Do games make money?

5 Aug

If you’re looking for an answer to this question, or a full-treatment of the question itself, I’m afraid you’ll have to look elsewhere – for now.

I’m thinking about writing a full blog post or writing a Games industry column tangentially related to this and it’d be useful to have some… what are they called?… oh yeah – facts!

Here;s where I could use some help. Over the years there’s been a truism in gaming that 80% of games lose money. That idea was and is so widely accepted as fact that I never think to question it.

So, two questions for you before I start pontificating on the subject with nothing but my gut and received wisdom to go on:

–Was it ever true? Did/do only 20% of games make money?

–Is it still true today?

(Oh, and one bonus question: Does the success rate differ from platform to platform and/or genre to genre?)

I’d sure appreciate some help with this.

20 Responses to “Do games make money?”

  1. Donald Harris (@TallGamer) August 5, 2013 at 2:00 pm #

    I think games do make money, I don’t think or maybe it’s a wish that failure rate is lower than 80% Are we talking about the entre industry? AAA and Indie as I think the numbers would different greatly between them. AAA is stuck in the repeat business of only making games that have made money in the past. Where as indies who push out a lot of games for the mobile and desktop platforms probably have a hire than 80% failure.

  2. Michael Dobson August 5, 2013 at 2:02 pm #

    It’s unlikely to be those exact numbers. The “80-20” ratio is known as the Pareto Principle, from 19th century Italian economist Vilfredo Pareto as reinterpreted by Peter Drucker, and is one of those general rules of thumb. (20% of your customers give you 80% of your sales, 20% of your employees give you 80% of your headaches, etc.)

    Although I spent a good deal of time analyzing TSR sales information, I can’t actually prove whether any particular product made money or not. The TSR accounting system never allowed costs to be segregated by product. It is true that a handful of products (probably a lot less than 20%) accounted for the vast majority of TSR total income, and it is also true that some of our most expensive products to produce were SPI games with across-the-board low sales.

  3. Dr. Cat August 5, 2013 at 2:33 pm #

    The figure I head back in the 1990s was that 92% of games lost money. And the lion’s share of the profits were made by the top 20 sellers. Sorry I don’t have a source to cite on that. I heard various people say that it was not unlike the way the book, movie, and music businesses worked, with the hits generating the money to make up for the big majority of failures.

  4. kpallist August 5, 2013 at 2:45 pm #

    Yes, games make money. Certainly SOME games make money (those at the top of the sales curve), and it’s probably true that in aggregate they make money even when taking into account the money-losers.

    It’s typical of any hit-driven business that some variant of the Pareto-principal is in effect. Books, games, music, etc. Lots of losers, but made up for by the few winners. One way to view the role of publishers is to distribute that risk so that some games (or movies or books) can have their creators get paid even though they lose money. publisher puts out 20 games, 2 are profitable, but enough so to float all the others. There’s an argument as well that says that the steeper the curve, the more disproportionate the winner:loser ratio, the more OVER-paid the hits must be. Why do so many aspire to be pro ball players or rock stars, when the odds are so low? Surely fewer would do so if the rare winner was then paid $100k/yr.

    As to whether the success rate is different per platform. Yes. Two reasons: First, open platforms allow lots of games to ship and then let them fail in the market; closed platforms kill titles before they ship (or at least they have that option), so many games ‘fail’ without the consumer seeing them. Secondly, the cost of development versus potential return changes both the number of sustainable losers, as well as the risk appetite of those bringing them to market (a $500k mobile game that’s looking off track might still risk launching. A $50M AAA game that’s looking off track might have any number of stakeholders call the thing off at a particular milestone checkpoint).

  5. ral365 August 5, 2013 at 2:48 pm #

    Gaming seems to have its own separate island from the overall national economy. In film or television, the quality rises or falls with the USA’s overall financial stability, but the gaming industry is independent of that roller coaster. They can earn or lose money regardless of the country’s economic times. MY theory is this is because film and TV are more attractive to the general public, and gaming has a more restricted, yet vocal, audience, mainly around ages 11 to 30, the generation that truly appreciates the medium. Most parents, small children, and senior citizens don’t play or appreciate gaming like today’s generation of teens and young adults. A lot of adults in the public still stereotype games as just senseless violence that harms kids and keeps them from being active, but I digress.

    You get my overall point, right, Mr. Spector/everyone in the blog?

  6. Lukas Irwin August 5, 2013 at 3:04 pm #

    I think the general rule of thumb is ~80% of all new businesses will fail, no matter what industry they are in. This is not specifically a game development thing.

