The Wild World of Video Games: From Toy to Titan#

Let’s talk about the video game business. It’s an industry that’s changed pretty much everything in entertainment – from TV to sports to movies. This industry pulls in some serious cash, more than $20 billion a year. Yeah, that’s bigger bucks than even Hollywood makes.

Back in the early 2000s, something really remarkable happened: the video game industry made more money than the movie industry. Think about that – video games had only been around for maybe a few decades at most, and most media companies still thought of them like toys for kids and “computer nerds.”

Fast forward to today, and the video game industry is worth more than the movie and music industry combined. And the companies that make these games? They’re some of the most valuable businesses around the globe.

But here’s the strange part: they don’t really make traditional “video games” anymore, not like they used to.

While movie studios are putting out record numbers of big, expensive movies that lots of people watch everywhere, video game studios are doing the opposite. Take Rockstar, the folks behind the famous Grand Theft Auto series. They used to release a new game roughly every four months on average. But as of mid-2022, their latest game is nearly four years old, and there’s no word about any new ones coming soon.

Even with this quiet period, Rockstar’s parent company actually had its best financial year ever.

So, what’s going on?

Why Less is More: The Shift in Game Business#

The simple reason is that video game companies don’t make most of their money just from producing and selling brand new video games anymore. In fact, these companies will try to avoid making new games whenever they can, because their businesses actually do better the less they make in terms of big, new releases.

Now, I bet a lot of you are already thinking “microtransactions!” quietly to yourselves. And you’re right, that’s part of it, but it’s only half the story.

So, it’s time to dive into how money works and figure out why these big video game publishers stopped… well, publishing as many new video games.

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The Cost and Risk of Making Big Games#

Okay, back to video games. They are definitely a major industry now, and developing them has become a massive business project. Like I said, the industry is booming, and more people understand how valuable games are.

But making these big games is incredibly expensive. Take Cyberpunk 2077, for example. It cost CD Projekt Red a whopping $316 million just to produce and market it. That’s more than only a handful of the biggest budget movies ever made! And, as you might know, Cyberpunk 2077 was poorly received when it launched. That really hurt the game company’s reputation with their players and their stock price with their investors.

CD Projekt Red’s 2021 annual earnings report showed they brought in $207 million in gross sales from the game. They might sell more copies over time, sure, but so far, that game looks like a staggering loss for the company. The creator mentioned they were “deeply sorry for this” and this video was them “publicly owning up to that.”

Now, you might think picking Cyberpunk 2077 is just cherry-picking a famously bad example. But honestly, many game publishers have poured huge amounts of money into what are called “AAA” game titles, only to see them stumble or fail right after they launch. Games like Fallout 76, Battlefield 2042, and Destiny are all examples of big-budget games that ended up being… well, “stinkers,” as put in the original text.

Making these AAA games has gotten incredibly complex. They now need the dedicated, unique work of thousands of people. The more pieces these publishers try to cram into their games, the more chances there are for things to just go wrong.

Think about the difference:

• The original Halo, made by a team of around 100 people, was a huge deal back then.
• Halo Infinite, released two decades later, needed over 100 voice actors alone!

Video games getting more expensive to make isn’t necessarily a problem on its own. An industry this big can always handle huge budgets. But if companies are going to make these kinds of investments, they really need them to pay off. You know, like the old saying, “Shut up and take my money!”

Beyond the Box: How Games Make Money Now#

Most big budget games, just like most big budget movies, do end up making money. But even though they’re both products meant to entertain, movies and video games are very different in how people use them.

Most people will only watch a movie once or maybe twice. Video games, though, are designed for people to play for hundreds of hours. And game companies have gotten really good at using this to their advantage by selling players more and more features as they keep playing.

For many games now, these microtransactions have become the main way they make money, with the actual sale of the game just being a nice little extra bonus. Some companies have even made their games free to play. They know that having more players online means more chances for them to sell virtual upgrades or cosmetic items through the game’s built-in marketplace.

Here’s the tricky part: Releasing a new version of a successful game can actually hurt these ongoing sales. If players move over to the new game, they’ll start buying things from its new store, potentially reducing purchases in the old game’s store.

