I was just wandering around a local GameStop. It took me a minute to find their PC Gaming section - and it was tiny. They had a 3 foot x 3 foot section for PC games priced at $20 or less (apparently inventory they’re trying to clear-out), and an even smaller section for regular-priced PC games. It was literally about one foot of shelf space for all their PC games selling for $30 or more.

I asked a salesman about this, and he said that between piracy and download services like Steam, there just wasn’t much of a market for selling PC Games.

I just thought this was pretty ridiculous. It would’ve made a lot more sense if this story came out on April 1st:

Crytek co-founder Cevat Yerli tells Develop that you might be paying money just for the privilege of trying Crysis 2 before it comes out. Yerli calls free game demos an antiquated “luxury” that have become “prohibitively expensive” to produce. The result: many studios will either stop releasing them or try to charge for an early test of the game. EA has already brought this idea up as “pre-launch DLC,”
…
Yerli says his company hasn’t yet decided whether there will be a demo for Crysis 2 or not, though he thankfully admits that a paid demo should be “something more than a small demo released for free.” Takeaway is the same, regardless: because of the development cost of building a giveaway level or two before launch, Yerli says the days of free demos are numbered. (Source: Joystiq)

InformationIsBeautiful has another interesting graph up. It compiles information about how much musicians earn through various music sales. I had no idea CDBaby was paying so much to the musician. Another interesting detail: musicians earn about 9% from each sale on iTunes or Amazon, and on the sale of retail CDs, labels earn 20% while musicians earn between 3% and 10% depending on the royalty deal. I assume this means that big-name artists can negotiate bigger percentages because they have more negotiating power. While some people get angry that the labels earn so much compared to the musician, I’m always hesitant to share their view because I don’t know enough details about the situation. For example, if a musician is earning $30,000 a year, and then he signs with a label so that they earn 100% of the music sales, but make him famous by pouring money into marketing, and the musician ends up making 10x as much money because his fame has increased his concert sales dramatically, then is earning a no money from each sale bad (assuming it comes with a dramatic rise in ticket sales)?

The other surprising thing about the chart is how little money anyone makes from streaming music services. In order for a musician (and this is a *single* musician, not a band) to make the equivalent of minimum wage by having his/her music on Rhapsody, Last.fm, or Spotify, they have to get between 850,000 to 4.5 million plays per month - which is shockingly high. And, it’s not because the record labels are taking it. It’s because there’s so little money flowing to the record company or musician.

Click the image to see the full chart.

On a related note, one of the members of OK Go was on yesterday’s “Planet Money” podcast, commenting on a recent Op-Ed piece he wrote in the New York Times. He had mixed feelings about the record industry, but he said one good thing about the record companies is that they fund a lot of bands. 19 out of every 20 bands who get signed go nowhere. So, when 1 out of 20 make it big and earn money, the record companies take a lot of the sales revenue. Given the economics of the situation, they have to. Kulash argues that record companies are “risk aggregators” (or, at least, they used to be until they started losing so much money over the past ten years). What is a “risk aggregator”? It means that they spread-out the risks that bands take over lots of bands. It’s kind of like insurance. The bands who get rich pay money to support the less successful bands, except that it happens through the balance-sheet of a record company who only accepts bands into the group if they think they might be successful.

…It’s decisions like these that have earned record companies a reputation for being greedy and short-sighted. And by and large they deserve it. But before we cheer for the demise of the big bad machine, it’s important to remember that record companies provide the music industry with a vital service: they’re risk aggregators. Or at least, they used to be.

To go from playing at a local club once a month to actually supporting yourself with music requires big investments in touring, recording and promotion — investments young musicians can’t afford. My band didn’t sign a contract with EMI because we believed labels magically created stars. We signed because no banker in his right mind would give a band the startup capital it needs.

Record companies, on the other hand, didn’t used to expect that all their advances would be repaid. They spread the risk by betting on hundreds of artists at once, and they recouped their investments by taking the lion’s share of the profits on the few acts that succeeded.

At least, this was all true when we signed our deal in 2000. Today, as the record industry’s revenue model has collapsed with the digitization of its biggest commodities, companies are cutting back spending on all but their biggest stars, and not signing nearly as many new acts. If record companies can’t adapt to this new world, they will die out; and without advances, so will the futures of many talented bands.

