Games industry Return on Investment

October 27, 2015 | Filed under: business

I was chatting recently to some other devs, and the topic of ‘return on investment’ and more relevantly, the time to recoup the initial investment came up. It occurred to me that the attitude that indie devs have to these values are very interesting, and often completely fucking mad.

Just to clarify how I’m thinking about these terms. Lets say you spend $200,000 to make your game, and after a year from when you commit that money, you have earned $220,000. The game then explodes and can never be sold again. You made a return-on investment, of 10% by getting that extra $20,000 back. That assumes you paid out the whole 200k on day 1, and had no access to any of that money.

If the game went on sale on day 1, and you get $200,000 back on day thirty, I’m saying the time to recoup your money there is one month, but note this is a ‘totally different thing to look at’. I think this is widely misunderstood. For example, one game may cost $200k, earn $50k a year and sell for a decade. Its time to recoup investment is a depressing 4 years, but in total you made $300k profit, and a ROI of 150% which is good. That is, however over ten years, so not as good as it sounds… Game two may cost the same $200k, make $300k in the first week, and then never sell a copy ever again. Thats a really quick and awesome profit, but in the long run…I’d prefer game one thanks… :D

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This is what makes looking at steam spy a bit problematic. What you really need in there is a ‘average income per day’ which for obvious bundling/price reasons is entirely inaccurate too, but at least it allows you to make vaguely sensible comparisons over time.

One of the reasons its important to keep these distinction is mind is that often the strategy that gives you the most immediately pleasing result may be in your worst interest. If we go back to our hypothetical $200k game again, and imagine the decision process when it comes to launch discounts or pricing… Arguably game one was priced too high, it didn’t sell that well, didn’t get into the charts, it bumbled along as a failure. for THREE YEARS after that game shipped, you have to admit to your parents each Christmas that no..the game has still made a loss…

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Meanwhile game two sold like gangbusters on the first day. WOOHOO! it was maybe a bit under-priced…but who cares. It made its money back and then some profit in a WEEK! OMG riches await, order a ferrari… Except, we may have priced it hilariously too low. Literally everyone even vaguely interested in the game now has it, and paid $1 for it. In the long run, despite us enjoying a smug Christmas meal this year…we will eventually find ourselves at a bus stop in the rain when game developer #1 roars past us in his Ferrari bought in year eight.

Ok, so is this a real issue? and do people make this mistake? I think it is, and they do. A lot of new indie developers are YOUNG. Its just pure maths. to an eighteen year old, the idea of earning money over a ten year period is kinda unappealing, thats like 55% of your whole life AGAIN. To someone who is 45, 10 years is just 22%. I can handle that. In other words, if I’m older than you, I am probably better at thinking longer term.

This whole topic came up because it occurred to me that breaking even in a month on an indie game is seen as ‘average’, which is insane. When you invest in a solar farm or wind farm, you are looking at breaking even within five to eight years. Five years would be AWESOME. Games have a long tail, and its sensible to think of them as long term investments, not one-night stands.

7 Responses to “Games industry Return on Investment”

  1. Tom H. says:

    When you invest in solar or wind, you’re making a capital investment. Most of these young developers are grossly undercapitalized by any sane measure; from the viewpoint you want to use, the economics just don’t make sense.

    When paying salaries for gamedev, one might have barely the amount of money they need to make the game, not the amount of capital they’d need to make 3-4 games (five-eight years of salary for your dev team).

    I don’t know how you got to the comfortable-sounding point where you are, but with three kids to support, when I leave industry to build a game I’ll have a hard time carrying the family for more than a couple of years on my savings. Break-even would have to be about 3 years from when I started development for me to not go back into industry for some time, which means maybe 1 year after release.

    • cliffski says:

      I did it VERY VERY slowly. making a very cheap, very quick game part-time, then reinvesting that and scaling up, again…and again…and again..until I was able to eventually go full time. That was about eight games in… And even then I didn’t have 2 years of money saved up, probably more like six months.

      • George says:

        From my limited time talking to indie developers, I feel like understanding this is actually a very common problem. More generally, many indie developers seem to want to make a very specific game and they’re uninterested in whether it’s feasible given their budget and time constraints. A lot of “failures” that I’ve read about over the last few years would have been unmitigated successes if the games in question hadn’t had 2+ year development cycles with teams of 3-4 developers or more, and I think it’s questionable whether those increased costs actually buy you much (in terms of sales) as an indie developer.

  2. If I remember correctly, you were saying that a developer charging less than 10$ for a game could not really make money from it these days.

    In this post you are mentionning amounts such as 200k. I wonder, do theses rules still apply for small games such as one that cost less than 10k to produce?

  3. shali8 says:

    Cliff I think that this is an interesting perspective, especially as a young guy going into the tech field. The funny thing is, the thing that I feel was most helpful is in the comments. Your comment about making a quick and easy game then selling it for cheap in order to fund bigger and better games in the future. That is something that has never occurred to me. I am glad that I saw it here. Other than all that though, I just saw the ultimate edition of GSB and I have to say if I hadn’t already bought all of the items in the edition, I would have bought it on the spot.

  4. Markusn says:

    You are assuming that for low price points “literally everybody remotely wanting your game has bought it by now”. By that logic only a few behind-the-moon folks would download Candy Crush today? Or do you assume there is a big difference on that behavior between Steam vs Mobile? I see major games go on sale all the time on Steam and it doesn’t feel like they are faring bad doing so. Really curious if you have data points to back up “low price points saturate quickly”.
    Also an ROI of 150% is nice but not over 10 years. That’s a mere 10% return per year on a super risky investment. The assumption that you will sell 50k/year for 10 years is so risky except for some outliers deemed “classic game” I’m not sure you can even use it for illustrative purposes? Games age quickly.
    (I mean, of course you CAN, but you know what I mean :)