As I mentioned before, this post started life looking at the various big budget game studios which have gone under recently. After reading it over again before posting, I decided to scrap it. While I do see the wave of studio shut-downs as being directly related to the poor profitability of games, that’s just a supposition on my part. And to list the many failing cases would be both depressing and insufficient as an argument anyway. It’s not enough to look at only the failures, you have to look at the successes as well.

And therein lies the problem. There aren’t enough successes. Sure they’re out there. World of Warcraft, Halo, COD4, Red Dead Redemption. But for every Halo there is a Haze, for every World of Warcraft there is an APB. What matters, for the health of the industry in general, is that the averages play out. It’s not enough that a hit brings in $100 million in profit, if for every hit a publisher also ships 6 titles that lose $20 million each. If every title was independent, that would be fine: quality is rewarded with profit, and its lack with loss. Businesses who make poor quality product should be punished, that is all part of a free market system.

But the problem is that the businesses at the core of the current system, the publishers, are shipping titles on both sides of the line. This is what they’ve always done. There’s nothing really wrong with that: it’s extraordinarily hard to predict in advance whether or not a title will be a success, and certainly not before a lot of money has already been sunk into the project.

What made such a system workable was that in the past, the profits on the hit titles were so much larger that they easily paid for the development of the flops. All publishers had to do was to stay on the right side of the line – make sure their hits were big enough and their flops were infrequent enough. So what has changed? Budgets.

Development budgets used to be far, far smaller. The retail price of games has stayed mostly the same, and the number of units sold has risen, not by much, but risen. But the budgets have gone insane. In any other business, the notion of accepting costs an order of magnitude higher, knowing that the incomes wouldn’t jump in the same way, would be madness. Bit by bit, the publishers have slipped to the position where only a few flops in a row is enough to cripple them.

For the games industry to be healthy again, an average game needs to be able to make money. That’s how averages work. If you have to be in the top 10 or 20% of titles just to break even, then there is 80% of the titles being made that are losing money, and those 80% cost almost as much to make as the top titles. And in the end, the funding for that top 20% comes from the same businesses that are funding the bottom 80%.

It’s not entirely the publishers’ fault – the console platform holders gave them a technology platform for which the development costs were far higher, and then took the old platforms away. No-one asked the consumer if they were prepared to pay a higher price for games on those platforms, because we knew they wouldn’t. Instead, the industry held their breath, and sucked up the increased risk and cost, hoping that they would be able to make good enough games to survive. That’s not a healthy business model.

Have you seen any new publishers enter the market recently? There’s a reason for that. Our business isn’t one that people want to get into. If publishers were making good money, for every failure because they shipped consistently poor games, another business would arise with a better focus on quality. That’s not happening – even the most experienced publishers are struggling for air.

It’s not just the publishers either. I know many developers who refuse to consider making anything but top-flight AAA titles, pushing the hardware to the limit. When it is suggested that titles on that scale aren’t profitable, they sneer, and point at the successes, and ignore the failures. They say that if being profitable means making social networking games, or mobile titles, then they don’t even want to be in the industry any more. What sort of an attitude is that? “If I can’t make these shovels out of diamonds, I don’t want to make shovels any more.” Does anyone want a diamond shovel? No. If you’re offering one for the same price as the old wood and steel shovel, then sure. But the old shovel was fine for me, and I don’t have any more money to spend on shovels than I had before.

The pre-owned market is a big indicator of the pain going around the industry at the moment. Consumers think even the current price points are far too high, so when retailers like Gamestop, etc. offer them a re-sale value that gets them the same games for cheaper, they jump at it. Why are the retailers pushing it? Because their margins were getting trimmed to the point where they couldn’t make a decent profit. Why? Because the publishers were also trying to maintain a decent profit level themselves, as risks and increased costs of development slashed their profits to ribbons.

What to do? Fix the budgets. Better efficiency. Get scope under control – no more long games for the sake of it. If one publisher takes the first step, back towards to profitability in their core business, is the consumer really going to abandon them? Will they really not buy a high quality game because it’s shorter than some other publisher’s offering? And if they don’t, what about next year, when that other publisher has gone under, and there’s no “other game” to buy?