Digital costs more than you think

Leading games industry analyst and SuperData CEO Joost van Dreunen on how the move to digital isn’t generating revenue quite as easily as some companies might have hoped…

I attended several analyst meetings at this year’s E3. Almost unanimously publishers pointed toward digital – the transition to digital development, publishing and distribution – as the most important strategic decision to grow their business. Implicit in this transition to digital is the notion that, different from the physical retail model, publishers get to keep more of what a gamer pays. It improves margins, as they say in business speak.

But does it?

There are some obvious benefits to digital. Reaching a global audience has never been easier, and allows even the most obscure title to gather a sustainable audience. It also reduces the value chain as digital games do not require publishers to hold any inventory or rent trucks to drive boxes to stores. It provides publishers with a lot of information on their customers, allowing them to better market and develop games. And, most importantly, digital distribution reduces the bargaining power of the retailers.

"Digital is not without its costs.Salaries need
to be paid even after the game has launched.
In the past, publishers would cut their workforce
after the release of a big title to reduce
overhead. Digital games require ongoing
development, maintenance and improvements,
forcing companies to keep more staff."

But digital is not without its costs.

Salaries need to be paid even after the game has launched. In the past, publishers would cut their workforce after the release of a big title to reduce overhead. Digital games require ongoing development, maintenance and improvements, forcing companies to keep more staff – a good thing because giving people job security allows them to do great things. And publishers now find themselves having to fill new positions in marketing and analytics.

There’s also the infrastructure needed to sustain online. Last year Take-Two found out what happens when 25m console gamers all go online at once. The money spent on resolving infrastructural issues when GTA Online went live put a hefty dent in Take-Two’s initial cost estimates.

And finally companies are still dependent on distributors. Facebook, Valve and Apple still take their 30 per cent cut and have control over what gets placed front and centre, and play a key role in connecting games with gamers.

So the question that publishers are trying to answer is does digital improve their margins?

Take-Two suffered, but survived, the initial shock of infrastructure needs for a large online console audience. Yet when it comes to monetisation, there is little upside: GTA Online players can purchase in-game currency but there’s no strong incentive to keep spending. So while the servers have to keep running, incremental revenue is on a constant decline.

Take-Two’s mobile efforts so far seem to be focused on building a secondary revenue stream. Releasing old GTA games on tablets earns a few extra million, but does little to extend the franchise.

Ubisoft, on the other hand, has been looking at digital differently. Growing its online sales slowly, but steadily, to $267m on a 12 month trailing basis, digital presents one fifth of its total revenue. Instead of seeing digital as incremental, Ubisoft is aggressively moving into mobile, claiming 90 per cent of these titles arriving next year will be free-to-play.

So the appropriate response to whether digital improves margins is how serious about digital are you? Only by making it central to your operation, formulating a detailed strategy across digital platforms, and staffing accordingly, will a transition to digital improve margins.