Profitability in a market where successes are rare
This week I wanted to share a really great article over on Lost Garden that echoes a lot of things I’ve been saying for a long time. Not just for indies (although it’s especially relevant for them), but for larger companies too. Some standout quotes that I feel are most apt:
Game development is inherently unstable. Technology, markets, profit margins and teams shift regularly. Any of these can quickly destroy a previously comfortable business.
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In the 90s, Sierra expected 1 out of 4 games to be a success and pay for the other products that failed to turn a profit. Recently, Mike Capps, the previous president of Epic, claimed that he couldn’t promise more than a 10% chance a game would be a success. If you made 10 games, on average, you’d expect only 1 would be considered a success.
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Your budget is likely Target Revenue * Success Rate. So if there’s a 10% chance of reaching $500,000, you should spend $50,000 on each project.
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Over time success has been dropping. 25% is almost never seen in modern game markets. […]Given a set of equally competent games, only a fraction will become profitable.
What happens if that profitable game make $600,000? It earned 6X its costs! You made a profit of $500,000, enough to make 5 more games. However, you are still on the long road to bankruptcy, despite an apparent success. There’s only a roughly 40% chance those 5 swings at bat will result in a success. Long term, you’ll find yourself out of money or in debt.
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It is a disservice to other developer to claim that a breakeven project is a financial success. Break even means almost nothing. You are still on the knife’s edge of baseline survival and should operate financially exactly as if you had achieved nothing.
You cannot bank on individual successes being repeated reliably. Games, even those developed by the best of developers, are not reliably successful. Maybe they miss the moment where the audience is really looking for them, maybe they get the quality bar wrong, maybe there are technical constraints that rob the title of what it needs to really work. It doesn’t matter, because unless games development suddenly becomes much more predictable than it is, a business making games has to assume that some if not most of their games will fail. If that business wants to be one which survives, it needs to be profitable across all its games, success or fail.
A team where the developers are taking low wages, putting everything they have into their first game, makes for a great story for the press. Make or break. But it’s terrible business. A team that’s taking their funding and figuring out how many months that will let them operate for, and then planning a game to fit that period, is a team that’s most likely going to fail.  Even if they survive the first game and limp on to make a second, even if through talent and luck and timing they magic up a massive success that not only makes all its costs back but also nets enough to fund their next game several times over, chances are the next game will not match the first’s success, nor the one after that.
This is true even for larger teams. The publishers are the ones who have to look at viability longer term, so often developers can ignore that and just live title-to-title, but the same pitfalls are there. If you’re a developer whose best title only earned back twice what it cost, then you shouldn’t be surprised if the publisher drops your team after the next title that only earns back a quarter of what it cost. They just can’t afford to take the risk that your next title will be a flop rather than a mediocre hit, because you’ll have become a losing bet. You have to deliver the massive breakout hits if you want to make them confident that over time you are a reliable generator of income, and not a drain on their coffers overall.
When we’re looking at whether making games is viable, we need to be looking at long-term profitability of the team, not just per-title. Anything you do to hide the true cost of your development is really just selling yourself short, setting yourself up for a later failure. Don’t lie to yourself about the cost of your time, or the extra hours you’ve put in. Don’t hide the costs of one game in something else. A game that is profitable, as long as you don’t count the months you spent eating just ramen, is not a profitable game. Don’t believe your own hype. It might be hard to accept, but there are no guarantees that the business you love is a profitable one.