The casual gaming industry enjoys extremely high profit margins. It it also growing very rapidly in the U.S. and Europe, with sales of virtual goods likely to more than double over the coming year.
For hit games with significant revenue made from selling virtual goods, profit margins can be around 90%. This compares to margins of about 40% for the average successful console game.
The source of the huge margin is primarily low costs. The revenue potential of a casual game is currently far less than that of a console game (most are free and have less sophisticated distribution channels), but casual games cost much less to develop.
As in the movie business, most console games are not hits, and struggle to turn a profit.
To illustrate the different economics, here is a side-by-side comparison of P&L for a hit console game compared to a casual online game, given $100 million in revenue (we understand that no casual games currently generate that much revenue, but offer this for comparative purposes when it comes to profit margins):
Here are the key differences between the two respective P&Ls:
- Product Costs: Console games must package and ship games in discs and boxes while casual online games are essentially code with no delivery cost.
- Royalties: Publishers must pay royalties as high as 20% to the console maker whereas casual online game publishers pay a transaction fee for the sale of virtual goods that rarely exceeds 10%.
- Development/Marketing costs: Development and marketing costs can rival movie budgets for many blockbuster console video games, which can often include licence fees paid to copyright holders of characters or places included in the game. In addition, advertising/marketing is usually done on expensive traditional media. Casual online games are less sophisticated technologically and cost far less to develop and market.
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