Article on high def development costs raking the industry

[Rangers]

http://www.slate.com/id/2210732/

Like pretty much every industry these days, video-game publishing is in some financial trouble. Electronic Arts, the world's largest game publisher, best known for Madden and the Sims, lost $641 million in 2008's fourth quarter. Activision-Blizzard, owners of the cash cows World of Warcraft and Call of Duty, reported losses of $72 million in the fourth quarter of 2008. (They lost $194 million the quarter before that.) THQ, the third-largest publisher in the United States, and known for lucrative licenses ranging from the Ultimate Fighting Championship to Pixar, had $192 million in losses over the holidays and is laying off 24 percent of its work force.

News of development-studio closings and layoffs are being reported around the world. And while publishers focus on internal cuts, many independent developers have closed outright. Such gloom, in a normally raucous industry, has set the talking heads, bloggers, and trade press to a quick conclusion: Losses and layoffs are the direct result of an economic crisis (on the premise that "things are tough all over")

But that idea, which makes intuitive sense, is completely at odds with recent sales numbers. In reality, video games are selling better than ever. The retailer GameStop announced sales of nearly $3 billion worth of games, hardware, and accessories during the nine weeks around the 2008 holidays—22 percent more than during Christmas 2007.

Interesting summation of things. I never thought the "rising dev costs" doomsayers, who have been around every generation and seemingly always wrong, would be a little bit right this time. Still, it's not an crippling problem until we stop getting our flow of games, and that isn't happening.

Still, I dont have any answers, except hopefully these companies can streamline. I think that's the answer, they just have to get leaner.

Too my mind, Valve, Epic and Id are examples of companies that I suspect are highly profitable. I think because they run small teams AFAIK, in the range of 60 to make their games.

I also wonder if MS outsourcing first party titles is playing well here. The article mentions that movies are a one and done production, whereas EA has to pay for it's staff year round. Well, outsourcing does avoid that.

I have begun to wonder in recent times if first party software could actually be actually losing money in significant amounts. Particularly on Sony's end it seems like they are financing some real high budget blockbusters only to see less than stellar sales.


It also seems Japanese companies in particular have avoided these pains, I'm just not sure why. Capcom, SquareEnix, and Konami seem to be doing ok. Again, more lean perhaps?

 

[obonicus]

I had seen this article earlier, but I immediately disregarded it when I saw their analysis of the Activision loss. The news I had read had related the fact that Activision's profit actually exceeded expectations, despite posting a loss this quarter. This just seems like ignorant press doom-crying.

 

[Rangers]

I had seen this article earlier, but I immediately disregarded it when I saw their analysis of the Activision loss. The news I had read had related the fact that Activision's profit actually exceeded expectations, despite posting a loss this quarter. This just seems like ignorant press doom-crying.

Well, it says they lost 74m, how is that a profit?

Regardless of Activision, it seems to be an issue. And as they say, who's in a better position to make money than Activision with COD and WoW?

 

[ErnstH]

Well, it says they lost 74m, how is that a profit?

Regardless of Activision, it seems to be an issue. And as they say, who's in a better position to make money than Activision with COD and WoW?

I think it had to do with a one-off write off related to the merger. I also remember them performing better than analysts expected (i.e. posting a smaller loss).

 

[aselto]

I had seen this article earlier, but I immediately disregarded it when I saw their analysis of the Activision loss. The news I had read had related the fact that Activision's profit actually exceeded expectations, despite posting a loss this quarter. This just seems like ignorant press doom-crying.

The author certainly didn't analyze financial reports too carefully, but it's certainly not ignorant doom-crying. Activision was probably profitable riding on COD, WoW and GH franchises but was hindered by posting some deferred losses that will be reflected in lower costs in the following quarters.

EA on the other hand is in real trouble with posting losses for like two years in row. I think that's because of them wanting to expand in too many areas at once without having current output that could sustain such huge expansion. Note how they are doing all these MMORPG ventures - LOTR, Warhammer, now Star Wars - they're huge investments and at the same time really high-risk. They bought Bioware/Pandemic in 2007 which combined have ~600 employees and while they released 2 games since then so far it's been nothing that would justify such huge expenses. That's why cutting 1100 employees, while sad for people involved, is a good thing for the company.
Very similar story goes for Take 2, THQ and other publishers that've been failing to be in black lately.
Of course you can be a big, profitable publisher in today's market, it's simply enough to look at Ubisoft with its steady but careful growth (though they've had some troubles recently with Prince of Persia and EndWar failing to meet sales expectations) or Capcom.

