Counting Rupees: Royalty Screwed


Each week Jeff Engel and Geoff Brooks alternate in contributing Counting Rupees, a column on the business behind gaming:

Gamers were outraged in recent weeks by a rumor that Xbox Live Arcade royalties were being cut in half for developers; in fact, some developers were reportedly considering moving development from XBLA to the PlayStation Network because of the cuts. It was less clear why Microsoft would do something like this: At first glance, it appears to stifle independent game development and reduce the overall quality of XBLA as a platform. Clearly, Microsoft is just being greedy, right?

Perhaps, but it's certainly not as clearcut as it seems at first glance. Although any changes to the royalty structure will mean changes -- and potentially significant ones -- for XBLA, they may still be beneficial in the long run for some people, possibly even increasing indie development.

As is often the case with rumors, there's more to the story than a simple royalty cut. Let's think first about what the costs and benefits of the changes are to both developers and Microsoft, after which we can decide why the action might have been taken in the first place and what it all means to us as gamers. From a developer's perspective, the cost is pretty clear: Up to 35% of the total revenues of a game. Does the developer receive any benefits? Yes, some: As reported, developers will no longer have to pay for features like worldwide ratings or localization, which both reduces costs and potentially provides access to a larger international market. And from Microsoft's standpoint, the costs and benefits are essentially reversed: It no longer has to pay the royalties, but it does need to provide some additional services.

Now we can think more clearly about the likely effects of this new structure. To the extent that the royalty cuts are not offset by the additional services provided (a likely scenario), existing developers face three options: If they can't sell enough games to cover their costs of production, they may choose to stop developing entirely, or move to a competing network. If they can, they may still opt to move – or just accept the cut. Yet changing networks isn't that easy. There's only one real competitor, PSN, and as of the end of last year the PS3 had sold only about half as many consoles as the 360. In order for that to make sense, you have to assume that PS3 owners are going to purchase twice as many copies of your game at the same price just to make the same amount you'd have had by sticking with XBLA. That doesn't seem too likely. The upshot, of course, is that game developers that can't cover their costs are likely to stop production, while those that can are probably going to stick it out on XBLA or publish through some other channel.

Why would Microsoft want to drive some developers out of the market? One potential reason is that it believes it can make enough in royalties from those that stay to cover the revenue lost from the departed developers. A more likely solution, however, is that it wants to promote its new XNA Creators Club.

The XNA Creators Club will basically allow anyone who's paid $100 for a development kit to put a game up on XBLA after a "peer review" process. While this obviously benefits budget developers, larger ones are going to leave the market – they can't cover their costs since they lose revenues much faster than their fixed costs accumulate.

In the end, here's what I think will happen:
  • Microsoft will succeed in bringing in lots of smaller indie developers by touting the XNA Creators Club and the "low-risk" royalty structure. This should quiet some claims that it's stifling independent development, since both of these programs should enable smaller developers to get their content published on a major platform.
  • The "bigger" indie developers will either desert the platform, restructure their development, or join one of the major 3rd-party publishers. We'll probably start seeing more of these "cheap" $100,000 games as more of the standard "indie" games become available on XBLA.
  • We'll see more games from the big 3rd-party publishers, especially those like Sierra Online who have truly embraced digital distribution. As it appears their royalty structure is basically unchanged, they will likely try to snap up the more talented indie developers who may not be happy with the new arrangements. While it may not be as lucrative to them as if they were able to publish themselves for the original deal, they'll have bigger budgets and a salary with a lot less risk should they produce a flop.
  • XBLA prices will likely edge up slightly, while XNA Creators Club will take over the $5 price point. Whatever anyone thinks about Space Giraffe, if it had been made under the new arrangement, the developers would be in an even worse position than they are today, being 50-60k from breaking even, rather than half of that. While most XBLA games are already at the $10 price point, games like Space Giraffe will probably move up to the $10 price point, and more may even start hitting the $15 mark.
  • XNA Creators Club will show tremendous potential with an onslaught of games and a few gems, but its low cost of entry may actually drown the good games in a sea of bad ones. It will be up to the user base to make sure that the good ones get the attention they deserve, and the ones that succeed here will be able to "promote" their next project to XBLA.
So XBLA may not necessarily get worse, but will probably look different. Unfortunately, as GSW suggests, this may just be a necessary correction that Microsoft needed to make in order to make some money off of XBLA, as the certification and simple hosting costs, which actually may go way up with XNA Creator's Club, may have caught up to the company. Also, after pouring billions of dollars into the Xbox brand and only recently seeing a profit, Microsoft may just want to look into other ways to start making back some of its investment. Is it possible that this is too much of a cut on XBLA royalties? Absolutely, but if Microsoft can't make money on the store, then it will simply collapse and everyone will lose out in the end. On the other hand, if the XBLA simply turns into a load of poor quality "home-brew" titles that no one buys, Microsoft won't be making any money off of that either. I would think that Microsoft understands this, so I wouldn't write off XBLA just yet.


As co-editors of A Link To The Future, Geoff and Jeff like to discuss, among many other topics, the business aspects of gaming. Game companies often make decisions that on their face appear baffling, or even infuriating, to many gamers. Yet when you think hard about them from the company's perspective, many other decisions are eminently sensible, or at least appeared to be so based on the conditions at the time those choices were made. Our goal with this column is to start a conversation about just those topics. While neither Geoff nor Jeff are employed in the game industry, they do have professional backgrounds that are relevant to the discussion. More to the point, they don't claim to have all the answers -- but this is a conversation worth having. You can reach them at

This article was originally published on Joystiq.