Where your $60 goes: Are we overcharged or undercharged for games?

“Games are too expensive!”

“Developers are charging too much for DLC!”

“These microtransactions are going to bleed us dry!”

You can’t get too deep into a conversation of the economics of gaming without hearing something along these lines. However, you just as soon hear counter arguments claiming that AAA game development cannot survive at $60 a game. What’s the answer? Are we being charged too much for games or too little?

To figure that out, first we have to look at where your $60 is going. Luckily we have some decently documented information that tracks everyone’s cut, courtesy of Steven Perlman from the now defunct streaming service, OnLive.

Let’s break down every slice of the pie here.

The Publisher’s cut is how much money a publisher makes every time you buy a game. Pay $60 for Squaresoft’s big new RPG, and they are only seeing $27 of that money.

The Platform Royalty is how much the company that owns the platform the game is played on gets. Buy a Switch game and Nintendo gets $7. Buy a PS4 game and Sony gets $7. Heck, buy a game on Steam and Valve gets $7. Note that all these amounts are estimates, and different platforms could take a larger or smaller royalty cut.

Distribution and cost of goods is how much it costs to actually create a physical copy of the game and get it to a game store. This money goes directly to the companies that manufacture discs, deliver them, and sometimes store them in warehouses.

Returns is essentially a buffer for games that don’t sell. This seven dollars is essentially the expense of selling unsold inventory.

Finally, there is the Retailer Margin. This is how much a game store actually makes when they sell you a game. So Gamestop is only making 15 dollars on your new game purchase.

It’s that 27 dollars that a publisher makes that is the key number here, but to understand whether or not we are being overcharged, we first have to look at how much a game costs to make.

Luckily, Kotaku’s Jason Schreier gave us that info as well. Games, on average, cost $10,000 a month per person on the team. This is just a ballpark figure. Some people will be paid less and some will pay more, and sometimes that amount will go up depending on how well known the studio is, or whether they are located in a particularly expensive place, but in general that’s what you can expect to pay for game development.

Schreier also gave us examples of what mid-sized and high-end game development looks like. A mid-sized game can expect a team of 40 to develop for about two years, costing around $9,600,000 to make. A high-end team is going to employ something around 400 people for three years, costing the studio $144,000,000. His estimates can’t be far off, as Call of Duty: Modern Warfare 2, one of the most notoriously expensive games in existence, cost $200 million dollars to make which would also probably include a marketing budget.

So let’s do some math. Just divide these costs by 27 to figure out how many copies a game needs to sell before it makes back its cost of development. In order to break even, the mid-size game needs to sell approximately 360,000 copies, before it even starts making profit. So when news stories break saying that a new game has sold 400,000 copies in its first week, what those news stories are ACTUALLY saying is, this game has recuperated all its expenses and everything from here on is profit.

It’s even harder for high end development. When you do the math there, you find that a high-end AAA game needs to sell 5,300,000 copies before it breaks even! That’s how many copies a developer needs to sell before it even starts to make profit. This is how Square-Enix can say that Tomb Raider which sold 3.4 million copies, was a failure.

This is also why so many people claim that AAA game development is too expensive and can no longer support itself.

This leaves us with a question, how does a publisher ensure that they make their money back. They could sell games for more money, but that alienates your consumer base. They could try to appeal to more gamers, but even the most mainstream game won’t see enough of a boost in profits to make a difference.

So the next obvious strategy is to cut out the middle man. If a game is sold digitally, then that $4 distribution cost gets lumped back in to the profit that the publisher and retailer makes. Similarly, the $7 for returns doesn’t really exist when a publisher can make pseudo-infinite digital codes. First party games bypass the platform royalty, since they are developed by the same company that owns the platform. This makes them pretty big money makers. However, even in this best case scenario, assuming that the extra $18 is split evenly between retailer and publisher, you are only looking at an extra $9 a game. Then again, you can also buy from a publisher’s store, such as the Nintendo e-shop, Ubisoft’s UPlay, Activision’s Battle.net or EA’s Origin, to give them yet more money.

All of this put together drastically reduces the amount of games that need to be sold in order to break even, but not by much.

Let’s look at Street Fighter V as an example. It has only sold 2.5 million copies, and yet its team is massive, which you can tell via one look at its credits. This game shouldn’t have been able to break even, and it wouldn’t have, if not for DLC.

DLC can be developed with a much smaller team after a game’s release, which reduces the “break even” sales point. Heck, many times DLC is designed and planned during a games main development period. Anyone who buys the DLC is essentially buying a more expensive version of the base game, and this confers more profit to the publisher. The same holds true for special collector’s editions. These editions cost more to make, but in return grant more profit to the publisher.

This brings us back to our original question. Are we being overcharged for games? Well, no. Are we being undercharged? Also no. We are being charged an amount of money that represents a price that consumers are willing to spend and that publishers can continue to make profit on. However, they only manage to make that profit because of all the extra DLC that comes out post launch.

Now I’m not going to say that publishers aren’t greedy. If a publisher can find a way to make more money they will. That’s the nature of business. The question isn’t whether or not a publisher is trying to make money off of consumers. The question is whether or not the publishers are providing a worthwhile product for the price they are charging. In short, is every game worth spending $60 on?

Some games are. Some games provide a complete experience out of the box so their audience doesn’t mind paying for DLC as an extra. Some games aren’t, but the quality of their DLC is so high that the majority of their audience doesn’t mind buying it for the experience it grants. Some games, however, provide very little content for a very high price. Some are even crafted to get players to continually spend money in order to enjoy the game in the first place. Many mobile games follow this formula and last year’s Star Wars Battlefront 2 did the same.

Thinking about the price of games in this way sidesteps the whole questions of whether or not a piece of DLC, a microtranscation, or a special edition is “ethical.” It boils it down to a simple question, are gamers being given a quality product for the money they are spending. That money could be just $60, or it could be more. Regardless, this is where your $60 is going, and its also why “games cost so much.”

What do you think? Are we paying too much for games? Let us know in the comments.