A while back, i decided to try and look and the Game Room service (no, i am not obsessed) from more of a business analyst position. This originally was a series of posts on an unnamed forum. i will try to piece it here a little more coherently. Some of the data used is dated (maybe August). Here is what i came up with....
So, i was looking at all of these doom and gloom Game Room posts. In this thread i would like to take a look at Game Room the business. Basically how i think things work (i'm most likely 98% wrong). You know stuff like how much licensing should cost and how much they should offer specific partners to join. You will see why i do not have a Twitter account. i haven't played around with business analysis for a long time. This is shaping up to be a four post arc (i'll try to keep them a little more readable than i usually do).
Ok, so why should a company sign on for Game Room when they could release a compilation disc?
Let's take a look at Namco, shall we (specifically Namco Virtual Museum). According to vgchartz.com (i know not the definitive answer), Namco's Virtual Museum has sold about 190,000 copies worldwide. This is probably a bad example as it includes 9 XBLA games (two of which were 800 pts). The XBLA games were really the sales point here. If the games were sold for $30, that is a respectable 5.7 million in sales. Now you get into the fun stuff like platform holder fees, certification, the retail and wholesale cuts, and more. There was an article on Kotaku that showed the anatomy of a $60 game (http://kotaku.com/5479698/what-your-60-really-buys). So essentially with a $60 game 45% ($27 goes to the publisher). i don't know the price history on Namco Virtual Museum so i can't definitively say anything about that. If you assume a $35.00 price point on all copies (highly doubtful) then the publisher gets about $15.75 per copy of the game sold. The real number is probably closer to the $10 mark per game area.
Let's split the difference and say it is $13 to the publisher for every compilation title sold. The compilation is going to likely sell more, but what has the better profit percentage? So, $13 for a disc containing 31 (actually 34 games), Namco is maybe getting $.42 per game on the disc. If Namco could get $1 per game sold on Game Room (licensing is the next post), that would be a gain of $.48 per game. On a per-unit basis it makes sense to at least try Game Room (and other downloadable distribution systems), keeping in mind the scale is much smaller. The usable stuff on Namco Virtual Museum would probably sell more than 75,000 individual games on Game Room.
So why forsake the "big money" for Game Room. The answer is you don't have to. Companies could still release a compilation if they wanted to (Game Room is not completely direct competition). It appears that traditional compilations have been replaced by "remix" versions, as compilations struggle to sell many copies anymore. Game Room is probably the best chance a company has at cashing in on retro properties on the Xbox platform (with XBLA drying up except for "remix"/remakes). Companies wouldn't want to have non-productive assets on their hands would they? Game Room may not net the million dollar returns for the rights-holders, but 6 figures is virtually guaranteed (at least for arcade games, and might be contractually guaranteed).
So, Namco, Taito, Midway and Capcom try Game Room out as a distribution platform (try 25 games each and see how you do). That sounded entirely too much like an add, oh well.
Let's take a look at Namco, shall we (specifically Namco Virtual Museum). According to vgchartz.com (i know not the definitive answer), Namco's Virtual Museum has sold about 190,000 copies worldwide. This is probably a bad example as it includes 9 XBLA games (two of which were 800 pts). The XBLA games were really the sales point here. If the games were sold for $30, that is a respectable 5.7 million in sales. Now you get into the fun stuff like platform holder fees, certification, the retail and wholesale cuts, and more. There was an article on Kotaku that showed the anatomy of a $60 game (http://kotaku.com/5479698/what-your-60-really-buys). So essentially with a $60 game 45% ($27 goes to the publisher). i don't know the price history on Namco Virtual Museum so i can't definitively say anything about that. If you assume a $35.00 price point on all copies (highly doubtful) then the publisher gets about $15.75 per copy of the game sold. The real number is probably closer to the $10 mark per game area.
Let's split the difference and say it is $13 to the publisher for every compilation title sold. The compilation is going to likely sell more, but what has the better profit percentage? So, $13 for a disc containing 31 (actually 34 games), Namco is maybe getting $.42 per game on the disc. If Namco could get $1 per game sold on Game Room (licensing is the next post), that would be a gain of $.48 per game. On a per-unit basis it makes sense to at least try Game Room (and other downloadable distribution systems), keeping in mind the scale is much smaller. The usable stuff on Namco Virtual Museum would probably sell more than 75,000 individual games on Game Room.
