MMO Box Sales And Defining Success

Sweet Smell of Success

What MMO is next going to experience the sweet smell of success?

There’s an interesting discussion raging in one of the articles I wrote last week between Samus, Pascal and myself about the finances behind MMOs and how, when and why they can be considered successful. It was all sparked off by the sweeping statement (what’s wrong with sweeping statements? everyone in the world loves them) I made in the post about how success for these games is measured in retaining subscribers not through box sales and that was challenged. Let’s explore that a little.

First up, let’s look at the term “success” because, after all, it’s very subjective indeed and varies not only from person to person but from situation to situation. For you, success might be climbing Mount Everest or creating a billion dollar company but for me, success might be measured by having a good day at work, completing a video game or managing to impregnate my wife. In the case of MMOs though (and particularly for these discussions), I determine success as being sustained long term profitability. Now maybe I watch too much Dragon’s Den but the bottom line is that the people pumping money into a company want to see, within three to five years, a good return on in their investment. Simply getting their money back ain’t going to cut it; they want a healthy profit to outweigh the risk and time involved.

And I think that’s a pretty big point when it comes to the impact that box sales make on MMO finances. They may cover some costs, but they don’t make an large dent on the profitability of the game, which is ultimately higher than the sum of its initial investment. In fact, I and a lot of other bloggers tend to believe that this profitability can only come from retained subscriptions.

For instance, if a MMO costs $50 million to make (which THQ just came out and admitted for Warhamer 40K) and sells a reasonable 750,000 box copies, assuming the gross profit per box is $20, the developers net $15 million. So unless I’m missing something fundamental here, even if the game sold a million units plus (which is pretty rare for a MMO), they’d still be well shy of covering their development costs before even trying to generate a profit to pay their investors a dividend with.

On a side note, I think it’s worth mentioning that a big differentiating factor between MMOs and other types of games is the number of units sold. MMOs cost, what, $30-50 million and launch to 500k – 1 million sales if they’re lucky. Now contrast this to Grand Theft Auto 4 which may have cost $100 million to make but sold well over 6 million units at a much higher sticker price.

I guess my point is that it appears to be that is indeed long term subscriptions are the real financial driving force behind these games. After all, a person forking out $15 per month for a year is going to net the games company a much more tidy sum than that initial box sale especially when the gross margin on the subscription fee is likely to be a lot higher than on the retail sale (digital sales aside… although for sure another reason why they are so popular with developers). In fact, if this wasn’t the case we wouldn’t have big companies like EA BioWare coming out and saying that SW:TOR needs to rock 500k subscribers to maintain a profit.

Anyway, a lot of this is my conjecture as I’m neither a business man nor have access to financial books of any of the MMOs out there so feel free to chip in with your thoughts. And if you quote me the Guild Wars model I’ll just ignore you politely.

-Gordon

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31 Comments

  1. Kierbuu says:

    I guess the answer would really depend on how long the customers stuck around. For somebody that plays a game month in month out for years, then their subscription is were the money is. If another player buys the box, but leaves after a month or two of game play then the box is were the money is.

    It would also depend on how you did some of the accounting. Take the Deathwing raid coming in Cataclysm. Who do we bill that too? It is still under development with a team of programmers and such working away at it. The encounter is a part of the box, but the development is taking place during ’subscription time’. Would the employee pay and cost of machine hours be subtracted from the box’s profits or the subscription’s?

    Heck, how many copies boxes a game sells at retail stores versus the number of “boxes” sold as a direct download would also make a huge difference. I don’t know what the percentage cut is for the distributors and retailers is on a new game, but I’m willing to bet it is a lot more than the amount it cost a company to let a new customer copy the game from their servers.

    I’ld guess a game successful game makes back 80% of its money off the box sales during the first year. Over the next several years it probably makes back all of the initial investment with a little profit from the box. The subscription though is were the big long term profit is.

    In short… boxes break even, subscriptions make the profit. At least that is my guess.

    • Gordon says:

      Yeah, I think a big factor that companies look at in trying to determine the profitability of a MMO is the retention rate of players. If a MMO can hold onto a player for 1 year, then that’s a huge amount of cash for them. If the average rentention rate is only 1 or 2 months though, the amount of money they can make drops dramatically.