In these tight times, it’s no surprise that EMI is trying to wring revenue out of everything we make, including our videos. But it needs to recognize the basic mechanics of the Internet. Curbing the viral spread of videos isn’t benefiting the company’s bottom line, or the music it’s there to support. The sooner record companies realize this, the better — though I fear it may already be too late.

Most people complain that the record companies are taking too much from the musician - but they’re only looking at how much they take from the successful bands, without looking at the full economic picture. I’m not really trying to be an apologist for the record companies. For all I know, they’re like ticketmaster - who unfairly harvests way too much money from ticket sales and does it’s best to drive competitors out of business or buys them to preserve the monopoly. I’m just a little skeptical about the whole narrative that gets passed around the internet. It’s also interesting to hear OK Go express the opinion about record companies that, while not all good, aren’t all bad, either.

I really like Tony Hsieh’s approach to business. Here’s an mp3 to his talk at the Web 2.0 conference:

In this presentation at the Web 2.0 Conference, Zappos.com CEO Tony Hsieh talks about his first business selling pizza in college, starting Link Exchange after college, and how he eventually ended up leading Zappos as the CEO. Tony discusses how his experience at Link Exchange influenced him to focus on corporate culture as a top priority, and why he thinks culture is so important to a company’s future growth and success.

Tony talks about the internal vision of Zappos not just to be an Internet footware merchant, but to be a brand that is known for an excellent customer experience. He goes on to list a number of specific techniques that the company uses to enhance customer service, and explains why he thinks that the telephone is still one of the best branding devices available.

[via IT Conversations]

This article came up on Slashdot today.

“Claims by the MPAA that illegal downloads are killing the industry and causing billions in losses are once again being shredded. In 2009, the leading Hollywood studios made more films and generated more revenue than ever before, and for the first time in history the domestic box office grosses will surpass $10 billion. … [N]either the ever-increasing piracy rates nor the global recession could prevent Hollywood having its best year ever in 2009. With an estimated $10.6 billion in consumer spending at the US and Canadian box office, the movie industry will break the 2008 record by nearly a billion dollars.”

They reference a TorrentFreak article claiming that domestic box office numbers are higher than ever — and, therefore, movie piracy isn’t having any effect:

Claims by the MPAA that illegal downloads are killing the industry and causing billions in losses are once again being shredded. In 2009, the leading Hollywood studios made more films and generated more revenue than ever before, and for the first time in history the domestic box office grosses will surpass $10 billion.

Those despicable Hollywood liars. Additionally, these kinds of stories seem to be an annual occurrence (What piracy crisis? MPAA touts record box office for 2007, What piracy? Movie biz sees record box office in 2008).

But, I don’t consider TorrentFreak to be a reliable source, and expect a big dose of spin coming from them. Too bad they didn’t provide any statistics so that we could see the trends. That’s okay. I will. Shown on the right are the total domestic (US and Canada) box office numbers, according to BoxOfficeMojo. The dollar amounts are in millions. (Hollywood Box Office, the original source for the $10.6 billion estimate has adjusted their estimate downward to $10.5 billion.)

Okay, you might see some trends here. There’s some pretty strong growth from 1980 until around 2002. Then, after 2002, the box office revenues hover between $9 billion and $10 billion a year.

Let’s take a look at those numbers in chart form. Strong growth up until around 2002, then some leveling off. But, the movie industry is still growing, right?

Well, if you consider that inflation is around 4%, you start to wonder if the movie industry is keeping up with inflation. What happens if we take a look at these same numbers and adjust for inflation using the Inflation Calculator?