So why forsake the "big money" for Game Room. The answer is you don't have to. Companies could still release a compilation if they wanted to (Game Room is not completely direct competition). It appears that traditional compilations have been replaced by "remix" versions, as compilations struggle to sell many copies anymore. Game Room is probably the best chance a company has at cashing in on retro properties on the Xbox platform (with XBLA drying up except for "remix"/remakes). Companies wouldn't want to have non-productive assets on their hands would they? Game Room may not net the million dollar returns for the rights-holders, but 6 figures is virtually guaranteed (at least for arcade games, and might be contractually guaranteed).
So, Namco, Taito, Midway and Capcom try Game Room out as a distribution platform (try 25 games each and see how you do). That sounded entirely too much like an add, oh well.
In finance there is something called the "pure play" method (at least i think there was). This is where you use the cashflows of a similar endeavor as a way to project future cash flow streams of another project. There is a potential problem in that companies used XBLA as a proxy for Game Room sales. That makes a certain amount of sense if you tweak it somehow - maybe saying 25% of the revenue on XBLA classics (when they still had them) is about equal to the high range estimate on a Game Room title. When i first heard of Game Room, i was thinking that maybe it would get sales about 5,000 on the high end. Of course, it turns out i may have underestimated that. That being said, what do i consider a normal arcade sales amount - 1,000 in the first couple months (and eventually 2,000-2,500 in the long term). Atari games i would put in the 300-600 short-term (and 1,000 long term for the average game - sports games not included).
Licensing?:
With all that stuff mentioned, it is time to tackle the idea of licensing as it relates to Game Room. i should mention that there is one pretty significant wild card here: Play Anywhere. If you included the Play Anywhere option, these games are the exact same price of the earlier XBLA retro releases. MSFT will surely make a push on this in the future.
Scenario One: Money Per Game Sold:
Scenario One: Money Per Game Sold:
So how does Game Room license games? The answer is that i don't know. There have been several likely models brought up - such as one price or the $1.00 per game method. Let me say that i do not believe the $1.00 per game for a minute. Companies like cash flows (at least positive ones) with limited variability/consistency. That is why you have stuff like a discount rate in capital budgeting. In order to be more predictable, they may not be fans (thought there is always a combo possibility - guaranteed money + a royalty percentage). i think that the most likely option of all is a flat rate for licensing all of a particular type of game. There is also a possibility of licensing certain games at a higher rate, but this just complicates things. You could justify a higher rate on arcade games as opposed to Atari games.
Let's look at the $1.00 per game sold idea for a minute... This is assuming that all three parties receive the same amount (the straight-line method). i find this to be unrealistic. For one, you essentially have Krome working on a contract. This contract was likely stipulated as a set amount of payments at pre-defined intervals (like maybe yearly, monthly, etc). That cost can essentially be written off as a time zero expenditure. The way i see it is as closer to a 60/40 split between MSFT and the publishers (or a 60/30/10). i went through the fee per game angle at several different levels. Keep in mind that my (bad) estimates show unit sales of 208,621 (which may actually be low). Instead of using an interval i used an approximate point estimate for unit sales. At $1 per game MSFT would be making in excess of $400,000. With those estimates a $.25 increase in the "royalty" rate redistributes $52,155 to the publishers. At $1.50 that amount would be $312,932 (or a little over $3,000 a game to MSFT). At $2.50 MSFT would only be getting about $1,000 per game. MSFT does have some leeway if they pay their licensing that way (thought it is highly influenced by abnormally strong early sales). At $1.50, i suspect MSFT would be making only 15-25K per game pack for the more recent ones.
i want Game Room's content to "turn over" every 4-6 months. What does that mean? Basically, it means new games and (hopefully) new partners. Even if someone like Taito signed on, they should not just go and release everything all at once. Sign them up for 25-30 games and then rotate partners as necessary. The novelty of a changing Game Room will be helped out by switching partners to make it seem fresher. Furthermore, there should be a two month supply of finished games in the pipeline at all times.
* Licensing: speaking of Taito, Namco, Midway and Konami ... Offer them $3,000 - $5,000 per arcade game. License 25-30 games from each publisher during a cycle. Also use a "release by" clause in the contracts where all titles will be released by a certain end date (unless "catastrophic" circumstances occur). The licensing fees paid out should be about 30-45% of Game Room receipts (though sales can beat estimates). Use the estimate that arcade games will sell about 2,000-2,500 units over the long run and Atari 2600 games will be closer to the 1,000 mark (with exceptions). Going forward, use tiered licensing structure with Atari 2600 licensed games going at $1,000-1,500 per licensed game. If SEGA comes on in the future with the Master System and/or Genesis, set the rate at $1,500 - 2,000 per game. Or you can license how you want to - just bring some new blood on.