  2. Stout says:

    Have any of y’all been able to find out what the cost of servers and tech support for any if these MMOs are? It’d be interesting to see what percentage of the monthly fee goes to that Versus profit.

    I’m sure they net a good enough profit on each month, but it’d be interesting to see how many months it would take of subscription fees to exceed the $20 profit from the box sale.

    Furthermore, lotro recently said they are making 3 times the money now that they have gone free to play. Considering their monthly fee was $10 along with $30 for the box, it means people are paying some serious cash in that game.

    • Samus says:

      I had previously heard ongoing costs of $2-3 per player. Researching Blizzard’s financial statements and using the maths, I was able to roughly confirm this. Certainly, subscriptions are quite profitable, if you have a stable population.

    • Gordon says:

      I’ve never been able to find any concrete information on it. My guess is that the numbers are tightly guarded in case they put off players.

      And yeah, the F2P model does seem to be successful as it – ironically – entices players into parting with more cash!

  3. Stout says:

    Also, don’t forget that the Asian market handles gaming and costs very differently. And with wow claiming 12 million subscribers or whatever they are up to now, not all of them are monthly subscription based.

    • Gordon says:

      Indeed. Also the subscription price in, say, China is a lot lower than in Europe and America. My guess is that Western companies like Blizzard don’t have nearly as high a gross margin per Chinese player as they do per Western player.

      • Samus says:

        Yeah, I can’t find numbers on how much less, but it is definitely way less. If you simply took $15 times 11 million subscribers for 12 months, you would have gotten just under $2 billion in subscriptions alone. However, in 2010 Blizzard pulled in just over $1.1 total revenue, from all sales in all games. Clearly, those players in Asia aren’t pulling their weight!

        • Gordon says:

          No doubt the Chinese government takes a healthy chunk of the profits too :) I’m pretty sure the low margins is why SOE cancelled the Asian launch of EQ2. I don’t think it’s worth effort unless you know you can appeal to millions of players.

  4. Samus says:

    “And if you quote me the Guild Wars model I’ll just ignore you politely.”

    Ha! Cut off exactly what I was going to say right at the end there. :)

    I guess instead I have to look at this from the angle of expansions. Realistically, most games would not consider an expansion to have any substantial benefit to their subscriber base (WoW might be the exception here, especially with something like Cataclysm focusing on lots of low level zones). For something like WAR, you would expect virtually all sales of the expansion to come out of the 130k (last I checked) existing subscribers, not add any significant amount more.

    So you have to wonder why they bother. Sales will be around 1/10th of the original box sales, and it won’t bring in additional subscription revenue. But clearly they believe this to be a worthwhile financial venture.

    I also have questions about using $20 per box in profit, with the big reason being a much larger portion of MMORPG “box” sales are actually digital downloads. But we don’t know what portion of sales are downloads, or what the profit margin on that is. Still, I think it is reasonable to stipulate that 1 million box sales will net an MMORPG more than $15 million.

    And originally, I only contended that box sales are worthy of consideration (certainly not that they are the only consideration). $15 million might be less than your budget, but it’s better than NOT getting $15 million.

    • rowan says:

      Even if only existing subscribers buy and expansion, if the goal is to retain subs, then a major (paid)-box) expansion will get players excited about new content/abilities, etc. and may bring former subscribers back to the game to check it out. Otherwise, a game would eventually just fade. Well, it would fade sooner.

    • Gordon says:

      Hehe, yeah I have absolutely no idea how Guild Wars manages to run and still make a profit. I’d loveto know though :) Call me cynical though but I’m guessing GW2 is going to have some kind of item shop system to help generate revenue.

      • numtini says:

        Guild Wars 1 has an item shop. They sell costumes, expanded storage, new character slots, and just introduced a deal where for ten bucks each you can turn one of your characters into an NPC hero for your other characters to use.

        The original model was to do continuous expansions, but charge for them by the box. If you look at the game design, it was kept low resource and it’s not an MMO, when you leave the town, it’s entirely instanced, so I’m guessing day to day costs are low.

        • Gordon says:

          Yeah, you’re probably right. I wonder how GW2 will fair?

