The Economics of a 2D Adventure Today

Oct 18, 2004

Note: I wrote this in 2004. In the days before Steam and Kickstarter, but most of it is still applicable, but a lot has also changed.

Someone recently submitted a question asking what it would take to build a classic 2D point-n-click adventure today and would it be a viable business? The internet is filled with classic adventure fan sites centered around the LucasArts and Sierra games and a common thread is always how much people would like to see new ones being made, and why isn't it being done.

These are interesting questions that I've ponder a lot in the last year, but never really looked into it in any detail.

Now, before I launch into this long stream-of-consciousness, there are a couple of important things to understand. First, this is only a thought experiment. This is not something I am planning on doing, or even have a huge interest in doing, so please don't feed the rumor mills. Second, this article contains gory and gruesome details about the games business and, in particular, marketing and distribution. If you'd rather remain blissfully oblivious to the horrors of what goes on behind the scenes, this is the place to stop reading. If you're one of those people that can't help but stare at a car accident, read on.

For this exercise, I am going to make a few assumptions.

Assumptions

1) We're building a classic 2D point-n-click adventure game.

Building the game in 3D is a much more costly endeavor that brings with it a whole slew of complications which I won't get in to in this article. The goal here is a class point-n-click adventure.

2) We're hiring real employees to build the game.

Clearly, the game could be done cheaper with hobbyists or people passionate enough about the genre to work for free or below cost, for back-end, or with a trust-fund baby on staff, but the goal in putting together this plan is to explore it as real business, and our business model is a little screwed if we count on people working for free. Also, given that deadlines will become important, it's necessary to have everyone's full attention and nothing says that better then a paycheck, except maybe a cattle-prod, but that might be illegal. I'd have to check.

It's also important to hire the best people possible. This is not a diss to the hobbyist market, there are some very talented people out there, but we'll need our team all in one place and not working at other jobs or going to school. If you're an unemployed adventure game developer hobbyist, please contact our fictional company for a fictional job interview.

I'm also assuming we have to pay competitive wages, and most of my pay information comes from the Seattle area, so we'll use that data for now. It's probably more expensive in the Bay Area, but cheaper in India.

3) We're going to focus on the development and product related costs only.

There are a lot of other overhead in running a company, even a small developer, we'll ignore those. There are also huge costs associated being a publisher, like marketing, sales, distribution, graft, etc. We'll ignore these for now, but touch on them later on the article.

4) The engine technology is not included in the costs.

There are a lot of 2D engines out there that will do what we need, so we'll just assume we're using one of those. I realize that many of them are Open Source, which could complicate or help our situation. I'm going to call it a wash and ignore the whole situation for now. Trust me, It's not that hard to get your hands on a good solid 2D engine for next to nothing.

5) The game is state-of-the-art, as far as 2D goes.

Yeah, I know. The last time you read state-of-the-art and 2D in the same sentence was back in the early 90's. The game will be fully animated and include wall-to-wall original music and full voice. No corners will be cut in the quality of the production.

Although some styles of art might be cheaper to produce than others, I don't think the savings is going to be dramatic. We might want to go with a pre-rendered 3D look rather then the traditional 2D animation found in a lot of 2D adventure games. Doing pre-rendered 3D might be a little more expensive because the tools tended to cost a lot, and 3D animators (as a rule) can be more expensive. People argue that you end up saving because it's easier to animate once you have the models built, but I have not seen this to be true, but my experience is a little limited in this area.

6) We're going to build the game in a year.

For a classic point-n-click adventure, this is aggressive, but should be doable. Monkey Island took less than a year. We'll need a lot more art, but that's a production issue and can easily be made up for with more people to a certain extent. We're also going to do a very rigorous pre-production, this will be essential in getting the game done on time and on budget. Since we're dealing with known technology, this should be very predictable.

7) We're using an established publisher for the game, and not self-publishing.

Starting a company that will self-publish the game into retail channels is a huge undertaking and would require some significant capital. Not impossible, but we'd need money beyond the cost of development, and that is a whole different business plan. It's also hard to become a retail based publisher with a single game. You need several games to have any clout with the retailers. We could do a distribution deal, but then we're significantly cutting into our profit. As the last two sentences suggest, we're also assuming in-store distribution, online distribution will be covered later.

8) It's a PC game

Dealing with the console manufactures on something like this would be a nightmare, plus the royalties you pay to them would kill us with a nitch game like this and it's just not the venue for these types of games. At least not to start.

