game sells. Publisher responsibilities include: product funding, product testing (finding bugs), packaging development, user manual development, customer service, marketing, public relations, and retail distribution. Their goal is to maximize sales, and as a result they prefer to launch games across multiple game consoles in order to sell more units. Roughly 300,000 units must be sold in order to break even; not surprisingly, seventy five percent of published video games fail to break even. Blockbuster video games sell units in the 1 million plus range and are highly profitable. For example, Tony Hawk accounted for almost half of the second largest publisher’s revenues in 2001. 129
The three video game console manufacturers, Nintendo, Sony, and Microsoft, control the value chain, as developers and publishers do not have the right to produce titles for the manufacturer’s console without the console manufacturer’s consent. In addition, video game publishers are required to pay a licensing fee for each unit sold (the fee is typically 16 percent of revenue; see illustration below). 130
With only three players in this part of the value chain the revenue capture per player is higher than that of any other part of the chain. Console manufacturers embrace the razor and razor blade model as the consoles are sold below cost to increase the user base. Console manufacturers strive to sign exclusivity deals with “third party” video game publishers for a single title or their entire portfolio of titles. Console manufacturers also have in-house developers that strictly produce “first party” titles. First party title development allows console manufacturers to capture all the rents associated with development, distribution, and licensing.
The top five brick-and-mortar retailers are responsible for seventy-five percent of video game sales.131 Retailers include software specialty stores such as GameStop and Electronics Boutique, toy stores such as Toy R’ Us and KB Toys, larger electronic retailers such as Best Buy and Circuit City, and mass merchandisers such as Wal-Mart. Retailers capture forty percent of retail revenues:
129 Telephone interview with Kevin Wynne, Marketing Manager, Activision, by David Perez, February 2 3 , 2 0 0 3 .
Interview with Phillip Mehler,
p, Press Release, The NPD Grou