What A $500 Million Game Actually Means

Hello, One Take Shrier here. You know, it's funny. I started this YouTube channel in part, not only for this reason, but in part because I didn't want people on YouTube to be taking my stuff out of context and misinterpreting it in these wild ways. And then of course, people started taking clips from my YouTube channel and misinterpreting them on Twitter and sharing them out of context because that is how the internet works. So, allow me to offer some complexity and nuance in today's video. We're going to talk about video game budgets. Once again, the hot topic that uh I think helps explain why the video game industry is in the state it is. And specifically, we're going to talk about a big number that has been floating around, $500 million. And I'm going to explain what that actually means and why it doesn't really mean what people think it does. But first of all, some context that has been sorely missing on Twitter. People took a

clip from my previous video, my most recent video about Boware where I talked about how Gears of War eay cost $500 million and how that was a real number and people extrapolated that to use for their, I don't know, console warfare or whatever. When the point I was making is that video game development has gotten so expensive that it costs these companies hundreds of millions of dollars to make. Gears is just one example of that. It was in the broader context of Boware and EA. EA decided to move ahead with Star Wars Battlefront 3 over Mass Effect 5. Um, in part because both of those games would cost hundreds of millions of dollars and EA is now saddled with debt to the tune of $18 billion that it has to service every single year. Um, we don't know the exact amount, but it is going to pay in interest alone more than a billion dollars per year. And so suddenly it is in a cash crunch and had to choose between one of those projects. This would not be the case if uh if Mass Effect, for example, cost them $10 million to make, then it would be a much easier decision to just make it. Um, all

that said, I think fixating on $500 million is kind of beside the point. Think of it as the larger point here is that video game budgets have grown exponentially and sales have not grown to in correlation with them and therefore the video game industry is running to problems as a result. Especially in North America, a lot of people are moving out of North America, shrinking their North American staff, laying people off here because of that. That is the larger point. Um, when you say when you look at an individual number, and I know it's tempting because some of these numbers are outlandish. And it also can be kind of um very tempting for people to compare them to one another to say, "Hey, um, I don't know, The Blood of Dawn Walker costs $40 million and Gears of War Eday cost $500 million. Does Gears of War eay really feel like a $500 million gain? And the reason that's dangerous and misleading and really shouldn't be done is because budgets are a matter of accounting. And accounting, as as anyone who's worked with a P&L before knows, can be uh

skewed and used to uh tell messages that you want. All sorts of tricks can be used in accounting. All sorts of things can be buried inside of a P&L, a profit and loss sheet. And um there's a lot of ways you can calculate budget. I mean just the other day I was texting with someone I was who was who was um high up at a studio at a game studio and I was like hey what did this this game you worked on cost? And he was like well it depends who you ask but um it could be X or it could be Y and just depends on the accounting wizardry you're doing here. So these things are um are are let's say mutable. Um these things can be changed and are very fungeable. They can be uh they are are amorphous. They can be squished and squeezed and turned into whatever you want them to be. So, okay, let's start from the beginning. What's a video game budget? As I've explained in a previous video, essentially the majority of a game's costs are labor costs. And so, what you do is you figure out the burn rate, average burn rate at

your game studio um per month, and you calculate that across the number of total months, and you calculate your budget from there. oftentimes these days you have studio burn rates per person of um could be anywhere in North America could be anywhere from 15,000 to I mean I've heard as high as $30,000 per month as a burn rate for an individual people that is including not just salary and benefits which are extremely expensive these days. Um uh a lot of companies are raising their are getting are having to pay more in healthcare premiums because of the uh recent tax bills and the new uh Trump's big bill that he passed earlier um earlier in his was it this year last year uh whenever it was that like has made healthcare premiums go up. So that's a big part of that too. So salary, health care um overhead which includes um all sorts of operational costs, rent and computers and all that stuff is kind of bundled into the burn rate, right? And so you calculate that for the number of months. And so every additional month you add to a video

