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The games publishing process involves a number of activities:
Games selection
Games at all stages of
development are pitched to publishers and the publisher must assess not only the sales potential of the game but also the competence of the developers and the viability of the project overall. Taking into
account marketing and PR budgets as well as development funding, a publisher can spend 5-10 million pounds on a single title before it is even released so the choice of which projects to take on is, arguably, the
most important but also the most difficult stage. With ever increasing average development costs, this stage has now become a highly structured and formalised process for most major publishers. Long gone are the
days when a development deal can be reached between the head of the developer and the head of third party publishing at the publisher. Even if a game design/prototype is genuinely wanted by a publisher, it will
still typically take between 3-6 months to sign and involve at least one publishing committee. To minimise the development risk, most publishers possess (or have acquired) in-house development resources.
Funding
In most instances, it is the
publisher that funds the development of a game it intends to publish. This normally takes the form of a royalty advance and is paid on a milestone basis. Once a game is released, the developer receives no royalty
payments until the title has recouped the publisher's advance. More information on development funding can be found in the development section.
A more recently practised method
of development funding is through the use of third party finance in the form of completion bonds or dedicated games production funds. Both comprise complex financing structures that allow payment by a publisher for
the development of a title to be deferred until the game is finished with the third party finance covering the development costs up to that point. In the case of completion bonds, a publisher's publishing contract
with a developer is used as security by a bank that provides debt finance to fund the development. Thus, it is the bank that pays the development advance which it recoups (plus interest) from the publisher once the
title's development is completed to the publisher's satisfaction. In the case of the production funds, it is private investors in territories with conducive tax regimes that provides the production capital, again
securing a return once production is complete. The advantages to the publisher are that its
development investment is deferred for up to 2 years, can be done off the balance sheet and is much lower risk (the publisher theoretically does not pay for titles that fail to meet their pre-agreed specification); the advantage to the developer is that it potentially allows them to command a higher royalty (they are essentially delivering a finished product); the advantage to the bank and production fund is that their capital outlay earns interest or some form of profit participation. The banks will more often than not bring in a completion guarantor to whom the completion risk is transferred whilst both will make use of third party industry producers to ensure the development goes to plan. It is a model that has been employed extensively in the film industry and, increasingly, within the games industry.
Producing the Game
Once a game has been
taken on by a publisher, a project manager or "producer" is allocated to that title to ensure that the game progresses according to schedule. Where funding is provided by the publisher, milestones are
usually set which the developers must achieve in order to get the next tranche of funding. Should the developers fail to reach the milestone then the publisher reserves the right to reject the product. Once the game
is approaching completion the publisher arrange for extensive play-testing to ensure that the game is both bug-free and playable. This process can take over two months to complete but most publishers believe the
process to be important enough to stand the costs. In addition to the internal approval process, publishers need to submit video games to the console manufacturers at a number of stages during their development for
external technical and quality-level approval.
Localisation
The publisher must often
also arrange for localisation of the game for the various global territories in which it intends to publish the product although it is not uncommon for the publisher to pay the developer to arrange localisation for
the major territories/languages. Localisation can involve far more than the translation of speech and written text. Whole scenes may need to be altered to cater for certain countries' laws and sensibilities - eg
games are not allowed to feature human (i.e. red) blood in Germany so a popular solution is to turn the red blood green and call the humans "zombies"!
Manufacturing/Distribution
All
publishers are responsible for arranging the manufacturing and distribution of a title and some also maintain distribution departments or companies that handle the physical distribution of the product. Manufacturing
of console games is done by the console manufacturers and their approved manufacturing partners although Sony were ordered in December 1998 by the EC to start allowing publishers to bypass Sony's manufacturing
control. Distribution is discussed in the next section.
Marketing/PR
Creating hype for a
product has become a crucial part of generating a hit and publishers have become increasingly sophisticated in their use of marketing. Marketing budgets can significantly exceed development budgets, particularly for
the larger territories of the US and Japan. The global marketing budget for Eidos' Tomb Raider III, for example, was £10m compared to development costs of less than a fifth of that and a marketing budget that
was half the size for Tomb Raider II. As an indication of typical territorial split, the Tomb Raider III budget was approximately £2m for Germany, £1.7m for the UK, £1m for France, £0.3m for the rest of Europe, £4m for USA and £1m for Japan and the rest of the world.
Marketing budgets tend to be calculated based on the expected revenues from sales of the product over the life of the marketing push. These tend to range from 10%-20% of gross receipts although most of the
larger publishers currently average around 10%-14%. A typical marketing push for a title in the UK will range from £100,000 to £500,000 depending on the title and the media targeted (TV, for example, tends to add a
minimum of £150,000 to the marketing budget).
The Publishing Business Model - Higher risk/reward
Games Publishing represents a much higher risk business
model than development. In addition to taking risks in funding games development by third party developers (in the form of non-refundable advances on royalties) and committing large sums to marketing, publishers
have, in the past, had to take inventory risks in trying to anticipate demand for a title. In 1994/5 the market took a an unexpectedly sharp downturn that left a number of US publishers with large quantities of
unsellable stock. The subsequent write-offs, not only of stock but also of products in development for the platforms that had experienced the downturn took their toll and all the larger games publishers posted
significant losses. Although this particular situation was exacerbated by the use of cartridge technology as the standard games delivery media (which could cost 3-4 times as much as a console CD/DVD-ROM) and is very
unlikely to happen again, overestimating demand for a console game can prove costly. Whilst a PC DVD/CD-ROM game can cost around £0.50-£1.50 to manufacture, full-price console games cost up to around £7.00 (Sony and
Microsoft handle all software manufacturing for their consoles and include a royalty in the manufacturing price). When Acclaim stuffed the (retail) channel with Turok3 SKUs in 2002 just prior to its financial
year-end in order to book the shipments as sales, it ended up having to post damaging exceptional losses in the next financial period when the product failed to sell and which contributed to its later demise. All of
the current generation of video games consoles use optical storage-based media (CD/DVD-ROM, BD-DVD or derivatives thereof) although Nintendo (whose N64 console was the last to make use of cartridge technology) have
stuck with ROM cartridges as the media for its Game Boy Advance and DS handheld platforms.
For games that are successful, the business case becomes
considerably more attractive. Assuming a premium quality console title is sold into retail at around £20/unit, around £7 is spent on manufacturing and distribution (including the console manufacturer's
royalty), leaving the publisher with net receipts of around £13. For a PC title, the retail sell-in price is lower but the company has lower manufacturing costs (approximately £1.50/unit as there are no
manufacturer's royalty charges). Publishers' net receipts from PC titles are therefore only marginally higher per unit than those for console titles. Where development funding has been provided and a royalty (a % of
net receipts) is to be paid out, the full wholesale revenue is received by the publisher until the advance has been recouped. Of course, the speed with which the publisher recoups the advance is dependent not only
on sales but also the royalty level agreed with the developer; the higher the royalty the quicker the advance will be recouped. The process is also made more complicated by
multi-tier and cross-collateralised royalty deals (see the development process).
This simple profit model for a PC game developed internally, shown below, demonstrates the potential:
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