I know, video games are exceedingly popular. As a society, we spend more hours (3 billion of them) playing video games today than ever before, and that is amid a myriad of distractions and entertainment options from other sources. But console video game sales have declined 19% over the past four years. Call of Duty: Modern Warfare 3 reached $400 million in sales in a single day, 4 times the highest single day gross of a movie. And while people can’t see to get enough gaming time in, video game developers are going bankrupt left and right.
Part of this disconnect is how we define video games in each case. Social games on Facebook, indie titles and other browser-based games count as playing video games. But they don’t count for video game sales. While the population grows, and inflation rises, the market for $60 console games has actually shrunk. A few blockbuster games succeed while the rest of the market suffers.
The common complaint from consumers is that $60 is simply too expensive for a video game. Value is all about perception, but consider for a moment that NES games cost $50 back in 1985, which is over $100 in today’s dollars. Games are relatively cheaper, but we feel that they are more expensive. What has gone up sharply is the cost to develop games.
As I get into numbers for a minute, please bear with me. Box office revenue for movies is well documented. Music sales are documented to an extent, like books. Video game sales (and the economics of the video game industry) are largely kept under wraps. The following figures are educated guesses.
It costs roughly $15 million to develop an entry level AAA title. The average AAA title costs closer to $25 million and some games like Max Payne 3 and GTA IV cost north of $100 million.
Very few console games sell more than 1 million copies. For instance, only 25 titles have ever reached that mark on the PS3.
To recap, we expect far more from a game now while we’re willing to spend far less, and yet consumers constantly complain that games are too expensive. Are you starting to see where the bubble eventually has to burst?
Many seemingly successful (popular but not necessarily profitable) game developers have already gone bankrupt, but the bubble has been prolonged with additional revenue models such as DLC. But some consumers feel alienated by DLC and people have started to rail against it. It may not be a sustainable model in the long-term.
In many ways, the issue comes back to perceived value. In a tighter economy, there is less disposable income to spend. And given the emergence of cheap mobile and social games, a $60 console or PC title is compared (unfairly) to a 99 cent mobile game.
Developers can continue to find new revenue sources to delay what appears inevitable. Valve invented Steam as a distribution platform, and EA is following suit with Origin. But given that consumers feel prices are too expensive today, developers can’t easily raise prices to meet inflation or rising development costs.
We’ve already seen layoffs from Blizzard, EA, iD, Sega, THQ, Silicon Knights, Obsidian, Relic, Vigil, 38 Studios and Slant Six in the past few months. Video game publications are folding. I’m shocked that no one else seems to see the writing on the wall.
That isn’t to say video games will disappear completely, or that the situation can’t be salvaged. There are alternatives, such as episodic games, subscription models, in-game advertising, micro-transactions or simply higher prices. Community generated content (such as Skyrim mods) could replace developer-produced content to lower development costs.
Either way, the traditional model of AAA development and $60 games will have to change at some point. Some of that concession will have to come from consumers as well. They may feel that games are too expensive today, but we may be coming full circle to our arcade roots, faced with a dreaded game over screen, and left with no option but to insert another coin to continue.
Editor’s note: Check back Friday for a very different take on the gaming industry from Allan Schumacher.