 $25,027,500

NA console sales = NA console sales = 1m units1m units

Breakeven Units* – Base CaseBreakeven Units* – Base Case

AAA Title AAA Sequel

All consoles 653,097 285,112

PC 163,274 71,278

Handheld 326,548 142,556

*North America, but international sales are factored in*North America, but international sales are factored in

What happens if…What happens if…

““We only We only sold 800K sold 800K

unitsunits!”!”

AAA Title AAA Sequel Current-Gen

Packaged goods sales - console $30,400,000 $21,280,000 $25,600,000Packaged goods sales - PC $7,600,000 $5,320,000 $6,400,000Packaged goods sales - handheld $12,800,000 $8,960,000 $9,600,000Digital distribution revenue $180,500 $126,350 $152,000Licensing revenue $750,000 $6,500,000 $0International revenue - all SKUs $5,984,000 $4,188,800 $4,500,000Greatest Hits revenue $1,270,000 $889,000 $1,270,000Wireless revenue $0 $500,000 $0

Total Revenue $58,984,500 $47,764,150 $47,522,000

Prototype $1,000,000 $0 $1,000,000Development - console $20,000,000 $14,000,000 $5,000,000Development royalty - console $0 $0 $0Development - PC $500,000 $500,000 $500,000Development royalty - PC $1,500,000 $900,000 $0Development - handheld $2,000,000 $1,400,000 $1,000,000Development royalty - handheld $1,200,000 $840,000 $0Marketing $6,000,000 $4,200,000 $3,000,000COGS/platform royalty - console $7,200,000 $5,040,000 $7,200,000COGS - PC $300,000 $210,000 $300,000COGS/platform royalty - handheld $3,600,000 $2,520,000 $3,600,000Markdowns - console $3,040,000 $2,128,000 $2,560,000Markdowns - PC $2,280,000 $1,596,000 $1,920,000Markdowns - handheld $1,920,000 $1,344,000 $1,440,000Variable cost (non-overhead) $2,540,000 $1,778,000 $2,080,000

Total Cost $53,080,000 $36,456,000 $29,600,000

Net Profit $5,904,500 $11,308,150 $17,922,000

(20%) topline revenue (20%) topline revenue impact on console salesimpact on console sales

(50%) impact on net (50%) impact on net profit for next-gen titleprofit for next-gen title

““We only We only sold 100K sold 100K

unitsunits!”!”

AAA Title AAA Sequel Current-Gen

Packaged goods sales - console $3,800,000 $2,660,000 $3,200,000Packaged goods sales - PC $950,000 $665,000 $800,000Packaged goods sales - handheld $1,600,000 $1,120,000 $1,200,000Digital distribution revenue $22,563 $15,794 $19,000Licensing revenue $750,000 $6,500,000 $0International revenue - all SKUs $748,000 $523,600 $562,500Greatest Hits revenue $0 $0 $0Wireless revenue $0 $500,000 $0

Total Revenue $7,870,563 $11,984,394 $5,781,500

Prototype $1,000,000 $0 $1,000,000Development - console $20,000,000 $14,000,000 $5,000,000Development royalty - console $0 $0 $0Development - PC $500,000 $500,000 $500,000Development royalty - PC $0 $0 $0Development - handheld $2,000,000 $1,400,000 $1,000,000Development royalty - handheld $0 $0 $0Marketing $6,000,000 $4,200,000 $3,000,000COGS/platform royalty - console $900,000 $630,000 $900,000COGS - PC $37,500 $26,250 $37,500COGS/platform royalty - handheld $450,000 $315,000 $450,000Markdowns - console $380,000 $266,000 $320,000Markdowns - PC $285,000 $199,500 $240,000Markdowns - handheld $240,000 $168,000 $180,000Variable cost (non-overhead) $317,500 $222,250 $260,000

Total Cost $32,110,000 $21,927,000 $12,887,500

Net Profit ($24,239,438) ($9,942,606) ($7,106,000)

(90%) topline revenue (90%) topline revenue impact on console salesimpact on console sales

(275%) impact on net (275%) impact on net profit for next-gen titleprofit for next-gen title

““We killed it We killed it at gold at gold mastermaster””

No revenueNo revenue

All costs except COGSAll costs except COGS

Only $5 million worse Only $5 million worse than shipping 100K unitsthan shipping 100K units

AAA Title

Packaged goods sales - console $0Packaged goods sales - PC $0Packaged goods sales - handheld $0Digital distribution revenue $0Licensing revenue $0International revenue - all SKUs $0Greatest Hits revenue $0Wireless revenue $0

Total Revenue $0

Prototype $1,000,000Development - console $20,000,000Development royalty - console $0Development - PC $500,000Development royalty - PC $0Development - handheld $2,000,000Development royalty - handheld $0Marketing $6,000,000COGS/platform royalty - console $0COGS - PC $0COGS/platform royalty - handheld $0Markdowns - console $0Markdowns - PC $0Markdowns - handheld $0Variable cost (non-overhead) $0

Total Cost $29,500,000

Net Profit ($29,500,000)

““We sold 2m We sold 2m unitsunits!”!”

