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EA: Old Republic can be profitable with 500,000 subs

Wed 02 Feb 2011 8:37am GMT / 3:37am EST / 12:37am PST
PublishingDevelopment

"Anything north of one million subscribers is a very profitable business" - Riccitiello

Electronic Arts upcoming MMO Star Wars: The Old Republic can reach profitability with 500,000 subscribers, according the CEO John Riccitiello.

Speaking in a conference call to investors, he said that half a million subscribers would be "substantially profitable, but it's not the sort of thing we would write home about."

"Anything north of one million subscribers is a very profitable business," continued Riccitiello. "Essentially it turns on a dime from being quite sharply negative in terms of its EPS impact to positive the day the product ships."

Earlier in the call Riccitiello had said EA is "incurring significant development costs" for the Star Wars MMO, which is expected to be released in 2011, although after the close of the financial year.

But he was also critical of reports in the press speculating on the costs of the game, in development at BioWare, which CFO Eric Brown has previously described as the "largest ever development project, period, in the history of the company."

"There's been a fair amount of talk on various blogs, describing spends that are vastly higher than anything we've ever put in place. Some of them, they bring a chuckle but they also bring a frustration for those that are being responsible in the management of EA's R&D dollars when they read sort of falsehoods out of the press."

22 Comments

Klaus Preisinger Freelance Writing

1,186 1,273 1.1
I guess that settles the debate on the business model of the Star Wars MMO.

Personally, I think MMOs are just games with a good copy protection which cost more than regular games. Instead of making $40 off every gamer, MMO companies make $100 off the average player if things are good. Sure, they are more expensive to develop too and the offer more meat than your 8h shooter, but at the same time MMOs tend to artificially drag things out until you are sick of it and walk away. Luckily MMOs tend to have a user base which religiously believes in server costs being so high that they have to pay $15 a month, which is why companies get away with it.

This is why I take the one million subscribers quote with a grain of salt. Who cares about permanent subscribers, when the turnover rate is high enough. In the end, EA will be happy making back its money and nothing else. Running the servers costs next to nothing, the money to keep the team employed will most likely be earned by sales of paid expansions. The only problem being how EA is going to make back its original investment. But I suppose SW is also tasked with stopping EA from bleeding, $300m in losses did not sound so good to investors. Yet thinking SW-MMO is going to magically balance every sheet in the way WoW does is maybe asking a bit much.

Posted:3 years ago

#1

Victor Perez CEO, Games GI

64 0 0.0
Klaus, you get it!!

MMO, is an evolution of PC games.. much more profitable if you do it well.. How many money have been wasted by medium videogame publishers in console, when they had the natural way-out there!!

But the key is to build a good F2P.. not subscribers paying high the licenses...

Posted:3 years ago

#2

Till Dzierzon Localization QA Tester, Zenimax Online

17 0 0.0
It is funny how many people think that ongoing costs of a MMO are just server costs. Other than that you have a few hundred people working in Customer Support and Community Management alone. On top of that you have ongoing development costs for expansions.

Posted:3 years ago

#3

Radu Ciu Product Manager, Alliance Computers

21 0 0.0
@Till Klaus was talking about differences in costs from mmo to "normal" game. I would believe every game has comparable costs in Customer Support and Community management if it has the same number of users.
Also expansions do cost a fair bit themselves so that should cover their costs?

I would not argue on the fact that a mmo does have usually a lot more content but that's about it.

Considering the high cost of developing the game saying it can be profitable with 500k customers when EA has alot of games that sold 5 milion plus copies and this game does have a much bigger development cost. It would seem the $$$ made by EA from every customer on SWTOR is alot higher than from Fifa 11 for example. Subscriptions ftw.

Posted:3 years ago

#4
I concur with Till, server costs are just one aspect of the ongoing costs necessary to keep an MMO running. For normal multi player games, Klaus' estimation may be more appropriate. Maintaining a multi-lingual customer service, billing department, constant content creation and QA cycles, fraud detection and community management are some of the main assets necessary to keep an MMO running. All of these can ramp up quite a bill if you want to be doing things right.

Posted:3 years ago

#5

Klaus Preisinger Freelance Writing

1,186 1,273 1.1
I read a lot of quarterly reports from Activision, EA, NCsoft and others and draw my conclusions from there. I believe the "Support is what makes a game cost $10 per month" to be equally bogus and I can prove it.