* Store: eventually Game Room is going to start using the store for more than games and mascots. i think of something along the lines of paid themes, floors, props, etc. In order to get more content, Krome/MSFT are going to need to monetize areas in Game Room they haven't yet (or aren't in Game Room yet).
* Add-ons: try for one add-on every 6-9 months. This could be things like usable arcades, theme packs, publisher game packs, improvements and expansions to the service.
* Allow for off-pack games: this probably will not come into play. What i am saying here is to allow things like Pac-Man to be released on Game Room outside of a regular game pack (or its own small game pack). The opportunities to capitalize on this would be things like "remixes" or remakes of "classic games" - like Pac-Man Championship Edition DX, Space Invaders Infinity Gene and that new Rush n Attack or Contra Game.
* Game Packs: this is something i have a little problem with. Game packs as they are currently construed lessen the sales tales on games. They do make Game Room slightly more visible. However, Krome - after you release enough free themes to fill an arcade stop putting them in the game packs for free and start selling them (except for any publisher added themes) for 40-120 points. Allow companies to purchase time on the video screens in your arcades (if they want to) - showed as featured games from a feature publisher or something like that.
Let's look at the $1.00 per game sold idea for a minute... This is assuming that all three parties receive the same amount (the straight-line method). i find this to be unrealistic. For one, you essentially have Krome working on a contract. This contract was likely stipulated as a set amount of payments at pre-defined intervals (like maybe yearly, monthly, etc). That cost can essentially be written off as a time zero expenditure. The way i see it is as closer to a 60/40 split between MSFT and the publishers (or a 60/30/10). i went through the fee per game angle at several different levels. Keep in mind that my (bad) estimates show unit sales of 208,621 (which may actually be low). Instead of using an interval i used an approximate point estimate for unit sales. At $1 per game MSFT would be making in excess of $400,000. With those estimates a $.25 increase in the "royalty" rate redistributes $52,155 to the publishers. At $1.50 that amount would be $312,932 (or a little over $3,000 a game to MSFT). At $2.50 MSFT would only be getting about $1,000 per game. MSFT does have some leeway if they pay their licensing that way (thought it is highly influenced by abnormally strong early sales). At $1.50, i suspect MSFT would be making only 15-25K per game pack for the more recent ones.
Scenario 2: Fixed Game Amounts/Compilation
So, in the last post i mentioned the royalty based system where the company got X dollars per game as a licensing scheme. This post touches on fixed amounts per game. There is another wrinkle here (aren't there always). There are two types of fixed schemes - the one size fits all (all games cost the same price) and the tiered pricing scheme. The fixed pricing scheme is more along the lines of MSFT paying a publisher $1,000 per game. The tiered scheme is a little different. One example would be doing something like paying $1,000 for Juno First, but $5,000 for Road Fighter (thought the sales for that one are mind boggling). Now, lets use Atari in an example: there could be one (or several) different rates for arcade games and a different scale for 2600 games. i'm not saying that Atari 2600 games should have a lower licensing cost - wait a minute, yes i am. There may even been a compilation license purchase for X games for Y dollars - like licensing all of Activision Anthology for something like $100,000.
So, now i have to go and play with numbers again... Let's say that every arcade game was licensed for $1,000. That would yield the arcade publishers (again according to my estimates, which you should assume most of the numbers are) $153,900. In other words, Konami 79,000 and change and Atari 74,000 and change. i initially assumed that was the case. However, much like the $1 per game figure this seemed a little off. For one thing, i don't think Konami and Atari return your calls if the money is less than $100,000 total. At $1,000 per game, a game would have to sell 333 copies to just recoup the amount paid for licensing. At $2,000 a game it would be 666. At 3,000 a game it would be about 1,000 copies. Keep in mind that my estimates put the average of Konami games at about 3,900 games. So with Konami as the example, licensing a game for $1,000 would lead to Konami getting $20,000 and MSFT/Krome getting $217,600 (trust me, this will come up again). From MSFT's standpoint, this would be a pretty good deal. From Konami's standpoint, it would be time to renegotiate. If Konami were getting $10,000 per game (highly unlikely), MSFT would only get an estimate $37,600 from the sale of Konami's games on the service. The point at which MSFT and Konami would go 50/50 is at $5,940 a game.