So, let's roll up our sleeves, pull out our slide-rules and get down to business.

Development costs and plan

Staffing is the main expense, and is always a hotly debated topic. Everyone has an opinion, and I'm sure this will be no different. Until a complete pre-production is done, it's hard to nail this cost down. These figures are based on my experience building adventures at Humongous Entertainment and at my last company Hulabee Entertainment. We probably built more 2D graphic adventure games than any other company in the world and we had a finely tuned production process. Granted, these games were for kids, but that only affects the scope of the project. If you've ever played any of those games, you will understand what I mean.

Remember, not everyone on this list would be on the project for the entire 12 months. This creates some complications because you need to keep people around to ensure a skilled staff for the next game. Hopefully we could get two games going in such a way that people would be moved off one project onto another. One advantage the movie business has is an infrastructure to deal with production people coming and going from projects. In the game business we don't have that. But, I'm going to ignore this issue for now. We'll assume there are other projects to keep people busy and there is no down-time.

I'm also going to assume the design and creative lead is either the lead programmer, lead artist, or both.

Lead Programmer (will also deal with engine issues) Lead Artist Producer

Subtotal: $220,000

3 Programmers (in the scripting language)\ 5 Artists (skilled in 2D animation)\

Subtotal: $480,000

Testing

Subtotal: $30,000

Other expenses that will be contracted out:

Script Music
Sound
Voice talent (non-union)
Voice recording

Subtotal: $60,000

The total cost for a 12 month project - including a standard 20% overhead for insurance, taxes, graft, paper-clips and a little rounding up - comes to:

Project Development Total: $950,000

Now, we can argue all day about how much we're paying people, whether someone is over or under payed, etc. Yeah, yeah, yeah. I know. My defense is that this comes from my direct experience in hiring people to do the exact same jobs. We can certainly save some money by hiring talented people with no experience, and that often works very well, but I'm assuming that at least half the people are experienced in the business.

I've kept the team pretty lean. It would be easy to dump the Producer, but that would be a huge mistake. A good and talented Producer is gold. We can also save a little money if the script or music is done by someone already on the team, but that will take them away from their other job and you have to ask yourself: are they really the best person for the task?

This cost is also just for development. If we're going to fully evaluate the prospects of a 2D point-n-click adventure in today's market, we need to think about marketing costs on top of development. Even if we use an established publisher, we're going to need to include this in order to evaluate the ROI (return on investment) that a publisher is going to look at.

Marketing Costs

Let's assume marketing costs comes in at $500,000. This figure is probably about half of what it should be. We can't just take out full page ads in the game rags and pepper the gaming sites with banner ads. We're going to need a good solid grass-roots campaign. If we're really clever we could get away with a number like this.

It's not uncommon to spend as much on marketing as it cost to develop the game. The marketing budgets for mainstream console games reach $10 million and more, but since we're not doing console, we save the drain of TV ads. We can also be clever with our PR and get the marketing costs down as much as possible. Lots of PR will go a long way on the initial game, but once the novelty wears off (and competition begins), we'll have to spend marketing money. As sad as it is, the best games don't always sell just because they are good. It takes good marketing to be successful. Never underestimate good marketing.

One big area of concern here is if we're going through a publisher, we're going to have to rely on them being clever with marketing and PR. That's a big risk. Most publisher try and fit everything into a template. We're going to need a publisher that is willing to think differently about this. It's an important trait to be looking for as we hunt for a publisher. But, as anyone who is pitching a 2D adventure game today will tell you, there aren't a lot of choices.

I see this as the single-most risky part of this venture.

For the first part of this evaluation, we're going to assume we're going through retail distribution. In reality, this is the most likely scenario. But more on that later.

Retail Distribution

I'll do that math for three different price points, $19, $29 and $39. I don't think it's realistic to assume a $49 price.

I'm sure this is obvious to most everyone, but I'll point it out anyway. The publisher does not get the full retail price of the game. The stores have to make a profit as well. The publisher sells the game to the retailer for what's called the Wholesale price. The store can then sell the game for whatever they want, but for the most part, they use the following numbers:

Retail $19 = Wholesale $15
Retail $29 = Wholesale $22
Retail $39 = Wholesale $30

There is also MDF (Marketing Development Funds) and co-op charges that the publisher needs to pay the retailer, and those typically run 6% of the Wholesale price billed quarterly, net of returns. These cost go to cover in-store advertising, news-paper circulars, etc. In addition, publishers also pay to have their games on "end-caps" or have special "shelf-talkers" (they don't really talk, thank-god, but I'm sure that's coming) that helps point out the product. General rule of thumb is: if there is anything in the store that calls any attention to the game, it was paid for by the publisher.

