The business of game development *spawn

[Rolf N]

Not entirely true, you only have half of it. Profitably has to be sustainable for continued investment. Nobody is going to increase their holdings into a company that can't maintain solvable earnings.

How long you wait, how much of a buffer you build before you start spending is besides the point. There's a long list of companies that financed huge growth with credits and loans, but they did so with the confidence that they could pay them back easily after fast-laning themselves up to a certain marketshare. See Amazon and Ebay, and actually about half of all companies ever.

The point is, if you never profit from your operation, you can't afford loans any more than you can afford direct financing of growth. You're not generating any values. You're just pissing away your time.

Pure revenue with zero profit is like a revolving door that can spin really fast but where nobody ever walks through.

Riddle me this: Why was EA's profitably up the last quarter, yet their stock prices continued to fall?

Your question is in contradiction with EA's eranings releases. Their profits have been down Y-O-Y for a few quarters in a row.

There was this economic meltdown coming into full swing approximately this time last year. That might have had some effect on the viability of entertainment products and businesses' ability to finance projects. Who really knows.

 

[London Geezer]

This is completely flawed reasoning!
Profits is what matter in the eyes of the owner of the firm, and in part what matters to the priority stakeholders aswell (debtholders would like firm to so it can pay its debts). The only one who cares about revenues are Managers, they would prefer to manage the 1 trillion $ firm ofc, since empire building is fun.

Nobody cares about revenues. The example that your stating is completely flawed, because what your saying is that the trillion dollar firm has EXPECTATIONS OF HIGHER PROFIT IN THE FUTURE.

1 trillion in revenue by itself is worthless. Your example says that blah blah cost cutting blah blah -> will lead to profits.

1 trillion in revenue and 0 profits and no outlook for improving this is worthless to everybody except for the manager.

(not accounting profits either which can be positive while stakeholders are still loosing, but financial profits (meaning positive NPV when discounted for RROI). )

Now give me a second to rip some other arguments here to shred.

I think you misread the point of my post. I said twice that "revenue is irrelevant" is not true. Because revenue is not irrelevant. Not once i wrote that "profit is irrelevant", while you imply that i did...
You're welcome to "rip arguments to shreds", if you understand what people actually mean.

 

[Ghostz]

How long you wait, how much of a buffer you build before you start spending is besides the point. There's a long list of companies that financed huge growth with credits and loans, but they did so with the confidence that they could pay them back easily after fast-laning themselves up to a certain marketshare. See Amazon and Ebay, and actually about half of all companies ever.

The point is, if you never profit from your operation, you can't afford loans any more than you can afford direct financing of growth. You're not generating any values. You're just pissing away your time.

Pure revenue with zero profit is like a revolving door that can spin really fast but where nobody ever walks through.
Your question is in contradiction with EA's eranings releases. Their profits have been down Y-O-Y for a few quarters in a row.

There was this economic meltdown coming into full swing approximately this time last year. That might have had some effect on the viability of entertainment products and businesses' ability to finance projects. Who really knows.

Way to take what I said out of context. I am not saying "pure revenue" is what matters. What I am saying is revenue is at least half of the equation to profitability.

And I was talking about EA's last quarter, compared to the previous quarter. If profitability is all that matters, then they should be up, not down. I was referencing poor logic. We all know it doesn't work that way.

 

[Rolf N]

This is completely flawed reasoning!
Profits is what matter in the eyes of the owner of the firm, and in part what matters to the priority stakeholders aswell (debtholders would like firm to so it can pay its debts). The only one who cares about revenues are Managers, they would prefer to manage the 1 trillion $ firm ofc, since empire building is fun.

Nobody cares about revenues. The example that your stating is completely flawed, because what your saying is that the trillion dollar firm has EXPECTATIONS OF HIGHER PROFIT IN THE FUTURE.

1 trillion in revenue by itself is worthless. Your example says that blah blah cost cutting blah blah -> will lead to profits.

