Category: Industry Musings (Page 1 of 7)

It is possible to both think that Steam has been a remarkable and amazing part of the gaming ecosphere, and still be excited that they’re no longer getting a free ride.
I’m not kidding.  Steam is great.  It’s the first thing I install on any new computer I acquire. It’s intuitive at what it does, full featured, and run by a generally responsible organization.  It probably single-handedly saved PC gaming, definitely has been the engine that drives indie gaming for the last decade, and will be a pillar of the industry for years to come.

That being said, I’m super excited by the Epic Store as a developer, and I hope they get more exclusives.  I summarized my theories in this thread – this blogpost expands that thread.

Let’s back up.  This week, it was announced that Gearbox and their publisher would release the PC version of Borderlands 3 on the Epic Store as a six month exclusive.  This prompted the easily excited outrage monkey portion of the video games audience to lose their shit — I mean, really stupid shit.  So let’s break this down a bit.

The economics of the games industry are dumb.  AAA games have cost $60 bucks for a long time.  It’s a weird purgatory – the price hasn’t increased with inflation, largely because the beancounters think that if you go higher than $60, a game is more expensive that something that Grandma will want to buy little Timmy for Christmas.   On the flip side, and I swear this is true, gamers are so used to $60 price tags for games that they immediately suspect that any game with a lower price tag is automatically lower quality.  So AAA games have stuck at $60 as the default price for a while.

You ever wonder, when you spend $60 bucks for a AAA game, where it goes?  Here’s one breakdown.  If you buy the game at Best Buy, less than half of that ($27) goes to the developer/publisher. If the developer and the publisher aren’t the same entity, the developer gets a small portion of that – 20% maybe.  So call it $5 bucks, and the developer doesn’t see a cent until the development costs of the game are recouped.

Eagle eye observers will note that a lot of these costs just don’t APPLY to Steam.  Steam games (and all box PC games) don’t pay platform royalties.  They don’t have to print CDs.  The costs of handling unsold inventory are unnecessary.   So while Steam demands a slightly higher percentage (30%) than Best Buy (25%), the lack of other costs meant that Steam was a better deal for developers.  Put another way, Activision makes about $27 selling a Playstation Call of Duty at GameStop, and about $42 selling a PC CoD to you on Steam.  That’s… pretty awesome!  Developers vastly preferred it if you bought their games on Steam, because we like paying our mortgages. Yay Steam!

In late 2018, Steam improved that number dramatically for AAA developers (because screw indies, amirite?) so that once you sell more than $10M, their cut drops to 25%.  Sell more than $50M, their cut drops to 20%. Suddenly a megahit like Call of Duty is earning $48 per copy (once they sell a few hundred thousand copies).  Outstanding!  And you also get Steam features like Cloud Saving.

But then Epic upset the apple cart.

The Epic Store deal is really good. Epic is undercutting this deal significantly, taking only 12% of a cut. Suddenly, devs/publishers are splitting nearly $53 per box.  You don’t have to meet any kind of minimum threshold to get this.  This is really good.  REALLY good.  Yay Epic!

But it’s more than that.  Sales on the Epic Store also wave the licensing cost of the Unreal engine if that’s your engine of choice.  I believe that Borderlands 3 is using the Unreal engine. If that’s the case, that’s another 5% in their pocket that they don’t lose if you buy on steam.  Put another way, Take 2/Gearbox puts $52.80 cents in their pocket for every copy they sell on the Epic Store, and only $39-$45 for every copy you buy on Steam. 

According to Steamspy, Borderlands 2 sold 5-10 million copies on Steam.  Now then, not all of those copies were actually sold on Steam and certainly some of those copies were sold at discount prices during Steam Sales and the like.  Still let’s do some back of the envelope math here and pretend that B3 ‘fails’ by only reaching the lowest number there (5 million)

• If 5M people bought the game on Steam, Gearbox/2K would enjoy a royalty rate of 30-20%, and they’d have to pay a 5% engine licensing fee to Epic anyway.  They’d get $222 Million, or $44.4 bucks per copy
• If 5M people bought the game on Epic, no engine licensing fees, and a 12% cut, gets them $264 Million, or $52.8 bucks per copy.  

So in the worst case scenario, Borderlands stands to make $42 Million more dollars for 2k/Gearbox.  That’s a LOT of enchiladas.  I don’t know if Epic paid Gearbox/2K for the right to exclusively launch on the Epic store but they didn’t really NEED to – If Epic launched on both, they’d lose about 9 bucks per copy of Borderlands 3 sold on Steam.

The very nature of the Steam Revenue split encourages exclusives. Look at the revenue split for AAA again.  You only get the GOOD revenue split if you hit $50M in revenue.  My back of the napkin math means that you need to sell 834K copies before you start getting that number — on all copies AFTER that.  What this means is that, if you’re on Steam, every copy you sell on Epic Games or Discord or whatever is a copy that’s not pushing you to that threshold.  

