chapter 7.2 game industry roles and economics. 2 video game industry value chain
TRANSCRIPT
Chapter 7.2Game Industry Rolesand Economics
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Video Game IndustryValue Chain
D e v e lo pm e n t
M o tio n - c ap tu r e p r o v id er
D eliv er y m ed iam an u f ac tu r er
D e ve lo pe r
P ublis he r
P la tf o r m h o ld er
( S o n y , M ic r o s o f t ,N in ten d o )
G am ec o d e
G am ec o d e
D ata
G am e c o d e( m as ter d is k )
F in is h edg o o d s
Bu g lis t
Ar t/an im atio n p r o v id erD ata
D is tr ib u to r o r r ep g r o u p P R f ir m & ad ag en c y
M ed ia ( T V, m ag azin es , I n te r n e t)
G am e s am p les & m ar k e tin g m ate r ia ls
G am e in f o
R eta ile r ( W al- M ar t , T ar g e t , T o y s "R " Us , E B)
F in is h ed g o o d s
C o ns um e r
G am e in f o
C o n tr ac t Q A p r o v id er
G am ec o d e
F in is h ed g o o d s
F in is h ed g o o d s
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Game Developers
Can be independent, or subsidiaries of publishers
Many developers started on PC due to accessibility of tools Console development requires
proprietary development kits and preexisting relationship with publisher
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Game Developers: Full-Service Cover all disciplines: art, animation,
programming, asset management, production
Idea for the game (“intellectual property”) can come from developer or publisher
Work for publisher on contract basis Paid set amounts per milestone completed
Payments are advances against future royalty payments
Royalties are calculated as percentage of publisher’s “net receipts”
Definition of net receipts is frequently obscure
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Motion Capture Used to automate animation
process for more realism in human characters
Magnetic or optical systems Internal mocap studio at publisher
or external service provider Services include accompanying
software and technicians, and post-capture data processing and tuning
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Art and Animation Service Providers Developers can outsource art and
animation assets to external companies Specified at contract and included in
development budget Art houses can become full-service
developers with judicious addition of programming talent
Cost is a function of quality, team location, and volume of assets
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Publishers If developers are the “geeks”,
publishers are the “suits” Various specialties: PC only, PC +
console, mobile, import, web Console/PC publishers handle:
Production process Quality assurance Licensing Manufacturing and shipping to retail Sales Consumer marketing and PR HR, finance, investor relations, legal
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Revenue from $50 Console GameAmount Purpose Paid By Paid To
$3 Cost of goods Publisher Media manufacturer
$7 Publishing license royalty Publisher Platform holder
$13 Retailer profit Consumer Retailer
$3 Markdown reserve Publisher Retailer
$8 Development cost Publisher Developer
$10 Operating cost Publisher Internal(overhead, freight, co-op, bad debt)
$6 Marketing Publisher Ad agencies and media
Items in bold can be converted to profit through careful publisher cost management.
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Quality Assurance Service Providers
Alternative to maintaining team of full-time salaried testers
Established in PC publishing, due to amortization of multiple hardware configurations over multiple projects
Gaining ground in console publishing; security of sharing proprietary console equipment is a perceived concern
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Public Relations Firms, Advertising Agencies, and Merchandising Teams
PR firms communicate with “consumer” media (ie mass-market general
media) “specialist” video game publications
Ad agency prepares creative for marketing campaign good communication ensures alignment of
vision with publisher Merchandising teams ensure all is in
order at store level
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Platform Holders
Revenue comes from: Hardware sales Licensing fees from compatible
peripherals First-party games Licensing fees from third-party games Licensing fees from development
tools Revenues from sales of proprietary
delivery media
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PCs are an Open Platform Intersecting relationships among:
CPU manufacturers, application software providers, graphics chip manufacturers, and box assemblers
CPU (Intel, AMD) and graphics chip (NVIDIA, ATI) manufacturers provide developer support and market their technology benefits directly to consumers
Application software providers (Microsoft) give developers free tools to ensure compatibility
Box manufacturers (Dell, HP) may bundle hot software titles to add value to their sale
Low barrier to entry for developers, but high competition for shelf space
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Consoles are a Closed Platform Console companies (Nintendo, Sony,
Microsoft) control nearly every aspect of games on their platforms
Proprietary development hardware and software Permission to become a licensed publisher License to use console company trademarks in
marketing materials May require permission to start a game Certification of a finished game
Investment in hardware must be offset by revenue from software (around $7/unit for third-party games)
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Delivery Media Manufacturers Delivery media for closed platforms include
anti-piracy technology Engineered by platform holder
Console companies historically manufacture finished goods for publisher
Nintendo and Sony continue to do so Sega pioneered direct relationships under
license between DVD manufacturers and publishers
Microsoft follows this model with Xbox Some publishers only manufacture disks, then
complete assembly at contracted packout companies
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Retail
Brick-and mortar retailers generally earn 30% margin on a $50 game
Sales of packaged goods by internet retailers follow the brick-and-mortar model
Electronic download of games via internet rising in popularity
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Sales Channel:Distributors
Purchase games from publishers, and resell to smaller independent stores and chains
Compete on price, speed and availability
Earn profit margin of around 3% Allows retailers access to many
publishers w/out separate relationships
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Sales Channel: Manufacturer’s Representatives
Establish personal relationships with buyers at national retailers
Compete on credibility and knowledge of retail processes and systems
Beneficial for new product launches from new companies
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Sales Channel: Regional Retailers
Independent store chains with in-depth consumer sales relationships
Compete on product knowledge and differentiated product offering
Buy games from distributors
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Sales Channel: Rental Retailers
Purchase games from publishers at standard pricing, but with no returns
Allows consumer to try a game before buying Boosts sales of good games; kills bad
ones Some rental retailers have begun
selling games
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Sales Channel:National Retailers Familiar names:
Electronic Boutique, Best Buy, Toys “R” Us, Wal-Mart
Publisher bears burden of relationship: Ships games to distribution center, or direct to stores Provides in-store merchandising materials Provides store staff with sales materials Generous payment terms (net 60+) Inventory auditing Perks: concert tickets, business dinners, golf In-store promotional events
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Sales Channel:National Retailers Retail buyer makes all game purchasing
decisions Indifferent buyer = poor sales and
disorganized in-store selection Buyers hold various controls:
Not stock a game at all Stock only in best-performing stores Feature game in weekend circulars Pricing adjustments
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Sales Channel:National Retailers Open-to-buy = amount of money
available in buyer’s budget that month to purchase new inventory Function of sales velocity and selling season “No open-to-buy” = high competition
among new releases for the period Sales data vital to publishers
Weekly and monthly reports called TRSTS provided by company called NPD
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Summary
Roles in video game industry haven’t changed much in 30 years
However, flow of money (ergo, balance of power) has shifted greatly
Balance of power keeps shifting, e.g. as next-generation console project costs skyrocket