Don’t be alarmed - there’s nothing complicated about this. Any industry can be thought of in what’s commonly called “vertical stages.”
Simply imagine the series of people a product goes through from its creation until it gets bought.
Now, imagine those steps arrayed from the first step with a designer at the top to the consumer at the bottom. Voila, vertical stages.
The game industry has a fairly common structure:
Wait, you’re saying, everything’s online! There’s no manufacturing anymore. That’s not quite true yet, but of course it’s less important and I’ll largely skip it below. Still, despite a ton of technological changes brought about by everything from mobile phones to the Internet, the basic five stages here are still alive and well. You and your firm may not worry about GameStop or WalMart, but I assure you many others still do.
So, let’s walk quickly through these nuts-and-bolts stages, then take a step back and see how they are changing as new technologies disrupt the old patterns.
Production takes place at the development stage in which games are conceived, created and programmed. This stage – the content – remains the industry’s main strength, although the economics of development make less sense for some than they used to.
Games designed for one platform are often recoded at lower costs for another, a process know as ‘porting’ and recently made easier with the rise of Unity as a platform. Development teams used to be mainly independent operations, but were increasingly bought out by major publishers and distributors in the 90s and 2000s. More recently, the economics have altered and allowed a boom of independent developers and the rise of the occasional commercial success, e.g. Minecraft. And like nearly any creative industry, the most successful game designers tend to work and produce better without interference from a larger corporate structure. Some of the savvier publishers purchase the developers but leave them largely untouched operationally. Others ignore this lesson and repeat historical mistakes.
Development occurs in three ways:
‘First party’ developers are those internal to a publishing organization. For example, Nintendo has its own internal development teams. However, the major manufacturer/publishers cannot supply enough titles for console games on their own.
‘Second party’ developers are those who contract for a publisher to create games for the publisher’s label.
Lastly, ‘third party’ developers are unaffiliated outside firms that create games for a platform, sometimes requiring a licensing fee.
Typically, online databases (http://www. gamasutra.com) place about one-half to two-thirds of development as occurring under the ownership of a publisher, though this varies as the economics wax and wane.
The standard revenues for developers are royalties from publishers. Much like the book publishing industry, the creator of the product typically works on advances against future royalties, which are paid out based on pre-established progress milestones. Developers share few of the risks for the title’s success, although many publishers reserve some payments in case of later product returns (Walmart still matters!) and to guarantee against price protection policies enforced by retailers (when the retailer has power, they make the publishers bear some risk on the sales numbers and guarantee success).
Typically, the publisher then acquires the intellectual property (“IP”) rights for the game and advantageous terms for possible sequels or spin-offs. Once released, product lifecycles are highly variable, and the unpredictability of consumer tastes ads more risk. Importantly, the rise in game popularity and their acceptance by major retailers has added to the ‘killer app’ hits-business product cycle. High-turnover shelf-space at Walmart--and a finite amount of screen space in an online storefront--means that a smaller number of titles with higher chances of success will dominate sales.
Publishers are the rights-holders for the games. Once the game is delivered by a developer (internal or external), the publisher is responsible for marketing the product’s launch and the manufacturing process if there is a physical product. The manufacturing process is part of the licensing deal when making console games, and the major three manufacturers maintain strict control.
Publishers who have their own development teams have a strong advantage over those who don’t, and can subsidize their teams. Licensings costs here can also involve sports or movies, e.g. a Harry Potter or Star Wars game usually carries stiff costs or profit-sharing built into it from the rights owners.
Over time, publishing has become what’s known as “concentrated,” which is a fancy way of saying that there are fewer and fewer publishers, which tends to mean less competition--and a tougher life for developers. However, recent disruptions and lowered costs have opened up a number of self-publishing routes or better deals for developers. Still, the big publishers retain a lot of power in the industry.
Look for part-4 of this 5-part series next week.