game, every time you delay a video game, you are adding more and more money to it as a result. Um, and then you on top of that, you throw in your codev arrangements where you're hiring in other companies to come in and work on your your uh game. And so that's how you get to these big budgets. But it's a little more complex than that. I didn't really get into this in my last video because it's kind of accounting um drudgery, granular accounting stuff. But there's more to that. And as other people have pointed out, uh the coalition, which is the company behind Gears of War, also had on its P&L, um on its profit and loss sheet, it was accountable for other parts of the organization. Maybe it was working on tech support for other companies. It was working on Unreal Engine stuff. It built its own custom attack. Um sometimes what you have and what you have to calculate for when you're doing this math is um what's called basic level. There's essentially two forms of expenditure that you can uh calculate when you're doing this weird accounting wizardry magic. Um, opex versus capex. Opex is your operational expenses, which is basically what it costs to run your

studio. Those don't go away. Day-to-day costs for your studio. Capex is R&D is research and development. And a lot of that can a lot of tech can be kind of written off as capex. A lot of times if you um cancel a game before it's even announced or released, you can write it off as capex which has tax benefits as well. it's research and development. It's kind of a different tax bucket than your operational expenses. So, um, capex is, at least in theory, ostensibly, it's supposed to be more of a one-time cost or kind of a a a singular cost as opposed to opex, which is an ongoing cost. And a lot of times, if you are working on something like a custom version of your Unreal Engine tech or some other just kind of big um expenditure that will pay off dividends in the long haul of the project, um, it might be qualified as capex. And in this case, yeah, I mean, when you talk about $500 million, there's a lot of things you could be talking about. I mean, you can also look at the credits of Gears of War Eday. You'll see a lot of people in there. Um, you'll see a lot of companies in there, a lot of studios in there. But what really makes the kind of the

comparison pointless is that every company has its own way of doing these accountings. And there's a reason that um in the corporate world, there's this concept called GAAP, general uh accepted accounting principles. I believe that's the acronym where essentially um uh the uh the powers that be the government regulators want everybody to abide by these specific principles because otherwise everyone would just it would just be a mess. Everyone is just doing their own kinds of accounting in all sorts of different ways. Um I'll give you some specific examples just to make this a little bit evident as to why these budgets can look so different from project to project. Um, some game companies, I believe Tensen might do this, I'm sure there are others, some game companies include bonuses and equity as part of their development costs, which leads to super bloated budgets. So, for example, um just as a comparison point, I don't know if Xbox does, I don't believe they do, but if Xbox included um their equity and the every a lot of people at Microsoft, if

you work for uh Microsoft, part of your uh compensation package is this equity, the vest over the course of four years and essentially you get stock and a lot of people make a significant amount of money there. A lot of people stick around at Microsoft for the long haul because they want that equity to vest because it's a big part of their comp package. If that was included in burn rates and in development costs, the numbers would be a lot higher than they are if they're not. So if Tencent is including them and Microsoft is not or PlayStation is not or whatever and you're trying to compare the budgets between these two companies, you are just not it's completely like apples and oranges to use use the cliche here. Um we're talking about two entirely different numbers that cannot be compared at all. Which is why once again when people are obsessing and fixating over this $500 million number, it doesn't really matter what that number is. The point that I was trying to illustrate is that we're talking about game development budgets that have swelled in a significant way. And there are other things you can throw into a P&L also. I mean, um, I've heard stories

about game companies that have multiple projects going that will take, um, a very successful project and slip some budget numbers, some some headcount from their R&D project or their less successful project into that to make the numbers look better. Um, right? So, you might have a P&L for um, your big successful online game, your Fortnite or whatever your Minecraft or whatever your big game is. Not saying those companies do it, but I've heard this happening at other companies. Um, and that might be used because you're making so much money with that project, you can hide some costs in there um, to make your other project look a little bit better, look like it's not burning quite as much money as it actually does. And a lot of people do this. Um, sometimes if you're an independently owned studio, you're not part of a big corporation and you are getting uh contracts with other publishers, you might be shady and you might kind of move some numbers around to make it seem like you are asking this company for $100 million just for this game, but actually are using some of that for this other game. That happens too. So again, these budgets can be

really complicated, especially at Xbox. Um, and then you get into expenses which are also really complicated. If you are part of PlayStation, for example, um, every single game you sell on the PlayStation store, you are paying a 30% fee to the PlayStation store as a result of that, right? But if you're part of PlayStation, if you're Naughty Dog or Sony Bend or Sucker Punch or whatever, and you are still you are part of the PlayStation organization, then in theory, 100% of what you make goes through the entire company. But as a studio, does your P&L reflect that or do you have to then like account for paying the 30% to the store because they have their own budget and they should be getting that and they should be accounting for that in their P&L. These are questions that are like applicable to these budgets all the time and make things a little complicated and also make it a little bit um make it impossible essentially to do the napkin math of trying to figure out if a game is a profit or not or by how much just