AAA Title AAA Sequel Current-Gen

Packaged goods sales - console $76,000,000 $53,200,000 $64,000,000Packaged goods sales - PC $19,000,000 $13,300,000 $16,000,000Packaged goods sales - handheld $32,000,000 $22,400,000 $24,000,000Digital distribution revenue $451,250 $315,875 $380,000Licensing revenue $750,000 $6,500,000 $0International revenue - all SKUs $14,960,000 $10,472,000 $11,250,000Greatest Hits revenue $3,175,000 $2,222,500 $3,175,000Wireless revenue $0 $500,000 $0

Total Revenue $146,336,250 $108,910,375 $118,805,000

Prototype $1,000,000 $0 $1,000,000Development - console $20,000,000 $14,000,000 $5,000,000Development royalty - console $0 $0 $0Development - PC $500,000 $500,000 $500,000Development royalty - PC $4,500,000 $3,000,000 $0Development - handheld $2,000,000 $1,400,000 $1,000,000Development royalty - handheld $6,000,000 $4,200,000 $0Marketing $6,000,000 $4,200,000 $3,000,000COGS/platform royalty - console $18,000,000 $12,600,000 $18,000,000COGS - PC $750,000 $525,000 $750,000COGS/platform royalty - handheld $9,000,000 $6,300,000 $9,000,000Markdowns - console $7,600,000 $5,320,000 $6,400,000Markdowns - PC $5,700,000 $3,990,000 $4,800,000Markdowns - handheld $4,800,000 $3,360,000 $3,600,000Variable cost (non-overhead) $6,350,000 $4,445,000 $5,200,000

Total Cost $92,200,000 $63,840,000 $58,250,000

Net Profit $54,136,250 $45,070,375 $60,555,000

2x topline revenue 2x topline revenue impact on console salesimpact on console sales

3.8x impact on net profit 3.8x impact on net profit for next-gen titlefor next-gen title

““We’re We’re charging charging $54.99$54.99””

AAA Title AAA Sequel

Packaged goods sales - console $42,000,000 $29,400,000Packaged goods sales - PC $9,500,000 $6,650,000Packaged goods sales - handheld $16,000,000 $11,200,000Digital distribution revenue $225,625 $157,938Licensing revenue $750,000 $6,500,000International revenue - all SKUs $8,160,000 $5,712,000Greatest Hits revenue $1,587,500 $1,111,250Wireless revenue $0 $500,000

Total Revenue $78,223,125 $61,231,188

Prototype $1,000,000 $0Development - console $20,000,000 $14,000,000Development royalty - console $0 $0Development - PC $500,000 $500,000Development royalty - PC $2,000,000 $1,250,000Development - handheld $2,000,000 $1,400,000Development royalty - handheld $2,000,000 $1,400,000Marketing $6,000,000 $4,200,000COGS/platform royalty - console $9,000,000 $6,300,000COGS - PC $375,000 $262,500COGS/platform royalty - handheld $4,500,000 $3,150,000Markdowns - console $4,200,000 $2,940,000Markdowns - PC $2,850,000 $1,995,000Markdowns - handheld $2,400,000 $1,680,000Variable cost (non-overhead) $3,375,000 $2,362,500

Total Cost $60,200,000 $41,440,000

Net Profit $18,023,125 $19,791,188

Wholesale is $42Wholesale is $42

+23% impact on net +23% impact on net profitprofit

““Can we get Can we get a deal from a deal from

Sony?Sony?””