  7. Don Perrin (@dbsperrin) August 5, 2013 at 3:44 pm #

    –Was it ever true? Did/do only 20% of games make money?

    In the miniatures world, I’d say this is bang-on!

    –Is it still true today?

    I think it’s still true in the miniatures world. Kickstarter may be raising the percentage value, however, as there’s high “toy value” for a miniatures Kickstarter, as opposed to just a book or software.

    (Oh, and one bonus question: Does the success rate differ from platform to platform and/or genre to genre?)

    Yes, I bet it does, but I’m answering solely for the miniatures games. I think historical miniature games are in the 5 to 10% range, but miniature lines and accessories are in the 20 – 30% range. No one can agree on the rules to use, but everyone likes a well sculpted set of figures or terrain.

  8. Rusty Parks (@yaxamie) August 5, 2013 at 3:49 pm #

    Pareto’s law, mentioned above, encourages diversity in the efforts of a developer. I’ve heard it said that Hollywood need only be a few major flops, back to back, before the game is fundamentally changed. This is also true of AAA games in any given genre.

    The answer is that no single game is guaranteed to make money, but games as a whole are a cherished past-time, core to a fundamental part of human experience.

    The AAA model is like roulette. No matter how big your bank is, if you keep doubling down on black, eventually, a few big losses will sink you.

    Someone could write a book on how the current model has pushed us to be more like the big-budget Hollywood model: one that I believe is destined to collapse.

    On the other hand, you don’t have to be “big budget” to make a lot of money. Tyler Perry’s last “Madea” flick has netted over 65 million. That’s not bad for a “love it or hate it” franchise that’s been made fun more than Randy Newman. Perry simply provides a viewing experience tangential to the mainstream. There’s a huge demand for it and it targets an under-served market.

    This is the same basic reason money funnels into the various kick-starters for “nostalgic” genres people still love.

  9. destoo August 5, 2013 at 4:33 pm #

    “In film or television, the quality rises or falls with the USA’s overall financial stability, but the gaming industry is independent of that roller coaster.”
    Commercial success for an enterprise like that is usually tied to the marketing investment. Some brilliant films came out recently with little or no publicity done (looking at you, “500 days of summer”) and at the same time AAA titles suffered, indie games just went on the radar of many media outlets, great developers were spotted and either hired by the big boxes, or offered partnerships.

  10. Harold (@har0ld) August 5, 2013 at 4:36 pm #

    I’d say it was and it is still true. The big change though is that when games make money these days, they make a lot (just read the Beat Hazard story, one guy, $70,000 invested, 2.2 million in sales) when it wasn’t the case a decade ago. Gunpoint, Minecraft, Super Meatboy… The list is getting bigger and bigger.
    The success rate today is clear: make a great game on your platform of choice (usually the classic PC, from a dev standpoint that makes sense), port it whenever you can on anything where there’s demand for it.
    The Humble Store and Steam are bringing a long tail effect, much appreciated in a hit-driven business.

  11. Mike Sellers August 5, 2013 at 5:24 pm #

    “Make money” means different things if you’re a small indie developer or a large PC/console/web/mobile publisher.

    In retail, the figures I had years ago were that 5-7% of PC games that made it to the shelves were profitable. This isn’t something publishers liked to talk about, but it was the reality from multiple large sources. I don’t know about console, but I suspect the ratios are about the same. And then of course, there were the many games that never made it to the store shelves — so the 5-7% that were profitable were at the top of a very large pile of broken dreams.

    In MMOs, the majority of those that were released made significant revenue and were probably profitable. Several years ago (when I was pitching MMOs), I tallied up all the ones released between 1996 and 2006. Of those, about 65% were likely profitable, having factored in probable development and marketing costs. Looking at only those with “commercial” budgets (I used a threshold of >$3M at the time), this came to 71%. If you removed EA’s large MMO failures (Majestic, Motor City Online, Earth & Beyond, and The Sims Online — if anyone remembers those!), the number jumped to 83%.

    The twist here is that only around 10% of all MMO projects announced (or reliably said to be funded and in progress via industry backchannel) actually made it to release. So once again, the single-digit profitability overall seems to hold.

