Our sister site GamesIndustry.biz is reporting that THQ has acknowledged that it needs to sell 2 million copies of its much-hyped shooter Homefront just to break even.
Speaking at the Wedbush Morgan conference last night, executive vice president and chief financial officer Paul Pucino noted that most new owned IP at THQ would need to hit this mark: "When you just think in terms or profitability, the owned IP, there's a threshold of break-even of about 2 million units per game, so you have to sell somewhere in the area of 2 million copies of a game like Homefront to break even. Once you get past that you're generating incremental operating margins as high as 60 per cent."
That's all well and good, but how is this a sustainable business model? The traditional games business is struggling with soaring budgets, and consumers are expecting more and more in triple-A titles, but putting the break even point at 2 million is going to probably hurt you with at least one owned IP. There's no guarantee that Homefront or any other game will even sell 2 million - not when it's being sold for $60.
Perhaps the marketing behind Homefront and the early positive buzz will lead to sales of 6 million - who knows? But the financial model behind it is quite clearly broken. When you look at a game like Angry Birds, which cost only $140k to create, the contrast is startling. Obviously, that's a completely different gaming experience, and we're not advocating that THQ and others give up on the big blockbuster projects like Homefront in favor of small titles like Angry Birds, but something needs to change at a fundamental level.
Online monetization can definitely help with regular DLC and recurring revenue bringing up the ARPU so that fewer units need to be sold to break even (assuming all those consumers want to go ahead and buy the extra DLC).
Perhaps episodic models are the answer? Rather than spend all your money on developing a 10-20 hour experience, maybe dole it out in 2-3 hour chunks. If the first episode tanks, you scratch the project and cut your losses, saving millions. If it's a hit, the development team can work to quickly build the next installment (which can also benefit from gamer feedback on the first episode, thereby increasing the chances of sales success). This would also allow most people to download the game, as it would be a much smaller file than an entire title, and publishers could avoid retail and used games this way as well.
Ultimately, we don't know what the best solution is (if we did, we'd probably be rich...) but we do know the industry will be in trouble if the break even point of games keeps escalating.
7 Comments
March 10, 2011
But the financial model behind it is quite clearly broken.
I would omit "quite" from that sentence. It reads better.
But the financial model behind it is clearly broken.
March 10, 2011
Digital distribution will help, as then a higher % of the $50 or $60 goes to the publisher/developer compared to retail, which would lower the break even point.
The problem with the idea of doling it out as 2-3 hour chunks (ie: Episodic) is that you still have the big up-front costs of developing the tech, creating the initial art assets, and doing launch marketing. A lot of that can be re-used for subsequent episodes making them cheaper to develop, but getting that first one done is still a big financial investment.
And even then getting subsequent episodes out the door can be difficult. Just look at Valve.
On the other side of the coin, yes angry birds took $140k to make, but how many games do you have to make at $140k before you hit on one that is as successful as angry birds?
March 10, 2011
"but how many games do you have to make at $140k before you hit on one that is as successful as angry birds?"
How many apps are there on the app store? Over 400,000 as of January, and growing at a rate of 50K per month. Let's take 1/2 of those as games.
So you'd need to make ~200,000 games to make one as profitable as Angry Birds.
...and speaking of broken financial models.
With 400,000 apps and $2 billion paid to developers you can do the math and get and average $5K paid per app.
So if you did make 200,000 games, at a cost of $40K to make each game (notably Angry Birds cost $140K) you'd be down ~$35K on each game, putting you a total of $7 billion dollars in the RED.
No matter how you look at it, there have been billions sunk into iPhone development that will never be recouped. Being lucky enough to get a hit certainly would be great, but it seems a bad business approach.
Looking at just the top game in a market is a bad way to judge the market!
March 10, 2011
"Obviously, that's a completely different gaming experience," So why bring it up? And as for episodes, that worked so well in the past the industry should try it again? (Sin Episodes any one?)
March 10, 2011
Russell Carroll
58 minutes ago
"...and speaking of broken financial models.
With 400,000 apps and $2 billion paid to developers you can do the math and get and average $5K paid per app.
So if you did make 200,000 games, at a cost of $40K to make each game (notably Angry Birds cost $140K) you'd be down ~$35K on each game, putting you a total of $7 billion dollars in the RED.
No matter how you look at it, there have been billions sunk into iPhone development that will never be recouped. Being lucky enough to get a hit certainly would be great, but it seems a bad business approach.
Looking at just the top game in a market is a bad way to judge the market!"
^ This.
I agree with Russell completely. You can't look at just one game, whether iPhone App or major release Triple A title, to sum up whether the entire industries' business model is broken or not.
If we are going to do that, then I can argue that the current business model is working perfectly as planned.
Example: The Halo franchise. First game went out on a limb, trying new things (as Homefront is doing), but it was/is a hit and now each subsequent release has made Microsoft Game Studios, Bungie, and the smaller 3rd party specialty designers, a crap-load of money. They now get money well beyond their budgets used to make said games.
Great article to get people fired up and stoke some fears of industry failings, but the argument is flawed as the article itself doesn't take in enough variables from the totality of the industry. Those variables are inevitably what make or break a game, and choose how many copies fly off of the store shelves and how fast they fly.
You can't quote one game with a small budget that happened to hit it big amongst literally tens of thousands of failed peers, and then turn around and compare it to a major release new IP title from an established company like THQ. The math just doesn't work out.
Homefront will do fine, THQ will make their money, if not in initial disc sales, then in DLC and extras later.
Quit leaning on the panic button.
March 10, 2011
I can't believe they found investors for this game. North Korea invading America is beyond impossible. The only country that can invade the US is Mexico. (Because our politicians refuse to close the border.)
March 10, 2011
There will continue to be companies that spend several years and $50mm on production and marketing in order to bring a AAA title to market on the existing VG consoles. The problem is that there is no room for smaller publishers to make any money for decent titles at a sub $50 price point. It's happening already. Content will either break through to that higher level and have tremendous success or it will be priced sharply at $19.99 and hope for the best. It's just a matter of time before we see big 3D console games at $79.99.