Lecture for Level 7 of The Los Angeles Film School's Survey of the Videogame Industry course.

1. Level 7
David Mullich
Survey of the Videogame Industry
The Los Angeles Film School

2. Economic Terms
 Cost: The value of
money used to
produce something
 Revenue: The
income a company
receives from its
business activities
 Profit: When
revenues exceed
costs

3. Man-hour
 Man-hour: The amount of
work an average worker
can perform in one-hour
 Researching and writing
a college paper might
require a student to do 4
man-hours of work
 Preparing a family
banquet from scratch
might require 10 man-
hours

4. Goods and Services
 Good: A product or material that
is sold to satisfy the wants and
needs of a customer
 Service: An intangible item that
satisfies a customer’s wants and
needs
 Market: A system where parties
engage in the exchange of goods
and services
 Value: The worth of a good or
service as determined by the
market

5. Video Game: Product or Service?

6. Capital(ism)
 Capitalism is a
system of creating a
profit by producing a
good or service
 Financial Capital is
“money lying around”

7. Personal Capital
 Your weekly salary
 Taxes
 Expenses
○
○
○
○
 What’s left is Discretionary Income

8. Discretionary Income (DI)
 Revenue – Overhead = DI
 …or Gross Income – taxes – necessities = DI
 What do businesses do with their discretionary income?

9. Financial Capital
 Capitalists want to put their money to use
to make more money
 This is called “Re-Investing”
 Any use of such money involves RISK

10. Risk
 “Nothing ventured, nothing gained.”
 Lottery players > Very great risk of money, no
risk of time
 Stock buyers > Moderate risk of money, small
risk of time
 Entrepreneurs > Great risk of money and time
 Corollary to the Golden Rule:

11. Golden Rule of Risk
 Whoever risks the most gets the greatest reward.
 Which of these two risks the most at the
Springfield nuclear power plant?

12. Labor vs. Owners
 Employees (laborer):
 No risk of income (as long as company stays
in business)
 No share in profits (unless negotiated or
offered)
 Owners (capitalists):
 No guarantee of income unless company
makes a profit
 Lion’s share of profits (less what they’ve
promised to investors)

13. Risk = Stress
 Most released games
don’t make a profit
 Game projects are
frequently cancelled
 Employees are
frequently laid off

14. Why don’t most games make a profit?

15. Sturgeon’s Law
90% of everything is crap

16. Pareto Principle (80/20 Rule)
 For many events, roughly
80% of the effects come
from 20% of the causes
 80% of your sales come
from 20% of your clients
 Only about 10-20% of video
games break even

18. Publisher
A video game publisher is
a company that publishes
video games that it has
either developed
internally or has had
developed by a video
game developer

19. Game Developer (Studio)
Stakeholders
 Studio Head
 Project Lead
 Design Director
 Technical Director
 Art Director
 Business Development Manager (Sales)

20. Game Publisher
Stakeholders
 Product Development
 Legal
 Finance
 Marketing
 Sales
 Customer Service

21. Electronic Arts
G4 Icons Episode #45: Electronic Arts
(21:32)

22. Publisher Functions
 Production
 Marketing
 Market Research
 Advertising
 Packaging
 Manufacturing
 Distribution
 Support
 Technical
 Community Management

23. Most of All – Publishers are the Bank
 Have the most money at risk
 Cost of development
 Cost of marketing
 Cost of inventory

24. Types of Risk
 Things that can go wrong all along the chain:
 Technological risk
 Schedule risk
 Market risk
 Inventory risk
 Distribution risk
 Liability risk
 Result is always the same:
MONEY LOST

25. Portfolio Management
 Diversify by genre
 Diversify by platform
 Diversify by budget
 Hope that your hits cover
your losses

26. The Blockbuster Trap
Companies try to
replicate success
Source: Anita Elberse, “The Creative Industries: Managing Products and Product Portfolios,” HBS No. 409-077 (Boston: Harvard Business School Publishing, 9002), p. 11
because demand
is uncertain, they
imitate “winners”
competitors do the
same, so investment
goes up
greater reliance
on winners
greater desire to
avoid risk and copy
past successes

27. So Why Do So Many AAA Games
Suck?
Source:
http://www.gamasutra.com/view/news/231661/When_big_games_launch_badly
_Breaking_the_vicious_cycle.php

28. Avoiding “Technical Debt”
Source:
http://www.gamasutra.com/view/news/231661/When_big_games_launch_badly
_Breaking_the_vicious_cycle.php
Technical debt is bugs and other technical problems that arise
early on and become worse the longer you put off fixing them.
• Sort out potential technical problems early, before they
become "known shippable" problems.
• Be more aggressive about getting their games in front of lots
of people before launch day
However, developers get the short end of both sticks: death
marches and the blame for low quality. The solution is to
address this culture of unrealistic expectations from publishers.