    In free-to-play, it’s still difficult to say, and of course companies are keeping this info close to the vest. My view though is that more F2P games are “making money” and likely profitable than other forms of games. OTOH, while I think more of these games are profitable than those from other types/platforms, this can mean very different things depending on context. If you’re a large publisher, a game may have to make 3-5x its marketing and operational costs just to make sense in terms of ROI and cost of opportunity (that’s a *massive* profit margin, and I assure you it’s not inflated). OTOH if you’re an indie or small publisher, you may be able to get along fine with a much lower margin. Then too, many F2P games are, I suspect, riding the profitability knife-edge: it’s one thing to take in a lot of revenue, but it’s also easy to get in a situation where your revenues are $2/user and your costs are $3/user — or worse.

    Overall, do games make money? Yes. But the profits made are highly concentrated. Even in F2P on mobile and tablet there’s a steep Pareto drop-off: the top 3-5 make much more than the rest of the top ten, and the top ten make at least an order of magnitude more than the rest in the top 20 (and after that it’s not really worth worrying about).

    That said, I don’t think this is an inherent market reality, or not entirely. This steep curve is as much as anything else the result of businesses (very naturally) going after the most revenue they can as aggressively as they can. This can result in a poor Nash equilibrium where most players lose (and a few win due to perturbations that may well be outside of their control). I believe there is a lot of money to be made with what I’ve called the Miramax strategy — making quality games that may not be blockbusters, but won’t require betting the bank on each one either. This, however, is a tough sell in the business of making games where the rewards for blockbuster success are so outsized. That kind of reward can blind those involved to the risks of making these kinds of bets. IMO.

  12. Patrick Block August 5, 2013 at 6:41 pm #

    I’d say it’s an impossible question to really answer. The question itself is simple on the surface, but in using the term “games”, it covers such an incredible array of types, sizes, and genres over a couple decades, and with quite a lot of different payscales involved for the people making the things. When you throw in MMO worlds piecemealing virtual armored hats and bottles of magic juice, do include all the years the game ran towards whether or not it brought in a profit?

    I’d hazard that the industry would not have survived as long as it has if all of those lawyerly suits had not determined that there was money to be made in the industry. Bloat wrecks profits. A lack of creativity brought on by the safe appearing notion of copying success ends up boring customers and weakening profitability in the long term. The companies do themselves in by mistaking the concepts of creativity/growth with risk.

    The newer Kickstarted games coming out will tend to show a clearer picture of whether or not there is actual profit out there if you produce a game people actually want, without all the bloat of boards of directors in ties on one end, and extreme advertising costs at the other. Kickstarting means streamling and involving the players into the creative process. I think that’s a big thing, and ultimately, great for the industry.

  13. Dewi Morgan August 5, 2013 at 7:35 pm #

    What’s a “game”? Seems to me, from hanging out on game dev boards, that:
    Almost no people who want to make a game, will even start.
    Almost none of those who are “writing a game” will actually finish it.
    Almost none of those who write a finished game will release it for money.
    Almost none of those that finish a game and release it for money will do any marketing.

    If you define game as “A game concept”, then no, games never make money, at least within any reasonable number of decimal places. If you define it as “A game that has actually been finished, and released, and marketed”, then sure, games can make money.

    The money they make is ([unit cost] * [number of units]) – ([dev cost] + [marketing cost] + [distribution cost]). Which tells you nothing; any of those values could be broken down more: dev cost is cost of licensed components, plus developer wages, plus…

    If you have a graph of profitability against (what?), then you will have a peak on the left hand side of the graph. High profit, AAA titles. Then you have a long tail dying off to the right. How long that tail is, depends on your cutoff point of what you consider a game.

    Bit question is, what would the X axis be? What *determines* whether you are in the peak or the long tail?

  14. Mark DeLoura August 5, 2013 at 8:02 pm #

    Hi Warren, I don’t believe the 80/20 rule suits the game industry over time, as the dynamics have changed quite a lot. For a number of years I tracked console NPD data against ballpark total costs, and in the oldy goldy days I’d say it was closer to 70/30 versus today at less than 90/10. Rising development and marketing costs haven’t quite been made up for by increased audience or retail price. And the performance of licensed games has shifted a lot, from being a great bet on console to being practically unsellable there.
    Of course, I was just tracking console…

  15. Anthony Castoro August 6, 2013 at 5:09 am #

    Warren, It’s pretty clear that fewer than 10% of games return more value than is invested in them. The rise of mobile gaming has only made those numbers worse. If you’re in a business that’s able to manage a strong portfolio, or you’re the owner of a platform, then you can make good money. If you’re only in the position to make one game at a time, you should have your head checked.

