Who do you pay when buying a game?

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How much do you think this retailer gets when he sells one of my games?

I’ve seen some debate about some of my posts on the publishing side of the business and I noticed that a lot of people don’t understand the economics behind a game. Sadly, that includes a lot of developers too.

I’ll keep the overview very short but I think it might be helpful to have some numbers in place for future reference when I’ll discuss some of the finer aspects of royalty report manipulation I’ve seen.

So if you want to know how much you pay to who when buying a game, read on.

On a 39,95 game in Germany, this is a typical breakdown found in royalty reports (numbers rounded)

  • The state (VAT 19%): -7,5€
  • Retail: -10€
  • Inflated publisher costs: -5€ (Logistics, sales and payment conditions)
  • Cost of goods: -1,5€
  • Net revenue: 15,95€
So if you sell 100K units in Germany, your net revenue in theory is about 1,6M€. For the record, most games do not sell 100K units in Germany.
On a 39,95 game on a digital platform, assuming a typical 30% fee for the platform, in
Germany:
  • The state (VAT 19%): -7,5€
  • The platform (30%): -9,7€
  • Net revenue: 22,75€
So if you sell 100K units in Germany digitally, your net revenue in theory is about 2,2M€. For the record, this is still quite rare.
So now you know :)
 Before you start running off creating your own studio based on this numbers, let me warn you that you’ll never see such net revenue. The why of that I’ll leave for another day. It’s quite a complex story unfortunately.
  • http://www.facebook.com/Dragonseekers Sergei Klimov

    There was once a comment by Charles Cecil over at GamesIndustry or MCV, talking about difference in royalties through retail and through digital channels.

    There’s specifics and specifics and specifics, I should say.

    E.g. in Russia, VAT is 18% in retail, but 0% for digital sales. So if you sell the game digitally, you automatically boost developer/platform revenue by 18% (which you can then spend advertising, or creating your next project, whatever).

    Another thing to note is the cost of goods. In the example with Euro 40 game, COGS is Euro 1.5, less than 5%. But imagine that you’re selling the game at Euro 10? Your COGS would be then over 10%, and if you throw in a nice metal box, or a full-color manual, you can easily go to Euro 2.5 (we once had Euro 4.5 for Samorost 2 Collector Edition in Russia), and that’s 25% of retail price. Digital channel is free of that, which makes lower price points more sustainable there.

    Finally, let’s also talk about payments. Swen – maybe you can focus in your next blog on that ;)

    One game I worked on, shipped in May of year X. By January of year X+1, i.e. 8 months later, I still haven’t seen a dollar due to the “wonderful” contract we had with the publisher. That’s 8 months when a dev team can’t fund its next project. With digital, you get money next month.

  • guest

    Seems i’d better start buying games on steam rather than in the local store.
    (May i ask why the Divinity soundtracks, great soundtracks btw, are for sale at Larian’s online shop while it’s composer is offering the same for free on his site?)

    • http://www.lar.net/ Swen Vincke

      Why that critter ! We’ll sue him right away ! I spent fortunes on the creation of that music ! :)  

      Seriously, the sales of music audio CD’s are quite low, and not our core business – we actually did it originally to help Kirill and to get rid of some unused stock. If he wants to give the music away for free, he’s welcome to do so. His compositions definitely helped setting the atmosphere in our games, so I’m already a happy trooper.

      • Pawel

        I still listen to some of the tracks from Divine Divinity :) That was the best music I’ve encountered in a video game. Divinity 2 OST is also very good, if not better.

        • http://www.facebook.com/Dragonseekers Sergei Klimov

          Pawel,

          I don’t know if you’ve seen this, it’s Kirill playing at the 20th anniversary concert of his rock band. Worth watching if only for the way he looks when he plays with the crowd.

          http://www.youtube.com/watch?v=_e6MpNUpFss

      • Pawel

        By the way, how about sales on Steam? The Dragon Kinght Saga was for 10 euro. Would you call it highly profitable, when compared to ordinary price?

        • http://www.lar.net/ Swen Vincke

          The sales syndrome is something I want to address in a separate blog entry – It’s quite a complicated issue so let’s say I owe you an answer on that one.

          • Farflame

            Please, Swen, could you reply also to my post about VO in topic “The cost of dialogue in games”? Im interested what do you think about partial VO (I set some arguments there) and if you already decided this matter in DC.

            Sorry that I write it here. :-)

          • http://www.lar.net/ Swen Vincke

            Hi Farflame – your points obviously make sense, and it’s something we’ve done (more or less) in the first Divinity. I’ll write an update on the dialogue debate once we figure out ourselves how we’re going to handle it  (including a fantastic picture of Thierry, our lead animator, with a face full of polyethurene thingies).

            As to the – “don’t listen to much to big sites comment” – I’m glad you mentioned that. I have quite a lot to say about those, and you just reminded me of that. 

    • melianos

      Some people (like me) like to own a CD.

  • Bree

    Just want to say,  apropos of nothing, how great I think it is that you are so open and communicative with your community. Always love reading your blog. 

    • haderach512

      I second this, I just read your blog for the first time, followed a link on gamebanshee, it’s great how open you are with all these topics. Will definitely keep an eye on other topics and who knows, maybe make some time to try Divine Divinity, since you guys have it on gog.com. 