Scenario 3: Combo Licensing
So, now i have to go and play with numbers again... Let's say that every arcade game was licensed for $1,000. That would yield the arcade publishers (again according to my estimates, which you should assume most of the numbers are) $153,900. In other words, Konami 79,000 and change and Atari 74,000 and change. i initially assumed that was the case. However, much like the $1 per game figure this seemed a little off. For one thing, i don't think Konami and Atari return your calls if the money is less than $100,000 total. At $1,000 per game, a game would have to sell 333 copies to just recoup the amount paid for licensing. At $2,000 a game it would be 666. At 3,000 a game it would be about 1,000 copies. Keep in mind that my estimates put the average of Konami games at about 3,900 games. So with Konami as the example, licensing a game for $1,000 would lead to Konami getting $20,000 and MSFT/Krome getting $217,600 (trust me, this will come up again). From MSFT's standpoint, this would be a pretty good deal. From Konami's standpoint, it would be time to renegotiate. If Konami were getting $10,000 per game (highly unlikely), MSFT would only get an estimate $37,600 from the sale of Konami's games on the service. The point at which MSFT and Konami would go 50/50 is at $5,940 a game.
Scenario 3: Combo Licensing
Now, for the combo method - a one time licensing fee plus a percentage. Let's use Road Fighter for demonstration purposes. Suppose MSFT paid an initial licensing fee of $2,500 (i actually suspect that might be the amount) to Konami to have the game on the service with an additional 10% of sales over 5,000 units. What would Konami receive in payment for my current estimate of 15,000 sales? That would be (here hoping i don't mess up the math) $5,500 (the initial $2,500 + 3,000 - 10% of 30K). MSFT/Krome would get about $39,500 for it. That number seems a little more potentially unfair than it should (but i am sure sales obliterated expectations).
Atari 2600 games are a different beast. 2600 games seem to sell far less (maybe that is just because there are so many 1 medal games where i massively understated sales amount). A $1,000 per game flat licensing fee makes a lot more sense here. You may occasionally have your Millipede (2600) and you Pitfall, but that level of sales seems to be uncommon among the Atari 2600 set. Suggestions/Recommendations:
Now it is my turn to make suggestions for the operation of the Game Room service. Ready for another wall of text, yeah! "Trust me, I know what I'm doing."Atari 2600 games are a different beast. 2600 games seem to sell far less (maybe that is just because there are so many 1 medal games where i massively understated sales amount). A $1,000 per game flat licensing fee makes a lot more sense here. You may occasionally have your Millipede (2600) and you Pitfall, but that level of sales seems to be uncommon among the Atari 2600 set. Suggestions/Recommendations:
i want Game Room's content to "turn over" every 4-6 months. What does that mean? Basically, it means new games and (hopefully) new partners. Even if someone like Taito signed on, they should not just go and release everything all at once. Sign them up for 25-30 games and then rotate partners as necessary. The novelty of a changing Game Room will be helped out by switching partners to make it seem fresher. Furthermore, there should be a two month supply of finished games in the pipeline at all times.
* Licensing: speaking of Taito, Namco, Midway and Konami ... Offer them $3,000 - $5,000 per arcade game. License 25-30 games from each publisher during a cycle. Also use a "release by" clause in the contracts where all titles will be released by a certain end date (unless "catastrophic" circumstances occur). The licensing fees paid out should be about 30-45% of Game Room receipts (though sales can beat estimates). Use the estimate that arcade games will sell about 2,000-2,500 units over the long run and Atari 2600 games will be closer to the 1,000 mark (with exceptions). Going forward, use tiered licensing structure with Atari 2600 licensed games going at $1,000-1,500 per licensed game. If SEGA comes on in the future with the Master System and/or Genesis, set the rate at $1,500 - 2,000 per game. Or you can license how you want to - just bring some new blood on.
* Store: eventually Game Room is going to start using the store for more than games and mascots. i think of something along the lines of paid themes, floors, props, etc. In order to get more content, Krome/MSFT are going to need to monetize areas in Game Room they haven't yet (or aren't in Game Room yet).
* Add-ons: try for one add-on every 6-9 months. This could be things like usable arcades, theme packs, publisher game packs, improvements and expansions to the service.
* Allow for off-pack games: this probably will not come into play. What i am saying here is to allow things like Pac-Man to be released on Game Room outside of a regular game pack (or its own small game pack). The opportunities to capitalize on this would be things like "remixes" or remakes of "classic games" - like Pac-Man Championship Edition DX, Space Invaders Infinity Gene and that new Rush n Attack or Contra Game.
* Game Packs: this is something i have a little problem with. Game packs as they are currently construed lessen the sales tales on games. They do make Game Room slightly more visible. However, Krome - after you release enough free themes to fill an arcade stop putting them in the game packs for free and start selling them (except for any publisher added themes) for 40-120 points. Allow companies to purchase time on the video screens in your arcades (if they want to) - showed as featured games from a feature publisher or something like that.