Activision lists $345 M as their quarterly revenue from WoW. They also list "Cost of Sales MMO" at $61 M, which is the only costs in the whole report you can somehow relate to WoW. There are no sections for individual costs, such as support, paying the team still working on it and servers, so I can only assume, that those are the costs of WoW, period. 17% of revenue cover the costs, the rest goes to the vault. Meaning Activision can break even on their MMO by charging $1.70 per user, per month. Support scales very well with the number of users, so even if you lose users, you can keep your profit margin, just fire a few support guys. Support is also not a factor big enough to get his own entry into the balance sheet, not with Activision and not with other companies.

The team working on WoW, however, is bit of a fixed cost, as long as you want the game to be worked on and churn out new expansions and microtransactions, which again, are not free. Can you really claim you need the money from the subscriptions to survive, if the content made by those guys is packaged goods? It is not like Blizzard is giving expansions away for free because you are a subscriber. I assume even post release patches to be part of the original budget calculation, which factors into how much the expansion will set you back at retail.

You can read all sorts of things in these quarterly reports, WoW is down 7% year on year, the split between regions for Activision is 53% North America, 38% Europe, 13% Asia. Which means only 30% of WoW revenue might come from Asia in a best case scenario. You can guesstimate Starcraft 2 made roughly $166 Million so far, just in case you were wondering if pays to make a game on PC. The answer is yes, if it is any good.

That leaves server costs and how they relate to support costs. Server costs are most prominently listed by NCsoft's quarterly reports. For NCsoft, server and bandwidth costs for all their MMOs (5 of them) and Web-Presences thrown together is but a footnote. Even when they released Aion and gained 1 Million subscribers in one quarter, the numbers practically did not move. Based on NCsoft numbers, the WoW servers should cost roughly $6 million per month. That is what comparative number crunching will yield. We had $61M MMO operating costs per quarter, divide that by three to have the monthly costs, subtract the guesstimated server costs and that leaves $14.8 M of those ominous "MMO costs of sales" unaccounted for. You get a few thousand of support guys including their offices for that kind of money. I even suppose the Blizzard Devs themselves are not in this budget. They pay for themselves by making boxed copies and selling them.

And remember, we break even at $1.70 per month per user for this entire infrastructure. Sure, there is a point at which we cannot scale down some of the costs, but there are healthy MMOs at 50.000 subscribers. They seem to be able to pay support.

I edited the break even point to reflect WoW's current monthly rates.

Edited 3 times. Last edit by Klaus Preisinger on 2nd February 2011 12:26pm

Posted:3 years ago

#6

John Donnelly Quality Assurance

313 38 0.1
That sounds way too low in my opinion.
But then I dont bother reading the reports for companies I have no share holding in.

Posted:3 years ago

#7

Till Dzierzon Localization QA Tester, Zenimax Online

17 0 0.0
@Klaus Could you please link to the report you are mentioning?

Posted:3 years ago

#8

Victor Perez CEO, Games GI

64 0 0.0
Even Klaus exaggerate a bit, thinking about the commercial distribution cost you need to afford for retail games.. What it is 60%-70% of consumer end-price? Online offer you the best distribution cost, running a permanent business with initial overheads, ok, but you can save any game from bad releasing version using metrics.. You can be so flexible in your product you can even redo it following the player’s preferences…. Everything can be done in online, if you are smart and listen what the player tell you.

Ex. The last online from CoH… you need to download more than 10 G… wrong, men, wrong… If I just want to try, don’t do it to me.. (btw, I love CoH)

Posted:3 years ago

#9

Klaus Preisinger Freelance Writing

1,186 1,273 1.1
@Till

Activision can be found here:
[link url=http://investor.activision.com/reports.cfm
]http://investor.activision.com/reports.cfm
[/link]
(Page 10 lists the costs of making all Activision games, which is a dirt cheap $300M, if you consider the revenues of $3 Billion listed on page 30; quite nicely segmented between all platforms. That is without Christmans business! Still, that means developers only get 10% of the money their publisher makes.)


