In this lecture, I'll discuss the business of gaming, or said another way, how much do games cost, how are they funded, how are they sold, and how do they make money? But first, why is this conversation important? Perhaps you're just interested in making games. You love them, you have ideas, and you want to build them. Well, it turns out games take time, energy, and resources to build. From a personal perspective, to make games, you need to eat, you need a place to sleep, and you need some security in your life. If you don't have these things, you can't make games. Therefore, knowing how the business side works means that you'll be more able to pursue your dreams, survive, and maybe even be profitable doing it. Let's start by getting some context on how much games cost to make. There has been a huge increase in the cost of development of AAA games over the last 25 years. For example, this table shows several AAA games, what platform they were originally released upon, and the estimated development costs. This does not include the marketing costs. It's interesting to note the dramatic increase in development costs with the release of each major new game system. Most AAA games today cost anywhere from 25-500 million dollars or more. Of course AAA games are like Hollywood blockbuster films, with huge development and marketing budgets behind them. But what about non-AAA games? There is not really the direct equivalent to B-rated movies or direct a TV releases, like we see in the film industry. However, there are independent funded games coming out from smaller studios that are not backed by major publishers. There are also mobile games which in general have a smaller scope, lower level of quality, and reduced level of expectation from players than AAA games. A reasonable estimate on these types of games done at a commercial level of quality is 50,000 dollars for a small-scale game, up to one million plus, for a large-scale game. As capabilities of mobile hardware and player expectations continue to increase, so likely will the budgets on these non-AAA projects. What drives the cost of development? Different projects have different elements that drive the cost. But there are typical budget line items. The number 1 driver of cost is typically labor. For example, if a typical employee was paid $25 per hour and worked 40 hours per week for 52 weeks per year, their salary would be $52,000 per year. Which is in the range of a starting salary in the game industry, perhaps a bit on the low side. If we take this value for starters, and build a team of 10 people, let's say four programmers, four artists, and two designers working for one year on a project. This table shows a simple labor calculation for such a team. Where we add in a modest 30 percent for the cost of benefits. You can see the grand total for one year of work from such a team is $676,000. On a typical AAA game, we don't have 10 people working on the team, we typically have a few 100. Of course, we have entry-level positions on up to senior and lead positions at higher salary points. A typical AAA game takes 2-3 years to build, not one. For example, if we scale up a team size to 250 people working for three years, and average out the salary per position to be $80,000, the calculation may look something like this. Our AAA labor budget has ballooned to $78 million. It all adds up quickly. Beyond labor, what are the other drivers of cost? One is equipment of course. We need computers to make video games. You need devices or Dev kits to test them. You'll likely need other equipment like servers, drives, sound equipment, and possibly motion capture equipment. You need development tools like a game engine, such as Unity, and ISO creation tools like those created by Adobe and Autodesk. You may also need to pay licensing fees for intellectual property, technology or platform licenses. You may have other overhead expenses to run the company, like rent for facilities, utilities, taxes, legal and accounting fees, supplies, furniture, business travel, and so on. Of course, beyond the development costs, you must also market the game. There is a lot of competition in the game business and a lot of content. Raising awareness of your game to potential players is a must, and this costs money. In fact, in the retail space, marketing budgets are typically 1-2 times the development budget. If you build it, they will not always come. One of the common failures in the Indie market is not budgeting for marketing. Last but not least, there is also cost to distribute games. If the game is a physical products, sold at retail, this includes the cost of the medium the game is placed upon, be it a disk or cartridge, as well as the cost of packaging, shipping, and handling. Often there is also a separate distribution company that helps with the distribution of the game to the retail space. The distributor often takes a healthy cut. Much of the distribution in the game industry today is done through digital distribution. This saves a lot of money over a physical product, but you often still need to use a digital distribution channel, such as the Apple App Store or Steam to get your game to potential players. These stores typically work on a 70-30 split. That is, if you sell the product for $10, the distribution channel gets three dollars of every sale. We'll talk more about this later in the lecture. For now, you can see there are a lot of factors that drive the cost to make and sell games. As a game development challenge activity, take a few minutes to think through what it would take to fund your next great game idea. I've provided a template spreadsheet to help you start your calculations. Fill it out based on what works for your project. Don't forget all the different topics we've discussed. You will quickly realize that making games is not an inexpensive endeavor. How do we get the resources to get started? That will be the topic of the next section of the lecture. For now, do the math.