Look at the Rockstar example again: If they released Grand Theft Auto 6 this year, it would definitely make a ton of money right away. But it would also cut into the ongoing revenue coming from Grand Theft Auto Online, which is currently the company’s biggest earner.

Releasing GTA 6 might still be worth it in the long run, but it’s a huge risk. Rockstar would have to spend hundreds of millions building a new game, and then run the risk of it being buggy and messy, like some other big launches we’ve seen. Someone quoted in the original text mentioned about the engine being the same as what they worked on, saying the core is the same and “they’ve really perfected the systems,” calling it a “beautiful machine there that you’d have to try really hard to [mess] up.”

Not only can companies lose money by releasing a new game (cannibalizing sales), they can also really annoy the players who spend the most! Imagine someone who’s spent hundreds of dollars on virtual items in an older game. If a new version comes out, they’re left with all that stuff in an outdated game.

Rockstar would face a choice with GTA 6:

• Option A: Let players bring all the stuff they paid for in Grand Theft Auto 5 into Grand Theft Auto 6. This means their new game would miss out on a lot of potential sales from people who are happy to spend real money to get the coolest gear. Leaving money “on the table” like that isn’t popular with the investors who have to approve a huge project like GTA 6. (The text mentioned the question came up about how “remaster and console cycle potentially impacting the… timing of GTA 6 and any interest in giving a year right here right” since Rockstar hadn’t announced new titles).
• Option B: Make players start from scratch in the new game. This is better financially for the company initially, but it risks making their most valuable players angry. If the new game doesn’t have enough new and exciting features, those players might just decide not to switch at all and keep playing the old version with all their acquired items.

The Feature Treadmill and Technology Plateau#

Speaking of new features, putting them into games has become both easier (for small projects) and harder (for big ones). We’ve already seen that hugely ambitious games packed with features, promising you can “do everything,” have the potential to be “massive embarrassments” when even just a few of those features don’t work right.

The problem for big game companies is that they feel they can’t launch these huge projects without promising something truly new and different to stand out from all the games already out there.

There was a time when “new features” could be as simple as better graphics. The old Gran Turismo games used to make headlines because they had what looked like “photo realistic graphics” at the time.

But now, game development tools like Unreal Engine give developers access to really high-end graphics pretty much right out of the box. They don’t need huge teams of developers building the game engine and graphics systems from scratch anymore.

So, it’s harder for big budget games to make themselves unique just based on features or graphics. It’s also harder for them to justify their very existence sometimes. As one part of the text humorously put it from a developer’s perspective talking to marketing: “marketing, I thought we were supposed to have total creative control… Welcome to the matrix.”

Let’s look at some history:

• The original Doom launched in 1993 and quickly became the game people thought of for combat video games.
• Less than 10 years later, in 2001, Halo: Combat Evolved arguably took that title and became the most popular first-person shooter around at that point. It was easy to see why; the technology was vastly different, and the overall feel and fun of the first Halo game were much greater than Doom. Someone quoted at the time said players “should really enjoy the game,” and besides being “easily the best game of the Xbox launch,” it was “one of the best first person shooters ever on any platform.”

Now, 20 years after Combat Evolved, people are still playing the original Halo. Why? Because it really had everything you’d want in a shooter. Sure, the graphics look old now, but the difference between Combat Evolved and the latest Halo game is much, much smaller than the difference was between Combat Evolved and Doom. For many players, the nostalgia and needing less powerful computers or consoles to run the old game are actually appealing.

Companies feel forced to be more and more ambitious to give people a reason to buy a new game. While technology does make some things possible now that weren’t 20 years ago, putting all those ambitious features into a game still relies on a larger and larger number of human developers. As someone said, “Video games have changed the… course of human evolution to some degree.”

When existing games are out there that people are perfectly happy with, they’re also going to be much less forgiving of any bugs or mistakes made by any of the thousands of developers now involved in bringing these new, complex games to life.

The Other Half of the Story: Selling the Shovels#

Okay, so to recap:

1. Games have gotten more expensive and riskier to produce.
2. Technology has reached a point where there’s less of a dramatic need for new games just to keep up graphically or technically.
3. Game companies have found new, much more predictable ways to make money from existing games (microtransactions/live services).