This chart shows the inflation adjustment in the third column and the Inflation-Adjusted (2008) domestic Box Office numbers in column four. Once you take the inflation adjustments into account, you can see that 2009 wasn’t the best year ever. The best year ever for the movie industry was 2002. If box office revenue reaches $10.5 billion this year, after adjusting for inflation, it will be the fifth highest year, behind years 2001-2004. Here’s a chart of these numbers:

Once inflation is taken into account, the 2009 box office numbers are about 9% lower (or $0.8 billion) than 2002 numbers. (Hm, that’s a few years after music industry revenues also peaked*.) On average, movie box office revenue increased by $177 million/year between 1980 and 2002. Then, on average between 2002 and 2009, it has declined by $114 million/year. Yes, this could be a short term dip in revenue (like the slump in the early 1990s), but had revenue grown at the same rate between 2002-2009 as it had between 1980-2002, revenues would be $2.0 billion (20%) higher in 2009.

If we wanted to go one step further, we could also point out that the US and Canadian populations have grown from 227 million and 24.5 million in 1980 to 305.5 million and 33.9 million in 2009, an increase of 35%. Based on that, we can see that the movie industry’s growth in the past 30 years has been based on population growth. Per-capita spending has fluctuated a bit, and has declined by 14% since 2002.

Per-capita inflation-adjusted domestic box office:

It’s not a horrible downturn, and it is similar to the decline seen in the early 1990s, but it’s also not an argument that piracy isn’t hurting the movie industry, nor is it “shredding” the claims that movie piracy is “causing billions in losses”.

I should also point out another interesting bit of spin. The Ars Technica article linked at the top says: What piracy? Movie biz sees record box office in 2008. Looking at that headline, it looks all wonderful for the movie business, doesn’t it? But, once you look at the inflation-adjusted numbers, you can see that 2008 numbers ($9.63 billion) were the worst numbers since 2000, and per-capita spending was the worst since 1997. Funny the tricks you can play when you don’t adjust for inflation.

* Graph of the music industry downturn since 1999:

I remembered hearing about Battlefield Heroes a while ago. It was an interesting idea: they were making a decent-looking first person shooter, and it was free to play. You could buy stuff in-game, but it was just avatar customization stuff that had no effect on the gameplay. The question I wondered back then was: would avatar customization make enough money for them to pay salaries? It seemed unlikely. One possibility is that they’d get millions of players, but keep their servers load lightweight (people would play peer-to-peer, which would cost them nothing). Then, even if a few percentage paid for avatar customization, they might do okay. But, it would require phenomenal success (in terms of the number of players). I thought I’d keep an eye on them, just to see what happened.

Well, recently, they announced some changes in their system. You can still play for free, but the changes make it harder to do well in the game unless you’re paying for in-game upgrades. The game has two ways to get upgraded weapons: Valor Points, which you earn by playing; and Battle Funds, which is what you get when you pay real-world money. The new update effectively reduces the value of Valor Points and increases the value of BattleFunds.

I’m going to give them the benefit of the doubt here, and say that they thought their business model would work, but after a while, decided they needed to boost their revenue. It didn’t really seem possible for them to survive on just avatar-customization alone. The whole “pay real-money for in-game upgrades” is quite a balancing act. On one extreme, players pay money for purely aesthetic changes (avatar customization). You get lots of players, people are happy, but the company is earning very little money per player. On the other extreme is a system where you can’t be an effective player in the game without paying money — the game is really a demo unless you pay some real-world money. You get fewer players, and people get more resentful over the bait-and-switch of “free to play, oh wait - you’re nerfed unless you pay” which harms the company/game reputation, but the company earns more money per player. Then there’s the balancing act of staying in the middle ground - trying to earn enough to survive and pay employees, but avoiding guilt and negative stigma of the bait-and-switch. I guess I’m not that surprised to see them shift towards a stronger pay-model, since their initial business-model seemed overly optimistic.

Link: EA restructures Battlefied: Heroes pricing; fans enraged

The guys over at Stack Overflow are saying that they tried Google Adwords, and it was horrible for generating ad-revenue for them. In a recent podcast (Episode 64, 15:00), they say that they had nearly one million pageviews per day*, but Google Adwords were generating 38 cents of revenue per month. That’s astonishingly bad. They said that they hand-picked some advertisers themselves, and their ad-revenue went up 50x — which would still only be about $19 / month. I’ve sometimes wondered if ads on websites actually generated any profit for websites, or if they were just a method to pay for a fraction of the monthly costs. Sounds like the latter. Even at $19 / month, there’s no way that Stack Overflow is paying for it’s own bandwidth and server costs.