The elephant in the room is, of course, Wii which has captured almost 50% of console market and is the fastest growing. None of the publishers have really tried to tap into Wii's audience - there have been some success stories, but no one so far has had significant part of their business strategy based around Wii. EA announced shifting focus towards Wii and others will follow the suit, so it'll be certainly interesting to watch how they fare. I am interested to see how "hardcore" games do on Wii.

Too my mind, Valve, Epic and Id are examples of companies that I suspect are highly profitable. I think because they run small teams AFAIK, in the range of 60 to make their games.

That's true, but they're not big publishers taking risks planning strategies for a wide variety of platforms - instead they're relatively small studios that target their specific audiences established in the last decade or two.

It also seems Japanese companies in particular have avoided these pains, I'm just not sure why. Capcom, SquareEnix, and Konami seem to be doing ok.

Most of Japanese companies actually have troubles as well, looking at last several quarters.

I have begun to wonder in recent times if first party software could actually be actually losing money in significant amounts. Particularly on Sony's end it seems like they are financing some real high budget blockbusters only to see less than stellar sales.

I wonder about that, too. Surely though Nintendo is doing better than just 'ok'

 

[Rangers]

I wonder about that, too. Surely though Nintendo is doing better than just 'ok'

Heh. Dev costs on a title like Mario Kart Wii or Wii Fit must be next to nothing. Then they sell millions forever.

Nice gig.

 

[obonicus]

The author certainly didn't analyze financial reports too carefully, but it's certainly not ignorant doom-crying. Activision was probably profitable riding on COD, WoW and GH franchises but was hindered by posting some deferred losses that will be reflected in lower costs in the following quarters.

How isn't it ignorant? They don't actually read and try to analyze the financial reports, but we're supposed to read the rest of the article and go 'well, I guess he knows the rest of what he's talking about'? Not saying these companies aren't in trouble, but I'll wait for an article from a different author. This is pure GAF-level analysis: 'HD is in trouble, Wii is the way to go, EA doesn't get it'.

 

[aselto]

How isn't it ignorant? They don't actually read and try to analyze the financial reports, but we're supposed to read the rest of the article and go 'well, I guess he knows the rest of what he's talking about'? Not saying these companies aren't in trouble, but I'll wait for an article from a different author. This is pure GAF-level analysis: 'HD is in trouble, Wii is the way to go, EA doesn't get it'.

You are right in a way, but despite mistake(s) I think the article is worthwhile. The didn't mention Wii at all (I did). The main point of the article would be: "publishers pushed themselves into trouble they have and I don't believe their cure (less games, but GTA-like blockbusters) is going to work".

 

[BoardBonobo]

IMO, The doom sayers of rising dev costs have managed to hit the mark this time because of the global down turn. Sales are up, there are more hungry gamers out there than ever before. It's just that the rising cost heap has collided with the monetary devaluation stack.

I agree that in the current climate Wii is the way to go to make money for nothing, it just strikes me that 99.9% of wii games are banal crud. Don't get me wrong Mario Kart is probably one of the most played games here, along with Shaun Whites on the Wii Fit. But with the exception of Mario Galaxy evertyhing else has been absolute pap.

 

[Simon F]

high def development costs raking the industry

Raking?

 

[Rangers]

Raking?

Sure it makes sense..somehow doesn't it?

I disagree with the conclusion of the article btw. It didn't strike me as meaningful. But it did sum up the losses and point out sales are higher so the recession is hard to blame.

I also tend to disagree with the whole "Wii" answer. Because I dont think anybody but Nintendo has proven they can consistently make not-bombs for that console. In the past I've thought hardcore games on Wii (like COD WaW and now Dead Space) will never work simply because the hardcore will always go to 360/PS3 in the first place. However now I think the jury is out slightly more since WaW did 400k on Wii in Dec. Still in general I dont think hardcore is the answer on Wii, and thats what companies like EA know how to do.

 

[fearsomepirate]

Still, it's not an crippling problem until we stop getting our flow of games, and that isn't happening.

