One of the quietest growth stories over the last few years has come from what is possibly the loudest consumer industry in existence (besides rock and roll I guess). The video game industry has been exploding over the last decade, and investors are starting to see serious returns from their commitment to companies like Microsoft, Sony, and Activision. However, this is still an under-developed and extremely risky industry to invest in, and so it remains appropriately discounted by the market.
Today, I’m going to go into detail about how it is that investors can better understand the revenues of the video game, as they arrive through sales, subsidies, and advertisements.
The most obvious way for a video game company to make money is through sales. Whether these be through single purchases, subscriptions, or a series of microtransactions, video game companies earn a direct profit from these sales. However, it is sometimes interesting to note that these sales need to have some serious volume to them, because many companies have taken up the practice of selling their platforms at a loss, and then covering the costs through the games themselves.
Microsoft, for example, cannot possible sell the Xbox at its current market price (let alone discounted sale price), given all the high quality electronics that are inside. It instead locks consumers into its platform, and then marks up game prices to the point at which they earn a better profit. While this has proven to be an extremely successful model over the long run, many investors were particularly concerned about the feasibility of selling the platform at a loss. Such concerns were later negated by the industry as they began to tap into government involvement.
It’s a little known fact that the American video game industry is one of the most heavily subsidized sectors around. Through clever application and design, designers have been able to apply for arts subsidy grants, technology grants, and even some research grants.
This means that a great deal of the developments seen in the industry are actually the direct result of government spending. This means a great deal of sense, because it is reflected in the massive growth in the quality of the products in this industry, as well as the explosion of smaller studios that product niche games, and then aim to be acquired.
The last way in which video game companies are experiment with to earn revenues is direct advertising. Companies have been known to pay respectable sums of money to have their products place directly in video games. While not as lucrative as movie product placements, video game placements provide a valuable source of cash for supporting the development process, and reducing the risk of a given venture.
What’s more, real advertisements in games are now being phased into products so as to increase the realness factor of the product. As designers begin modelling full blown city environments for players, it becomes easier and easier to include billboards and radio ads for real products within the game environment.
While all of these revenue streams provide for some pretty juicy returns, it’s important to remember the extremely long development time of a single product, as well as the fact that media-related consumer products tend to create roller-coaster returns for investors. However, as companies begin to increase the sophisticate their offerings and billing structures, the industry will begin to soften up into a less adventurous investment.
invest in.
