Reddit Gold: “Game developers, what are your thoughts on loot boxes?”

Reddit Gold highlights the most useful and educational content on Reddit as found on r/AutoBestOf.

Today’s post is from u/Cabadrin who answers the question: “Game developers, what are your thoughts on loot boxes?

I’ll chime in as well – like Gwen I have to say this is a nuanced answer. I worked in the game industry for twelve years, and I was intimately involved in the financial modelling and sales of several free-to-play titles.

Most loot box models go to supporting the team and studio, rather than lining a specific person’s or executive’s pockets. The goal of most game developers is to continue making games, not make a massive profit, and outside of the AAA implementations most revenue goes to supporting the studio itself.

The cost to make a video game has significantly increased over time. Looking at a few high-profile releases over the last few decades, Dragon’s Lair cost $3MM to develop; some years later, the ambitious Wing Commander III cost $5MM to make (and it had Mark Hamill!). A little while later, Jak and Daxter cost $14MM, Half-Life 2 cost $40MM, and Destiny cost $140MM. Most of those costs don’t include marketing costs, which may be as much as the principal development cost.

Online games, like the ones that sell loot boxes, also have ongoing costs that are difficult to defer. People are expensive, and keeping the lights on, the servers up, and your players happy for years creates ongoing costs that have to be deferred somehow. Either you have a massive hit with an online games that covers your cost and then some (see Guild Wars), you have a subscription model, or you sell additional content over time. Studios have to come up with some way to cover the ongoing cost of developing their games and, hopefully, allow them to develop new games as well.

As a real-world example, Eve Online cost $53.2MM to generate $86.1MM in revenue in 2016. Key expenses were salaries ($23.7MM), areas like marketing expenses ($12.9MM), R&D ($18MM), and general staff and expenses ($16.3MM). That leads to $6,000 per month per employee based on salary; $13,480 per month per employee after all expenses. That’s not a huge margin, especially because the profits then went into financing their future projects.

For smaller developers, the margins are even slimmer. I know when I worked on games that were built around loot boxes and microtransactions, we had 30% taken from the platform holder (Apple / Google / Steam), then licensor / publisher amounts taken off of that (~15% – 30% depending on the deal), and then what was left was for the studio. That may only leave $0.35 – $0.55 of every dollar going to the studio. The studio then has to cover the salaries, overhead, and cost – say, $8MM based on 50 employees at CCP’s $13,480 / mo rate. That means the studio may need to make $16MM – $24MM in gross revenue just to cover employee overhead, let alone fund future development of another title.

Assuming $24MM in annual gross revenue, that means $2MM per month in gross monthly revenue, which with a playerbase of 50,000 active players means each player needs to spend on average $40 per month to keep the lights on.

There are very few models that allow for that kind of monthly revenue that aren’t based on DLC, content expansions, or IAPs. And to answer why we don’t just go back to the way things were, there are far, FAR more game developers today than there were ten or even five years ago. It would mean tens of thousands of developers lose their jobs, their studios shutter, and their games close. Most game developers don’t want that to happen to their studio.

So to summarize, loot boxes mechanics sound like they make a lot of money, and they do! But the cost of making games has gone up, the number of developers have greatly increased, and even smaller studios face the uncertain question of how they can compete without dipping into selling content, MTX, or loot boxes.

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