Estimating profitability

Hagu recently suggested an interesting topic to suggest, the profitability of MMORPGs. He writes:

"Topic suggestion: game profitability and why people quote subscribers. In particular, what do you game insiders/cognoscenti use to estimate profitability. In particular, how many subscribers does it take to support a developer.

Personally, I think a game with 20k subscribers with a nice profit margin is doing better than if SWTOR gets 999k subscribers and loses money.

Specifically, the 350k subscribers quoted for EvE. That is about $60m/year of gross income. Take off direct costs like credit card fees, servers, bandwidth, customer support and you get a much smaller number. I am used to California programmers being considerably above $200k/year in fully burdened ( salary, benefits, overhead ) cost. And there were supposedly >300 people working on the Apocrapha release and a considerable number still.

And if 75% of the WoW players don't make it through the trial, I can only imagine the % at EVE. 350k subscribers staying 6-8 months on average means you need 1-2 thousand new subscribers every day. How many Google ads do you need to put up in order to get enough people to click through, sign up, and survive the daunting EVE new player experience?

I may be overestimating direct costs or overestimating % developers vs lower paid people (SQA, tech pubs) or Iceland is much cheaper. But I can't see how CCP / EVE is doing that well financially on EVE. What do people who know the industry far better than I estimate?"

Well, I don't work in that industry, but I'm afraid there is no easy way to estimate profitability. That starts with released number often being very unprecise, or not telling the whole story. You are quoting over 300 people working on Apocrypha, but what exactly does "working on" mean? If that is 300 game developers, then you'd still need to pay a bunch of other people: Managers, secretaries, accountants, human resources, janitors, and so on. And that is just during the development phase, once the game goes live you need webmasters, community managers, and customer service representatives as well, plus a billing department.

An even bigger problem is that even if you knew the operating cost of a game and its revenue, you still don't know whether the game is actually "profitable" in the eyes of an investor. A game that makes one million dollars profit per year would be very profitable if it had only cost 1 million dollars to produce, but would be unprofitable if it had cost those fabled $100 million in development. Development cost depends a lot not just on the number of developers, but also how many years those developers worked to release a game, as they don't produce any income during that time. A MMORPG can take anything from 2 to 7 years to develop. And that development cost has somehow to be earned back over the years. What counts is not just how much money you make, but what your rate of return is. There is such a thing as "cost of capital", so if a $100 million game makes less profit than what those $100 million cost to borrow, the game is unprofitable.

This is why unprofitable games sometimes get sold: The original investors write off their losses, the game is sold for a song to another company, and as that company doesn't have the development cost to bear, their cost of capital is much lower, and the same number of subscribers can suddenly be profitable.

So in summary I don't think you can easily say "it takes 1,000 subscribers per developer" or any number like that. And I don't have enough specific information about how profitable EVE is, other than the fact that the game is still running and expanding, which suggests to me that is in fact profitable. As I mentioned in another thread, companies react to profit and losses in predictable ways, and it is often easier to deduct profitability from watching what the company does than from some back-of-an-envelope calculation.