I'm not so sure about this. I guess part of it is rationalization by officers under the pressure of having to say something positive at an earnings call. "We've earned nothing but ... uh ... at least now we're well positioned going forward blah blah" etc. But it's not all bunk. There is a certain value in having attained better economies of scale, building your brands, looking all relevant to communities and blurb writers due to sheer size.

Of course if it goes on for too long, it beomes an issue of trust. There comes the point where you should just dump your money at a bank where it accrues interest, instead of loaning it to a company that can only make promises.

 

[London Geezer]

I'm not so sure about this. I guess part of it is rationalization by officers under the pressure of having to say something positive at an earnings call. "We've earned nothing but ... uh ... at least now we're well positioned going forward blah blah" etc. But it's not all bunk. There is a certain value in having attained better economies of scale, building your brands, looking all relevant to communities and blurb writers due to sheer size.

Of course if it goes on for too long, it beomes an issue of trust. There comes the point where you should just dump your money at a bank where it accrues interest, instead of loaning it to a company that can only make promises.

Agreed. A company might make massive losses one year because they invested heavily in the launch of a new product.
Following year the product is launched, the company breaks even.
Following year the company makes a profit.

Do we crucify the company because three years ago it made a massive loss in the run up to the launch of their new product? No, of course not.

 

[Rolf N]

Way to take what I said out of context. I am not saying "pure revenue" is what matters. What I am saying is revenue is at least half of the equation to profitability.

Of course it is. You cannot have profit without revenue and I stated as much earlier. But that doesn't mean you can focus on incresing revenue in hopes that this will automatically increase profits. It does not. The two metrics are related but not proportional.

And I was talking about EA's last quarter, compared to the previous quarter.

Seasonal patterns distort such comparisons. The christmas quarter is well expected to outperform the other three in the same year, because it holds the biggest shopping season.

Year-over-year comparisons are what you usually do when you want to observe longer-term developments.

 

[Cheezdoodles]

Hrmm... ...when EA goes to wallstreet, they report annually earnings in revenue. Gross and profit margins, assets inflows and outflows make up revenue earnings. Shareholders increases or decrease their holdings into a company based on these financial statements, profitability is only one value to the equation. If EA went to wallstreet as a smaller, higher earning company their stock prices would be higher. This is basic economics.

You cannot say anything about stock prices based on CURRENT performance. Stock prices are driven by expectations of FUTURE performance. Unless the two firms are absolutely identical, you cannot infer anything about the stock prices relative to the two firms.

Shareholders invest\disinvest based on EXPECTATIONS, not based on the financial statements. The financial statements is one of the things you look at to see if your expectations where correct.

Stock prices move immediately to incorporate all publicly available information. You never invest\disinvest on the basis of a financial statement, the stock price has already incorporated the financial statement in the stock price. You invest based on expectations of the future. Account statements = the past

Do you think EA wants 6 different platforms? No. This increasing their spending. Everyone is seeing the addressable market of the Ps3 and 360. Right now, everyone is chasing MW and GTA, that's the meme.

EA wants higher profits. If addressing 6 different platforms = more profits, then EA wants 6 different platforms.

Only if you assume that lowering the amount of platforms would still keep total demand equal would your theory hold. . Which is not exactly a realistic assumtion, as video gaming is not a good that is essential to survive.

Ok so you keep bringing up examples of developers maximizing a single product, a single release window over 4 years. Where are your examples of developers doing multiple products within a window of a year? You [and they] simply aren't accounting for the higher spending to achieve that end of addressing multiple markets. EA isn't accounting for the higher spending ( well, they are now ). Clearly, we are already seeing a solution they've been adapting - which is minimizing company outflows to increase company revenue inflows. This is happening at the macro-level first. They've been maximizing the output of their highest earning studios. This would eventually lead EA to kill their "EA partners" program to those they have to invest considerable amount of capital.

Flawed thinking. EA maximizes profits just like any other rational firm. Addressing multiple markets is ofcourse more costly than addressing one platform, however, as long as the gain in revenues from increased demand (bigger potential market) outweight the cost of addressing multiple market, this is the only reasonable thing to do.