29. The Greenlight Process
Greenlighting is getting
everyone on your team
to agree “let’s do it!”

30. Development Contracts
 Work-for-Hire
 Flat fee
 No retained rights to developer
 Publishing License Agreement
 Advance against royalties
 Developer may retain certain rights

31. Royalty
 Percentage of every sale
 Up-front money is an “advance” on future
royalties
 Advance must be “earned out” before true
royalties are paid

32. Stupid Developer Trick
 “I’ll cover all my costs with the advance and
wait for profits when the royalties come.”
 MOST GAMES NEVER EARN OUT (make
a profit).

33. Advances
 Never paid in one lump sum
 Too risky
 Bad for cash flow
 Paid out over a series of “milestones”

34. Milestones
 Typically paid against “deliverables”
 Signed Contract
 Documents (GDD, TDD, Schedule)
 First Playable (Will it work? Will it be fun?)
 Alpha (feature complete)
 Beta (asset complete)
 Gold Master (publisher approved to sell)
 Source Code & Assets

35. Milestones
 Production milestones (such as Alpha and
Beta) are typically defined by:
 Features: Degree of completeness
 Assets: Percent final
 Bugs: Number and severity allowable

36. Risk vs. Reward
Video Game Developers vs Publishers: Who
Wins? (12:33)

38. 1950s-60s – Priceless

39. Early 1970s - Rent
Early video game machines were placed
along side pinball machines, pool tables,
foosball and air hockey

40. Late 1970s - Buy

41. Early 2000s - Rent
You “bought” early mobile games, but you
didn’t really own them

42. Free To Play
 Sell premium features or additional levels
 Sell items or services individually
 Sell eyeballs (advertising)
 Blend two or three

43. Conversion Rate
 Percentage of players who spend money
on your game.
(for example:)
 Subscriptions
 Premium features
 Digital goods

44. Online Business Models

45. The Times – They Are A
Changin’
Game Theory with Scott Steinberg -
Episode 1: Reinventing the Video Game
Industry (10:00)

47. We’re Sudden Millionaires
Our rich Uncle Carlos left us $2M (USD)!
 We can save it
 Risk?
 Reward?
 We can invest it
 Risk?
 Reward?
 We can start a business
 Risk?
 Reward?

48. Let’s Make (and Sell) a Game!
 What are we going to make?
 Concept Doc
 Feasibility Study
 Who’s going to buy it?
 Business Case

49. Marketing
 Demand for the Product
 Optimal Market
 Value Proposition
 Create Awareness
 Communication Channels

50. Market
 “Those whose money you want.”
 Who’s buying?
 What are they buying?
 How competitive is the market?
 Are there voids to fill?
 How do we create demand for our product?
 Marketing seeks to answer these questions
through the Business case.

51. Marketing Terms
• Installed base: a measure
of the number of units of a
particular type of system
• Market share: the
percentage of a market
(defined in terms of either
units or revenue) accounted
for by a specific entity
• Metrics: the continuous
iterative exploration of past
business performance

52. Types of Research
 Concept tests
 Competitive research
 Gameplay/usability research
 Advertising research
 Demographic research

53. Demography
“The statistical study of human populations”
 How would we describe this room?
 100% Californian
 100% nerd
 100% ages 17-34

54. Demographics
 Different ways of describing groups
 Age
 Gender
 Geographic distribution
○ States or Regions
○ Urban / Suburban / Rural
 Income
 Ethnicity
 Family size
○ Single/Married
○ # of kids

55. Research
 Inherently flawed
 Sample size
 The Observer Effect
 Asking the wrong questions
 Misinterpreting the results
 Better than
 Anecdotes
 Polling your friends
 Calling your daughter during a meeting

56. Chicken / Egg Question:
 Does the game determine the market?
or
 Does the market determine the game?

57. Considerations
 How does the market impact game design?
 What genres are appropriate?
 What platforms are appropriate?
 How difficult is the game?
 How steep is the learning curve?
 How long does it take to play?
 Is it single-player or social?
 What licenses work?

58. Why to Buy?
 The marketer’s (and the designer’s) job is
to answer that question.
 Answer must be more specific than “it’s
cool!” or “it’s fun!”

