What are the cost components that make up the retail price of a typical video game? Put another way, how much does each participant in the video-game development / distribution chain get?
I get this question all the time.
In this presentation to Columbia University students, Steve Perlman, OnLive’s founder, both demos the OnLive system and discusses their business model. At the end of part 3 and the beginning of part 4, Perlman discusses the graphic to the left (click for larger view) which shows the cost breakdown for a typical video game.
As you can see, for a typical console-based video game that costs U.S. $60:
- $15 goes to Retailers: eg: GameStop, Electronic Boutique, Walmart, Amazon
- $7 goes to Returns/PP/MDF: Returns are money paid-out to retailers for product returns. PP stands for “price-protection” which is money paid back through the chain if/when the publisher reduces the video game’s price. MDF stands for ‘Marketing Development Funds” which are paid to retailers for promotions such as TV ads, local flyers, and in-store marketing displays.
- $4 goes to Distribution/COGs: Distribution = shipping and warehousing. COGs = Cost of goods sale. ie: the cost of the physical DVD, manufacturing, the instruction manual and the case.
- $7 Platform Royalty Fee: For every game sold approximately $7 goes to Microsoft, Sony or Nintendo, as applicable, for whatever platform the game plays on – eg: Xbox 360, PS3, Wii.
- $27 goes to the Publisher. Unfortunately this $27 is not further broken down to show how much of the $27 typically goes to independent developers. The amount paid to independant video game developers can be anywhere from 10% to 70% of the amount paid to the publisher – but often only after the publisher has first recouped any advances paid to such third party developers.