Where Does Your $60 Go?

Remember the first time you paid $60 for an Xbox 360 game? You know, right before you knocked over the magazine stand and stormed out of GameStop in disgust, swearing to the heavens that you were going to play the crap out of that game? Sure, it’s a lot of money, but the cash you forked over isn’t just filling up some fat-cat executive’s wallet — making games these days isn’t cheap. Then again, it doesn’t all go toward development of the game; everyone wants a slice of this pie chart. So where exactly does your $60 go? We spoke to Wedbush Morgan analyst Michael Pachter to get the inside word. When you fork over the money for a game, who gets rich — and who might die tryin’? The answer might surprise you.

RETAILERS
Let’s start with the most obvious part — when you buy a game, the retailer is making a profi t above what they paid at the wholesale price. Generally, this is around 20 percent of the total cost, so, when you’re paying $60 for your copy of Halo 3, the retailer is making $12, since a full-price game at its wholesale price costs only $48.

There are exceptions to this rule, though, according to Pachter. Retailers will sometimes be given a “vendor allowance” — a discount of around $2 — for advertising at the point of sale. Those big banner ads and Master Chief cardboard cutouts that you would probably kill to have in your living room are allowing retailers to make even more money. In fact, a really high-profile game like Halo 3 might have a vendor allowance of more than $2. “They’re certainly doing it for Halo,” says Pachter.

“They’re certainly doing it for Grand Theft Auto — even Spider- Man: Friend or Foe is going to do it at Target or Wal-Mart or something. Vendor allowance dollars are provided, and sometimes those are give to a firm like Best Buy to feature Madden on the photos of television sets that they show in their weekly circulars. So [running the video] may not have a real cost, but Best Buy is collecting [ the allowance] to frame that advertising.”

MANUFACTURING AND LICENSING
For the sake of argument, we’ll assume that $2 vendor allowance is pretty standard for most games, which leaves the publisher with $46 from every game you buy. From that $46, it then has a number of other costs, including the licensing royalties they pay to Microsoft for, as Pachter puts it, “the privilege of putting the game on the console.”

This is how Microsoft makes its money from each game, and why it has just as much interest in seeing third-party titles like THQ’s Stuntman: Ignition (just for the sake of a random recent example) succeed as it does with first-party games like Halo 3. It’s not pure profi t for Microsoft, though: part of that money is used for the manufacturing of the game, although that’s not a terribly expensive part of the process.

“Manufacturing cost is literally 70 cents a disc, the jewel case is 15 cents, and the packaging materials are probably another 15 cents, so we’re really talking about $1 per disc,” Pachter explains. “That’s incorporated into Microsoft’s charge — they do that for you. The reason they do the manufacturing is that they want to make sure they collect that big fat royalty on every game on the 360. They don’t say: ‘Okay, THQ, go to Technicolor and have them stamp out your DVDs and we’ll trust you as to how many you’ve had made. You can just send us a check.’ They say: ‘Want to order 500,000 units from us? We’ll make them for you. We’ll deliver them when you pay us.’ That’s really what their business is. The reason anyone is in the videogame industry is to collect these royalties.”

However, just as some factors can change the wholesale price of games, other factors can reduce the licensing and manufacturing fee charged by Microsoft. “When I say $12 for royalties,” Pachter notes, “I’m sure there are some guys who pay $10. I’m sure that EA has negotiated a better rate for Madden or FIFA or something. I’m sure some deals are cut for exclusives, so when Splinter Cell Conviction comes out, the Ubisoft guys are pretty astute: you don’t give an exclusive if you don’t get a break.”

MARKETING
At this point in our math, the publisher is looking at making $34 for the game, assuming they haven’t received a discount from Microsoft. There are still more costs, though, including the actual marketing of the game. Magazine ads, bus-stop billboards, website banners — who knows, maybe even forum viral marketers.

Generally, Pachter says, the “average spend in the industry toward marketing is around 14 percent or 15 percent” of the wholesale price, which works out to about $7. Most companies will actually include the vendor allowance in the marketing budget, though, so since we’ve already added that to the tally, we’ll leave the marketing budget at $7.

12NEXT