Recently I was over on The Ancient Gaming Noob blog, where a discussion broke out on all the recent discussions about lootboxes, game development costs, game pricing, microtransactions, and all the rest. In particular, it was prompted by this video:

Despite the title of that video, games are indeed plenty expensive to make, and more specifically, they’re definitely too expensive to make without the revenue brought in by all this upsell stuff.

But the reasons why are complicated, and worth explaining in more detail. So I did, in comments on that blog, and the replies there suggested that I needed to make a blog post of it.

So here it is, basically a fix-up post, and not up to my usual essay standards, being as it is cobbled together from several impromptu comments. Bold text is comments I was asked or replied to.

First off, to address some of the figures in the video: cost of goods is not the same thing as cost of development. I’ll share some figures for that later on, but I think that by and large the public doesn’t really know how much games take to make.

Is it “too expensive”? Well, that’s a value judgement. We could look back at the history of studios that overextended and failed, and notice that it sure seems to be a high-risk business. But restaurants are a high-risk business too.

So question one: How many studios fail because video games are “too expensive to make” versus having a bad business plan or unrealistic expectations? (Or just a bad game?)

There is no question that there are plenty of studios that overspend. And yes, restaurants are extremely high risk businesses. But restaurants mostly compete on fixed costs — ingredients are largely the same for everyone, and barring something weird, their prices change at the rate of inflation. Games, not so much; every year a game that is competitive costs more to make.

I did a talk back in 2005 about this. It’s here: https://www.raphkoster.com/games/presentations/moores-wall-technology-advances-and-online-game-design/ You can find graphs in there of the rise in costs for games. In short, it’s been an exponential curve for a few decades now. In 1995 it was around $2m to make a top-notch, AAA game. In 2000, it was more like $4m. In 2005, it was $12m. In 2010, $40m. In 2015, $120m or more. The biggest games are costing north of a quarter billion dollars to make. These figures, by the way, are already adjusted for inflation, and don’t include marketing money.

In terms of raw data generated — literally, the number of bytes the game takes up — we can easily see that dev teams have to generate many orders of magnitude more bytes than they used to. Voice and artwork have absolutely skyrocketed.

The result: a game like Assassin’s Creed has a staff of 1500 at seven studios in five countries.

Through it all, games mostly have sold for $60. Which used to be the equivalent of $100, because of inflation. Only today, thanks to Steam sales and the like, games actually sell on average for less than full retail.

The key thing to understand is that the public doesn’t buy B games. A game with stellar gameplay and less than state of the art graphics is generally simply left on the shelf. Yes, indie games with distinctive art have managed to break through so everyone will cite counterexamples, but looked at statistically, it’s something like 99.9% don’t. The average game on mobile makes somewhere between $0 and $100 total ever — and the typical game makes nothing. The average sales across all games on Steam is only 32,000 copies — that’s including all the hits that sell tens of millions. Metacritic scores show that you basically have to be up there at 85+ to be viable, and it’s very hard to get that without state of the art tech and visuals.

“Too expensive” isn’t a measure of just cost though, it’s a measure of risk. As costs have risen, we have seen massive consolidation across the industry. There used to be over 20 publishers of AAA games in the 90s. There also used to be dozens of third-party studios. As costs have risen, third parties have either died when they overextended trying to reach the quality bar, or they were absorbed by the larger companies. Publishers overextended by banking on major franchises, and when one didn’t hit, went away.

This cycle tends to reset only when new technology platforms come along that don’t let you do expensive productions because they don’t have the graphics horsepower. Mobile was like that, so was Flash gaming. But as soon as you can overspend on graphics, it becomes mandatory, and then the spiral starts. Early MMOs was like this — Ultima Online cost only a couple of million, Star Wars Galaxies under $20m, Sims Online and WoW north of $80m. Facebook games like Cityville cost more than UO to make! I wrote some about that in my post “An Industry Lifecycle.”