    I’m assuming you actually know the answer to this question, but if not, I’m happy to point you to various market data sources on how much money games make. Assuming you already know all of that, I have to wonder what the context of the question really is. Hit-driven nature of the industry? Business risk versus other industries? Exploration of the motivation to make games given the obstacles?

  16. Harry Jarvis August 6, 2013 at 2:36 pm #

    Accounting practices, marketing costs, operating costs, studio overhead, write-offs, etc., especially at the larger publishers make this kind of statement hard to quantify. Example: If Project A (projected $$$$ maker) slips out of fiscal, and creates a $$ hole in the current studio fiscal budget, and Project B (projected $$ maker) is asked to bring it in a quarter into current fiscal to help cover that hole, and then only makes $, and A comes out later at $$$$1/2, is B a loser, and A a winner?

  17. Albert McClelland Jr (@tankmonkey) August 6, 2013 at 4:16 pm #

    I’ll try and answer the bonus question since most of my experience can speak to that. Logically, targeting platforms that with the largest user base tends to sell more games. To get maximum exposure for your game, making it simultaneously available on as many platforms as possible would generally be the way to go.

    However, on those larger platforms you’re also competing with all of the other developers who want a chunk of that big user base. You fall into the danger of your product being drowned out in the noise of a bunch of other similar products. That said, some developers benefit from the noise if their overhead is low enough. With a mediocre title, smaller developers can break even when AAA studios lose money. Then in those rare instances when a small team is actually profitable, their profit margin could potentially be much higher than a AAA studio making a similar game. I’d be interested to see the data on how much a small studio profits versus a AAA studio once you take out their overhead and compare failure cost to success.

    Genres fall into the same problem, if you’re a AAA studio you’re most likely going to pick a genre that has a proven track record so you can reliably predict sales. That can offer a lot of profit, but you run the risk of being drowned out by the other games in that genre or being considered unoriginal (especially if you’ve made this game n*1000 times before). Low risk walks hand-in-hand with low overhead. Therefore, small studios that take chances have the opportunity to make a lot of money when they succeed versus little to lose through failure.

    All of that taken into account, when you’re working in a genre that is culturally relevant, your chances of success are higher. When you’re working on a platform that has more users, your chances of success are higher. But! When you don’t have a lot to lose (low overhead), and you end up doing something crazy (insert profitable title from a small developer) you tend to become culturally relevant while punching logic in the face with your success (Difficulty level: Insane).

  18. Allan Fowler August 6, 2013 at 10:13 pm #

    Hi Warren,
    You pose a good question. The problem with answering this is how we first interpret the statement.
    If we include games that are never released, then yes, I believe that there would be a disproportional number of failures when compared to the games that make money. However, if we are only considering released games, then I doubt this percentage imbalance would be as high. The other challenge is also defining profit. As there are usually several stakeholders in the distribution chain, some of these organizations will be getting a cut of profit and therefore, someone must be making a profit somewhere. Otherwise they would not be involved.
    However, like in many industries it is really tough for new entrants to gain traction in a competitive market place and a number of these new entrants will not survive. Therefore, there will always be a number of product releases that do not break-even for the developer. The actual percentage is going to be really difficult to find, as I doubt many developers would want to admit or discuss this.

  19. Jump Or Fall August 8, 2013 at 12:33 am #

    Only Good Games make money. By good I mean things that puts player in front of the screen days and nights. Some people making money from previous there success by stamping the very same idea multiple times. Not quality, not marketing, not genre absolutely none of this things is not main thing, if player don’t want to play it, than this game can’t make money.

    Make Free to play game, and do it free to win, if players starting to play it, Congratulations your game will bring money.

    Make super polished game, Charge for Copy, Charge for everything player likes. But miss the point were u convincing player to be engage on it. And u fucked🙂.

    Only good games make money. And I am tired of hearing this bullshit.”you know this game actually good, but they had bad marketing campaign”. How many percent game are good and they still fail to making money? Plz someone show me this kind of game🙂

  20. Edward Lerner (@nedlern) September 19, 2013 at 3:28 am #

    I can’t speak for the others, but I’ve seen giant piles of real profitability data. As rough guide 50% make money, 50% lose money (just like everything else). As an industry we average under 10% ROI, just like every other normal industry. However 1% make 90% of the profits, 1% make 50% of the losses, the rest are all pretty marginal. Badly executed games lose money, but no one sets out to make a bad game. Good games sometimes make money, if their goodness is less than their cost (including substantial marketing cost). Great (and huge) games sometime make great amounts of money, but they take a great village, not just a great leader or great game designer.

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