based on sales alone because there's so many different things you can do here. Um to use boware as an example just because I was recently talking about that. Um I have a quote in my my uh first book blood sweat and pixels uh talking about Dragon Age 2 which was a game that was developed in uh about a year a little more than a year to fill a hole in Boware schedule. Essentially Boware said we have to delay Star Wars the Old Republic from 2011 to 2012 I believe it was and EA said okay what are you going to put in there to to make up for that? and they decided to make this Dragon Age game that was kind of a rushed sequel moved really quickly. And uh the quote that I have in there is that like in some even though the game wasn't a huge success and wasn't considered a success for Boware, in some dark accounting corners of EA, it is considered a success because they can move the numbers around and they can do their accounting wizardry to make it work for that fiscal year. So, this stuff is really complicated and I think getting once again at the question of Gears and $500 million, I think there is

a temptation to say, "Hey, this game cost $500 million. Are you really getting that for what you're looking at? Is this really uh like comp is this really comparable to the uh I don't know $200 million that it's spent to make The Last of Us 2. Um, is this not going to be profitable? Is Gears is the coalition going to be shut down as a result? Is Gears considered a big flop as a result?" And again, I think this is part of the discourse because of the Xbox of it all because there are a lot of people with very passionate feelings, pro Xbox and anti-Xbox and everything in between. And I think that leads to some kind of let's say uh unnecessary discourse, pointless discourse, discourse that is just entirely based on meaningless things to to be tweeting things that get you lots of retweets and likes saying um things like uh Gears of War cost $500 million. it's a huge flop. Whereas this other game cost $50 million and sold a bazillion copies. Um that is just completely pointless. Um of course we

can look at the numbers of Gears of War and how many copies they sold. Um and it certainly does not look good for them based on what we're seeing. I believe the reporting number that The Verge reported was something like 400,000 copies, which is absolutely not good. But there's so many factors there that you cannot just take a budget number and a sales number and figure it out like figure out if the game was profitable or not or how badly a miss it was. Um, for example, with Xbox specifically, I mean, Xbox, you want to talk about accounting wizardry, Xbox is a master of that because they have all sorts of kind of tricks that they pull and things that they do and it's very, very complicated to deal with P&Ls within Xbox. Um, there was a time, by the way, I think they've changed it, but a a few years ago, there was a point where, um, projects would not be funded like for the entirety of a project. They would be funded on and approved, their budgets would be approved on a year-to-year basis. So, instead of saying, "Hey, I want to plan out this game. It's going to take me x number of years and cost x y number y amount of money," it would just be, "Here's my budget for the year. Can you

approve it?" And that would go on until like the last 18 months or whatever. and then they would say, "Okay, time to figure out what the next year is going to look like, what the marketing is going to look like, and that's when uh cost would be advertised." And it would be more of a kind of traditional P&L sort of thing. So, Xbox is its own kind of beast. They also have Game Pass, which throws an entire another wrench into the uh P&Ls at Xbox. Um, this is here we're going to get a little granular, but stick with me for a second. So, Xbox Game Pass, as you probably know, is a uh subscription service where you pay 10, 15, whatever it is now, $20 a month to get access to a bunch of games. And so, as a result of that, those games are not getting sales. I am playing those games because of Xbox Game Pass, but I am not they the developers behind them are not getting sales. So, the developers are like, "Hey, what the hell? Like, how do I account for that?" If you're outside of Xbox, you're probably getting paid a big chunk of money to be on Game Pass. And I mean those Game Pass deals, they don't happen anymore, but they used to be or they don't happen quite as as richly anymore, quite as much anymore, but they

