In my previous blog posts, I outlined the beginning of why I believe game development is not cheap.  In this post, I'm going to reinforce that point by outlining the remaining costs associated with starting a game development studio.  It's worth repeating that with this exercise I am not building just a game, I'm building a company.

When we last left off, we were at $436K in costs over nine months.  All of our employees were in an office, sitting at their desks and working towards the production of our awesome game.  Before we can truly get started, we need to recognize that we left out some major components to the process.

Establishing a company is not free.  There's filing fees with federal, state and local governments.  There's a bank account and the associated accounting software required to run the company.  Employees tend to get disgruntled when the promised paychecks don't arrive. :) Figure $200 for QuickBooks, $500 in filing fees, checks and other essentials.  You'll need to protect your company's ideas so you better get some legal help to draw up the non-compete and employment agreements.  Assuming you don't raise funding from an outside source, legal fees will run you around $2K to produce.  We can roughly figure somewhere around $3K to set the business up.

Our project needs an answer to the build or buy decision when it comes to the 3D engine that we're going to use.  A 3D engine can cost a significant amount of money.  Gamebryo is $50K per title per platform with a $25K yearly support fee.  In addition to that you'll spend money on training so that your developers and artists can get up to speed quickly.  Emergent charges $8K for artist training and $4K for programmer training.  Conversely, you can use something like Unity 3D and save some money.  Each license of Unity is $1200 and they offer paid support.  We'll budget the same for training and average out the costs of the licenses between these two solutions for our fictional company.  That brings us to $29K and $12K training.  Remembering our personnel burn rate of $42K per month from the first article means that if we cannot build the same 3D engine functionality in one month with our team then buying is the right decision.  In this case, buying is easily the right decision and this doesn’t take into account the logistical effects of building your own engine. (Artists sitting idle waiting for tools to come online.)  Side note.  The Gamebryo license will include source whereas the Unity code will not which is something else to consider.  Unity will be more in line with Gamebryo for a source code license.

The last part of the equation we've not addressed is the game’s sound.  We need to budget for a sound engineer so that our game can have music and sounds.  Sound engineers make approximately $70K a year so we'll figure a $60 per hour contract rate for two months or $19K.  If your game concept is heavy on story then you’ll need additional hours for that.  If you need motion capture or voice actors then there’s additional expense.  For our fictional company, we’re not getting that sophisticated so we’re only going to look at adding audio to the game. 

Lastly, there’s the publisher relationship.  This model assumes a publisher for the final three months of sustainability.  I’m assuming that the publisher will bring a QA team and marketing for your game and that those expenses are the reason why your first payment will be delayed a few months.  Obviously, this can vary considerably so your financial model has to consider the added costs of dealing with a given publisher.

Employees: $380K, check.
Office & Tools: $58.5K, check.
Game Development Environment: $42K, check.
Incorporation & Legal: $3K, check.
Contract Labor: $19K, check.

Grand Total: $502.5K

That's a startup studio for approximately $500K.  I'm sure there are a whole host of ways to creatively reduce that number.  Keep in mind, that every time you pull a resource or don't purchase something, something will have to give.  Don't want to pay that many people?  Scale your game design down so that it can be completed by the remaining employees.  Does it still have a chance in the marketplace or do you need to find a new marketplace?  A final consideration has to do with raising capital.  If you decide to raise the capital instead of paying these salaries out of your own pocket then there are additional costs.  You'll have networking expenses, travel expenses, presentation expenses and additional legal expenses.  Most VC/angel sites will tell you that you can figure legal expenses to be $20K - $30K depending upon the amount of negotiation over the terms and contracts.  There may even be a finder's fee that needs to be paid to the referring party that introduces you to the people with money.  These can range from 1% - 5% of the total deal value so if you're going to raise $500K for our fictional company, you should plan to raise between $530K and $580K so you can pay the fees associated with raising capital.  As soon as you go down the VC/angel path, your game design needs to change accordingly so that you have a shot at selling the requisite number of copies for the much larger expected returns.

Building a game development company from scratch is not cheap.  I hope I've done a bit of a service to those that believe all that gaming goodness comes for free or nearly free.  Looking back at Flight Control, their web site indicates that they have hit 2 million sales on the iPhone.  That's a remarkable number but if it took a team anywhere near what I've described here then they are barely breaking even on the game.  They've had to add staff to handle the community’s response to the game.  They've been in business for more than nine months and if they’re paying their employees, it’s been with a burn rate north of $50K per month.  Given our fictional company's financials and the fact that they've grossed a grand total of $1.4M from iPhone application sales we can deduce that they’re doing well.  Their game’s sales easily meet the cash flow needs of sustaining a game development business but it's not the runaway success that the news would have you believe despite the great sales numbers. 

It’s not cheap.  That’s my point.  I'll talk about the development constraints and the sales projections in the next installment.