COGS+royalty is $5 for COGS+royalty is $5 for console titlesconsole titles

+25% impact on net +25% impact on net profitprofit

AAA Title AAA Sequel

Packaged goods sales - console $38,000,000 $26,600,000Packaged goods sales - PC $9,500,000 $6,650,000Packaged goods sales - handheld $16,000,000 $11,200,000Digital distribution revenue $225,625 $157,938Licensing revenue $750,000 $6,500,000International revenue - all SKUs $8,280,000 $5,796,000Greatest Hits revenue $1,587,500 $1,111,250Wireless revenue $0 $500,000

Total Revenue $74,343,125 $58,515,188

Prototype $1,000,000 $0Development - console $20,000,000 $14,000,000Development royalty - console $0 $0Development - PC $500,000 $500,000Development royalty - PC $2,000,000 $1,250,000Development - handheld $2,000,000 $1,400,000Development royalty - handheld $2,000,000 $1,400,000Marketing $6,000,000 $4,200,000COGS/platform royalty - console $5,000,000 $3,500,000COGS - PC $375,000 $262,500COGS/platform royalty - handheld $4,500,000 $3,150,000Markdowns - console $3,800,000 $2,660,000Markdowns - PC $2,850,000 $1,995,000Markdowns - handheld $2,400,000 $1,680,000Variable cost (non-overhead) $3,175,000 $2,222,500

Total Cost $55,600,000 $38,220,000

Net Profit $18,743,125 $20,295,188

““Short the Short the market, market, guys.guys.

Markdown reserve is Markdown reserve is limited to 2% across all limited to 2% across all SKUsSKUs

+40% impact on net +40% impact on net profitprofit

AAA Title AAA Sequel

Packaged goods sales - console $38,000,000 $26,600,000Packaged goods sales - PC $9,500,000 $6,650,000Packaged goods sales - handheld $16,000,000 $11,200,000Digital distribution revenue $225,625 $157,938Licensing revenue $750,000 $6,500,000International revenue - all SKUs $9,036,000 $6,325,200Greatest Hits revenue $1,587,500 $1,111,250Wireless revenue $0 $500,000

Total Revenue $75,099,125 $59,044,388

Prototype $1,000,000 $0Development - console $20,000,000 $14,000,000Development royalty - console $0 $0Development - PC $500,000 $500,000Development royalty - PC $2,000,000 $1,250,000Development - handheld $2,000,000 $1,400,000Development royalty - handheld $2,000,000 $1,400,000Marketing $6,000,000 $4,200,000COGS/platform royalty - console $9,000,000 $6,300,000COGS - PC $375,000 $262,500COGS/platform royalty - handheld $4,500,000 $3,150,000Markdowns - console $760,000 $532,000Markdowns - PC $190,000 $133,000Markdowns - handheld $320,000 $224,000Variable cost (non-overhead) $3,175,000 $2,222,500

Total Cost $51,820,000 $35,574,000

Net Profit $23,279,125 $23,470,388

Licensed TitleLicensed 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

AAA Title AAA Sequel

Packaged goods sales - console $38,000,000 $26,600,000Packaged goods sales - PC $9,500,000 $6,650,000Packaged goods sales - handheld $16,000,000 $11,200,000Digital distribution revenue $225,625 $157,938Licensing revenue $0 $0International revenue - all SKUs $7,480,000 $5,236,000Greatest Hits revenue $1,587,500 $1,111,250Wireless revenue $0 $0

Total Revenue $72,793,125 $50,955,188

Prototype $1,000,000 $0Development - console $20,000,000 $14,000,000Development royalty - console $0 $0Development - PC $500,000 $500,000Development royalty - PC $2,000,000 $1,250,000Development - handheld $2,000,000 $1,400,000Development royalty - handheld $2,000,000 $1,400,000Marketing $6,000,000 $4,200,000COGS/platform royalty - console $9,000,000 $6,300,000COGS - PC $375,000 $262,500COGS/platform royalty - handheld $4,500,000 $3,150,000Markdowns - console $3,800,000 $2,660,000Markdowns - PC $2,850,000 $1,995,000Markdowns - handheld $2,400,000 $1,680,000Variable cost (non-overhead) $3,175,000 $2,222,500

Total Cost $59,600,000 $41,020,000

Net Profit $13,193,125 $9,935,188

Profit Impact SummaryProfit Impact Summary

Next-Gen Title Next-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

Breakeven Units* – Breakeven Units* – Really Wonderful CaseReally Wonderful Case

AAA Title AAA Sequel

All consoles 449,890 205,863

PC 112,473 51,466

Handheld 224,945 102,932

*North America, but international sales are factored in.*North America, but international sales are factored in.

Note: Console development royalties don’t kick in until unit 2,000,001. Note: Console development royalties don’t kick in until unit 2,000,001. Even in this Really Wonderful Case. Even in this Really Wonderful Case.

Revisiting ArmageddonRevisiting 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

Thank you.Thank you.