Organisational Structures of the Games Industry
There have been four stages to bringing a game to the market: Development, Publishing, Distribution and Retail.
Development
This is done either by a publisher’s in house development resource or a separate third party development company. Most game designs are based on a new concept that the developers have created or a pre-existing template around which they have to create new ideas. The development team is usually responsible for all elements of the game’s construction and makes use of people with highly specialised skills ranging from level designers, engine programmers, artists and animators to physics programmers, audio technicians, composers and artificial intelligence programmers. Funding for a game’s development can either come from internal resources or the publishers of the game. Since the funding and sales risk is incurred by others within the value chain, the developer is paid in advance royalties (and if the game’s sales are high enough to recoup the advance, the developer receives post-advance royalties). The royalty advance is usually matched to the project’s development costs and is usually a proportion of the net wholesale price of the product or net receipts to the publisher. The rate can vary from around 5 per cent to as high as 40per cent (the industry average is 15-25 percent).
Publishing
The publishing process involves a number of activities:
Games/developer selection:
Games at all stages of development are pitched to publishers and the publisher must assess not only the sales potential of the game, but also the competence of the developers and the viability of the project overall. For games development projects based around licenses, the publisher must choose the most suitable developer - whether in-house or from a selection of third parties.
Funding:
In the vast majority of cases, it is the publisher that funds the development of a game. Increasingly a developer will have had to self-fund the game to a prototype stage before a publisher will commit to publishing it (and fund the remainder of the game’s development). Development funding normally takes the form of a royalty advance and is paid on a milestone basis.
Producing the game:
Once a game has been signed by a publisher, a project manager or ‘producer’ is allocated to that title to ensure that the game progresses according to schedule. Should the developers fail to reach a milestone or meet a quality threshold then the publisher normally has the right to cancel the project.
Localisation:
The publisher often must also arrange for localisation of the game for the various global territories in which it intends to publish the product. This has to take account of cultural sensitivities and local legal requirements as well as language diversity.
Manufacturing/Distribution/wholesale:
All publishers are responsible for arranging the manufacturing and distribution of a title and some also maintain distribution departments or work with companies that handle the physical distribution of the product. Manufacturing of console games is done under the auspices of, if not directly by, the console manufacturers. Most publishers handle the wholesale of their products to the larger retail accounts themselves, employing third party distributors for the smaller retail chains and independent retailers.
Marketing/PR:
Creating hype for a product has become a crucial part of generating a hit and publishers have become increasingly sophisticated in their use of marketing. Marketing budgets can significantly exceed development budgets and tend to be calculated based on the expected revenues from sales of the product over the life of the marketing push.
Aside from the console manufacturers, the largest companies in the games sector are invariably games publishers. The potential upside from the publishing business model is far more attractive than for developers.
Although it is higher risk, publishers benefit from retaining the largest proportion of games revenue per unit sold, broader IP (intellectual property) retention and from greater business model scalability.
Distribution
Distribution comprises the physical conveyance and, in many cases, the wholesale of games to the retail chains and independent retailers. Some of the larger publishers have their own distribution infrastructure, often originating from the acquisition of independent distributors. These distribution facilities are often used by other, rival publishers and despite the theoretical conflict of interest, they mostly appear happy with this status quo.
Most publishers, however, use third party distribution companies, even if only to provide the selection, packaging and carriage of their products from the manufacturer/warehouse to individual retail stores or retail chain depots (known as ‘pick, pack and ship’ distribution). The larger distributors provide a broader range of services than just pick, pack and ship operations. Most offer wholesale services, undertaking the responsibility for selling publishers’ products into retailers and managing these retail accounts. This is particularly common for the many smaller retail accounts whose day-to-day administration would be simply uneconomic for most publishers. Some publishers use multiple distributors to engender competitiveness to maximise their distribution reach; others have adopted an exclusive approach handing all of their distribution requirements to a single company. In some territories, the line between distribution and publishing can be very blurred. This is particularly the case in continental Europe, where many distributors offer to perform a complete sales and marketing role too and even provide guarantees and advances to the original publishers.
Retail
Retailers, through high street, mail order or website, sell the products on to the consumers. With the help of the publishers and distributors, the high-street retailers coordinate point-of-sale marketing through the use of in-shop displays, demos and posters and determine which titles will fill their (usually) very limited shelf space. Retailers are also the first point of call for returns. Games are being sold in an ever broadening array of locations, although to some degree this breadth is partly based on the fortunes of the market. Thus, in the transition between one generation of games console and the next, some retailers may opt out of stocking games until a sufficient installed base of new consoles has been reached and software sales for these new platforms have become sufficiently mass-marketed. Some supermarkets will, for example, only stock chart product for the dominant console and little else.
Hard-core online gaming represented 40 per cent of the 2004 market by value and 25 per cent of total online gaming households.