THQ recently announced they were shifting resources away from HD development, and Riccitello recently said that EA's going to focus on making fewer, higher-quality games. This is inevitable--the US publishers lose money in aggregate, and their losses for 2008 were 42% higher than 2007. An industry that as a whole loses money is bound to contract. That means fewer games, or lower-budget games (Wii and handheld games, fewer "cinematic" games).
http://www.dfcint.com/wp/?p=236

It also seems Japanese companies in particular have avoided these pains, I'm just not sure why. Capcom, SquareEnix, and Konami seem to be doing ok.

SE's profit has been plummeting since 2006. Capcom's profit was down 95% last quarter. Konami's healthy, though.

I also tend to disagree with the whole "Wii" answer. Because I dont think anybody but Nintendo has proven they can consistently make not-bombs for that console.

Because only Nintendo has proven so far that they know how to consistently please Wii customers. I think a lot of these developers need new management. I hope someone at the big publishers is asking management they they didn't think of Wii Fit. If Company A is making products that customers want to buy and Company B is not, the only party Company B can blame is Company B. Blaming the customer, blaming the competitor, or blaming acts of God ("no one could have predicted Wii Fit would sell!") is a sign that your company is heading toward the dumpster.

Still in general I dont think hardcore is the answer on Wii, and thats what companies like EA know how to do.

I am getting kind of annoyed with the floating definition of "hardcore." So now EA Sports, the Sims, and movie licensed games are "hardcore"? EA got successful by figuring out what kind of products people would buy, and we hated them for it. They were sellouts destroying the industry. Now they've turned the page and are putting out things to the critical acclaim of the "hardcore" gamer...and losing money.

 

[obonicus]

SE's profit has been plummeting since 2006. Capcom's profit was down 95% last quarter. Konami's healthy, though.

How healthy is Konami, really? Wasn't MGS4 a huge part of 2008's revenue?

Because only Nintendo has proven so far that they know how to consistently please Wii customers. I think a lot of these developers need new management. I hope someone at the big publishers is asking management they they didn't think of Wii Fit. If Company A is making products that customers want to buy and Company B is not, the only party Company B can blame is Company B. Blaming the customer, blaming the competitor, or blaming acts of God ("no one could have predicted Wii Fit would sell!") is a sign that your company is heading toward the dumpster.

On the other hand, Nintendo (and much of the peanut gallery of armchair analysts) thought Wii Music would be the next Wii Fit, and planned their schedule accordingly, while it was just a moderate success -- waning Wii sales in Japan may be a direct result of their failure to keep the platform supplied with software people have an interest in. No one's infallible.

 

[aselto]

SE's profit has been plummeting since 2006. Capcom's profit was down 95% last quarter. Konami's healthy, though.

Capcom had no significant releases for the Holiday quarter. We should judge their health based on this quarter with SF4 and RE5 being released. I think overall the company's doing much better than Konami this generation.

I am getting kind of annoyed with the floating definition of "hardcore." So now EA Sports, the Sims, and movie licensed games are "hardcore"? EA got successful by figuring out what kind of products people would buy, and we hated them for it. They were sellouts destroying the industry. Now they've turned the page and are putting out things to the critical acclaim of the "hardcore" gamer...and losing money.

They still release movie licensed games (LOTR, Harry Potter, Bourne), sport games and The Sims etc. I think their losses come from too rapid expansion of internal development, not their strive for quality. Note how Activision shut down many Vivendi studios or broke deals with independent developers after the merger, even though there were many promising ones. Instead, they opted for yearly releases of their existing franchises and introducing only 2-3 new IPs a year - this way they don't have to depend too much on those new IPs. EA banked heavily on Mirror's Edge and Dead Space and with these games' weak performance came bad financial results.

I also tend to disagree with the whole "Wii" answer

Wii isn't "the" answer - companies should be profitable on all fronts. However, leaving Wii audience only to Nintendo where money is on the table for all parties involved isn't something that game publishers should do, especially that the risk involved is relatively low - it's reportedly 3 times cheaper to make a Wii game than an HD one, and the userbase on Wii will soon be bigger.

 

[dobwal]

Wii isn't "the" answer - companies should be profitable on all fronts. However, leaving Wii audience only to Nintendo where money is on the table for all parties involved isn't something that game publishers should do, especially that the risk involved is relatively low - it's reportedly 3 times cheaper to make a Wii game than an HD one, and the userbase on Wii will soon be bigger.

