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Counting the Game Industry’s Gold

posted on February 5th, 2009 by golden jew

Like most industries, the gaming industry is bound by the conventional economic wisdom that you must spend money to make money. Historically, that’s meant taking a loss on every game system sold (with the notable exception being most Nintendo consoles) in order to tap into selling game after game to console owners. This measure of success is known as the “attachment rate” or “tie ratio.” A somewhat (November 2008) dated Gamasutra chart shows that the Xbox was in the lead, with 6.6 games/system sold, followed by the Wii at 5.5 and the PS3 at 5.3.

This statistic has historically been a powerful metric for measuring market penetration and overall success for a console. After all, what’s the point of selling a console if you can’t sell game after game? But as with many things in today’s integrated media world, the lines have blurred and traditional metrics don’t necessarily tell the whole story.

This generation of consoles has produced systems that have significant secondary revenue streams contributing to the bottom lines of developers and console manufacturers alike. All of the big three boast online services that offer (for a price) downloadable content and games. Xbox has an extensive, wide ranging arcade, Wii has Nintendo’s massive library of old-school games, and the Playstation has access to extensive Sony media that Sony has refused to properly monetize. While some downloadable games are simple board games that run $5, others are 10 hour RPGs that sell for $20, such as the Penny Arcade RPG.

We’re also seeing media cross-overs like Netflix coming to the Xbox (the fact that Microsoft pre-empted a company like Sony to capturing a movie revenue stream shows how clannish Sony’s media departments are) or the fact that Rock Band has sold over 30 million paid tracks, a substantial portion of the revenues of which have gone to the distribution services of Xbox, PS3 and now, the Wii. Further complicating the issue is that game prices represented in the attachment rate vary dramatically in this generation of consoles. Xbox and PS3 gouge customers for $60 a game, and Wii game prices range wildly from $30 to $50, depending if you’re buying “Cooking Mama: Express Fast Food Stupid Game” or “Cooking Mama Wolfgang Puck Deluxe Edition.”

The bottom line is that an attachment rate is no longer a fair representation of a console’s success. It does present some of the picture, but at the end of the day, the most important metric is bottom line dollar revenues. Halo 3 may sell millions of copies, but the investment to make a Halo 3 is incredibly deep with an incredibly long development cycle. Rebranding a movie for distribution across Netflix, or recoding Megaman for the Wii may ultimately be equally lucrative, particularly when you’re talking about 1,000 movies or 100 Megamans (megamen?). Now of course, a console is ultimately only as strong as its game base. You need the Fallouts, Halos, and Mario games in order to build a loyal following. But one can easily forsee a world where 20%-40% of revenues are from secondary streams–DLC for games, cross branded media, downloadable games.

What I want to start seeing is a metric called “Monetization after Console Sale” or MACS, because everyone loves acronyms and Steve Jobs is too sick to come after me right now:

Physical Game Sales
DLC for Physical Game Sales
Stand-Alone DLC Sales
Media Sales
Other Sales

The metric would average total top line (that’s revenues, not profits) for each category divided by the number of systems sold. As is done with the attachment rate, it could be separated by first party and third party sales. Since it’s a dollar average, it accounts for the discrepancy in pricing–ultimately, if you charge more successfully, your numbers will show it. It also lets us see who is capturing what markets. Logically, one would think Sony would be dominating media sales, considering they are a media company. In reality, we know that the Microsoft/Netflix relationship is devouring market share that should favor Sony, given Sony’s extensive media portfolio.

Times are a-changing, and both companies and the industry media need to adjust their evaluation metrics accordingly. Console makers are no longer just selling games–they’re selling entertainment and need to be judged accordingly and by 21st century metrics. We are still using an abacus to measure the radiation of quasars.

5 Comments

  1. Spyder Mayhem said on February 6, 2009:

    Excellent post, and I totally agree.

    Sony’s imbred business model will not completely upset me until Blood Bowl is released on almost every system imaginable except the PS3. Then again, I’m not sure how good the replay value would be after I got sick of playing both other owners of the game online over and over again. Same goes for Champions Online, which I’d rather play on my TV than my computer, but I won’t have a choice because of DC Universe Online, which is starting to look ominously like a sequel to ToonTown.