used to be uh things that would single-handedly save game studios and single-handedly make games profitable because Xbox was paying so much money for those Game Pass deals. But within Xbox, if you're part of the Xbox or you get what's called an attribution on your P&L, where essentially Xbox's finance people will calculate a number based on how many hours people played of your game on Game Pass and that number will then go on your P&L and say this counts for your as part of your profit for your profit and loss statement. Right? So, if I make a game and it doesn't sell enough to be a profit, maybe in theory this attribution from Game Pass, which they call um member weighted value is the term that they use at Xbox. They have a lot of just kind of funky terminology that they use in the same way that you might have seen um uh over the last few years when Bloomberg when we broke the news that uh that they were um that Xbox was that Microsoft was asking Xbox people to and Xbox studios and games to hit a 30% profit margin. They use the term accountability margin which is

their own kind of calculation for margins for profit margins. Anyway, member weighted value, that's what they use for Xbox Game Pass. So, um, so like if a game uh sells X number of copies but then makes that amount of money in this kind of theoretical here are the number of hours we're you've played, people have played of your game and so therefore we're going to calculate this member weighted value accordingly and give you that as a profit. um then some games might be profitable even if they're not actually profitable, but they're profitable due to Microsoft calculations. And that's just one factor. I mean, there are all sorts of other factors. Um if you're at Xbox and you're using Azure, then you might you might be forced to use Azure or maybe you're not allowed to use Azure because Azure is all booked for AI this year. Um, and Xbox also has uh some companies have dealt with have had to deal with this too, but Xbox specifically, I've heard all sorts of stories about um budget clawbacks where essentially they're saying, "Hey, that budget we agreed to. We want you to knock 10% off of it. Hiring freezes, which can also

often be like short-term benefits for Xbox's overall um opex, their expenditures, but cost more in the long run. So, for example, if I'm a team and I'm trying to ramp up and I'm at 50 people now, and Xbox says you can't actually ramp up to 100 people the way you wanted to, um, I will say, "Well, okay, but that just means we're going to have to spend even more money next year to get people up to speed and to throw more people at the problem because we weren't able to hire up based on our plan." And so that can that can cause all sorts of havoc in like exchanging the kind of short-term gain on a fiscal year for long-term pain down the road, which again can lead to these inflated budget numbers. Um the the budget number for Halo Infinite, by the way, I don't even want to say it because it's just going to be taken out of context on Twitter and used in in these console war nonsense, but like that is even even higher, let's say, than the uh Gears of War Eday number. And again, we're talking about numbers that are inflated for all sorts of reasons. Um, but a lot

of that is is is um is labor costs. Like I said, I mean, when you talk about game budgets, you were talking about labor costs. It's just when you're talking about um this accounting wizardry, it gets into way more complicated territory. Um anyway, I could go on and on about these accounting tricks that these companies use, but I won't keep going. What I will say and I will reiterate this once again is that if you find yourself tempted to do this or if you see people doing this which is um comparing Xbudget at Y studio to Zbudget at a studio um if you say like hey Naughty Dog made this game for X amount while uh the Coalition made this game for Y amount. Uh how how could that be? This game looks so much more expensive than this one does or like this is so much bigger. This took so much more time. whatever it is, whatever kind of comparisons you want to make, don't do it because you are it's just complete nonsense. It's just not uh you're there's no grounds of reality of comparing the budgets of different companies because these budgets are

calculated in such different ways. The overall point and the point that remains true is that game budgets and game the cost of making games has gone up exponentially. the exact numbers are not really useful as data points. And until maybe one day we'll get to a world where all these companies have to be transparent and have to share their exact calculations and P&Ls and amortization and their tax structures and we can actually see exactly what it looks like. Unfortunately, we're heading in the opposite direction because companies like Activision and EA have now been bought and therefore are no longer publicly traded and no longer have to share their financials every quarter. So, we're not seeing quite as much transparency as maybe we did even a couple of years ago. That said, without that information, there is really no way to be able to compare and contrast these different companies and their budgets and these games and how much they cost and what profitability actually means for them. Because remember, for some of

these companies, especially the console owners, profitability for a game can be calculated one way, but when you account for console sales, game pass sales, game pass attribution, on and on and on and the list goes. Even other parts of Microsoft, you could account for um if you are accounting for that, then profitability means something very different than it does if you are just looking at pure a pure revenue versus costs play. So, in other words, just ignore all the Twitter nonsense and try to think about things in a little bit of a nuanced way is what I would ask all of you to do. All right, I'll see you all next