59. We Buy to Fill Needs
 Cheetos  hunger
 Mountain Dew  thirst
 Zoo York hoodies  clothing
 Gasoline  transportation
 Anything cool  self esteem
Psychologist Abraham Maslow proposed that we
unconsciously prioritize our needs:

60. Maslow’s Hierarchy of Needs

61. Know Your Market
 Mass
 Core
 Niche

62. Mass Market
 Very large and diverse

63. Core (or “Hardcore”) Market
 Smaller and more homogeneous

64. Niche
 Small but very loyal

65. Marketing Channels
 Magazine/Web Advertisements
 Billboards
 Tradeshows
 Radio/Television Commercials

66. PR ≠ Advertising
Public Relations is publicity that you don’t pay
for.
 Sending out press releases
 Doing interviews and press tours
 Being reviewed
 Writing blogs
 Appearing on podcasts

67. There’s no such thing as bad PR
 Screw-ups double the press
 Piracy is a nice issue
 Linux port? Do it!

68. Create Assets
 Make a deviantArt account for your
concept art
 Post gameplay videos on YouTube
 Publish and spread screenshots

69. Everything A Game Trailer Should Do
 Have sound
 Be shorter than two minutes
 Have a minimum of text
 Leave viewers with an understanding of
how your game plays
 Show what makes your game special

71. Distributor
An organization or set of organizations (go-between) involved in
the process of making a product or service available for use or
consumption by a consumer or business user.

72. Retailer
Retail consists of the sale of physical goods or merchandise from
a fixed location, such as a department store, boutique or kiosk, or
by mail, in small or individual lots for direct consumption by the
purchaser.

73. Retailers
 Major, Game Retailer
 GameStop/EB Games
 Minor, Game Retailer
 Pink Godzilla (Gorilla), Hyper Game, Hastings
 Major, Tech Retailer
 Best Buy, Fry’s Electronics
 Major, Mass Retail
 Wal-Mart, Target, Kmart, CostCo, Amazon

74. Retailer Issues
 Displays
 Pre-orders
 Trade-ins
 Ratings/Appropriateness
 Cross-Regional sales

75. Displays
 Buying Visibility
 “Street Date”
 “Stock Date”

76. SKU
A SKU is a stock-keeping unit, a number
code that represents a unique identifier for
each distinct product and service that can be
purchased.

77. Pre-Orders
 Consumer: Guarantees prompt delivery
 Manufacturer: Allows them to gauge demand
 Retailers: Assured of minimum sales
 Marketing: Used to generate buzz
A pre-order is an order placed for an item
which has not yet been released.

78. Trade-Ins
 Decreases unit sales for publishers (and
developers)
 Significant profit for retailer

80. Downloadable Content (DLC)
 Additional content released through the
internet
 “Live Team”:
 Producers
 Development
 QA
 Community Managers
 Revenue is NOT split with retailers

81. DLC by Genre
 Fighting: Extra characters, costumes
 Shooting: Maps, multiplayer modes,
unbalanced new weapons
 Sports: Release annual full-priced title
instead
 Action-Adventure: New areas, sidequests,
non-standard weapon type
 RPG: Items, weapons, armor, quests

82. DLC by Genre
 Strategy: New scenarios, maps, units
 Racing: Cars, tracks, combat mode
 Party: Minigames
 Music: Songs, famous musician avatars
 Exercise: Routines, yoga poses, mode
where the game just complements your
body

83. Community Managers
 MMOs and other Online games
 Roles:
 Beat Cop
 Cruise Director

84. Beat Cop
 Griefing
 Abuse
 Fraud
 Farming
 Exploits

85. Cruise Director
 Information help
 Problem solving
 Event planning and
management
 Content creation

86. GM Tool
 Master control panel for any account
 Create/delete items/money
 Change character attribute
 Customer service functions
 World control
 Rare spawns
 World events

87. Community Management
Extra Credits: Community Management
(5:17)

89. Indie Development
Extra Credits, Season 6, Episode 21 -
So You Want to be an Indie (6:29)

90. Indie Project Funding Options
 Publishers
 Day Job
 Credit Cards
 Friends, Family & Fools
 Festivals & Contest Prizes
 Angel Investors & Venture Capitalists
 Incubators & Accelerators
 Government Programs

91. Crowdfunding
Extra Credits, Season 4, Episode 10 – Crowdfunding (7:29)

92. Monetizing Indie Games
 Portals – Share of ad revenue
 Kongregate.com
 Newgrounds.com
 Miniclip.com
 Addictinggames.com
 Many, many others!
 iOS, Android – Direct sales
 WiiWare, PSN, XBLA – Direct sales
 Web self-publish – 100% of ad revenue

93. Self-Publish!
 http://www.indiegames.com/
 http://forums.indiegamer.com/

95. Game Trailer Analysis
In this lab, each of you will present your analysis of a game
trailer.
Like this one…
Assassin’s Creed 1 Trailer (1:52)