It doesn't matter how cheap development is for the Wii, if a dev/pub can't make games thats going to resonate with the Wii crowd, that dev/pub is just as capable of losing money in the Wii market as it is in the 360/PS3.

Third party pubs flock to the 360 and PS3 because its a proven enviroment. Its not a gaurantee you'll make money in the 360 and PS3 market, but that market will eat up the type of products (if they are good and well marketed) that most pubs are used to delivering.

Nintendo is dominating the software market of the Wii with software where the games themselves can be easily replicated but the success of those games can not. You can bet pubs want to take advantage of the huge potential of the Wii's userbase, but the question isn't "should we enter the market?" but "how do we enter the market and have success?".

Nintendo is like the gov't of China while the 360/PS3 is more like the US or more westernized countries. One likes to have iron like control over its economy, while reluctantly lessenen it grip to encourage growth, while the other is built on the concept of free enterprise and private ownership as they see them as keys to a healthy economy.

 

[Cheezdoodles]

That one of the worst articles ive read, there is nothing there that proves that the losses he is talking about are in anyway related to HD development. He is just saying blah blah blah all these firms posted losses, blah blah blah. Unless he actually does a real financial analysis of the companies he talks about (and ofcourse SHOWs this in the article), he cannot determine the cause of the losses at all.

 

[Mobius1aic]

Devs should switch to the slower approach with small teams as they still seem to make money and still release very high quality product. Also, I think a real return to PC development is very likely soon since there is no heavy licensing fee to pay. Yes the production is still somewhat expensive and risky, but with proper building and compatibility, you can make a game available to a wide range of computers, laptop and desktop alike. I'm very surprised no dev has made a science of IGP support outside of EA and their Maxis team. Because of that, every girl and woman with a laptop can play the Sims, even on Intel Extreme Graphics from cerca 2003. That's some real money right there, especially with so many expansions. I'm not saying they have to casual games, but you can make a good looking game on a weaker GPU. Far Cry or HL2 level graphics are good enough when the gameplay is well designed.

 

[Squilliam]

Im thinking along a different set of lines than the typical development costs killing industry mantra. Maybe the issue stems from the management style and systems of these companies, not from the development requirements of the HD consoles themselves?

If we take a look at some of the more successful companies such as Epic, Valve etc etc. Theres are a few things which seem to stand out for both companies. They have very selective hiring practices. They both don't have huge numbers of staff and yet seem to have very good throughput in terms of productive work done and they both have excellent production management and creative teams in place.

Perhaps the issue for the industry which is finally catching up to the bigger publishers is they cannot treat it like a sweat shop environment any longer. They lose their best staff to burn-out or attrition and producing a large number of games which just flood the marketplace. The teams with experienced and knowledgable staff, the names we have known for a long time are making the money here and the teams filled up with people with 1-2-3 years experience seem to be doing themselves and the company no favours.

They still have to pay that 100K per developer anyway, so it doesn't actually cost them much more money to have fewer, better developers at 120-150k costs due to higher salary/benifits if they can employ fewer of them and produce higher quality work with far fewer project management hassles/problems.

 

[assen]

If we take a look at some of the more successful companies such as Epic, Valve etc etc.

Valve and Epic aren't good examples for "the industry". You should be able to run a good business creating and selling videogames without having a side business of digital distribution or middleware.

 

[NERO]

I read the article earlier in the day and was pleasently surprised to see it show up on B3D. It's not meant to be a blockbuster essay on the industry, but just a quickie that shows what is fundamentally wrong with an industry breaking revenue records yet losing money. Obviously it's cost, the question is what component of cost is causing the shortfall. It has been discussed many a time on this very forum, but it has to do with development costs for the larger productions, overall management and more recently currency risk. Keep in mind that games don't cost very much more than they used to (50-60USD per media) but the cost of creation seems to be going up with graphics expectations. As an example 10 years ago, devs didn't needed to care as much about rendering hair, now they have entire teams that do so. Another is that nearly every game has a multi-player component when 10 years ago that was not a necessity. A related thread to this gloom is the thread about how the Wii might (or will) change future developement.

We may have reached a wall when it comes to production budgets and the way things are going we may very will see a sea change. More Madden-type games, more downloadable content...etc. Much more intelligent folks are unable to predict where this industry will go so I won't really try.