The Gamble of E3: The Math Doesn’t Add Up

PHOTO ILLUSTRATION: © TAYLOR REEH

PHOTO ILLUSTRATION: © TAYLOR REEH

A few weeks ago, there was a Senate bill in Nevada passed that “allows for variable-payback percentages in slot machines.” In plain English, this allows games of chance to have elements of skills that can lead to better cash prizes. The Association of Gaming Equipment Manufacturers that lobbied for this bill is headed by Thomas Jingoli, who also happens to be the Chief Compliance Officer of Konami Gaming.

I’ve been thinking about this story more as E3 news descends on us. Every year, news gets trickled out to players and shareholders of game companies alike, as publishers try to pitch us on new and exciting games, features, and consoles. This year? Sony’s Andrew House said their first party lineup is “a little sparse,” Microsoft is bringing (of all things) an update to a controller that should have been there from the start, and Nintendo is busy semi-announcing new games through surprise Nintendo Directs, but staying mum on their prospective next platform, the NX. The conference itself is letting some select members of the public in for the first time ever, trying to get people excited for these games.

E3 always feels like a gamble. There are games announced that never come or are cancelled before they come to light, sequels to games no one asked for, marketing pushes for tech that the public is still waiting for, and occasionally, a great and fantastic new concept in video games genuinely worth the expense and risk of bringing it to market. We also hear from critics that E3 is a show of force for the video game industry in the cultural landscape, and in the same breath, hear that it doesn’t make sense to have a show anymore; after all, the companies put their trailers and streams of the conference on the Internet.

It’s a roll of the dice each time, with the stakes ever rising. The line between video games (eg, Super Mario Bros, Tetris, Metal Gear Solid) and video gaming (eg, slot machines, video poker) is already blurry and the math is getting into role reversal. The gaming industry (casinos) generated $6.5 billion in 2013, a shadow of its former self. The gaming industry (video games) is set to generate almost $103 billion in annual sales by 2017.  A 600 square foot E3 booth, the smallest available one, in 2013 with all associated parts and labor costs about $30,000 to stage. Of course, this assumes you have something to show at the expo and have spent the money developing a game, which by the time we get to E3, is hopefully almost a complete one. Does the cost of developing games, marketing plans, and coming to Los Angeles for a week make sense financially? For Nintendo, the answer is a partial no, electing last year to stay away from the E3 show floor and instead host a special Nintendo Direct stream and is doing the same this year.

The GAMBLE OF DEVELOPING VIDEO GAMES, MARKETING, AND RUNNING E3 BOOTHS MAY EXPLAIN WHY KONAMI IS DOUBLING DOWN ON ITS CASINO GAMING STRATEGY INSTEAD. PHOTO CREDIT © HOUSE OF JAPAN, G2E 2013

The GAMBLE OF DEVELOPING VIDEO GAMES, MARKETING, AND RUNNING E3 BOOTHS MAY EXPLAIN WHY KONAMI IS DOUBLING DOWN ON ITS CASINO GAMING STRATEGY INSTEAD. PHOTO CREDIT © HOUSE OF JAPAN, G2E 2013

Kickstarter, the crowdfunding darling that has produced products such as the Pebble Watch, is the house asking players for donations. Koji Igarashi, one of the guys behind Castlevania, has raised $3.1 million so far in his effort to fund development of Bloodstained: Ritual of the Night. His initial crowdfunding goal, $500,000, was a gamble on his part to show the financiers backing him that the market wanted a Symphony of the Night-style game. Once Igarashi proved people wanted his game, the money the financial people were holding (an undisclosed amount) unlocked and the people making Bloodstained could get more cash (and presumably, get paid a decent living wage doing it).

The average game developer’s salary is around $83,000. Bloodstained’s project time is said to deliver the game in 2 years. One person associated with this game may make as much as $166,000 if that bears out. On the conservative side, let’s say 25 people work on the game. This works to be about $4.1 million. This number does not include all the other stuff presumably also going into the game’s development cost, like licensing for the engine they’ll use to build the game, a marketing budget to sell the game to people other than the ones who backed it on Kickstarter, and keeping the lights on at the building where they will be making the game. $4.1 million in hypothetical costs to make one game in a projected $103 billion industry.

No wonder Steam is awash with ports from mobile games, DayZ-style games, and free-to-play MOBAs that won’t have a player base a day after release. Developers and publishers are trying to maximaze the work they’ve already done in order to get the biggest payday at the lowest risk. For example, the fact that Payday 2, a game where you figuratively and literally rob banks, has 23 pieces of DLC is testament to the low risk the business side of games wants to take on. The strategy is to keep making add-ons for properties that already exist instead of making Payday 3 (though Overkill Studios is making the next The Walking Dead game).

On the other hand, the cost of failure is huge. Zynga, the once popular developer of Facebook games like Farmville, reportedly closed one of their studios in Orlando, trying to reduce their costs by $100 million and laying off 364 people. It is worth repeating: $100 million for Farmville’s decline in popularity. In that context, Konami’s support to make skill-based games in Las Vegas legal makes sense: there’s not enough money in video games anymore to justify the risk.

FARMVILLE'S DECLINE IN POPULARITY TRANSLATED INTO LOST CASH FOR ZYNGA. PHOTO CREDIT: © ZyNGA

FARMVILLE'S DECLINE IN POPULARITY TRANSLATED INTO LOST CASH FOR ZYNGA. PHOTO CREDIT: © ZyNGA

This confusing spectrum of game companies that succeed and fail is why E3 seems like a dangerous stage to pitch your niche, fan-favorite game only to cancel it later (Phantom Dust). Then again, it may be the best place to redo your platform strategy (see Microsoft's backpedaling on nearly everything the Xbox One stood for console since it was announced). Hopefully, we get exciting and interesting video games to play for the next year and the developers that made them continue to make a profit, even if the over six-figure budgets mean players get infinite sequels and DLC. Meanwhile, developers get squeezed out. 

With E3, there's always another game to bet on, always another chance to see where the chips fall. Just don't pay attention to the numbers; it's a house of cards.