1.9 This is more of a general question about MMOG developers, publishers, etc., and how those relationships work, how profit and contracts work, etc. Could you give us a summary of what might be typical in this industry?

Both really, but the monthly subscriptions in the long run. The initial box sales help pay for the initial development cost, although it typically still takes several months of subscription revenue before the entire development, marketing, etc. costs are paid for.

After that, the revenue comes in the form of the monthly subscriptions and the periodic expansion releases. Every 2 or so expansion releases it's also a good idea to put a 'gold' or 'platinum' version of the main game out that includes the older expansions. This 'freshens' things, and keeps two SKUs (boxes) of your product on the channel/on the shelves simultaneously, which is also good. We've found that a new expansion also renews interest in the game itself and that sales of the original game or the re-packaged game (and therefore overall subscriber numberes) go up as well. I assume this is because existing players are excited about the expansion, the expansions get reviews in magazines, etc., so the word about the game gets out to new players as well.

The costs, however, continue as well. Not only do you have the marketing dollars necessary to put the expansion and refreshed main product out there (both ads as well as channel marketing dollars (end caps, PoP (point of purchase) materials, etc.) but you also have the continued cost of the Live, Expansion, Operations, and CS teams (not to mention the infrastructure costs themselves -- the server farms, the bandwidth costs, etc).

The way a developer/publisher relationship usually works is that the developer is paid advances on the game in order to fund development. The publisher sets up milestones and other metrics to make sure the developer is doing their job (e.g. making the game, preferably on time) and then pays the developer a portion of the agreed upon advances at those milestone dates. This money is then used by the developer to pay salaries, rent, buy computers & software, vast quantities of diet Mountain Dew, etc. Rarely is any money kept around except maybe a small fund for an emergency because a smart developer wants to spend that money on more employees, tools, equipment, etc. so that the game turns out that much better.

The contract the developer usually has with the publisher includes the total advance amount, the milestone schedule, and the royalty percentage.

(The other way, which is more rare, is that the developer raises funds through Venture Capitalist or Angel Investors or the founders themselves were already very affluent and also willing to put their own money on the line).

So when the game comes out, all revenue goes first into paying back the development costs (e.g. nobody is making any money). Once the costs of development are paid, both the publisher and developer make (hopefully) a profit. The developer gets a percentage royalty payment on an agreed to frequency, and the publisher gets the rest. (The Publisher usually gets the majority because they fronted all of or at least the majority of the money and therefore assumed the vast majority of the risk).

The developer can then take that profit (again, assuming the game was successful enough to have paid of its development costs (and MMOGs are VERY expensive, btw) and do any number of things with it. They can pay out royalties to their employees and/or a bonus or some such, or they can put the money away to build up a 'nest egg' hoping to eventually be able to self-fund a game.

Very successful developers (say ID Software, for example) I believe (don't know this for a fact) pay for the majority of the development costs for their games such that they assume the financial risk and therefore receive a much higher royalty. This is atypical, however -- it typically requires a developer that's stayed independent and been around quite a while and has a long history of hit titles behind them.

Developing, launching, and maintaining massivley multiplayer games is more complex, however, since MMOGs are not 'fire and forget' like many conventional video or computer games, the costs keep recurring. Money still has to come into the developer to pay for the Live, Expansion, and CS teams. So, typically, the developer also at some point executes a contract (or amendment to the first contract) to receive advances even after the game is launched. This is, of course, a good thing because no one wants to lay off their talented and experienced staff after the MMOG is launched. Royalty percentages, etc. are also figured out then for both the expansions and the overall success of the game in terms of retention and monthly revenue the game generates. Sometimes royalties are not a set number but can go up (or down, but hopefully not) based on how successful the game is (e.g. if the overall revenue or profit reaches a certain point, the developer's royalty could go up).

The profit margin for an MMOG can be very good relative to other games because of the recurring monthly subscription revenue. If the operation of the game is kept lean and mean but also at the level that the customer is sastisfied and therefore keeps subscribing, the margin can be very high (up to 40%-50%). This is one of the reasons, especially early on in the UO/EQ days that everyone and their dog wanted to make an MMOG (regarless, unfortunately, of whether they truly had the talent and/or passion for this particular genre).

The fact of the matter, however, is that while those profit margins are indeed attractive, it takes a LOT more to make an MMOG than a typical game. It's a lot harder IMHO, takes a talent pool that is not necessarily the same as what it takes to make a single player games, and that talent pool (since there are far less MMOG experienced developers out there) is much harder to find. Then you need good operations people and a good operations infrastructure to launch the game and maintain it after launch (you all know the struggles many companies have gone through with launching theses games). The development cycle is also typically longer (3-5 years) and many people simply aren't willing to devote that kind of time only working on one title. And, as mentioned, the expense is very high (becuase of the infrastructure necessary as well as the longer development cycle), so it's often hard to find a publisher/funder willing to assume that level of risk. Bottom line: there are far easier ways to make money in the computer/video game business -- you really need a developer and publisher committed to the genre.

But, of course, if all goes right and the game is a success, in the end a lot of profit can be generated. Again, most of this typically goes to the publisher. The money that goes to the developer, as mentioned above, can be used for royalties, bonusses, or saved (or some combination of the three).

Typically, if the developer is in it for the long haul (and the mentality of the developer who wants to make an MMOG is typically oriented thusly), they try to keep much of that profit to put into future games and endeavors.

The other scenario that can occur if the game is very successful is that the publisher or someother enterprising entity will buy the developer after the game launches and looks like its going to be a success (or even before, if everything looks very promising). An example of this would be SOE buying Verant not long after EQ came out. And if the developer is employee owned (e.g. the employees have stock options), this can be a way to make good money more short term as opposed to staying independent and amassing royalties. There are, of course, downsides to 'selling out' as well, and it's an interesting (but probably overall good) 'problem' to deal with.

I hope this answered your questions -- the short answer would be to say that box sales drive the initial big hit of revenue (and payback of development costs) but the real profit comes from long term subscription revenue that a successful and popular MMOG hopefully generates (and then, of top of that, successful expansions).

View Printable Version