          • Randomessa says:

            Hey, just posting to note that ANet has been pretty clear that their low server expenditure has nothing to do with GW1 being instanced:

            “Interestingly many people believe that the completely instantiated world was the reason for Guild Wars 1 to not need monthly fees. This is completely wrong! The existence or lack of a persistent world is totally unrelated to the running expenses which are needed to maintain an online roleplaying game.”
            (source: http://wiki.guildwars2.com/wiki/Guild_Wars_2:_The_Status_Quo, interview with Jeff Strain)

            That said, I expect GW2’s revenue will come from a similar expansion-release + items like appearance-to-armor-linking items (transmutation stones) and convenience perks such as the aforementioned extra storage space and costume slots.

  5. UnSub says:

    I’d looked at this issue in relation to SWOR on my blog, so GO GO BLOG PLUG TIME:

    http://unsubject.wordpress.com/2010/10/21/five-reasons-why-swor-is-a-high-risk-mmo-2-it-is-going-to-cost-too-much/

    EA’s announcement of SWOR being successful with 500k players ignores some critical issues, such as “500k players over how long?”.

    Box sales are a great start for MMO revenue, but the truth is that long-term you want that sub revenue, which is why a lot of MMOs drop their box costs substantially post-launch. MMOs work best by getting players into the game world and then encouraging them to put some money down once they’ve become engaged (hence the success of F2P).

    Publishers are now looking at MMO revenue over long-term cycles, but they want that to be a profitable not a continuing cost burden. A huge problem is that the industry isn’t blinking at MMOs costing $50m+, when that makes it a huge expense that may be in debt for a long time. City of Heroes reputedly cost between $8m and $13m to develop and made that money back in less than a year. DCUO cost over US$50m and I doubt those costs are going to be recovered before January 2012.

    And that’s before we start talking about ongoing costs…

    @Samus: My understanding is that digital downloads incur a 30% publisher royalty, making it more profitable per unit to release online than through a physical store.

    • Gordon says:

      I think MMOs have a huge risk/reward ratio. I reckon a few of them (WoW, LotRO maybe, a few others) make really nice returns on investment whilst others flop and then enter turtle mode to just try and claim back the initial costs over a few years. I think WAR fits this bracket.

  6. Matt says:

    @UnSub As the industry matures and development costs come down I am hoping that we’re going to see a move away from the $50m+ ‘WoW killer’ to more modest titles that don’t have to appeal to the lowest common denominator just to break even.

    There is a huge gap in the market between the big budget AAA titles and the copycat cash shop shovelware that could be filled with less ambitious games that have a strong niche appeal, ala Eve. Let’s have more of the (not quite) the same please.

    • Gordon says:

      Agreed. I think there’s still a huge market for smaller games, that cost less to develop, and appeal to smaller audiences. The only reason games like SW:TOR need 500k subscribers is because the development costs are so fricking high.

      • UnSub says:

        @Gordon and @Matt

        I see this as one of the reasons that F2P is booming – cheap production, shorter development time and ability to remain profitable on a much smaller player base. Then that studio goes on to develop another title that helps flesh out their gaming portfolio and draw in another type of customer.

        The alternative is (as Gordon states) “we need to be the second biggest MMO in the West to even look at being profitable”, which is insane.. ly optimistic.

        @Matt – Cryptic follow this model – they keep a team working on their toolset and produce games that use the same (but constantly updated) engine. It saves them a lot of development time and money, but obviously they’ve been criticised for deficiencies in game content.

        I’m very curious about Neverwinter, and seeing if Cryptic have learned the hard lessons of their ChampO (which I still play from time to time) or their STO (fun, but not enough to pay for) launches.

  7. Peregrine says:

    With the growing popularity of “Collector’s Edition” MMO boxes that promise rewards (like the recent Rift head start, how does that change the equation? If a developer got $20 off a regular box title, what does that mean for a collector’s title which may cost $20-30 more? Obviously, increased profit. And with powerful incentives like headstarts, etc, that could drive a large percentage of the buyers to the Collector’s version.

