Video Games: Big Bets and Big Bucks

WSJ writes:

U.S. videogame sales are expected to rise 10% this year to $7.76 billion, according to Wedbush Morgan Securities. That’s not far behind total U.S. box office receipts, which stood at $8.6 billion at the end of November.

But the fast-growing industry also faces a major challenge: Escalating development and marketing costs are sowing the seeds of an “arms race” that analysts say will intensify as publishers rely more heavily on big releases to generate the lion’s share of their profits.

The string of big-budget games released for the holidays is expected to put pressure on some of the smaller publishers, who have significantly fewer titles on shelves and may not be able to survive if even one of them stalls…Once the arena of children and hobbyists, videogames are now a big business dominated by a handful of large media firms that are spending heavily on popular franchises.

Developers now spend upward of $10 million to create their leading games — an unheard of amount just a few years ago — and budgets for some high-profile titles can be much higher. Analysts estimate production costs for Microsoft’s “Halo 2” were about $20 million (a Microsoft spokeswoman says the cost was “less than $20 million,” but declines to be more specific). It’s not uncommon for publishers to spend even more on marketing for a hot game.

Despite rising costs, hit games are extremely profitable. Take Two Interactive Inc. spent less than $10 million to develop the latest “Grand Theft Auto,” says President Paul Eibeler. The game, which retails for $50, could generate world-wide sales of $400 million by year end, says Michael Pachter, analyst at Wedbush Morgan. After taking into account advertising, bonuses for the designers, hardware royalties and manufacturing costs, Mr. Pachter figures the game’s gross profit — in the three months since its release — has been about $285 million.

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Rajesh Jain

An Entrepreneur based in Mumbai, India.