Multiplatform development is ALOT cheaper than single platform development on a per cost platform basis. And it increases demand, as you gain access to more markets. Its not exactly hard to see why you'd want to go multiplatform rather than singleplatform, unless that singleplatforms demand is as big as the multiplatform market demands.

EA adresses multiple markets because this gives the highest possible expected return. = higher expected PROFITS

Riddle me this: Why was EA's profitably up the last quarter, yet their stock prices continued to fall?

This is easy. Because EA's profitability last quarter was WORSE than expected. Coninued fall after the announcement just implies continoued worsening of market expecations for the company.

That is the only thing that moves stock prices. EXPECTATIONS. Prices move constantly because there is constantly a flow of new information that in some way shape or form will change people's expectations about the firm, and this information moves prices.

 

[Cheezdoodles]

I think you misread the point of my post. I said twice that "revenue is irrelevant" is not true. Because revenue is not irrelevant. Not once i wrote that "profit is irrelevant", while you imply that i did...
You're welcome to "rip arguments to shreds", if you understand what people actually mean.

I did not say that you said that profits is irrelevant.

I just said that revenue by itself is irrelevant, and the argument you constructed with the 1 trillion firm and 1 billion firm is NOT related to revenues, but related to expectations of cost cutting etc can lead to higher profits in the future.

This is not the same as saying that revenue has value. Revenue by itself hold no value.

There is a certain value in having attained better economies of scale, building your brands, looking all relevant to communities and blurb writers due to sheer size.

Yes and this value is only driven from EXPECTATIONS OF FUTURE PROFITS.

Agreed. A company might make massive losses one year because they invested heavily in the launch of a new product.
Following year the product is launched, the company breaks even.
Following year the company makes a profit.

Do we crucify the company because three years ago it made a massive loss in the run up to the launch of their new product? No, of course not.

Your example stated here doesn't fit at all with what you said earlier, your now talking about completely different things. Now your talking about profits.

Lets go back, il try to show you this

Having such a huge business has its own obvious advantages compared to the smaller - but more profitable - business.
The 1trillion company might have 90% market share, and they have all the potential to cut costs down the line and make a profit.

-> Your talking about EXPECTATION OF FUTURE PROFIT. Revnues by itself here is irrelevant. If they dont have the potential to cost cuts, then having 1 trillion i revenues is worthless if they are not profitable.

The cost cutting etc, is INCREASING the efficiency of a firm. This ofcourse has value as it will increase profits. Revenues by itself has no value.

If it costs you 100$ to make a Wii but you can only sell to market for $50, and both cost and price are fixed for all percievable future, there is no value from having a 1 trillion dollar revenue from selling wii's. (Well, there is a negative value).

The 1billion company might have the remaining 10% market share and has an uphill struggle to even get close to the size of the larger business.

The billion company does not have any interest in having the size of the larger business. Its only interest is having the best possible return on investment. (THIS IS OFCOURSE NET OF ALL FUTURE CASHFLOWS, so unless becoming the biggest firm will give you the best CF after discounting for investments necessarily and RROI, this is not what we want).

Further, if the trillion dollar company is not profitable, but the billion company is. Then basic understanding of economics will tell you that all things equal, in the long run, the trillion dollar company will be bankcrupt.

Safe to say, unless you make assumtions of possible future profitability, revenue has no value. This should be obvious to everyone here.

 

[Ghostz]

Geez... with the quote mining.

You cannot say anything about stock prices based on CURRENT performance. Stock prices are driven by expectations of FUTURE performance. Unless the two firms are absolutely identical, you cannot infer anything about the stock prices relative to the two firms.

Shareholders invest\disinvest based on EXPECTATIONS, not based on the financial statements. The financial statements is one of the things you look at to see if your expectations where correct.

Stock prices move immediately to incorporate all publicly available information. You never invest\disinvest on the basis of a financial statement, the stock price has already incorporated the financial statement in the stock price. You invest based on expectations of the future. Account statements = the past

If EA indicated they were going to be a more profitable company by decreasing its size by a third ( decrease expenses ), then their stock prices would move higher based on that data ( and it has ). I really don't know what you are on about here. I don't disagree.