Basically, there isn’t a good business plan. There aren’t any realistic expectations. Any sane business person would say “don’t make games.” You can see this in MMOs now — where just getting 100k people subbing to something ought to make a highly satisfactory viable business… but go look at player reactions to visuals that aren’t at the absolute top end.

This is why service games — which reduce volatility and drive customer lock-in — help. And why free to play — which lowers marketing costs, hugely expands audience, eliminates price sensitivity, and removes spending ceilings — makes a difference. Bigger bets, fewer games, and try to make a service with microtransactions. It’s the only sensible way to play in the market if you have money.

If you don’t have money, the sensible thing to do is to make as many cheap small games as you can and hope one hits big and goes viral, so you have money and can switch to making a service-based game, or just keep making small ones. Just don’t switch to making a single bigger game that isn’t a service, because if it fails to hit, you’re dead. And it takes money to even make the public aware of your game. Marketing costs are huge. These days, $85m for marketing an AAA game isn’t a crazy figure. That would buy you four SWGs.

None of this is helped by the fact that the overall ecosystem has also changed a lot in many ways, which I wrote about in my post “The Financial Future of Game Developers.”

When games are cheaper to make, we get indies and creativity and explosions of awesome in the market. When games are expensive to make, we get predatory business models, sequels, and clones. People are complaining about predatory business models, sequels, and clones — so, games are too expensive. 🙂

There is just a small set of publishers who can make such titles. Why haven’t they raised the box price? Why isn’t the latest Assassin’s Creed title $99? Or $120? Or whatever? Or does the box price not matter so much when you have service revenue?

Why haven’t pubs raised prices? For one, price sensitivity. It was tried a bit, quite a few games launch at $69.99 if you recall. And of course, stuff like collector’s editions exist, which basically is a premium price for a few pack-ins that have relatively low cost of goods.

But simultaneously, publishers came around to the upsell model via free to play and microtransactions. Why cause sticker shock when you can get the money anyway via other means? If anything, expect to see sticker price drop as the pubs tilt more revenue towards the serve end of the equation. On mobile, it’s already the case that you can’t sell a game for $0.99 — literally — you have to give it away. Steam average point of sale price has fallen similarly. Discs are likely hanging on only because retail still matters for consoles. Once it’s all digital, games will mostly be free, and you’ll pay entirely through upsells and maybe subscriptions.

The question is unrelated to costs: “why do game publishers prefer microtransactions over box costs and subscriptions” and the answer is sadly: because players like P2W and many players are easily addicted to gambling.

It’s a bit more complicated than that.

Microtransactions, particularly coupled with free to play, greatly open up the available audience and the revenue potential. Here’s the thought experiment:

Someone has a price sensitivity threshold. Say they are willing to try your game for $24. If the game is $24.99, they will pass it up. If you put it on sale for $23, the price is below their threshold, and they will buy it. This is pretty standard. Lowering entry price makes more people willing to take a flyer on the product.

And the gap between $0 and $0.01 is huge — the effect of zero pricing is massively disproportionate to the price difference, because of loss aversion — we don’t want to give up any money at all, even a penny, on a high risk.

So lowering entry price pushes the audience bigger; we’re talking by a couple of orders of magnitude, potentially. Creating $200 games means that the audience that wants $60 as their price threshold isn’t going to be willing to buy even if they would shell out $200 lifetime on upsells.

But then there is the high end. It is completely, and I mean, completely, normal for people to be willing to shell out $1000 or more a year on their hobbies. They might have a one-time price sensitivity of $50 and still spend that much over a year. Think of a golfer and greens fees. They’d walk away if asked to pay $100 for a tee time, but will plunk down $50 every weekend for a year.

To use a very MMO specific example: on average, each player during the heyday of subscriptions was willing to pay more like $40 a month, not $15. We know this, because that’s how many accounts they tended to each have. (This was distorted by higher folks having dozens of accounts, but that actually reinforces my point).

