Platform and Developer Economics

If we go back to the fact that, typically, most of the margin or profit pool has been taken by the content owner; the owner of the intellectual property. Fast forward five to seven years, where there are a lot of free-to-play games, lots of different games serving the long tail, more releases, who’s going to capture that profit pool?

It’s worth bearing in mind that the profit structure of a platform is quite different from the profit structure of a content creator. Effectively, as a platform, if you’re Apple or you’re PlayStation or Xbox or Steam, you may profit on a game, irrespective of whether the game is profitable. This is when you are selling a third-party game. From day one, you’re making your 25% to 30% on the title. You’re making on everything. So if you’re selling a billion dollars of games, you know you’re going to make your $200 million, $300 million contribution. That’s not the case as a game developer. As a game developer, you have a totally different risk profile. Your business model, whether you have some kind of external funding or not, means you don’t make any profit until you have recouped and covered your entire development costs. Bearing in mind that development cost now, doesn’t stop on the day you launch the game; it carries on.

You’re having to recoup your sunk cost and then fund your ongoing development, to keep the game as a service going. It can be a long time and a lot of consumers, before you get to break even. There are some useful things, tools and technologies, that mitigate that. But it means you are in a different position. As a result, I think it’s quite right and necessary that the bulk of revenue goes into this content creation, because you’re only making money when you are successful.

How do you look at the change in the game developer economics?

Fortunately, whilst game developers, going back in history, have always been on a sticky wicket, to some extent, there are a lot of benefits and changes, over the last years, which have been empowering for the game development community. One of them is the advances that have been made in the tools and middleware side of the business and the ability to, effectively, out of the box, license in the technology you need, in order to create a game, without having an army of coders doing stuff for you. That’s helped game economics and game development and liberated it, I think.

The other side is that your sources of funding and the ability to raise capital have dramatically changed. When I started in the industry, 27 years ago, there were very few sources of funding for a developer. You might be lucky and you might have a rich uncle; there wasn’t as much of an angel community. What you would actually do is, you would go to a publisher – and admittedly, there were a lot more publishers – and ask them to fund it. If they funded it, it would be a bit like the record industry. You’d take the money and then you’d wait a long time to get any more out of it. That was your only route. You were reliant on publisher decisions and publishers make decisions about their creative investments in a very different way from developers.

By and large, developers will create things because they think they are creating something wonderful and exciting. Publishers will invest in things because they think they’re going to have a low risk return on investment. That, in itself, was a constraint. What’s happened, since then, is that the sources of funding for a developer have got a lot greater. They have been able to go to platforms, for the last while. Nintendo really didn’t commission anything much. They had Rare and a few places they went to, but it was mostly their own stuff. Xbox and PlayStation commissioned a lot of content. After that, there was the ability to create and sell games for the subscription services, such as Plus and Xbox Live. I think, most importantly, in recent times, has been the advances in angel and venture capital investments and the fact that games, which was kind of an unattractive area in the early days, is now very attractive and a very well-understood area in those communities.