EA wants higher profits. If addressing 6 different platforms = more profits, then EA wants 6 different platforms.

EA has Ps3, 360, Wii, DS, PsP, Ps2 and Pc. Profitability is down on the Ps2 and 360, higher over the Wii. Where do you think the majority of their investment should be focusing? I am going to say the Wii.

Only if you assume that lowering the amount of platforms would still keep total demand equal would your theory hold. . Which is not exactly a realistic assumtion, as video gaming is not a good that is essential to survive.

No, I assume achieving greater output at lower costs to supplant any lost in demand. Making you more solvable and higher earning company.

Flawed thinking. EA maximizes profits just like any other rational firm. Addressing multiple markets is ofcourse more costly than addressing one platform, however, as long as the gain in revenues from increased demand (bigger potential market) outweight the cost of addressing multiple market, this is the only reasonable thing to do.

What are you on about? Where are these gains in profitability? Have you been following? EA is down Y-O-Y.

Multiplatform development is ALOT cheaper than single platform development on a per cost platform basis. And it increases demand, as you gain access to more markets. Its not exactly hard to see why you'd want to go multiplatform rather than singleplatform, unless that singleplatforms demand is as big as the multiplatform market demands.

Again, you increase output over a single platform, rather than two; two rather than three. You get Insomniac and Bungie?, who is able to do 3 ps3 or 360 titles in 3 years, with their size as opposed Square Enix, who is only able to get out 1 Final Fantasy in 4 years. Who do you think is more profitable?

 

[Rolf N]

yes and this value is only driven from EXPECTATIONS OF FUTURE PROFITS.

Yes.

 

[London Geezer]

Your lack of understanding of economics just proved here.

Quit the personal attacks, there's really no need.

I did not say that you said that profits is irrelevant.

It looked like you did.

I just said that revenue by itself is irrelevant, and the argument you constructed with the 1 trillion firm and 1 billion firm is NOT related to revenues, but related to expectations of cost cutting etc can lead to higher profits in the future.

This is not the same as saying that revenue has value. Revenue by itself hold no value.

No. I merely said that revenue is not irrelevant. Is that wrong? No.

Yes and this value is only driven from EXPECTATIONS OF FUTURE PROFITS.

Thanks.

Its pretty clear that your lack of economic and financial understanding is shining through.

Again, no need for that. Instead of patronising people, you should explain things simply after you understand what they're trying to say.

-> Your talking about EXPECTATION OF FUTURE PROFIT. Revnues by itself here is irrelevant. If they dont have the potential to cost cuts, then having 1 trillion i revenues is worthless if they are not profitable.

I agree and i obviously didn't write it very clearly in my first post. Of course a company needs to have expectation of future profit, or else there woudl be no point in continuing with the business.

Further, if the trillion dollar company is not profitable, but the billion company is. Then basic understanding of economics will tell you that all things equal, in the long run, the trillion dollar company will be bankcrupt.

Safe to say, unless you make assumtions of possible future profitability, revenue has no value. This should be obvious to everyone here.

Of course, my first post was obviously not clear enough, but it's a no brainer that a company that is not profitable year in year out has no future, regardless of size. My point is that a lossy year can be covered by following more profitable years.
Not all businesses are profitable in the same amount every single year, yet we don't see them going bankrupt just because of a bad year. We are in a console forum and as you know this is how things work in the console business, no?

 

[Cheezdoodles]

No, I assume achieving greater output at lower costs to supplant any lost in demand. Making you more solvable and higher earning company.

What do you mean by output? Your gonna create much more games for that platform and sell them?

There is a problem with your thinking, if you reread this:

Multiplatform development is ALOT cheaper than single platform development on a per cost platform basis. Any developer here will tell you this (simply because you can reuse a ton of assets, and porting a game is little more than rewriting code - the cost of coders is not particularly high (as you dont need that many))


And going multiplatform increases demand, as you gain access to more markets.


