Saturday, April 5, 2008

Lost Publisher Revenue: The Heresy Edition


What you are about to read may be tremendously interesting to publishers and guaranty I never speak to a console manufacturer again. If you are a client, I am sorry. It was nice working with you and I hope your new agency relationship is beneficial to both of you. I think publishers are losing revenue.

The game business is young and operates on a model cobbled together from a bunch of other industries, including music, book publishing, film and a bit of licensing. We have models which are completely upside down relative to other industries. For example, until recently, and in some cases still today, if BMW wants to put a BMW in a James Bond film, BMW pays a lot of money to MGM. If BMW wants to put a BMW in the James Bond game, the publisher pays money to BMW. The cash flows in the wrong direction. License fees are paid to the manufacture for the privilege of providing very valuable product placement. But today is not the day for the product placement discussion. I would rather focus on a throw-away sentence from yesterday's post.

It would certainly be interesting if Microsoft and Sony had to pay the publisher a fee every time multiplayer game session is initiated, but it just doesn't work like that.
(Is there anything more conceited than quoting myself?)
Radio stations keep playlists and even though fees are not collected from consumers, the station pays royalties on every song played. A television network pays a fee to the rights holders every time a television show is broadcast. Radio and television fees come from advertising sales. Cable systems and channels, like Xbox Live, charge consumers monthly subscription fees. An MSO pays a per subscriber fee to cable channels like ESPN and Comedy Central for the right to air the channel on its cable system. The channels then pay license fees to content creators each time the content is run on the channel. In most cases they keep the advertising revenue. Pay cable channels like HBO collect money from subscribers and reinvest the money in original content and purchase studio content in the semi-open market. In other words, every one of these distribution channels pays for the content flowing through their system.

Now let's take a look at the game business. A game publisher pays a license fee, commonly referred to as a path charge, to the console manufacture for each unit manufactured. The fee is designed to offset the very large R&D expense of developing the console. The publisher's only revenue comes from a sale of the game unit, or additional content. However, Microsoft is generating subscription revenue from consumers who engage in multiplayer game sessions via Xbox Live. Hours and hours of multi player session are logged in Call of Duty, Microsoft's own Halo and other multiplayer games. In fact, access to the multiplayer community is a prime driver for Live subscriptions, but the publishers who pay the extra money to build the multiplayer content derive no revenue from Microsoft for the game sessions initiated. Publishers may receive some incremental sales for games with robust multiplayer component from consumers who will buy instead of rent, or keep a game instead of returning it to be resold as used, but the feature is not critical to success. Bioshock, Assassins Creed and Mass Effect had no multiplayer and were each exceedingly successful. While the publishers do receive a benefit from the investment, it looks like Microsoft may be receiving a larger one. Microsoft receives a piece of the initial sale and the benefit of the investment in the multiplayer component.

Microsoft may argue multiplayer content is only one component of Live and the provision of service is exceedingly expensive, so publishers should not be paid on a per session basis. They would be right about the reason for subscription and costs, arguably wrong on the payment though. Bringing a third industry into the mix, putting satellites in the air and maintaining them is expensive, but Sirius pays for content. Subscribers don't only sign up for Howard Stern, but they pay him, and they pay Martha Steward for their content. Howard Stern and Martha Stewart don't pay to put their content on the air. Sirius offsets the investment and potentially profits through the sale of subscriptions, hardware and advertising fees. Sound familiar?

Microsoft is starting to pay for exclusive linear content from Hollywood and of course they pay for their studio content, but unlike any other industry, they get paid for the thirty party content that utilizes the system. Publishers do get revenue from add ons and downloadable games, but Microsoft is really only holding these games on consignment. They retain a portion of the fees to cover their costs, and pass the balance on to the publisher. Where is the session fee?

Publishers, what do you think?






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