NCsoft can be found here:
[link url=http://www.ncsoft.net/global/ir/earnings.aspx
]http://www.ncsoft.net/global/ir/earnings...[/link]
(interesting to read reports of the past to see how Guild Wars sales faded off and how Lineage 1 got a huge boost after moving from subscription to microtransaction)

EA is also an interesting read:
[link url=http://investor.ea.com/
]http://investor.ea.com/
[/link]
(Projected platform growth rates, good numbers on the topic of how costs for marketing, costs for development and profit margins add up. Turns out you do earn more money working for EA, more than twice on average it seems.)

Especially comparing EA and Activision reports can be an eye opener concerning the whole Infinity Ward deal. Activision spends 10% of its budget on development, EA roughly 35%, no surprise EA seems to have the less disgruntled ex-employees.

Posted:3 years ago

#10
@Klaus,
Unfortunately it is not quite as simple as this. Different companies have different accounting policies and not all costs (and revenue) are treated in the same way. It is common, for example, for a material proportion of a project's development costs to be capitalised and deferred rather than expensed in the period in which it is incurred. Thus the "development costs" for a particular period will rarely reflect the actual amount they spent during that period with any accuracy. The same is becoming increasingly true of revenues too. For example, some publishers spread the revenues from online games over a period of 3-12 months after they are generated rather than at the point when they were generated. They do this to better match the ongoing costs involved in providing that online games service.
Finally, "cost of sales" can also be used in different ways by publishers and, in the case of an MMOG, may not include many of the costs you might associate with running an MMOG such as marketing and support. In ATVI's case, the MMOG cost of sales DO include at least some elements of support costs as the recent increases are in part attributed to a "continued focus on customer service for our subscribers". They will not, however, include ongoing development costs nor marketing costs both of which are treated differently and will be of material size.

Posted:3 years ago

#11

Andrew Ihegbu Studying Bsc Commercial Music, University of Westminster

473 187 0.4
Terrible news. What a waste of an IP imo. After all Bioware did with the KoTOR franchise, this seems a lot like a sellout. Dont get we wrong, I like MMOs, but when you make a game thats selling point is novel worthy storyline and gripping NPCs, turning that all into questing with other gamers kind of kills the selling point imo. They should have released this alongside the SP games, not instead of them. And now they want to tell us that even if it flops it will still be profitable. Meh.

I just honestly think they could have gone on to make another 4 KoTOR singleplayer games and sold bucketloads, this just looks like another MMO style get rich quick scheme, and if Klaus is anywhere near correct, it is.

Edited 1 times. Last edit by Andrew Ihegbu on 2nd February 2011 7:58pm

Posted:3 years ago

#12

Thiago Attianesi Creative Director, Fan Studios

59 2 0.0
500,000 subs is a huge number.

Posted:3 years ago

#13

John Donnelly Quality Assurance

313 38 0.1
Good point Nick,

Thiago, back 6 years ago it was but people see WOWs 12 million and think all MMOs need to hit those types of targets.

Before wow 500K was a huge player base for an MMO, today its still a good number but investors dont think like the rest of us.

Posted:3 years ago

#14
@Andrew I'm inclined to agree with you about the MMO being disappointing, but I think Bioware has earned a chance to impress with their title. I haven't been let down by a title of theirs yet--well, besides the Sonic game and the weird voice acting in Jade Empire.

I don't think 500K subs is a difficult target at all. Initial sales for TOR should be high just because of the IP and the history Bioware has had with the KOTOR franchise. 500k should just be a fraction of that, right?

Edited 1 times. Last edit by Alex Chiang on 2nd February 2011 7:00pm

Posted:3 years ago

#15

Private Industry

1,176 182 0.2
Well it can be still argued that "expansion packs" are given away for free to subscribers. While this does not account for the 3 bigs expansions that came out so far, people still get constantly free content. I`m sure it`s not really cheap to have all the servers running, customer support, the devs doing new content and patches, QA and everything localized for the different countries.

With 500 000 they might be profitable in the meaning, they can finance the servers, support and what not, but how many sales and subs does it need to recoup the development costs that accumulated over at least 5 years quickly?

Posted:3 years ago

#16

Jamie Watson Studying Bachelor of Games & Interactive Entertainment, Queensland University of Technology

179 0 0.0
i hope this does suceed as it looks like a decent game (even though im not a big MMO fan)

500k for subs is alot...can it be done?

i dont know..

how many years will it take to get that number?

