Game actors
There are 4 main actors in the game industry. They are:
- Retailers, who sell games to individuals,
- Distributors, who sell games to retailes,
- Publishers, who finance games, and
- Developers, who make games.
So - who does what, who has the game idea, and who gets the money in the end?
The process, from the initial idea to the disk drive
There are two ways to begin the story of a game.
- Either a developer has an idea, and creates a game prototype. Then, it looks for a publisher to finance the game.
- Or, the publisher has a concept, and look for a developer to execute a game based on its guidelines. The frequent illustration of this is licensed games.
It is also possible that the publisher and the developer are the same company. Although there are no monetary flows in this case, the process doesn’t change much.
Once the game deal is signed, the publisher has to look for a distributor, who will commit, well before the release, to buy a certain amount of boxes. For each territory, there can be only one distributor, although it is frequent that, worldwide, a game is distributed by different companies.
The distributor, in turn, will use their sales force to sell the games to retailers: shops, brokers, e-retailers, etc.
Again, a publisher can also be its own distributor (this is often the case of the larger publishers.)
The publisher has to take care of the marketing and communication efforts - ad campaigns, web sites, press relationships, etc. This is quite complex because it requires a global presence. Very few games have visibility without constant efforts in all directions to keep them alive.
Once the game is finished ("beta version"), it has to go through a quality assurance phase, organized by the publisher. If this is a console game, it must also be validated by the console manufacturer, who has its own quality criteria and has the right to block the release of a game. During this QA phase, the developer corrects reported bugs and glitches until the game is finally approved ("gold").
Gold, technically, means that the final "master disc" has been created - that disc will be duplicated in the manufacturing process. For PC games, this phase is straightforward: the publisher chooses a CD/DVD manufacturer, who will burn the discs, print the manuals, the boxes, and package it all. This can be done in small or large series and is very cheap compared to the price of the final game (a couple of dollars). However, the publisher must reserve a slot well in advance, and if they fail to deliver the master disc at a given date, they may have to wait a few weeks, which can be disastrous. For console games, it is the console manufacturer who makes the discs or cartridges. They charge a high price for this (ten or twenty extra dollars, or more), because this is how they get their royalties. Two other issues: small series are not possible, and, if the support is not a true CD or DVD (for instance, GBA cartridges), the manufacturing costs are even higher and there are often delays.
The distributor then handles the logistic and sends the games to the shops, which sell them to individual gamers.
Is it the end of the story? Either the game does well, and the distributors have to order more from the publisher. Over a certain number of boxes sold, the publisher also pays a royalty to the game developer. In that scenario, every one is happy and gets money in the end.
Or the game doesn’t do that well. The distributor manages to get rid of the boxes they pre-purchased, possibly by selling the last ones at a cheaper price, but won’t re-order new units. In that scenario, the retailer and the distributor make money on the game, but the publisher and the developer do not, or barely.
Last possibility: the game is a complete commercial fiasco. The distributor usually has to repurchase unsold stock, and may or may not have the right to return it to the publisher. In that case, every one loses money, from retailer to developer, and worse: business relationships are usually harmed.
Another way to view the story is that the developer usually works on one or very few titles, and is in serious danger if one of the titles fails. The publisher works on more titles from, usually, several developers, so if one of their games makes it really big, it doesn’t matter if the other fails. The distributors work with even more titles, usually from several publishers, and the retailers, who sell all titles, are only affected by the macro-economic trends of the industry.
The videogames industry is very cyclical in nature: on one hand, it is very seasonal as most games are sold in the last quarter or the year. On top of that, it is marked by longer, "generational" cycles, that correspond to the lifespan of one console (5-7 years). Those cycles end when console manufacturers announce their future models. Towards the end of the cycle, gamers tend to buy less games for the older system in prevision of the new, anticipated hardware, and at the beginning of the new cycle, games can’t sell too well because the installed base of new systems is not large enough.
One figure which is not cyclical, however, is the cost it takes to develop games: while early games were often realised by one single polyvalent person in a matter of weeks, for a few thousand dollars, typical development teams now count dozens of highly specialized professionals; game projects take a couple of years and cost millions of dollars (usually 10+). Marketing expenses, once optional, have also gone through the roof and, for the more visible titles, are greater than the development costs.
However, in each season, there are a few extremely successful games which sell millions of copies, which is more than enough to recoup everyone’s investment... Moreover, the "next big thing" hasn’t arrived, yet. In the infancy of videogames, it was possible that one game had such appeal that a sizeable part of the console owners (say one third, half, or more) would buy it. That happened for Pac Man or Space Invaders. Now that major consoles reach an installed base of more than 100 million, imagine what that would represent if such a game was released...