What are the cost components that make up the retail price of a typical video game? Put another way, how much does each participant in the video-game development / distribution chain get?
I get this question all the time.
In this presentation to Columbia University students, Steve Perlman, OnLive’s founder, both demos the OnLive system and discusses their business model. At the end of part 3 and the beginning of part 4, Perlman discusses the graphic to the left (click for larger view) which shows the cost breakdown for a typical video game.
As you can see, for a typical console-based video game that costs U.S. $60:
- $15 goes to Retailers: eg: GameStop, Electronic Boutique, Walmart, Amazon
- $7 goes to Returns/PP/MDF: Returns are money paid-out to retailers for product returns. PP stands for “price-protection” which is money paid back through the chain if/when the publisher reduces the video game’s price. MDF stands for ‘Marketing Development Funds” which are paid to retailers for promotions such as TV ads, local flyers, and in-store marketing displays.
- $4 goes to Distribution/COGs: Distribution = shipping and warehousing. COGs = Cost of goods sale. ie: the cost of the physical DVD, manufacturing, the instruction manual and the case.
- $7 Platform Royalty Fee: For every game sold approximately $7 goes to Microsoft, Sony or Nintendo, as applicable, for whatever platform the game plays on – eg: Xbox 360, PS3, Wii.
- $27 goes to the Publisher. Unfortunately this $27 is not further broken down to show how much of the $27 typically goes to independent developers. The amount paid to independant video game developers can be anywhere from 10% to 70% of the amount paid to the publisher – but often only after the publisher has first recouped any advances paid to such third party developers.
The above graphic is used by OnLive to convince publishers to use their system. Interestingly, you can see that they suggest that for every retail game sold, $12 is typically lost to piracy and another $12 is lost from used-games sales. Publishers and developers hate used game sales. Gamers, of course, enjoy them. Whether these lost revenue figures are accurate is debatable. I won’t delve into that debate here.
Perlman then goes on, of course, to point out that all the red and brown square costs go away when publishing through the OnLive System. They can be split by the publisher and OnLive. In other words, more money to the publisher (and hopefully developers), no money to wholesalers and retailers, no piracy and no ‘losses’ due to used game sales.
Whether publishers will consider lowering prices given that their costs are dramatically reduced was not discussed. However, as you can see in my ‘OnLive Video Game System & Business Model Presentation to Columbia University’ post, publishers will be free to price games in any way they choose.