We'll assume we're not going to pay for anything beyond the required co-op and MDF, but it might be a wise investment to buy some better placement.

We also have the cost of the box, CD, manual, shipping, graft, etc. This is called Cost of Goods, or COGs for short. This will typically be $1.50 unless we want to throw some cool extra stuff in the box like we used to do in the olden-days. Could be a good idea for the initial launch, if so, we'll bill that to marketing.

There are also fees for outside sales commissions, distribution, EDI (electronic inventory management), inventory management, field merchandising, etc. This will add another $1 to the cost of our game.

We need to assume that we're going to get returns. These might come from damaged product, customer returns, or games that the just don't sell. We have to account for this, it's typically 20%. As a side note, next time a store tells you they can't take a game back because the publisher won't take it back, call bullshit. Of course, it's not as simple as the publisher giving the money back, it's typically done as credit, and it's often negotiated with respect to new games being bought from the publisher. It is one of the reason that a single game publisher is going to have a hard time.

So after all this, plus a little rounding, we're down to the following profit:

Retail $19 = Profit $9
Retail $29 = Profit $18
Retail $39 = Profit $25

It's now time to calculate our break-even point. That is the point that our publisher has made all their money back. To do this, we divide the total cost of the project by the profit at each price-point.

Our game cost $1,400,000 to build and (minimally) market, so to break-even we need to sell the following units at each price-point:

Retail $19 = Break even units 155,000
Retail $29 = Break even units 75,000
Retail $39 = Break even units 56,000

Hmmmm....

There is quite a jump from the $19 to the $29 price point. It will be tempting to try and sell it at $29, but with a game like this, we might need the lower price-point. But the lower price point could leave some buyers with the feeling that the game isn't worth the full price, and that somethings wrong with it. Game players are always screaming about wanting lower prices, but the truth is, if you lower the price too far, people stop buying it (unless it's a high profile game).

155,000 or 75,000 units doesn't sound like a lot, but our publisher is not in business to break-even, we're probably going to need to sell two or three times that. Not every game we do is going to be a success, no matter how hard we try and how good we are. If we're going to push some creative boundaries, we're going to need to experiment, and that's going to mean some failures. We need to make a lot more then just break-even. A publisher or investor is going to look at spending a dollar on this verses spending a dollar on something else. This has to be a compelling option for them. Break-even is not compelling.

Maniac Mansion Deluxe, the fan remake of Maniac Mansion, racked up over 200,000 downloads in a very short time, while it was free, it does show a strong interest. How much of that was just "nostalgia" could be an important questions to answer. How many of those people would spend $19 or $29 for a new game is another question I don't have the answer to.

Now let's look at online distribution, after all, we are living in the futuristic year of 2004.

Online Distribution

Online has one big advantage: It cuts out the middle-man, allowing us to get the full retail price of the game. Online also has one big disadvantage: it cuts out the middle-man. Having the game sit on a store shelf gets it in front of people eyes, it also gives it this sense of legitimacy, like a hardcover book does in the book publishing business. The perception of shelf presence will vanish at some point, but it is a reality today. There is a good reason why games like EverQuest are sold in stores and not exclusively online.

If we only have an online presence, we need to do something to drive people to our website. That's going to require more marketing, promotions, tie-ins, etc. We can count on the buzz of our game being the first 2D point-n-click in fifty-years, but that is only in certain circles. We need to reach beyond that. It's also the kind of buzz that dies quickly. If we plan on doing more than one game, we need some kind of sustainable way to get people back to our site.

The issues surrounding marketing are not unique to online sales, just complicated by it being new and different.

Online distribution is also not free. Bandwidth costs money. If we plan on the game being successful, we need servers and bandwidth able to handle huge simultaneous downloads. With all the animation, voice, music, graft, etc, we could approach 1GB. Nothing will kill our sales faster than willing customers that are unable to download the game at a reasonable speed. Research I did several years ago into online distribution showed that, allowing for peak usage, bandwidth cost could run $5 per download. A lot might have changed since then. It was at the peak of the dot.com thingy.

No doubt, someone will bring up BitTorrent and other P2P systems as a method of distribution. Assuming that our purchasing model can deal with it, it is a good alternate way to get the game to people, but does it really hit all the people we want to be buying the game? If we're trying to hit a broader audience, we need a fast, simple and direct way for them to download our game.

