Golden Ticket

Golden Ticket
Playing the Spread

Jason Della Rocca | 3 Jul 2007 12:00
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When we split the data between new and sequel/franchise titles on top of internal and external IP (Graph 2), we see marked differences. While the internal franchise curve looks nice and meaty, the new internal titles don't fare as well, which makes sense, given how it took GTA three iterations before it struck big.

So, what's going on here? Why isn't everyone on the internal IP bandwagon?

Crunching the raw numbers starts to tell a slightly different story (Table 1, Table 2).

OK, lots to explore here. First off, internal IP's wealth contribution to the industry far exceeds what we're generating from external properties. Though, when divided by the number of titles in each category to get an average-revenue-per-title amount, the difference is somewhat less striking - albeit still in favor of internal IP.

Finally, here comes the internal IP bandwagon, let's jump on! But wait ...

The key numbers in all of this are the standard deviations in each category. Generally speaking, standard deviation serves as a rough measure of uncertainty. As a representation of risk, the higher the number, the greater the potential variation a result is.

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Looking back at Table 1, internal IP makes, on average, $4 million more (or 5 percent) than external IP. However, that extra money comes at a steep cost of additional uncertainty; the standard deviation is 19 percent higher. So really, when you're making internally-created content, you're 19 percent more uncertain you'll make 5 percent more than going with an external license. And executives don't like to gamble.

Jumping back to Graph 1, this means the tight clustering of the external IP tail is more attractive than the greater spread and unpredictability of the internal IP tail, even though the greater predictability of the external IP curve means you have no chance of reaching the sky-high numbers of the few internal IPs that hit it really big.

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Reviewing Table 2, we can similarly evaluate the risk/reward disparities between the different categories. Interestingly, new IP of either variety is less risky, though less successful on average, than sequel/franchise IP. That does seem to speak to the especially hit or miss nature of long-running franchises.

Of course, gross sales numbers can't tell the full story. The profit margin on games based on internal IP is likely higher in most cases, meaning it may be easier to hit your sales mark on external IP games, but it may cost you more to get there. However, there's probably a counterweight when you factor the "free" marketing that comes along with riding the coattails of a major movie release.

So, do the suits have it right? As with personal investing, it comes down to a question of how much risk you are willing to bear along with your objectives. If you are super risk averse, don't expect to make massive returns - T-bills do not the millionaire make. Fundamentally, this boils down to modern portfolio theory, using diversification to optimize a publisher's range of IPs (internal and external, as well as new and franchise).

But, what's the right mix? How many of each type of project makes for a sufficiently diverse portfolio? It all depends. My interpretation of the industry's collective wail is publishers are too heavily invested in external IP. While this may satisfy the short-term demands of Wall Street, it does put into question the future wealth generation potential of the industry as a whole - both financially, as well as creatively. Should we be content to serve other entertainment sectors for more predictable, but overall less, revenue - a big portion of which exits the game industry? Hell no!

Jason Della Rocca is the executive director of the International Game Developers Association. (Opinions expressed do not necessarily represent those of the IGDA.) As a closet economist, you can find him crunching numbers at his blog, Reality Panic.

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