Analyst Claims Only Four Percent Of Games Earn Money - UPDATED

Analyst Claims Only Four Percent Of Games Earn Money - UPDATED

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Geoffrey Zatkin, president of research company Electronic Entertainment Design and Research, claims that only four percent of all videogames that are released for sale actually make a profit.

Zatkin made the statement in a recent interview with Forbes, discussing how EEDAR uses "historical and competitive data sets" to project game sales as well as how publishers can employ various aspects of design, marketing and release strategies to maximize a game's profit. Since being founded in 2006, EEDAR has provided a wide range of game design metrics and other information to major publishers including Electronic Arts, Activision and Ubisoft.

"Every game I have ever worked on, we've gone in blind as to which features would sell the game better," Zatkin said, adding that the idea of sinking an extra $500,000 into a game to include features like multiplayer that may or may not increase a game's profitability "would scare the crap out of me." The reason, apparently, is the gross imbalance between the amount of money spent on finalizing a game's design and the amount of games that actually earn that money back: According to the article, 60 percent of a game's budget is spent on "reworking or redesigning" it, yet only four percent of games that get a retail release actually earn a profit.

Four percent? Seriously? I'm no expert and I'm certainly not looking to start an argument with someone who is, but there's no way that can be right; it's either a typo, a gross miscommunication between Zatkin and the interviewer or EEDAR is the worst research and analysis firm on the face of the Earth. Anyone in any business, videogames or otherwise, would have to be absolutely out of their mind to invest in a project with only a four percent chance of earning a profit. That's like playing Russian roulette with a fully-loaded revolver and hoping one of the rounds is a dud.

The rest of the interview is interesting, if a bit depressing; Zatkin appears to believe that videogame profits can be maximized by way of homogenized, analyst-based design in which every aspect of a game's creation can be broken down and examined based primarily on how it will most likely affect a title's sales and profit potential. It's sad, but he may be right: EA Sports doesn't keep tapping the Madden NFL keg for its vast expanse of unexplored artistic potential. But the idea that only four percent of released games earn a profit is a tough one to swallow.

Are game publishers really that crazy? Or is there some other factor at work that we're just not seeing?

UPDATE: EEDAR has contacted us with a clarification of the Forbes interview with Zatkin, and as predicted, the "four percent" figure is the result of a misquote.

The confusion results from the fact that while the number quoted referred to games that reach store shelves, the figure given by Zatkin was actually based on games that just enter production. "Only 20% of games that begin production will ever finish," the statement said. "Of those 20 percent that are finished and released to the market, only 20 percent of them will ever realize a significant profit (Source: Secrets of the Game Business Francois Dominic Laramee). That equals four percent of games that start production return a significant profit."

Of course, you might wonder what "significant profit" is. We did too. So we asked.

An EEDAR representative said that as the use of the term implies, there's no hard-and-fast number for what represents a "significant" return on a game. If Halo 3, as an example, earned a million dollars in profit it would likely be considered a dismal failure; for a small casual gaming startup, on the other hand, it would be a major success. Like every other aspect of game design examined by EEDAR, what constitutes an acceptable profit is determined on a case-by-case basis based on numerous factors.

So while you may or may not be a fan of "game design by analytical committee," at this it makes a little more sense this way.

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Four percent can't be right, surely the games industry would have collapsed if this was the case.

That can't be right...

Maybe 4% only make major profits, but I would think most games make a bit of profit.

1 out of every 25 games turns a profit? No way. A lot (more) companies would have disappeared if that were the case.

You know though - If he's counting all the crap that's shoveled out every year from companies that only produce one or two crap titles (i.e. Dirty Dancing the Game OMG OMG!), it just might be correct.

If that was so, then all of the crap games they make for the Wii and DS have REALLY brought the market down. But SOMEONE will eventually buy Dogz 5: Letz Take A Walk (although they're either outta their mind or 6 years old).
So at the same time, this figure seems both plausible and absolutely impossible. I blame EA for this conundrum.

