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 Video Game Costs Could Crash the Industry

Today, video games are more popular than either music or film, but just 30 years ago, they nearly ceased to exist.
Rapid console releases (like the Atari 7800 only two years after the maligned Atari 5200), subpar games (like E.T. for the Atari 2600, most copies of which wound up in a New Mexico landfill) and the fact that most people already owned all the consoles and games they cared to, combined to nearly wipe gaming off the map. Now, history may be poised to repeat itself.
Consoles today are more powerful than ever, and "AAA" video games (popular, mass-market titles, like Halo or Mass Effect) are triumphs of visual, aural and narrative ingenuity. Publishers command massive amounts of capital, and let developers play with tens of millions of dollars to create the best player experience possible.
Paradoxically, gaming's titanic presence in the cultural and business spheres may prove to be its undoing.
On Tuesday, Yoichi Wada, CEO of Japanese publisher Square Enix, stepped down. The Final Fantasy publisher was poised to earn about $37 million for its 2012 releases. But now, it's likely to lose $138 million instead.
Such a cataclysmic loss might be understandable if Square Enix's games were critically panned or sold poorly. Neither supposition is true. Open-world crime game Sleeping Dogs, stealth assassination game Hitman: Absolution and the highly anticipated Tomb Raider reboot all sold spectacularly well, and received either warm or glowing praise from critics. Sleeping Dogs moved 1.75 million copies (almost unheard of for a new franchise), while Hitman and Tomb Raider moved about 3.5 million apiece.
Even so, a corporate presentation from Square Enix asserts that none of these major releases met sales expectations, and now both their finances and their CEO are going down. It doesn't take a game designer to know that when a critical darling sells 3.5 million copies at $60 a pop and becomes a "failure," there is something seriously wrong with the way the industry is making and marketing games.
"Dear game publishers: adjust your budgets and STOP chasing [Call of Duty] numbers," warns God of War designer David Jaffe on Twitter. "Not every album is 'Thriller', not every movie is Titanic. It's OK." For the record, the Call of Duty numbers he cites amount to more than $1 billion earned in 16 days.
The cost to develop a game can be enormous. Analyst group M2 research estimated that the average AAA game in 2010 cost $28 million to make, with flagship series like Call of Duty venturing into $50 million territory. Just 10 years ago, budgets hovered closer to the $5 million to $10 million range.
This money, for the most part, is funneled into enormous development teams. Graphics account for a large part of this cost: modern, nearly photorealistic visuals and silky animation require a small army of artists. Programmers, level designers and producers have to make sure the game runs properly, while writers and musicians need to work in teams in order to make enough content to populate a believable, coherent game world.
If you play through any Assassin's Creed title, be sure to have an episode of The Simpsons handy during the ending credits. They take roughly the same amount of time to watch.

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Another culprit behind high development costs is the growing global market for games. Simply translating a game's text is no longer good enough: Gamers now expect full localization, which often includes costly menu redesigns and expensive all-star voice casts. While North America, Western Europe and Japan used to be the only sizable game markets, now Latin America, Eastern Europe and the rest of Southeast Asia require equal attention.
The situation becomes even worse when publishers spend AAA budgets on commercial and critical flops. Electronic Arts (whose CEO also left amid recent financial pressures) spent massive amounts of money developing the preposterously named Medal of Honor: Warfighter. Lack of interest in the title from fans and the press left EA with a $45 million loss to account for in its last fiscal year.
Ironically, the enormous costs and high risks associated with big publishers may leave independent and mid-size publishers in a much more stable position as the next console generation dawns. The industry may be headed for a crash, just like in 1983. However, gamers should also remember that 1983 paved the way for 1985, when the Nintendo Entertainment System released and changed everything for the better. A similar watershed moment in gaming could be on the way.