In my last post, I discussed the problems that digital games face in an increasingly crowded market.
Reading through that prior article, you might think that big companies are ready to take the same dominant role in online games that they hold in the console market. The GameStop acquisition of Kongregate this summer could be a sign that the Large will gobble the Little.
Big companies will, as usual, have major advantages. But I think Indies have far more long-term advantages in the digital world than they have in consoles. At least four big advantages of size for console companies don't necessarily apply to online game publishers:
1. Initial Manufacturing Cost
You never forget signing big checks with lots of zeros in them. When I was a publisher I hated the moment when I had to sign off on the initial manufacturing run of a game.
If you spend $9,000,000 developing a game you do it in stages, with lots of milestones when you can stop spending if something goes off track.
But if you spend $9,000,000 manufacturing just the initial inventory of a game you do it with one swoosh of your pen... and if the game bombs you can't send anything back for a refund.
Digital games don't just have lower development costs than the typical console title. They also don't come with the big bill for manufacturing... a bill that comes before you really know how popular a game will be.
Digital distribution inherently has far less risk than physical distribution, because you spend far less money before you have good information on how much you should be spending. Plus, you never have to credit stores so they can mark down prices, and you never have to take returns.
2. Cost of an Incremental Unit
Manufacturing one more copy of Call of Duty costs Activision $9 or $10, all in.
How much does it cost Popcap to manufacture one more copy of Bejeweled Blitz?
How much for Valve to serve up another PC copy of Left 4 Dead on Steam?
Nada. Nothing. Zero.
How much can a retailer re-sell those games for on the used market, diverting sales without paying Popcap or Valve (or the games' developers) a dime?
Zip. Nil. Nuttin'.
Once Popcap and Valve make the original investment in web hosting and in developing a game, selling one more copy is virtually free. The only question is how much to spend on marketing and future enhancements.
3. No Need for a Catalog to Use in Lieu of Price Protection
Games are sold on consignment by retailers, a leftover rule from our roots in the toy business. When a game doesn't sell, publishers have three choices:
-- Take the product back and return the retailer's money
-- Issue the retailer a credit for "price protection" so they can lower prices
-- Take back the old product, but replace it with a new game
This is one of the advantages of scale for console publishers: they wheel and deal taking back product, swapping for new titles and then re-selling older inventory at lower price points through different channels.
What if you're a smaller console publisher with just one title? No wheeling, no dealing. You either issue a refund for returned goods or issue a credit for price protection. This issue alone has bankrupted small publishers.
How much does this issue cost online publishers? You may have to credit the occasional outraged customer, but there are no seven-figure reserves for returns on your balance sheet.
4. Big Marketing Budgets Only Help Good Games
Larger companies do have advantages in the digital space, just as they do on consoles.
They can cross-promote new titles to fans of their prior games, a key to Zynga's success (as seen in the image on the left).
The revenue from current hits can be used to finance new titles.
They have more money to hire top talent.
They can build better-looking, better-sounding games just by spending more money than smaller competitors.
When they create a great game they can afford to publicize it.
But what if it's not a great game?
All good marketing does for bad games is make them fail faster. Oh, and add to that: it increases the size of the crater and the number of casualties when they crash and burn.
That's why big companies will not dominate the digital space as totally as they've dominated packaged goods, despite their very real advantages.
Digital games have lower budgets and minimal manufacturing costs, so there's less need for a parent with deep pockets.
Digital games don't have inventory discounting and returns risk... because there is no inventory. Less need for a big product catalog to maintain leverage with tough retailers.
A great game with some marketing dollars can outperform a poor game with a big promotional budget. Less need for the cash-intensive promotional blitz.
And that's why, as the headline says, Indie Games Face Different (Big) Challenges than Games at Retail.
Do you disagree? Use the comments box below to share your opinion.
Copyright (c) 2010, Don Daglow. All Rights Reserved.