Edge asked for confirmation and they said that 20% of games in development make it to the market and 20% of them make any money.

I don't know what this means for people who invest in game development. If investors say that a gold miner is a liar standing next to a hole in the ground then I wonder what they think of people asking for money for the next WoW killer.

4% seems out of place. I wouldn't go as far as to say every game makes a profit, but 4% is just too low.

How can the Game Industry's revenue surpass the Film Industry with such a slim chance of success? It doesn't add up. Especially when you have all shapes and sizes of games for varied markets, ranging from casual to hardcore.

Moreover, the purpose of a (capitalist) business is profiting, so why bother starting one in the Game Industry if you have a (let's say) 96% chance of going bankrupt?

You're better off selling toilet paper, at least you'll know that you'll never run out of customers.

There would be NO games made if the odds were that low. He must be counting the games that never actually get developed and put onto the market, games that don't really get any serious money spent on them. Hell, he might even be counting games that never get past the initial pitch, to get a figure like that. To be honest, I kinda doubt the 20% figure the poster above me mentions, that seems kind of low also. But at least it's plausible, if only barely.

Didn't industry analysts predict the iPod would never take off?

Game companies can stay afloat by breaking even. I'm not sure what their definition of "making profit" is, but there has to be some buffer between breaking even and making profit. If the threshold to making profit is a surplus of about 1000$ per year per employee, I can see how those 4% might come about.

So companies can stay afloat by not "making profit". It just means that the manager may not be able to afford a new yacht every five years.

More Fun To Compute:
Edge asked for confirmation and they said that 20% of games in development make it to the market and 20% of them make any money.

That would make more sense as a figure; a lot of games start development but never get finished... many aren't even announced to the public, they just get to an early stage of work and die out before reaching the spotlight. I don't know if the "died at concept" stage is really 80%, though, unless you count brainstorming stuff that gets a summary review and then dies when pitched to a producer; the investment in those is pretty low, if I understand things correctly, in comparison to a completed A-list game.

I defintely could see games sharing the book industry's "hit" curse, wherein a small minority of hits (20%?) make tons of money while the majority (80%) of titles either break even or never earn out their costs.

-- Steve

(the 4% has already been explained as miscommunication on Edge http://www.edge-online.com/news/analyst-clarifies-%E2%80%9C4%E2%80%9D-report)

As for analyst-based design, that's already how it's done, no? Also, the vast majority of games out there mainly aim to hit a particular genre and style, and sell accordingly. It's a bit like action movies, or comedies, or rom coms, or any film genre. 80% of it is generic stuff that nonetheless hits the spot. Nothing wrong with that.

Hooray for misquotes.

So truly, only 20% of all released games earn profit. Well, maybe that's a sign that we need better games, not more games. I see dozens of games on the shelf that I wouldn't even play if I got them for free, which shows the sad state of the industry.

Bit more of an update available, including the clarification from EEDAR as well as an explanation of the clarification. Good times.

Of those 20 percent that are finished and released to the market, only 20 percent of them will ever realize a significant profit (Source: Secrets of the Game Business Francois Dominic Laramee). That equals 4 percent of games that start production return a significant profit.

I guess this really depends on the definition of "significant" and what percentage turn any profit at all. Those numbers are not given, and there a very big distinction between something that's a break-even or modest success compared to a total wash.

Also not known is the relative losses on the canceled or non-hit games when compared to the profits of the big winners. Except the end result is obviously that the major publishers are making money, so the profits must more than make up for the losses.

A more interesting analysis would compare the success rate (and resulting profit margins) to the film and music industries.

As I recall Age of Empires was effectively concieved by a committee saying "what are the best aspects of rts' & what can we do to make that = $$$" So the idea in itself isnt all that unusual or bad. However, judging from the tone of how its said I get the feeling the guy meant games in future will be concieved in the publishers office, then they will tell a developer what to do

 

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