  8. Mister Meh says:

    Pointing you to an interesting article about the subject at hand:

    http://www.gamasutra.com/view/feature/6285/bill_roper_making_mmos_work_again.php

    Despite that Bill Roper has a resume that would make many of us cringe to see his name on the roster of any game we have interest in, his comments on how the Developer’s cash flow really works give a good deal of insight. You have to get over his over excessive use of the words “Yeah” and “Like” to read it though.

    I think one of the considerations that we on the outside assume is that there is 1 profit making entity. I think we need to split out the developer and publisher from the mix. Publisher gets their share before the devs obviously. And when we consider that these recent big sale MMOs are using recognized IPs to sell, you have consider the giant royalties. EG, Trion is probably taking a great deal more home from their sales than EA and THQ could ever hope for. GW’s royalties have to be through the roof. And I can only imagine that Lucas wants 3x as much for SWTOR.

    My understanding is that most developers are basically slave labor for months well into the first quarter of the launch. The publisher and royalties suck all the money from the box sales and initial subs. It takes months to years for the developer to see returns. Hence their aptitude to try and round up as many projects at once and ever going to keep those investments in the queue for down the road.

    Latest breakdown estimate I have found from a Developer point of view to how MMO box sales revenue (not profit) is split:

    Developer – $10
    Publisher – $20
    Licensing – $10
    Retailer – $10
    Manufacturing and Distribution – $3 (significantly reducing over the years)
    Royalties – $7

    But that also highly depends on the contract type; type of game; and IPs involved. In many cases, the publisher gets their returns, and the developer ends up failing to maintain and goes belly up. Those games turn a profit, but for who? I think the sad truth is, in many small cases, it’s the publisher at the expense of expendable studios.

    I think you could simply point at EVE for your point; they have been on direct sales for just subscriptions since the start. Floating all their own overhead and development for the last 7 years. Clearly subscriptions make the real money that the studios chould care about.

    Now that I’m done laying that out ….. yeah, GW2 model. :D

    • Gordon says:

      One of the reasons Blizzard has done so well is because they required very little funding to make WoW after the success of their other games. I don’t know what their relationship with Activision is like now but the ability to be fully owned and controlled has certainly worked to their advantage in the past.

      And yeah, the GW2 model… ssshhh :D

      • Mister Meh says:

        Oh yeah. Blizzard (pre-activision) is also another case of owning the IP and being able to only answer to themselves, instead of investors.

        I wonder what the Activision relationship brings to the new wrold of investments for them.

        • Gordon says:

          Big bags of cash :) I know it’s cynical to say but Blizzard sold out (I don’t blame them). The owners and shareholders took a lot of cash and essentially Activision got a nice money spinner on their hands. It’s life and business so I don’t hold any malice towards anyone over it.

    • numtini says:

      As with so many things, Eve is an oddity here. It was originally distributed by the standard retail box and was a complete flop. After six months Simon and Schuster Interactive sold the rights back to CCP (my guess is at a substantial loss), who then went through the electronic distribution method. It was another year after that before the game cracked even 50k subs and far longer before anyone paid it much attention. It’s probably the only game I can think of that had that bad a launch and didn’t just disappear or end up on life support.

      • Gordon says:

        I think it goes to show that if you stick at the something long enough eventually you can find your audience. EVE has had a lot of great viral marketing over the past three years to really help it take off. All of their stories about backstabbing and banks getting robbed has attracted a lot of curious players.

  9. Bhagpuss says:

    If we can assume that MMOs aren’t charities and don’t keep servers running out of the goodness of their hearts, presumably every MMO that doesn’t close down is either making money or the people running it think it still has a chance of making money.

    Therefore, any MMO that hasn’t closed down either is either a success or a potential success. Only MMOs that close down are failures, and even then only if they close before having recouped their costs and made a profit.

    There are exceptions to this. I can think of one straight off. Mostly, though, I believe it’s fair to conclude that running MMOs are profitable.What we have no idea of is HOW profitable. Are they just barely scraping by or are they coining it hand over fist?

    • Gordon says:

      “Are they just barely scraping by or are they coining it hand over fist?”

      That’s the big question, isn’t it. I can’t help but feel that some MMOs – WAR, AoC – are barely scraping by and have entered turtle mode in order to just try and make some cash but not really push for huge profits any more.

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