System like Steam and even custom BitTorrent clients are very real possibilities, but they are risky and untested and will cost is time and money. Publishers and investors don't like risk. They are already taking a big one on the game, the fewer risky parts to our plan the better.

With online distribution there are also issues with accepting credit cards, dealing with returns, unhappy customers, copy protection, unlock keys, graft, etc, etc, etc.

We will also have to overcome the "everything is free on the internet" mentality. Many companies have - so it's far from insurmountable - but it is an issue that needs to be considered. Piracy is also a huge problem. When you have a main-stream product, be it a game, music or a movie, you are some-what insulated from piracy because of high volume. When you're dealing with a nitch market - like a 2D point-n-click would be - you are much more susceptible to the negative effects of piracy due to the smaller market and lower volume.

Finding an online publisher would solve some of these problems (or shift them to someone more equipped to deal with them), but I have yet to find a online publisher willing to spend the kind of money we're needing for an online distributed game of this scale. They are very much in the mindset of small webish games for the casual gamer. In contrast, conventional publishers are used to spending larger sums of money on games.

Online distribution seems great until you start to really look into it. It's rife with issues, but shouldn't be discounted. At the end of the day, we'd probably settle on some of both.

The last issue is developer royalties.

Developer Royalties

If we go with a publisher, we are going to get a cut of the wholesale price. We'll assume a rate of 20%. It is also typical for the developer to recoup the development costs before any real money is paid out. What is recoupment and how is it calculated?

As a developer, we are "loaned" the money to build the game, in our case $950,000 (most publishers do not bill the developer for marketing, some do). We need to pay that money back to the publisher. When the game is sold, we get our 20% of the Wholesale price, but we have to pay back our loan, so we won't get any money until our royalties have reached $950,000.

To calculate the developers break-even, we take the $950,000 we "borrowed" and divide that by 20% of the wholesale price. So for the developer to start making money, the game needs to sell the following units at each price point:

Retail $19 = Developer break even units 320,000
Retail $29 = Developer break even units 220,000
Retail $39 = Developer break even units 160,000

Double Hmmmm....

Whether the whole developer royalty model is fair or not is not the point of this article, so let's not get side-tracked on that. It's the way the industry works, and we'll have to live with it until the armed revolution of 2007. As the date approaches, keep checking this site for instructions.

Some final thoughts

  • Remember, this thought-experiment was about building a modern 2D adventure game in today's market. There are a lot of other styles of games that can be made cheaper. Stay focused.
  • There are a lot of issues and sub-issues I have not talked about, or only briefly touch upon, so this should not be used as anything other than a conversation starter.
  • There are an endless number of cheap ways to do marketing and ways to cut development cost. If this was a real business plan, all those would be thoroughly thought through.
  • There are a lot of alternate distribution models that we could explore beyond the traditional retail sales and emerging online. We could do it as shareware, advertising funded, bundled with cereal, etc. The list is endless, but they are also risky and unlikely to get us the funding to build the game. For this thought experiment, we're trying to build a viable business likely to get funding from an investor or publisher.
  • Anyone attempting this is going to have to find a publisher (or become a publisher) that is willing to put out several games before evaluating the success of the venture. It's going to take a few really good games before this catches on. If our publisher (or we) gives up after an initial failure, it will never succeed. A longer term vision is needed.
  • We need to expand the audience beyond the current 2D adventure fan base. While this is a large and dedicated group, it needs to be larger and growing. We need to appeal (with the game and the marketing) to a new set of people who are not exclusively interested in high-testosterone 3D gaming. Games like Grim Fandango had a very wide appeal, but were miss-marketed and abandoned to quickly.
  • We should build a Mac and possibly a Linux version of the game. We need every channel we can get. Linux poses some problems (perceptionally and technically), but they are worth solving. I have not thought a lot about the Linux issues, they might be simple.
  • We're going to need to come up with truly innovative stories and modern game play. We can't just mimic the adventure games of the past. We have some huge graphic perceptions to overcome, at least as a first impression. Everyone talks about game-play being king. We would need to prove it.
  • We should think about a licensed property, but the economics of it probably don't make any sense. And it's not as much fun.
  • There is not going to be a lot of profit on the back-end. While we do need to build a viable business, in the end of the day, it's got to be something we love, because it's not going to be much more than a paycheck.

Fun to think about...

Now everyone back to the salt-mines...