The increasing cost of game development is driven by the diminishing returns of improving graphics hardware. Each subjective improvement in graphics quality requires more rendering power than the last, and while hardware manufacturers have made significant progress in this area, human effort does not scale as easily. This means that while it is now possible to create larger and more detailed games, they require significantly more work to develop. The cost of game development is approaching a tipping point where costs are rapidly increasing. While it would be possible to stop pursuing increasingly advanced graphics and larger game worlds, the competitive nature of the console market makes it difficult to break out of the graphical arms race. Publishers must pay a percentage of their sales to platform holders, but Sony and Microsoft are exempt from this fee and are actually subsidized by it, giving them an advantage over third-party publishers. Additionally, developing impressive graphics helps to sell consoles, which generates additional revenue for the platform holders and creates a positive feedback loop. Third-party publishers do not benefit from this cycle, but still cannot afford for their games to appear outdated compared to first-party output.
The mobile games market does not have the same dynamics as the console market, as graphics are not as important for selling mobile games. However, the economics of mobile game development can also be problematic. While the potential return on investment is higher for mobile games due to lower development costs and a larger target market, the chances of success for any individual game are much lower. With over a million games on the Apple App Store and only a few thousand in each console library, the competition is fierce. In such a unpredictable market, publishers must keep releasing new games in the hope of achieving success and must eliminate those that do not perform well. While the cost of developing any individual mobile game may be lower compared to a traditional AAA game, mobile game publishers still face significant development costs across their entire portfolio, not including marketing expenses. To attract players, mobile game publishers often rely on paid marketing, which can be expensive and frequently exceeds the core development budget. Additionally, much of the user acquisition spend goes towards advertising in other mobile games, further contributing to the marketing budgets of competitors and leading to an increase in user acquisition costs.
Making games development pay
Given the challenges facing both the AAA and mobile games markets, it is likely that more studios will be acquired by first-party publishers and other large companies, such as the recent acquisitions by Microsoft and Sony or Netflix's purchase of mobile game studios. Others may turn to new monetization models, such as randomized reward systems, subscriptions, battle passes, and in-game advertising, which is estimated to make up over a third of mobile games revenue and is expected to become more common on console and PC as well. To reduce costs and make it easier to hire engineers, some studios may adopt third-party or open-source tools for areas like testing, analytics, and backend infrastructure, or adopt AI-assisted development tools to increase productivity. These trends, along with the proliferation of startups offering game tech solutions, can be traced back to the issues with the traditional economic model of the games industry. While some of these solutions may not be successful, the continued demand for games suggests that the industry will continue to grow and there is hope for finding a better balance in the future.