Many could be forgiven for assuming that the creation of boxed retail videogames is an inherently profitable business.
After all, success stories abound. From the early days of coin-op through to modern so-called AAA titles, each hardware generation has enthralled consumers with a host of immensely clever, highly polished and occasionally revolutionary titles.
Many of these titles gain widespread media attention, whereupon industry and non-industry pundits alike roundly proclaim the latest blockbuster as "the most successful entertainment launch ever", or some derivation thereof, implying in no small measure that the title exists in a vacuum of its own creation, to be forever held aloft as an example of manna from digital heaven.
In recent times, this proclamation has become so predictable, it's actually possible to reliably guess at the next iteration. By late November this year, Call of Duty: Black Ops 2 – a sequel to a spin-off – will feature widely in entertainment and technology headlines the world over, once again taking the annual sales crown. Its success will be short lived however; by April 2013 Grand Theft Auto V will likely catapult the industry towards another ridiculously massive sales record, at which point technology editors the world over will struggle to contain nosebleeds whilst furiously hammering thesauraus.com for different variations on "smashed".
But these titles are by far the exception to the rule. For every boxed game brought to market that dramatically exceeds predicted sales, there are hundreds that fail dismally, many of which bring game publishers to the brink of financial ruin. Sadly for the consumers of boxed games, the current market is woefully ill-equipped to foster any indulgence in creativity, innovation or indeed anything that might look suspiciously like a gamble from a publisher standpoint.
It's really all about the numbers
A cursory glance at the financial state of three top publishers in the business – Activision, Ubisoft and Electronic Arts – reveals an industry that survives almost entirely on the back of a small handful of successful titles each year. And even then, only just.
In its last financial quarter this year, Ubisoft posted a US$47.7m profit. Reason enough, anyone would assume, for Canada's darling developer to release large, pre-inflated balloons from ceilings all over Montreal, particularly as the company posted a US$67m loss in 2011. But when that profit comes from a overall sales of US$1.36bn – in other words, a profit margin of just three and a half percent – the company can hardly be lauded for efforts in eradicating volatility for its shareholders.
To even begin to look like a sure thing on paper, Ubisoft would need to find an additional revenue stream to come on board. Some US$620m in sales last financial year came from music and/or casual titles such as Just Dance, Rocksmith and Howrse; one needs only to look at Activision to see what happens when a massive source of revenue turns into a broken record.
Electronic Arts has fared somewhat better in the last financial year, reporting US$76m in overall profits, bouncing back from a staggering US$276m loss in 2010. Again, what appears on the surface to be a healthy balance sheet ignores the fact that the vast bulk of this profit came from one end-of-the-road title – Mass Effect 3 – launched at the end of the financial year.
But what is even more worrying for the AAA market in general is that Mass Effect 3 itself reportedly cost US$40m to make, and required retail sales of over $200m (or approximately 3.5m copies) to drive the fourth quarter $56m profit figure. That's an awful lot of stock to shift, and an awfully big gamble to take to make a mere $16m on one of the most beloved franchises out there. Coupled with the infamously poor reception afforded to the ending, it's little wonder that developer BioWare – bar film or comic adaptations – has had enough of the whole thing.
Still, at least Electronic Arts can boast a slightly higher 2011 profit margin than Ubisoft; roughly seven percent or so from nearly a billion in sales.
Of course, none of this compares with the behemoth that is Activision-Blizzard. An overhead view reveals profits well into the stratosphere; US$384m for the first quarter in the 2012 financial year alone, on sales of US$1.17bn.
These figures again seem attractive, but they represent a 23 percent slump on sales (down from US$1.44bn) and profit (down from US$503) over the same period last year. The holding company may take solace in an impressive 30 percent profit margin, but the majority of this is gleaned from World of Warcraft subscriptions and fan-driven Call of Duty sales, both of which cannot possibly remain favourable forever.
Activision’s quickly-implemented Call of Duty Elite and Blizzard’s real-money auction house in Diablo 3 speak to companies keenly aware that all forms of revenue must be explored swiftly in order to keep the balance sheet in an agreeable state for Activision-Blizzard’s investors. Diversification too, is an admirable goal; Skylanders is by no means the first child-orientated title for Activision, but it certainly seems to be a profitable one.
Either this approach must be taken, or the company will need to invest heavily in the likes of unpredictable also-ran intellectual property such as Prototype, and nobody (including consumers, it seems) wants that.
Doing what must be done to survive
Those gamers quick to point fingers at the so-called "nickel and diming" found in many downloadable content and subscription models would do well to realise that these practises are not necessarily indicative of companies seeking to potentially wring consumers dry. To needlessly bleed the only method of income supporting an entire company would be a foolish gamble by all accounts, and one hardly likely to sit well with investors.
That a company such as THQ can slip from a US$36 share valuation to under a dollar on the back of two poorly received titles shows that no players in this industry can ever be entirely sheltered from failure.
Worldwide recession aside, facing down the remainder of 2012 without any confirmation as to the launch of a new hardware generation will likely cause revenue streams to dry up unless they're mined repeatedly for safe coin. Not only will new next-gen consoles cost millions to develop, creating new games for them are likely to cost many times more than the existing generation, due to higher polygon counts and additional labour costs necessary to bring the product to market in a timely fashion.
The likes of day-one DLC, incremental avatar updates, value-added services to existing products and all manner of microtransactions are destined – at least for the short term – to provide a much needed and structurally viable method to ensure ongoing profitability to the publishers of boxed titles.
Profitability, as can be seen above, that isn't always particularly glamorous, often vastly misleading and rarely ever reliable.