Posted:3 years ago

#17

Roger Weber Founder & CEO, Ranked Gaming

9 2 0.2
@Klaus
Altough your numbers may be correct, they are not taking everything into account. You are looking at WoW a little over six years after its release, many game developers would be happy to create a game with such a long life cycle, just as Warcraft III and Starcraft have been popular far beyond the average time for their genre.

The point is, that WoW had a very long development time and cost, just as other MMOs do, and they're very risky undertakings. You could argue that the subscription takes all of that into account, the initial investment, the support, the servers, and whatnot. However those things are just 20% of the cost, the other 80% is pure business. The first MMOs set a "standard" in the players, the customer's mind, the subscription price is just matching expectations. It's all about the right pricing, and at the end of the day it's about making money. It's not about making the subscription price match the actual costs.

Posted:3 years ago

#18

Klaus Preisinger Freelance Writing

1,186 1,273 1.1
@Roger.

Thank you for your insightful comment and on some level you are right of course. But let us take WoW out of the equation for a moment. Let us look at a game which pulls numbers similar to the game Mr. Riccitiello is about to unleash on us.

The obvious example here is Lineage 1. There you have a game with Diablo 2 style graphics released in Korea where the publisher did not have much competition. Pulling financial records from 2005 quickly reveals the game made roughly 25 Billion Korean Won per quarter back then. Skip ahead to 2009 and the game still makes the same money. Five years later the revenue is the same, which big western non-MMO brand can match that? It gets better, NCsoft does an experiment, switching the game over to f2p microtransactions. Suddenly the revenue doubles to 50 Billion Won. It fluctuates a bit, but is holding steady at that level. We are talking about a 12 year old game outgrossing most major releases of 2010. It made almost 200 Million Dollars this year and was released in 1998!

We always compare to WoW, but if we compare to other MMO games which are long established MMO brands, then we can see that life at 500k-1M subscribers is actually pretty good. Server costs are not a factor, the big development costs are all behind the publisher, the team working on the game can be scaled down, there is no need for marketing blitz campaigns, there is no need for management to do anything. I am willing to bet Bioware is aiming for that. Sure, in the beginning, it will be about breaking even. But after that, there is no denying that the operation costs are but a fraction of what the game will be raking in, even if it "only" has 500k subscribers.

Compared to WoW that is little. But on paper that is still $15M every quarter, if you "only" charge $10. Show me a company with an annual budget of $60M for their console game. This has giant ramifications for NCsoft. Their 12 year old game makes enough money to pay everybody in their company. And that is not the only game they make, there is also Lineage 2, City of Heroes, Aion and Guild Wars. All of their wages are in no danger, Lineage 1 basically already pays them.

A typical NCsoft quarterly report will list 50% of revenue as operating profit. A bit less for q3 2010, if you check, since they had to pay Richard Garriott $28M. NCsoft mainly does MMOs, so this report gives us the best idea about where the money goes. All the people working support, the global localizations, the post-realese content patches, the development of three new MMOs at once, all the business costs and what have you, the full monty. And we are still talking about half a normal subscription fee to cover that.

Again, you are right Mr. Weber, matching expectation is why they get away with it. But if you look at it purely form an economic point of view, then the profit another company makes is the pressure the marketplace can afford to put on its competitors. Meaning in long run subscriptions either go down, or companies start spending way more money on supporting their MMOs than they are doing now. In any event, the 500k subscribers the Old Rebuplic "needs" will certainly finance more than the continued existence of the game.



Posted:3 years ago

#19

Krasimir Koichev Producer, Riftforge

35 0 0.0
Of course, EA's CEO will try to lower investor expectations. After all, announcing that SWTOR is another WoW-killer is the surefire way to get fired.

Posted:3 years ago

#20

Krasimir Koichev Producer, Riftforge

35 0 0.0
@Klaus, Thanks for the insightful numbers. I never bothered to look on page 10, much less page 30 on any financial document!

Posted:3 years ago

#21
@Alex

500k subs is a very hard number to hit. What other game has met that mark, and retained it beyond the three month timeframe other than WoW? Even the creeping wonder that is EVE still boasts approximately 300,000 subs. The MMO market is not as big as investors and companies want to believe.

Posted:3 years ago

#22

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