The Costs of Video Games

This morning, we talked about the cost of video games. In June, MSN reported that the cost of them may go up. See below for full details:

 

Top video games may soon cost more

More complex code, anti-piracy systems pressure the price tag

By Tom Loftus

June 17 — What price happiness? Today a top new title for your game console debuts at $49.99. But as development costs for some titles continue to climb, change may be in order — either in the price of games, or the kind of games themselves.

YOU COULD BE paying an extra 10 bucks a title by the end of this year, predicted Michael Pachter, an analyst with Wedbush Morgan Securities who has been tracking some of the biggest players in the industry. Other analysts disagree, citing the game industry's general reluctance to change price patterns — in either direction. But while static or cheaper prices for your games may sound great in theory, the reasons behind game pricing may make you think twice.

THE 'LIFE CYCLE' MODELGame title pricing isn't just a matter of costs plus markup. Understanding the pricing game requires understanding how what analysts call the console "life cycle" affects supply and demand.

The "life cycle," as the name suggests, is the time between a console's debut and its eventual replacement by a more powerful gaming system. The life cycle of early consoles such as the 8-bit NES or the 16-bit Sega Genesis was about five years, for example.

The current generation of 128-bit consoles, now in their third year on the market, are entering what industry experts call the second half of its life cycle; the period where price points in both hardware and software trend southward.

"Once we see the price of consoles coming down, we see more mass market usage, then we'll see the price of games coming down." said Hal Halpin, president of the Interactive Entertainment Merchants Association, a retailing group. "It has this domino effect. The more mass market, the broader the base, the faster the recoup cost."

Case in point: More than half of the games sold for Nintendo 64 and Sony PlayStation games occurred after 1998, almost three years after the consoles debuted.

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So far, the life cycle price model appears to be holding for today's consoles. Hardware prices have decreased and, on average, prices for Gamecube, Xbox and PlayStation 2 titles have gone down. Older, greatest hits games are priced at $19.99 and $29.99.

But new triple-A titles remain stuck at $49.99.

BUILDING THE BIGGER BANG

Here's one reason why: If today's consoles are in the second half of the cycle, development costs should be in decline as game developers reach the technical limits of the platform. That's not happening.

"Research and development costs continue to go up," said Richard Ow, a game analyst for the NPD Group.

In 1996 a typical PlayStation game cost less than $1 million to make and sold for $49. Today, development costs for an Xbox or PlayStation 2 game run anywhere from $5 million to $7 million per title and sell for $49.99. And some game titles can cost upwards of $30 million.

Several things are driving development costs up:

First, compared to the last generation of consoles, the current 128-bit generation requires at least 40 times as many lines of code to fully exploit its capabilities. And that costs money.

Shiny president Dave Perry says that the more advanced the console, the larger the development team. He should know: Shiny's "Enter the Matrix" cost more than $20 million to develop.

"To keep pushing the limits, that not only takes more people, but better people," Perry said. "Great development staff are therefore becoming more and more valuable, and as our industry moves to Playstation 3, Xbox 2, etc., then they will be at a new premium," he said.

And then there's the other costs — things like the hour of exclusive video footage shot just for the "Matrix" game. Does the game feature licensed content or characters? That costs the game publisher an additional $1 to $10 per game unit.

The actual manufacture of the game — including printed materials and anti-piracy code installation — is done by the console manufacturer. For this honor, the publisher pays an additional $10 to $11 per unit in royalty and manufacture costs. Then there's marketing — flyers, commercials, tradeshows — third party distribution and a fund to be used as security against returns.

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With so many costs built into production, said Halpin of the game retailing group, a triple-A game price change in favor of higher prices and higher margin or lower prices and higher sales would not be easy.

"Right now it's too much a part of philosophy in way of conducing business," said Halpin. "Especially for public companies. They would need to re-scale their economics."

THE END OF THE $49.99 GAME?

Another reason why the prices of top games haven't gone down, said Ow of NPD, is that customers accept the price point.

"There just doesn't seem to be negative reaction to game prices," said Ow. "Even if one publisher took the chance to lower the price of triple-A game, it could bias the consumer that it's a lesser game."

So why haven't prices for the top titles gone up more than 99 cents since 1996? Pachter, the Webush Morgan analyst, believes that publishers just don't know any better.

"Game publishers don't understand consumers, they understand video games," he said. "Prices never go down. People don't have a problem with prices going up, the publishers do."

One title, "SOCOM: US Navy Seals" already hit the $59.99 price point when it debuted last August. "Sony included a cheap headset, the kind you could find on any Jet Blue flight, and charged $60 and no one complained." said Pachter.

Over the next year, approximately 750 new titles will hit the market. If past sales figures offer any clues, said Pachter, the top 50 to 60 games will rake in 50 percent of the total sales. "Once you see those numbers, it's easy to see that half could command a $60 price point," he said.

The key word is "could." Pachter said he believes that the Xbox version of "Doom III," scheduled for release later this year, may go for $59.99. But he admits that he's the only guy on Wall Street to predict the price jump.

OR NOT?

Developers also pooh-pooh the thought of price increases. Development costs have risen, true. But so have game sales.

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Last year Americans spent $10 billion on game hardware and software. Hundreds of thousands of consumers purchased triple-A titles like "Grand Theft Auto: Vice City," at $49.99 — analogies of second-half life cycle price decreases be damned.

"Can games get more expensive (to develop) and still break even (at current prices)?" asked Jason Rubin, president of the game development company Naughty Dog. "Of course we can. As long as sales keep climbing, you're fine." said Rubin.

And that's what appears to be happening. Rather than boost the prices, many console game publishers have taken the Hollywood approach to increasing revenue: The blockbuster.

Ultimately, a price increase may rest with the customers. If one publisher sells a hot new title for 60 a pop and makes a killing, publishers with similar titles may follow. But if consumers determine that the gameplay can't match the price hike. ... Well, hell hath no fury like a gamer spurned.