Why making games makes cents
An article I wrote for Areca Capital’s January newsletter on the 26th of December 2013. The focus here is on Digital Games but I think this will be a good lead up to exploring table-top game commercialization as well.
Games are largely misunderstood and are seldom seen as a worthwhile industry to many but this isn’t the case and here’s why. My first statement would be that games are definitely making money. Whether for entertainment, education, training or simulation purposes, games are generating a lot of income. One of the first few games to capitalize on the rise of the mobile gaming industry has been the ever famous Angry Birds by Rovio Entertainment Ltd, a Finnish game developer that launched their game in December 2009 in Apple’s App Store. Angry Birds has since enjoyed nearly 2 billion downloads and has spawned multiple franchises as well as its own merchandise line. At a dollar a download (typical of Apps in the App Store), you get the idea that Rovio’s developers are really happy people indeed.
On the PC games front, we have online games like World of Warcraft (WoW) by the ever popular Blizzard Entertainment. WoW is a massively multiplayer online role-playing game that involves millions of players living in a persistent virtual world. Currently it is still the world’s most-subscribed online game with over seven million subscribers followed only by Eve Online. At its height, WoW boasted over 13 million players worldwide and with a monthly subscription fee of $15, you can imagine how much money Blizzard makes in a year.
A personal favorite, Swedish Indie developers Mojang of Minecraft fame has sold over 33 million copies of their game since its launch in 2009. Their intellectual property has even been licensed to toy-making giants Lego in 2012 and also has its own line of merchandise which includes handbooks, annuals, poster books, magazines, and T-Shirts. Not bad for a small group of developers.
More recently closer to home, Puzzle & Dragons, a mobile puzzle game about collecting digital monsters has been reported to be earning $3.75 million a day! GungHo Online Entertainment, the Japanese studio responsible for Puzzle & Dragons posted a profit of $183 million in the early quarter of 2013. Other successes in the mobile arena would be Supercell’s Clash of Clans that generates $2.4 million per day in the first half of 2013.
The most recent and astounding success story has been the launch of the arguably controversial game Grand Theft Auto V whose sales broke records by earning $800 million in worldwide revenue in the first 24 hours of its release and eventually surpassing $1 billion in sales in the next two days. The game itself took 5 years to develop and industry analysts estimate Take Two’s (the company behind Rockstar Games which developed GTAV) investment in the production of the game at somewhere between $200 million to $265 million.
Hopefully I’ve established that games are great revenue generators but not many developers have successfully decoded what it takes to not only develop but also to market and sell their games. The industry success stories are built upon the numerous bodies of failed endeavors and investors would be wise to be aware of the risks involved. Traversing the business end of games is indeed a tricky and stormy journey at best.
Some games monetize through direct sales, through online distribution portals or retail physical copies. Valve’s Steam and Desura are digital distribution services where gamers can purchase virtual copies of their games which can then be downloaded at their convenience. This is seen to be where the future of most games will be headed with the proliferation of broadband globally. Some games monetize through advertising revenue such as online web game portals like Kongregate or Armor Games where players go through advertisements before allowed access to a host of free-to-play games. The revenue from the advertising is then split between the service provider and the developer.
There are games like previously mentioned World of Warcraft which operate on a subscription basis where players pay a monthly fee to gain full access to the game and its services. While still going strong, this mode of monetization is fast losing popularity with the influx of free-to-play games. Free-to-play games are games which are offered freely without charge but earn revenue off its players purchasing in-game purchases such as cosmetic upgrades or powerups.
Games are also treated as a form of promotion, where companies commission the development of product-specific games to promote their brands or create awareness. More and more advertisers are seeing the interactivity that games provide as more engaging and provides a longer lasting impression for their brands.
These are just the tip of the iceberg and there are many other ways for digital games as a medium to generate income. Having said that, this article isn’t meant to paint a rosy picture about the guarantees or returns that the game industry can provide but it is to make a simple statement that it is an industry worth looking into further as a career or an investment vehicle.
Malaysia is currently an attractive target for many international development studios and companies as we are strategically situated, proficient in English, and our infrastructure has improved vastly. The government has also recognized the potential of developing this sector in its many initiatives to attract foreign direct investments to our shores and also to promote the setting up of our own local development studios to develop homegrown intellectual property. Technology is ever evolving and so is the game development industry, it is this and many other factors that make the development of games a serious and lucrative industry to explore.