In the present games industry, the main method of games distribution is retail. This is your EB Games, your Gamestops, and yes, your Wal-Marts.
Wal-Mart is incredibly powerful, and one can attribute to Wal-mart the placement of the abyssmal Deer Hunter and its brethen of games on the monthly/weekly top ten games sold list since 1998.
Some game developers have experimented with their own digital distribution systems, most notably Valve, who attempted to distribute Half-Life 2 through Steam, Valve's own content delivery system), before they were halted by a lawsuit from their retail box publisher (Vivendi Universal).
The way the games industry works in general is this: developers make the game, then send it to a publisher to get it boxed and put into stores, and then the retailer sells the game to the customer. The publisher and the retailer get the bulk of the profits, while the developer gets little return, so it's not surprising that a lot of developers are now trying to do their own digital distribution. As I understand it, Sony now sells the bulk of their Everquest upgrades directly online to the customer.
With this in mind, publishers are now writing in online distribution rights into the contracts they make with developers, so that they too can sell games online for direct download.
Retailers don't want to get cut out either, so now retailers are doing direct downloads as well. Gamestop tried this before as a rental service in 2001, and it quickly went under, but this time they've partnered up with TryMedia to feature Digital Distribution on EBGames/Gamestop's website, where a customer can now just directly download the full game to their computer. Most of the titles up for this are old titles or casual games with prices ranging from 4.95 to 59.99, stuff that might otherwise end up in the discount game bin.
The end result is that now there's a fourth person taking a piece of the pie -- the online game distributor (TryMedia). Let's just say that Gamestop has negotiated a deal where they get 25% of the customer dollar, while TryMedia gets the rest. TryMedia will skim some percentage of the 75% left over (let's say 40%) and pass the rest to the publisher, who gets the remaining 60%. The publisher has an agreement with the developer for 15%, so 15% of 60% is 9% of the original customer dollar -- meaning 9 cents per dollar (which goes back against the advance given by the publisher). For a $60 game, a whole $5.40 might make it back to the developer (which is likely then used to pay back the $40 million dollar development cost of the title). (need to sell 7.4 million copies!)
In the old model, Gamestop took 25%, publishers took the remainder 75%, and gave 15% of the net to the developer -- 15% of 75% amounts to roughly 11.25% of the original dollar, making a $60 game worth about $6.75. (need to sell about 6 million copies)
Notice the difference in the number of copies that need to be sold? Is it any wonder why so many game developers go bankrupt?
With more people coming in to take pieces of the pie, how long will it be before developers make even less than 5%?
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