The business of video games (90s and early 2000s)
The video game industry is one of the fastest growing sectors in the US economy. Its’ interactive entertainment products are slowly but surely supplanting traditional forms of entertainment such as TV & movies. In 2021, two third of all Americans (~227 million) played video games (ref) and this figure us up from ~164M in 2019 (ref). From 2010 to 2020 the consumer spending on video game content in the US has gone up from $17.5B to $49B (ref). This rapid growth in market size and customer spend has let to a lot of new players into the market. This article covers some of history of player ownership and how money was made in video games and is part of a larger series which explores the past, present and the future of the business of video games and player ownership.
Disclaimer: All opinions expressed here are my own and not of my employers.
What does it mean to own a game? In 1990s and early 2000s, when I started playing video games, I would go out and purchase the game (usually on a CD) for my platform of choice PC, Xbox, Playstation etc. One needed the physical disc to play the game even if the game was installed on your device as it was the key which proved your ownership of the game and hence allowed you to play the game. If your CD got scratches or got damaged you could no longer play the game you purchased. Every time you wanted to play a different game, you had to physically swap the CDs out in your CDROM drive or Console. Also the portability was a challenge as you physically had to take the disc over to your friends place if you decided to play the game at their place. But at the end of the day, the disc was mine to own, to sell, to trade or loan to my friends. It was no different from any other physical thing I owned.
From a game developer’s perspective, games were these massive projects that you worked on for years. Your balance sheet was in red for all the years you spent working on the game and you made most of your money within the first few months of the release of the game and hoped that you made enough money to be profitable by making up for all the capital invested so far. It was not very different from the movie industry. It was a hit driven business, with very long lead times. The appetite for experimentation and trying something new was very low, because an unsuccessful game could cause tens of millions of dollar of loss to the game developer and publishers. Game developers would crunch to get the game ready for a certain launch date and then take a well deserved break, before going heads down on the next game.
But how did the game developers make money? What were their key metrics for success? Even back then it was clear that the metrics game teams wanted to target were Player Acquisition, Engagement and Monetization.
So how did you acquire players for your game? The acquisition happened through ads and playable version of the games (demoware and shareware), and I for one use to wait for the monthly Chip magazine in India to try out the trial versions of upcoming games.
In order to drive engagement, you just made the games fun so that players would keep coming back to play it. The content used to be limited and could get repetitive and boring, so game teams added different difficulty levels, achievements, leaderboards, speed run timers etc. The games were made easy to pick up and play but hard to master. This way the games had longer shelf lives (a few months or in the best case scenario until the next version of that game came out). What game studios did not want, is for the players to sell their game off on the secondary market for a much lower price to get some of their money back. They also never saw a single dollar from the secondary market sales.
The monetization in this phase was mainly through physical distribution channels in stores. The games usually sold for $60 price point in retail for the standard edition and this has been an industry accepted practice in PC & Consoles for a while. The premium SKUs such as collectors edition cost between $70 and $100 (ref). A year or so after the original launch the ultimate edition or game of the year edition would launch for $30 to $50 and eventually the game would settle down for a back-catalog price of around $20 for as long as the platform for which it was built sticks around.
So the game publishers got $60 per game sold, Right? Wrong! They saw around $27 of the $60 retail price point. (Ref). The retails took roughly 25% of the sale price, the platform royalty was around 11.5%. When you add the costs of goods sold, returns etc.. you are left with only 45% of the original (or $27) making it back to the game publisher.
This model of game development, physical distribution and physical ownership worked for a while, but change was on the horizon. Players wanted more content and they wanted it now. Game teams wanted to improve their profitability, by either having a larger portion of the pie, reducing the time to ship games, increasing revenue sources or any combination of the above. The end goal was to make enough money to continue being a business and keep releasing bigger and better games for the customers, and to make sure one bad game or bad creative decision did not put the companies out of business.
With the rise of the internet, immense possibilities for Player Acquisition, Engagement & Monetization opened up. Digital distribution channels via online store fronts, targeted advertisements for acquisitions, multiplayer games to increase engagement, DLCs, in game virtual economies and much much more.
More on the digital distribution channel and live services in the future articles…