If you only have point of sale revenue, then you are limited to revenue capped at the price sensitivity threshold: meaning, you multiply the fixed price times the number of people, and that is what you get. But if you offer upsells of some sort, then you can tap into the willingness of hobbyists to spend a large amount over time, even though they may not be willing to do it in large chunks. This means that the game can actually extract the full $1000 that the hobbyist was always willing to pay.

If you only do upsell microtransactions, you get a much higher revenue ceiling on average, and a revenue floor of whatever your entry price is. Your audience is capped at whatever that price point is, though; all those $23 purchasers never give you any money. Once you reach saturation of everyone willing to pay that price, your game will never grow again, unless you lower that price or find whole new markets.

If you add free to play on top of microtransactions, you get the higher revenue ceiling, plus you get the incremental revenue of all the people who are willing to pay less than the old entry price. Then you get around fifty times that many people playing for free, but as long as your cost of operation for those free people is less than what you are earning overall on average, you turn a guaranteed profit. The free people basically act as marketing for your game, as available opponents to keep it lively, etc.

If you only do free to play with no upsells, you lose your shirt, because the cost of operating will be higher than your revenue.

What about the gambling and pay to win?

OK, so far we haven’t talked about the method of microtransaction. You cited two: pay to win and gacha (the original term for loot boxes). Let’s start with the first.

Pretty much every physical sport uses pay to win. You buy a better tennis racket, better sneakers, better racecar, better golf clubs, because you think it will get you an advantage. We just don’t like it in videogames because digital in theory frees us of that unfairness. Though of course, we cheerfully buy Alienware computers and Razer gaming keyboards… ahem. Anyway, pay to win is basically one of those things that people are, shall we say, deeply contextual in their disapproval (though they will deny it until the cows come home). There are lines where it’s excessive, but defining them is hard.

Gacha, is absolutely leveraging people’s inability to predict randomness. And yes, it can easily tilt over into tapping into the same brain flaws gambling does. But we have to be careful there too, because after all games use random loot drops of various sorts all over the place. Any policies, regulations, or laws will have to be careful to draw that line in such a way that they don’t inadvertently ban Diablo or coin-op Tetris — which also features random drops on a small repeated transaction basis, as do most arcade games actually!

Several Asian nations ended up with tight regulations against gacha exploitation, but they were years ahead of the US on it. Nothing in AAA games is anywhere as egregious as Zhengtu Online was, or the stuff that hit Japan five years ago. I’m all for smart regulation here.

Gaming seems to be the only industry in existence that can get away with using the excuse of “games are expensive to make” as they figure out new ways to monetize the consumer beyond a set price point.

Actually, this is happening with all software, not just games. I have to pay a subscription to Photoshop now, I notice. Probably a consequence of Myhrvold’s Law: “Software is a gas, it expands to fill its container.”

The inclusion of multiplayer into titles that could obviously do well as a stand-alone single-player title also boggles the mind if “games are so expensive to make”. I’ve seen reports where the added cost of multiplayer is inexplicably high.

You have this backwards.

First, multiplayer anything is a new game and one that can be 2-3x as expensive to make as single-player anything, if you are doing it at AAA scale (Servers! Bandwidth! Uptimes! Matchmaking!)

Second, single player cannot drive ongoing revenue. Therefore by definition given today’s costs, they cannot “do well” in comparison to titles that can drive ongoing revenue. This is part of why you see less single player stuff getting made. It doesn’t offer a good enough return. Expect this trend to continue, with all single player stuff gradually becoming the “bonus value add” in a multiplayer-first game, getting wrapped in multiplayer trappings, etc.

The term is “opportunity cost.” Given two games that cost $10 to make, one which earns $50 and one that earns $250, which do you choose to make if you only have $10? Making the first one is equivalent to passing up $200.

I told you all that this would happen back in 2006. 🙂

I reiterated it in 2013.

It’s not that I like this world, mind you. But I think that it is important to have context when debating the games business.