How Do Game Developers Make Money?
Whenever I get an incoming class of new game students, I ask them, “How many of you are enrolled here just because you like playing video games and want to learn more about their hobby?” No hands raised. Then I follow up with, “How many of you want to actually make money at game development?” Every hand goes up.
So, exactly how do you make money by making games?
Well, the first thing you should know, I tell my students, is that most computer games do not “make money”, and by “make money” I mean “earn a profit”. The estimates for the percentage of games that break even (earn the amount of money that they cost to make) is 5-30%, and that figure certainly doesn’t count all the games made by indie developers released through the App Store or on a web portal.
Most games earn money by being bought in a “brick & mortar” store (such as GameStop) or downloaded from a virtual store, like App Store, and the developer receives a percentage of the sales.
In recent years, many game developers have adopted a “free-to-play” model, allowing gamers to download their games and play them for free. So how do they make money? There are three basic techniques:
- Sell additional levels, assets or features.
- Sell virtual goods (such as power-ups and decorative items) as micro transactions.
- Sell eyeballs (incorporate advertising).
- Work for hire. The publisher pays the developer a negotiated fee for developing the game, and then they part ways. The developer gets no money from sales or other revenues, and has no other rights to the game, including to its characters.
- Publishing license agreement. The publisher pays the developer an advance against royalties for developing the game; that is, the publisher pays the developers costs for making the game — but not all at once; the publisher pays the money out in increments when the developer completes pre-negotiated deliverables, called milestones. Then when the game is sold at retail, the developer gets a royalty; that is, a percentage of the sales — but not until after the advances have been earned out.
Let’s say the publisher advanced the developer $5M for developing the game. The developer will not receive one penny of royalties until the game has sold enough that the developer’s percentage of the sales would have been $5M. (Note that in all my years in the game industry, have I have never known a developer who worked on a project for me to have earned any royalties). In a publishing license agreement, the developer may also be granted certain rights, such as right of first refusal to make a sequel, or a percentage of character merchandise rights.
Of course, that’s if the developer is publishing its own game.
If a developer works for a publisher, then there are two main models.
Of course, the way most of us in the game industry is by working for someone else who is taking these risks. But even then, there is some risk involved. As an employee, there is a risk of getting laid off, which happens far too frequently in the game industry. As a contractor, there is a risk that your client won’t pay you for your work, which has happened a couple of times to me, too.
So, as I tell my students, don’t make games merely because you hope to get rich. Instead, do it because you can’t imaging doing anything else, despite the risks.