* According to Alexa.com, which tracks website traffic, Stackoverflow ranked as the 639th most visited website in the United States, which is certainly respectable.

2d Boy recently had a 1-year anniversary sale on their game “World of Goo”. The game normally sells for $20, but now you can pay whatever you want for the game (minimum of 1 cent). They also asked people why they paid what they did, and released statistics on how much people paid.

The Results:

57,000 people downloaded the game over the past week. The average price paid was $2.03. In total, that adds up to $115,710. Because PayPal takes 30 cents + 2.9% of each payment, they ended up paying 13% of that ($15,000) in transaction fees, leaving them with $100,000, or $1.75 per buyer.

Here’s their bar-chart of the money paid and number of people at each price (click for a larger image):

Full Survey Results are here.

I have to admit that I’d thought about trying the “pay what you want” model for future games. It’s hard to interpret these results, though.

The Bad:
People paid very little - developers saw a scant $1.75 per sale.

There are some reasons that this should be taken with a grain of salt, though. I can think of quite of few reasons why this payment was low. First, the game has been out of a year. This means that everyone who would’ve paid $20 for it probably already bought it. Maybe 2dBoy is picking up the people who were willing to pay for it, but weren’t willing to pay $20. Also, in the questionnaire, asking why people paid what they did, 11.6% said they already owned it on a different platform, so they were just giving 2dBoy a few dollars for the opportunity to have it on another platform.

Of the 12% who actually answered the survey, when asked “How much do you think this game should cost normally?”, 85% said this game should normally cost $10 or more. But, only 12% of survey responders actually paid $10 or more. And only 5% of buyers paid $10 or more. Based on the sales numbers, 23,335 people (41%) paid 99 cents or less, and less than a third paid $2 or more. This is one of my fears of the pay-what-you-want model; that people will admit that a game is worth X dollars, but a large majority will pay much less than that if they have the opportunity to pay you less.

The Good:
They got a lot of sales, which added up to $100,000. That is, $100,000 on top of their previous income.

For comparison, 2dBoy says that the game actually cost about $116,000 to produce. Although, $116,000 is their “minimum living expenses” cost. They said that it took two people two years to produce the game, and $96,000 covered their living expenses - which translates to $24,000 per person per year; which is not a decent living.

I’d like to be able to try to generalize these numbers, but there’s a lot of difficulty in doing that.

First of all, World of Goo is a very popular game. So, trying to vindicate the pay-what-you-want model based on “they already earned $100,000 and only spent $116,000″ doesn’t work very well. Afterall, World of Goo is probably in the top 99th percentile of games produced. So, if they made $400,000 on a $116,000 investment (ie. a good profit), it would also mean that 95% of the games on the market would be showing losses in the same situation.

Second, the pay-what-you-want model generates free publicity. Since World of Goo is essentially a first-tier game, it benefits disproportionately from free publicity. A second or third tier game might get a lot less free publicity, and then they’d get less benefit. To put it another way, let’s say that pay-what you want causes people to pay you less money, but increases the number of buyers. The numbers for some fictional games might look like this:

Using normal sales model:

Switching to a pay-what-you-want sales model, GameX (which is popular) gets lots of free publicity on gaming websites and blogs, GameY (which is obscure) gets a handful of mentions but remains obscure:

In the case above, GameY didn’t gain much in publicity, but it saw a sharp drop in the amount paid for their game. It would be a losing strategy in that case.

I also have to wonder about how pay-what-you-want model will change over time. Right now, it’s relatively novel, but if everyone did it, would the publicity decline — and, therefore, cause a decline in the profitability? In the survey, almost 1 our of 4 people said that they like the pay-what-you-want model and want to support it. But, if it becomes popular, will people stop supporting it because it is “established”? And what percentage of them paid higher amounts of money? Theoretically, the “we want to support pay-what-you-want” people could account for 100% of the people who paid $5 or more, and they could disappear as the model becomes more popular.

Wow. This is sleazy.