I mentioned at the start that microtransactions were only half the reason why game companies can go so long between big new releases. It’s true, if players weren’t happy spending hundreds of dollars on a single game over many years, these companies would probably have to release more games to keep the cash flowing. (The creator noted that the “predatory monetization of video games” is a topic they made a separate video on).

But there’s something else that has arguably been an even better business opportunity for the really big players in the video game industry. And that is providing the tools to other game developers.

There’s an old saying about gold rushes: if you want to get rich, you don’t dig for gold, you sell the shovels.

Think about it – there are thousands of small game studios out there, all trying to create the next big hit like PUBG or Fortnite. Some will make millions, most will make very little. Bigger games with more money behind them have a better shot at making back their investment, but it’s still like digging for gold in a very crowded, competitive place.

Some companies figured this out. Take Valve. They were once a very successful game studio known for making games. Now? Making games is pretty much just a side project for them. Why? Because they make way more money running the Steam marketplace. The creator put it simply: “Why doesn’t Valve make games anymore? Because they don’t have to. They have enough money. End of the news.”

Epic Games also started life as a game developer. But they’ve expanded into running the Epic Game Store and licensing the powerful tools they use to make their own games to other aspiring developers.

Their tool, Unreal Engine, costs $1500 per developer per year. There are 22,000 self-reported video game businesses just in America. Even if each of those companies only had five developers using the engine, that’s over 100,000 potential Unreal Engine customers.

Unreal Engine currently has about 13% market share. Based on the licensing fee alone, Epic Games could be making around $20 million just from those yearly fees (though the creator notes that “is actually not that much really”).

But Epic Games has another strategy. They intentionally make their software cheap or even totally free to use in many cases. Why? Because they also charge a 5% royalty fee on any game sales that exceed $1 million. Just like free-to-play games are designed to attract players who spend a lot, Unreal’s free-to-develop model is designed to attract developers who might create titles that earn a lot.

That 13% market share could potentially bring in as much as $650 million from the American game market alone, just from that 5% royalty on successful games. Epic is a private company, so they don’t share their financials publicly, but estimates suggest the company earns over a billion dollars a year worldwide just from their game engine business.

Diversifying Risk: Buying Studios#

Other companies have taken a different, less technical path to finding new ways to make predictable money. Some of the biggest names in gaming, like EA and Ubisoft, have simply gone out and acquired dozens of smaller game studios.

This does a couple of things:

1. It helps share overhead costs across lots of different projects.
2. Crucially, it leads to much more predictable revenue streams.

Instead of putting all their hope and money into one giant, risky game release, these companies spread their bets across dozens of studios and hundreds of different game titles. Some of those games will do well, and some will fail, but as long as the successful games make enough money to cover the cost of the failures and then some, the overall business is healthy and predictable. It’s like someone in the text said: “Go buy your mama house go buy your whole family houses put this money in your savings account go spend some money for no reason come back and ask for more.”

Managing lots of smaller developers also gives these big companies a presence in many different parts of the game market. There’s money to be made in hardcore competitive games, story-driven games, social games, and mobile games. But it’s impossible for one single game to successfully make money from all those different markets at once. Buying studios lets them cover their bases.

The Future of Big Budget Games#

Unfortunately, all of this means that big budget, standalone video games are likely going to become less and less common. Video games are a business, after all, and businesses follow where the money leads.

Think about Candy Crush. It’s one of the highest-grossing games ever, and it was made on an initial budget of less than a million dollars. (As the text noted, “tasty”).

As long as customers are happy with the games they already have, and especially as long as they’re willing to spend more and more money on titles that came out years or even decades ago, game companies are going to avoid taking huge risks that could potentially sink their entire business.

Now, if you’re curious to see just how creative (and maybe a little sneaky) these companies have gotten at squeezing every possible dollar out of players, you should definitely go watch that other video I mentioned on the predatory monetization of video games.

And a big special thanks again to ClickUp for making it possible for everyone to keep learning how money works!

(“Are you winning son?”)

The creator mentioned that this channel (where this video is from) is going to be smaller than their own main channel, mostly because they want to shine a light on channels that might be “harder to stumble upon than your Gram Stefans or whatever.”