      • http://www.lar.net/ Swen Vincke

        Thanks guys – that’s cool to hear! It’s a lot of fun seeing discussions pop up based on the stuff I write here. 

        • Illusive Man

          Don’t know if it’s only for marketing / communication purpose but it’s great that you and Sergei actually talk with us.

          Seems that Indie Dev’ are more communicative that others ( especially when they try to shake things up :D )

          • http://www.lar.net/ Swen Vincke

            This blog originated from the status update posts I was doing on the Larian Studios forums @  www.larian.com/forums. The idea is that by putting it in a blog format, a wider audience will be reached. Obviously we’re trying to increase the visibility of our games, but you can be rest assured that most entries are fueled by a healthy dose of controlled anger aimed at the way this industry managed to organize itself, as well as a desire to communicate to other developers our experiences in removing the obstacles on the road to independence so that they can benefit from the lessons learnt. 

          • Illusive Man

            Guys, it sounds like passion and dedication !

            I never played a Divinity game in my life but I’ll order The Dragon Knight Saga right away.
            ( Thanks for releasing it on 360 by the way ).

          • http://www.facebook.com/Dragonseekers Sergei Klimov

            @bfa45b5b03dd379a90e81e1244bc7a16:disqus,The motivation behind this blog is fairly simple: our goal is to create the dream game before we die. To do that game, we need a lot of money to cover the production – to pay for the content, and to pay for the sizable team, as it’s going to be an RPG that is very heavy on the assets.Sometimes I envy Jakub at Amanita, who can create the game of his dreams with seven people on board, without any compromises on the quality. We’re playing in a different genre, we need tons of stuff for the in-game world.

            Now, the amount of money we need for the dream game, no publisher in the world wants to give us, as of now. Because all the publishers these days are extremely conservative, and when/if they are going to make any gambles, they’re going to want to own the IP, control the franchise, etc. etc. etc., and we all see where that leads to (HoMM6 being a shadow of HoMM3, despite a lot of “franchise management”).

            So, we need to be independent, and we need to be big enough so that we can sit down and just spend $30M on one project, with no coffee breaks. How do we do that? We go there step by step, project by project. And along the way, we will need help. It’s been surprising how many people actually think like we think, in this industry. Even my US lawyer, a shark among the sharks, said that he’ll be happy the day we succeed and prove that indies can score high in the mainstream market, not just on the periphery and in the niches.

            This blog is our small lighthouse that sends out the signals to similar-minded individuals, and teams. We’re saying, hey guys, we’ve been around for 15 years, and here’s our thoughts: the industry needs evolution, the industry needs new role models, and the industry needs to remember what it’s all about, we’re not “moving stock” or “creating IP with USPs in EMEA XLOB”, we’re actually creating coolest stuff on earth, something that satisfies the itch to play.

  • Illusive Man

    Amazing how digital and retail games are sold at the same price…
    With this example, it’s clear that without “Inflated publisher costs” and “Cost of goods” the “Net revenue” is increasing for digital sales, even if this example was simplified for better comprehension.

    Good for publishers but unfair for customers.

    And it’s far from the excuse “It has a cost to host the data and keep servers up, we can’t have a lower price.” publishers throw sometimes when customers complains.

    • http://www.facebook.com/Dragonseekers Sergei Klimov

      The Net revenue on a digital sale is higher than on a retail sale, true, and that’s a saving due to logistics and the actual cost of the box going out.

      However, before we get too happy for the sake of publishers, let’s look down at something called price erosion. Years and years ago, I used to buy my paperbacks in New York at under 5 dollars. I still recall that the only books going over that price margin were Stephen King’s, where his publisher could expect people to pay no matter what’s being asked.

      Now, two days ago I bought 2 paperbacks in London, at Foyles, an indie book store if there is one, and I’ve been asked to pay 18 pounds. That’s over 10 dollars for each book. It seems that book prices have kept up with the inflation in general.

      The same with the salaries: the salary I have to pay to get a good coder working for me in Moscow is now a few times higher than what we used to pay ten years ago.

      However, the game prices haven’t really moved anywhere, have they? Or actually, they went down. The Witcher 2 is not at $60, but at $35 at the time of launch. The salaries increased, the cost of buying a book went up, but the price of an average game just went down.

      For one thing, I welcome this – it’s like with the music, at $1/song I’m now buying so much more than I ever bought before, my actual financial contribution to the music industry is growing each year. But for another, with the prices of games going down anyways, in general, I think that we don’t really need to push them down even faster by offering “digital option” at a discount.

      • Illusive Man

        Indeed, video games prices are lower actually than some years ago… on the PC market.

        From my point of view, with the rise of the consoles market, 60$ became the standard price for 360 ou PS3 games. The so-called “dying” PC market lowered his prices.
        And then *TaDaa* digital distribution / sales comes in ( thanks Evolution ). And now some “specialists” feels like the PC market is not dying anymore and digital “will Save us all !”

        With cross-platforms titles and digital sales, there is more money than ever flowing in the video game industry ( not for everyone unfortunately), bringing shadow over the others like the Movies industry.

        So i’m sure gamers who don’t know / understand all the black magic of video games publishing, and don’t want to became pirates, would gladly like to pay their digital games a bit cheaper.

        And then Steam came up with daily / week-end / holidays sales from -33 to -90 %.
        Thanks Evolution :D