The guys who came up with it probably thought they were encouraging developers to choose between one platform or the other.  They were probably right.  They’re probably just surprised as to which direction developers (especially those around the Metro-Borderlands size) are going to decide is the logical direction to go.

Exclusives are how platforms are sold. People keep saying ‘Epic should compete on its own merits, and not have to depend on exclusive content’ but, um, exclusive content has always sold new platforms – and that’s definitely what this is.  It’s a cornerstone of console gaming, for example, with great exclusives like God of War, Horizon Dawn and Spiderman being a cornerstone of why Playstation is kicking XBox’s butt this generation.  Console developers do this by buying studios entirely usually. But yeah, paying for the privilege of exclusive content is NORMAL.

And unlike exclusives for PC, there is a $400 price tag on the console if you want to play Horizon on top of the cost of the disc.

It’s not just games.  Exclusive content is the cornerstone of the business model of HBO and Netflix for example.  And let’s face it, Steam has thousands of de facto exclusive games, because that’s the only place those games can be played. 

In the absence of exclusive content, players will typically choose the platform that has the most inertia.  And to repeat, every copy of Borderlands 3 that is sold on Steam costs Gearbox/2K about 9 dollars.

Gamers should want more of the money they DO spend to go to game developers and publishers.  Games are expensive to make, and they get more expensive every year, as salaries rise, technical complexity increases and the costs of making content go up.  And yet, the box price of games has stayed constant. 

If more of this box price goes to the people who design, art, engineer and market these games, it reduces the need for us to have to resort to sell sparkle ponies and loot boxes or to increase the costs of the games in order to cover those increased costs. 

 People who think that the Epic Store means significantly fewer sales than Steam are probably deluding themselves.  First off, Borderlands is a huge, well-respected and beloved IP.  People will seek it out.  Selling your small, funky indie title on the Epic Storefront may not be a great idea because the store doesn’t yet have a critical mass – it’s not a place people go to shop for games yet.  But if you have a big, well-anticipated game like Borderlands (Borderlands 2 is still in the top 10 for daily plays on Steam), players will go and seek it out.  Being a seperate launcher didn’t hurt Starcraft, or Destiny, or the Sims.  Players will find Borderlands 3, wherever it lives.

And where it lives is pretty good.  Epic has the ability to drop an ad for Borderlands 3 in front of 250 Million Fortnite players with over 78 Million Monthly Active Users.  This is actually greater than Steam’s 67 MAU, although Steam still has a higher daily concurrency and everyone who opens steam is coming to shop, not play Fortnite.  Still, the people who think Devs selling on the Epic store think it will have a much smaller reach are probably in for a disappointment.

But still, the proof is in the pudding. And we have one test case so far, where Epic’s first exclusive (Metro Exodus) did 2.5 better on the Epic store than its predecessor did on Steam. And to some extent, you have to wonder if the relative sparseness of the Epic Store is helping.  Epic’s store is currently a highly curated experience of high quality titles.  In Steam, Metro was competing against dozens of similar titles, some years old.

Yes, this is capitalism — and the audiences are what’s being sold.  A lot of gamers are saying things like Epic is trying to be ‘monopolistic’ or that this isn’t capitalistic.  That’s because they’re mistaken about which customers are what are being fought over here.  

This is an EXTREMELY capitalistic, EXTREMELY competitive dance happening. But the customers being courted are developers/publishers like Gearbox/2K and 4A Games. What is being sold is the playerbases. YOU’RE the product.

Steam’s sales pitch is a 30%-20% revenue split, with the strongest PC customer base in the world and a robust, full featured back end and well-integrated payment systems that work with almost any payment system on planet earth.

Epic’s sales pitch is a 12% revenue split, with an audience that is as large (but unproven spenders), a free engine license and a much more curated store. And did I mention just a 12% revenue split? Did I mention that Borderlands is looking at somewhere around 40 MILLION DOLLARS in additional revenue that goes to game creators and publishers instead of the store?

Valve could end this quickly if they REALLY wanted to.  Their install base is hugely attractive.  If their revenue split were suddenly match Epic’s – or even get close – choosing Epic would be a very hard choice.  But doing so would mean losing a HUGE amount of revenue.  Valve is, I believe, taking a ‘wait and see’ approach to see if Epic congeals into a serious threat to their bottom line.

Anyway, if Red Dead Redemption also goes the Epic route, things are going to get heated very quickly.

I don’t want Epic to ‘win’ this war.  That would be just as bad as Steam keeping a monopoly on the marketplace.  I don’t want any one store to have a monopoly everything.  I want competition.  I want these guys competing for games to publish.  I want these guys to compete for customer eyeballs. 

Competition is GOOD. I’m happy that we may end up in a situation where there are two stores competing to make lives easier for game devs. I’m happy that Steam will be forced to clean up it’s act, and that Epic is hungry to offer innovations. And I’m disappointed that gamers are pissed off about it, and that some observers are milking this outrage for clicks and views.