So, if EA where smart, taking your assumtion of greater sales per game on that one single platform they would do the following:
Port all the games over to other platforms (lowering average cost per game for all platforms), this will increase demand (thus sales), and this equals more profits.

What are you on about? Where are these gains in profitability? Have you been following? EA is down Y-O-Y.

Lol? How is EA being down Y-o-Y even remotely relate to the fact that multiplatform development is cheaper on a per platform basis?? EA has been multiplat for ages.

 

[Cheezdoodles]

Quit the personal attacks, there's really no need.

Sorry.

No. I merely said that revenue is not irrelevant. Is that wrong? No.

2 firms:

A: 1 trillion revenue
B: 2 million in revenue

Both will earn 1 million in profits for ever.

Which one is worth the most?

Answer: They are worth exactly the same. Because the value of any company is the NPV of all future cash flows.

Only profits has value, revenue alone has no value until you start making assumtions about profitability that can be gotten from revenues.

My point is that a lossy year can be (and usually is) covered by following more profitable years. Not all businesses are profitable in the same amount every single year, yet we don't see them going bankrupt just because of a bad year.

Nice point, but its not related to revenues whatsoever.

 

[Ghostz]

What do you mean by output? Your gonna create much more games for that platform and sell them?

There is a problem with your thinking, if you reread this:

Multiplatform development is ALOT cheaper than single platform development on a per cost platform basis. Any developer here will tell you this (simply because you can reuse a ton of assets, and porting a game is little more than rewriting code - the cost of coders is not particularly high (as you dont need that many))

And going multiplatform increases demand, as you gain access to more markets.

Yes, release more Wii titles, increases Ps3 output slightly, phase out support of the Ps2, Psp and Ds, these are lower cost solutions, return on investment per title by percentages is at least 3x higher. Simple mathematics. Higher profitability, lower costs equals more revenue, stocks would trend higher based on that expectation.

Again, reducing support to platforms would yield higher profitability.

 

[London Geezer]

Sorry.



2 firms:

A: 1 trillion revenue
B: 2 million in revenue

Both will earn 1 million in profits for ever.

Which one is worth the most?

Answer: They are worth exactly the same. Because the value of any company is the NPV of all future cash flows.

Only profits has value, revenue alone has no value until you start making assumtions about profitability that can be gotten from revenues.



Problem here is that this point is not related to revenues whatsoever.

I agree with all those points.
Besides i'm not the economist here, so give me a break!

 

[Cheezdoodles]

Yes, release more Wii titles, increases Ps3 output slightly, phase out support of the Ps2, Psp and Ds, these are lower cost solutions, return on investment per title by percentages is at least 3x higher. Simple mathematics. Higher profitability, lower costs equals more revenue, stocks would trend higher based on that expectation.

Again, reducing support to platforms would yield higher profitability.

Do you even read what i write? Or just randomly type answers?

REREAD:
"Multiplatform development is ALOT cheaper than single platform development on a per cost platform basis.
And going multiplatform increases demand, as you gain access to more markets."

So: If you release more titles for platform [X], then you port them over to another platform.

Costs per platform is now lower than before (obviously), and your sales has increased by selling the same game in an additonal market. This increases your profits and ROI.

Thus allways optimal to go multiplatform. Numeric example:

Spend 50million on development and sell to PS3 market. Assume you sell 3million *60=180 million - 50 = 130million profit. Return on investment: 260%

OR spend additional 10 million on porting the game to X360, doubling your market, and you sell an additional 3 million copies. Total profit is now 360-60=300. ROI= 500%

I can change the cost of porting up to 49 million, and this will still give more profits and higher returns: 360-99=261 Profit. ROI: 263%

Note: As long as the porting is cheaper than development (which it is), going multiplatform is ALLWAYS better than single platform.

 

[DuckThor Evil]

Multiplatform development is ALOT cheaper than single platform development on a per cost platform basis. Any developer here will tell you this (simply because you can reuse a ton of assets, and porting a game is little more than rewriting code - the cost of coders is not particularly high (as you dont need that many))


And going multiplatform increases demand, as you gain access to more markets.