Wikipedia: Hollywood Accounting

In accountancy, Hollywood accounting is the practice of distributing the money earned by a large project to corporate entities which, though legally distinct from the one responsible for the project itself, are actually owned by the same people. This substantially reduces the profit of the project proper, sometimes eliminating it altogether. The effect of this practice is to reduce the amount which the corporation must pay in royalties or other profit-sharing agreements.
…
Due to Hollywood accounting, it has been estimated that only about 5% of movies officially show a net profit, and the “losers” include such blockbuster films as Rain Man, Forrest Gump, Who Framed Roger Rabbit, and Batman, which all took in huge amounts in box office and video sales.

Because of this, net points are sometimes referred to as “monkey points,” a term attributed to Eddie Murphy, who is said to have also stated that only a fool would accept net points in his or her contract.
…

Examples

Winston Groom’s price for the screenplay rights to his novel Forrest Gump included a share of the profits; however, due to Hollywood accounting, the film’s commercial success was converted into a net loss, and Groom received nothing. That being so, he has refused to sell the screenplay rights to the novel’s sequel, stating that he “cannot in good conscience allow money to be wasted on a failure”.

Stan Lee filed and won a lawsuit after the producers of the movie Spider-Man did not give him a portion of the gross revenue.

The estate of Jim Garrison sued Warner Bros. for their share of the profits from the movie JFK, which was based on Garrison’s book On the Trail of the Assassins.

Art Buchwald received a settlement after his lawsuit Buchwald v. Paramount over Paramount’s use of Hollywood accounting. The court found Paramount’s actions “unconscionable,” noting that it was impossible to believe that a movie (1988’s Eddie Murphy comedy Coming to America) which grossed US$350 million failed to make a profit, especially since the actual production costs were less than a tenth of that. Paramount settled for an undisclosed sum, rather than have its accounting methods closely scrutinized.

Joystiq has been running a few articles about how companies got their name. The story behind Stardock:

“I was in college and started the company to help pay for school until I could get a real job. I needed to get a computer and got a hold of a wholesale distributor to get the parts to build it. When I called, they asked me what the name of the company was and in panic, I looked around and was reading a book by Raymond E. Feist and the chapter was called ‘Stardock’ so that’s what I said the company’s name was. It stuck and has been since.”

Wow, he came up with a name on the spur of the moment.

The story Randy Pitchford tells about Gearbox (of Half-Life fame) is a little more harder to believe. It involves a high-stakes late night poker game in New Orleans with Gabe Newell. And, if that tall-tale didn’t trip your BS detector, it appears that Valve and Gearbox are now confirming that the story is a fabrication. I wonder if Pitchford was just seeing how far he could string Joystiq along with that unlikely story.

These stories remind me of a recent episode of This American Life, called “Origin Stories”. In the beginning of the episode, they discuss corporate creation myths. Google even has a myth about starting in a garage:

The Apple and Hewlett-Packard garages have now become such a part of Silicon Valley myth, that it’s made other tech companies want stories like it. Google, for example, they did not start in a garage. The founders began working on their search engine in 1996, when they were at Stanford. They didn’t move into a garage until 1998. They already had investors, and they were just in the garage for five months. But in 2006, Google bought the garage as a company landmark.

It’s like no one wants to hear the story of the rich, well-connected guys who meetup at the Marriott conference room to hatch a business plan. You know, there’s no romance in that.

Dan Heath has written about these origin stories in Fast Company magazine. He says one way to measure just how appealing these stories are, is to count all the ones that get quotes widely, even though they aren’t remotely true.

For instance, when eBay began, a story circulated that it’s founder created the company so that his fiance could buy and collect Pez dispensers more easily. Not true.

One of the creators of YouTube used to claim that the idea for the business came after a dinner party in 2005 when two of the company’s masterminds, Chad Hurley and Steve Chen, shot some video and tried to post it online, and found out just how hard that was back then…. Steve Chen later admitted in Time magazine that the dinner party [story] was embellished to provide a better founding myth.

Of course, there’s plenty of other myths created about historical figures, as well. For example, Christopher Columbus didn’t have some crazy idea that the earth was round back in 1492 - everyone knew that the earth was round. In fact, a Greek mathematician had made a pretty good estimate of the size of the earth back in the third century BC. And George Washington didn’t cut down a cherry tree.