Retail Statistics

Unfortunately, while the royalty model worked reasonably well in the old days of $100,000 development budgets, the associated risks are far less manageable in today's market.

A Hit-Driven Business

The overwhelming majority of PC games sell fewer than 100,000 units before going out of print; for most professionally developed and published titles, sales will begin to taper off at 15,000 to 40,000 copies, with any remaining inventory being liquidated by the publisher for little more than the cost of printing the box and CD-ROM. On the console side, the average title stands a much better chance of breaking even, but few teams can break into the console market without proving their worth in the PC world first. The bottom line: the vast majority of game projects lose money for the developer, the publisher, or both.

Therefore, the industry must rely on a small number of best-selling titles to earn enough profits to offset the losses suffered on the bulk of the projects.

Hedging Your Bets

Since all but the largest independent development companies release at most one or two games a year, the low probability of a hit makes it very difficult for developers to finance their own work. Therefore, most developers seek to shift the risk toward their publishers by negotiating advances that cover production costs and a reasonable profit margin.

The publishers, on the other hand, have no one else on whom to offload their risks. Thus, their strategy becomes one of cost reduction (limiting the losses on any individual title by reducing advances to a minimum) and risk balancing (by publishing as many different games as possible to increase the odds of a hit).