Tobold's Blog
Wednesday, September 22, 2010
Estimating profitability

Hagu recently suggested an interesting topic to suggest, the profitability of MMORPGs. He writes:
"Topic suggestion: game profitability and why people quote subscribers. In particular, what do you game insiders/cognoscenti use to estimate profitability. In particular, how many subscribers does it take to support a developer.

Personally, I think a game with 20k subscribers with a nice profit margin is doing better than if SWTOR gets 999k subscribers and loses money.

Specifically, the 350k subscribers quoted for EvE. That is about $60m/year of gross income. Take off direct costs like credit card fees, servers, bandwidth, customer support and you get a much smaller number. I am used to California programmers being considerably above $200k/year in fully burdened ( salary, benefits, overhead ) cost. And there were supposedly >300 people working on the Apocrapha release and a considerable number still.

And if 75% of the WoW players don't make it through the trial, I can only imagine the % at EVE. 350k subscribers staying 6-8 months on average means you need 1-2 thousand new subscribers every day. How many Google ads do you need to put up in order to get enough people to click through, sign up, and survive the daunting EVE new player experience?

I may be overestimating direct costs or overestimating % developers vs lower paid people (SQA, tech pubs) or Iceland is much cheaper. But I can't see how CCP / EVE is doing that well financially on EVE. What do people who know the industry far better than I estimate?"
Well, I don't work in that industry, but I'm afraid there is no easy way to estimate profitability. That starts with released number often being very unprecise, or not telling the whole story. You are quoting over 300 people working on Apocrypha, but what exactly does "working on" mean? If that is 300 game developers, then you'd still need to pay a bunch of other people: Managers, secretaries, accountants, human resources, janitors, and so on. And that is just during the development phase, once the game goes live you need webmasters, community managers, and customer service representatives as well, plus a billing department.

An even bigger problem is that even if you knew the operating cost of a game and its revenue, you still don't know whether the game is actually "profitable" in the eyes of an investor. A game that makes one million dollars profit per year would be very profitable if it had only cost 1 million dollars to produce, but would be unprofitable if it had cost those fabled $100 million in development. Development cost depends a lot not just on the number of developers, but also how many years those developers worked to release a game, as they don't produce any income during that time. A MMORPG can take anything from 2 to 7 years to develop. And that development cost has somehow to be earned back over the years. What counts is not just how much money you make, but what your rate of return is. There is such a thing as "cost of capital", so if a $100 million game makes less profit than what those $100 million cost to borrow, the game is unprofitable.

This is why unprofitable games sometimes get sold: The original investors write off their losses, the game is sold for a song to another company, and as that company doesn't have the development cost to bear, their cost of capital is much lower, and the same number of subscribers can suddenly be profitable.

So in summary I don't think you can easily say "it takes 1,000 subscribers per developer" or any number like that. And I don't have enough specific information about how profitable EVE is, other than the fact that the game is still running and expanding, which suggests to me that is in fact profitable. As I mentioned in another thread, companies react to profit and losses in predictable ways, and it is often easier to deduct profitability from watching what the company does than from some back-of-an-envelope calculation.
After reading Hagu's comment, I looked around for CCP's annual report. Unfortunately, the latest published figures I could find relate to the 2008 operating year. At least back then (that's now almost two years ago, they appeared to have a very healthy balance sheet, a strong income and a return on equity around 25%. Perhaps not spectacular compared to certain other examples but certainly very, very good.
Erm... and I completely agree with what you said at the end, Tobold: actions do speak louder than words. Thanks for another good post, by the way :)
Isnt it easy enough to calculate the number of box units that need to be sold in order to break even on launch day? If 100 million is spent on -just- the developement of a game, does that take into consideration the marketing costs of said game as well? I'd also bring into question the publisher relationship as well, as it tends to be one of the great "secrets" of game developement that often goes unaddressed or talked about when these discussions come up.

I just find it hard to believe that investors are willing to risk capital in such an environment where so many unknowns exist within MMO developement.
I'll add that computer game developers *supposedly* earn significantly less than average (for a programmer).

Game companies use their reputation, and the idea that developing games is cool, to reduce their salary burden.
Tobold, as usual you left out box sales. A game like WAR or AoC that sells 1 million box copies pulls in $50 million, covering all or most of that development budget.

I remind you, again, that both those games paid off their development costs and were profitable in their first year. As a game, you may see them as a failure. But as an investment, they were a success (perhaps not the success they wanted, but everyone got their money back and more).
"Tobold, as usual you left out box sales. A game like WAR or AoC that sells 1 million box copies pulls in $50 million, covering all or most of that development budget."

Yea that's horribly wrong. Out of the initial $50 for a box, the amount of money that actually makes it back to the devs and investors is tiny. Sure selling close to 1m boxes at $50 is nice, yea, but not when you have the costs of AoC/WAR. There is a reason both games cut a huge amount of the staff 6 months after release.

Longevity is king in MMO profitably though. UO is a massive success because it's still going and still has people paying, long long after the initial costs have been paid off. It's now basically 'free money' for EA. That EVE has been around for 7+ years, and is still growing, should tell you all you need to know about the money CCP is making. You don't have 300 people working on a free expansion if you can't easily afford it.
Ha! Do you ever make posts that aren't in direct defense of Darkfall?

I'm not making any statements about quality, only profit. If they had sold 20 million copies, and their subscribers dropped to the 200k they had after 6 months, they still would have cut all that staff.

Let me ask you something, do normal games (not MMORPGs) always lose tons of money? Because those games have zero ongoing revenue, only box sales, and you seem to think the 1 million box sales the most successful of those get means nothing.
I see, you are trolling. One more biscuit for you then before we send you back under the bridge.

Non-MMOs don't cost 50-100m to make, and don't count on having X number of people paying $15 a month for Y years to turn a profit. They also don't have continued costs after launch based on selling Z copies and predicted retention rates.
Non-MMOs don't cost 50-100m to make, and don't count on having X number of people paying $15 a month for Y years to turn a profit. They also don't have continued costs after launch based on selling Z copies and predicted retention rates.

I would assume this was sarcasm, except you know from Darkfall that MMORPGs can cost much less to create, and servers and support can be adjusted for subscriber numbers as low as 30-40k and still turn a profit.

Both WAR and AoC made expansions, odd behavior for games that you think lost so much money.
A lot of people in these sorts of discussions conflate the roles of publishers/investors and the developers themselves. The developer-publisher relationship is a lot like the book author-publisher relationship. In a standard deal for a smaller studio, the publisher pays studios an advance upfront based on a negotiated estimate of what it will cost to develop the game. The publisher will also handle distribution and marketing of the title, not a trivial matter in age of multimillion dollar ad buys for games.

In exchange, ALL net revenue (ie minus distribution, retailer's cut, etc) from the sales of the finished game goes to the publisher until the publisher is made whole. Only after that point will a development studio see any money from the sales of their game and usually at rates of 20% or less (of net revenues).

MMOs are a more nebulous proposition. Who pays for building out the server infrastructure or the initial hiring of a customer support team necessary for a current generation MMO? While those expenses may be assumed by the publisher, the ongoing maintenance and development of the product is not. So, unless the developer has a number of other projects helping fund the continued support of their MMO, it's left in a situation where its continued existence is predicated on breaking even month to month on subscriptions or item sales.

If the numbers don't add up for the developer, the only thing to do is to alter the variable they're in most direct control of: costs. Server merges. Staff cuts. Most developers don't have a long "runway" to burn cash. Regardless of first month sales, if customer retention rates are low the developer has to immediately shed cost or risk going out of business.
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