The cost of developing a game has increased exponentially over the past few years. The first game I worked, ‘The Punisher,’ had a development budget of six million dollars. I would say that’s in the middle range of development cost during that time.

Nowadays, just marketing a high profile game will cost that much, with twenty million dollars being a reasonable estimate for the development cost of a competitive console title.

Many developers have remarked on this huge increase and thinks it is bad for the industry, however I believe that big budget titles plays right into the hands of large publishers.

The free market is great because it allows for competition, but for a company, competition is bad for the bottom line. There is a reason why we have laws against abuse of monopoly and collusion between companies.

For publishers, higher cost of development means a higher barrier for entry and less competition. As long as high budget games make a profile, it makes sense to drive up the cost of development.

Consider the economics of GTA IV. Let’s assume the cost to develop the game is $100 million, which is vastly over-estimating the real cost. The game has already sold over 6 million copies. So if the publisher just receives $14 per copy out of the $60 that consumers paid, they’ve made a profit.

Publishers can get $20-$30 out of that $60, after the retailers and Microsoft/Sony takes their cut, so GTA IV was definitely a good investment.

Now if GTA IV can be developed for only $1 million, wouldn’t that be even better for the publisher? Actually no.

First, if the potential upside of making a high game is that high, there would be thousands of new development houses started in the hopes of making it big. It isn’t that hard to get a couple of million dollars from family and friends. It almost doesn’t matter if those developers make good games or not, as even the bad games will make people less likely to buy.

This not only means more competition for GTA, but also reduces the power of publishers as a whole, since if a huge hit can be self funded, why give most of the profits to publishers?

Secondly, if the publishers have $100 million to invest, they would need to fund 100 different games if the development costs were only $1 million. This would be very difficulty to manage all those projects and to get marketing behind them. This is similar to how VC will only fund large amounts to companies that have a huge upside. This is also the reason why VC are getting more interested in the games industry, we are playing near their ballpark now.

As it is now, the huge budgets means that only the established publishers can make any money. Developers also have less leverage against publishers, since developers won’t have the resources to create the game on their own and there are only a few publishers that the developer can go to.

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