    Lucky for Sony, the statistical analysis of revenue hasn’t yet caught up with reality so that they can get away with crap like this. Hooray…?

  2. pat said on February 9, 2009:

    i reserve the right to comment more on this later if i feel the need, but my immediate thoughts include:

    1. you value tie ratio too highly, i suspect. i think tie ratio has some explanatory power, but is not as useful as a lot of other numbers (such as either of the numbers that make up tie ratio)

    2. for the 3 hardware guys, this information is mostly implicit in their financials. if they are doing well in terms of revenue and income, they are winning this battle.

    3. i would like to see it broken out according to something like the line items you suggest, but there are a few problems with this. the first is that we dont know what kind of licensing arrangements teh console makers have with devs/pubs; how much of each sale goes to each party (if anyone does have info on this i would love to see it). the other is that i dont think the accounting is really there. financials basically report by business segment and may have some geography, but something this fine just doesn’t appear. so even if some publication like edge online or gamasutra wanted to put this together i dont think they could, at least not without working hand in hand with the companies themselves.

    4. this is relevant to software makers as much as console manufacturers, since bethesda participates in fallout 3 dlc, so some variation on this may be even more helpful for the software guys.

    5. i would be willing to bet that after all is said and done, right now, in 2009, the hardware and software guys are still making far more money on the initial sale of a disc than they are with all the rest of this.

  3. GJ said on February 9, 2009:

    Pat, some comments to your comments, naturally.
    1) Which two numbers comprise of the tie ratio? I think it’s a useful metric simply because it gives a scope of how well a console is doing at being a platform. Which is why they’re in this business.
    2) This is true, but the idea is to spot trends before they become an issue. To me, this is becoming particularly important as platforms like the xbox successfully branch out beyond strictly box sales (the PS3 also has the same potential in terms of media, and the Wii has a number of DLC games). If you focus only on one revenue stream when the market is going elsewhere, you’re setting yourself up to fail. Being able to track individually what segments are growing the fastest is critical. Simply knowing that you’re “financially strong” tells you are winning the war– but not which battles you win. Which is a great way to lose a war.
    3. No, we don’t know a lot of this stuff. The point is it would be good for us and the industry if we did. I think if one manufacturer strong across all metrics (Microsoft probably) put out the numbers, they’d throw down the gauntlet to the others to show they are equally viable. If not– why are you hiding data? Because you’re afraid you’ll look bad. And as these are all public companies, that’s meaningful.

    4. Agree.

    5. Agree. But again, it’s not about 2009. It’s about 2012, 2020, etc. If it was only about 2000, Sony would still be cock of the walk.

  4. jay said on February 10, 2009:

    Ultimately publishers shouldn’t care about ratios. The pure end number is all that’s relevant so a system with a tie rate of 2 should be more appealing if there are 100 million of them out there than a system with a tie ratio of 4 that has an install base of 20 million. Meaning the console that moves more games is a more attractive option to publishers.

    Pat and I only disagree on how irrelevant we think tie actually is. I think it’s less relevant. Pure software sales is infinitely more useful to know. Knowing only the tie rate doesn’t necessarily illuminate anything – if it does then the past teaches us that higher is often a sign of a less healthy console.

    I think my position actually strengthens your argument that we need a new metric.

  5. GJ said on February 10, 2009:

    I see your point Jay, but perhaps I’m not fully understanding video game economics, but for non Nintendo systems (and historically, Nintendo systems), you lose money when you sell the platform to make money on the games.

    Therefore you need to sell X worth of games in order to make back your loss and start making money. A tie ratio of 2 might mean you’re not doing that (particularly on say, the PS3 where the console is so expensive because of BLUE LASER DIODES!). A tie ratio of 4 might indicate that you are doing well. This can be read in the financials as Pat would say as well– you’re either making money or you’re not. But I would presume there’s a correlation between tie and financials. And if there isn’t, it just proves my point that we need new metrics anyhow. I WIN NO MATTER WHAT! I AM NINTENDO, YOU ARE PS3!

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