So, if EA where smart, taking your assumtion of greater sales per game on that one single platform they would do the following:
Port all the games over to other platforms (lowering average cost per game for all platforms), this will increase demand (thus sales), and this equals more profits.

Going multiplatform decreases the demand for single platform in isolation and creating multiplatform game is more expensive than single platform when total costs are measured. In some cases the increase in total demand is just not there to outweight the costs, or atleast the risk of it doesn't justify spending, especially if there are other more lucrative options.

Platform exclusives get a huge mind share boost compared to multiplatform games and get more attention everywhere, excluding the biggest multiplatform games. I'd still say that in vast majority cases going multiplatform is the better deal for publishers, but not always.

 

[Shifty Geezer]

There is a valid debate here, but too many ego's being waved around with a sense of superiority. Yes, you are right and everyone else is wrong, but that makes it your job to present a polite and infallable case to disprove them, rather than to grumble how thick and wrong everyone else is.

 

[Ghostz]

I thought this thread was locked?

Do you even read what i write? Or just randomly type answers?

REREAD:
"Multiplatform development is ALOT cheaper than single platform development on a per cost platform basis.
And going multiplatform increases demand, as you gain access to more markets."

So: If you release more titles for platform [X], then you port them over to another platform.

Costs per platform is now lower than before (obviously), and your sales has increased by selling the same game in an additonal market. This increases your profits and ROI.

Thus allways optimal to go multiplatform. Numeric example:

Spend 50million on development and sell to PS3 market. Assume you sell 3million *60=180 million - 50 = 130million profit. Return on investment: 260%

OR spend additional 10 million on porting the game to X360, doubling your market, and you sell an additional 3 million copies. Total profit is now 360-60=300. ROI= 500%

I can change the cost of porting up to 49 million, and this will still give more profits and higher returns: 360-99=261 Profit. ROI: 263%

Note: As long as the porting is cheaper than development (which it is), going multiplatform is ALLWAYS better than single platform.

You are assuming that you can't amass more revenue by doing 2 games at 60 dollars over one platform, then 1 game that's multi-target. Your numbers don't add up: Insomniac is a more profitable company, then the company that's putting out Final Fantasy every 4 or 5 years.

Your example fails to take into account there's more spending in multi-format titles, more lead time in development. For the cost of GTA or MW; assuming you had 5 different Bungie's or Insomniac's, you could get 5 titles done with the same resources as a single format. This is much more efficient. You are't betting the hen and the farm with this strategy. The returns are always proportional to the investment, expenses are kept at a minimum and margins are maximized.

 

[Shifty Geezer]

I thought this thread was locked?

Only for restructuring.

Yes, release more Wii titles, increases Ps3 output slightly, phase out support of the Ps2, Psp and Ds, these are lower cost solutions, return on investment per title by percentages is at least 3x higher. Simple mathematics. Higher profitability, lower costs equals more revenue, stocks would trend higher based on that expectation.

PS2, PSP and DS are low selling so yes, dropping them could maybe be a valid proposition. But if you're advocating platform exclusivity as the most profitable path for a publisher, why didn't you answer Ostepop by suggesting EA should become a Wii-only developer? Why are you including XB360 and PS3 in their projects, and not suggesting FIFA and Madden would make a load more money if they were platform exclusive?

Your example fails to take into account there's more spending in multi-format titles, more lead time in development.

This makes little sense to me. It costs on average $20 million to make a title for a platform. It cost...$1 million to port it. Thus for a game each on PS3 and XB360, a publisher would either have to spend $40 million for two exclusives, or $21 million for one title ported. What little I've seen of financials and publisher behaviour, that extra $1 million to port is generating a lot better ROI than putting it part-way towards a platform exclusive. Of course are there are cases where the effort isn't deemed worth it, so you won't see every title ported always and you'll be able to find examples of exclusivity, but that's far from the norm especially these days.