Sunday, August 25, 2013

Profit Raider: How the Tomb Raider reboot was unprofitable

Through the blogosphere last week, it came to light that the Tomb Raider reboot has sold over 4 million copies to date. While this information isn't so surprising as most analysts had projected sales around this number, what is shocking is that Square has claimed that Tomb Raider has been unprofitable. Today I try to wrap my head around this seeming incongruity and attempt to provide some justification for how it might be possible that Tomb Raider has sold so many units but failed to turn a profit.

4 million sales qualifies Tomb Raider as one of the best selling games of the year and, by all accounts, should be called a success. The first question that comes to mind when Square states that Tomb Raider has been unprofitable despite 4 million sales is "just how many did you need to sell?" with the immediate follow up of "why did you think Tomb Raider would sell that many?!?". Call of Duty, which perennially breaks sales records, usually rakes in somewhere near 20 million units sold by the end of its first year on shelves. This, pretty much, represents the absolute maximum that you could expect a game to sell and, generally speaking, anything over a million units is a resounding success. For Tomb Raider, I have a hard time understanding how Square could put a valuation on the franchise such that an unproven reboot would need to sell more than 4 millions copies to be successful. First off, part of the reason that the game is a reboot is that the franchise fell out of favor and stopped being a money maker; Tomb Raider was on the bench because gamers had become tired of the series and weren't buying the latest installment. Further, no Tomb Raider game, even at the height of its popularity, had sold more than 4 million copies in its first year (as far as I could find, Tomb Raider Legend clocks the best first year sales at 4 million). The logic of needing to sell better than the best iteration of your series in order to break even is plain faulty. Thus, the question remains how could Tomb Raider not be profitable?

Poor Project Management

One simple explanation for Tomb Raider being unprofitable is that Square grossly mismanaged the project. A concoction of cost overruns in development and marketing coupled with initially optimistic sales estimates could easily lead to disaster. Development costs are notoriously tricky to manage and games routinely require more than what was initially budgeted to complete. In the case of Tomb Raider, a flagship product, so much money goes into development that it is nearly impossible to scrap the project instead of paying to complete it. Marketing costs are a bit easier to predict but can be subject to fluctuation. Tomb Raider was released within two weeks of Starcrat (Activision/Blizzard) and Sim City (EA) which would have certainly created competition for advertising space. Finally, it is entirely possible that an executive miscalculated the draw of the Tomb Raider franchise setting profitable sales targets at unrealistic values (and budgeting based on inflated projections). While a successful game can recover from a combination of these factors in moderation, if all three majorly occurred, it is not difficult to explain why Tomb Raider is unprofitable.

Square is Lying

I will only briefly mention this because it is a possible explanation but one I feel to be incredibly unlikely. The suggestion is that either Square is lying about sales figures or about not making a profit. I don't see what Square has to gain by lying about not making a profit; they are responsible to shareholders and this is pretty much the fastest way to pissing them off. As for sales, while I think numbers can be inflated a bit, I am pretty sure it would be found out quickly enough if the figures were off by more than a few percent and the ability to fudge a million sales would require an accounting genius usually portrayed as the assistant to comic book super-villains.

'Profit' to 'Units Sold' Ratio is a Bad Metric

While over-inflating unit sales is reasonably difficult to do, attributing an accurate profit to unit sales ratio can be difficult for the public (privately this data can be broken down and explained). As Tomb Raider is sold on multiple platforms, and  profit margins vary by platform (not to mention variance in retail pricing by platform), this initially creates difficulty. From here, titles can be digitally sold at a discount at different times and for varying amounts. In Tomb Raider's case, the Steam Summer sale probably accounted for a stack of unit sales but at significantly reduced return to Square. In short, it doesn't matter if you sell a billion units if the distributor is the only one pocketing cash from those sales. All this said, Tomb Raider sold nearly 2 million copies in its first week of release which is generally the most profitable time for game sales (no markdown in price). As such, I don't think this easily explains Tomb Raider failing to turn a profit.

Square Never Intended to Profit (at least in the short term)

Aside from poor project management, I think that the next best explanation for Tomb Raider failing to turn a profit is that it was intentionally made at a loss with the expectation of profitable returns on future products. This model is surprisingly common. XBOX original units were famously (and successfully) sold at a significant loss under the assumption that more hardware units in homes would equate to more software sales and greater long-term profit. Further, Id software used to make games more as a tech demonstration for its latest engine which it would then license for huge profit. For Tomb Raider, the idea may have been to develop a versatile engine for the reboot and then hammer out subsequent iterations at a significantly reduced development cost. In this case, the idea is that profit would come from sales of future titles built in an engine that was funded by the first game. While I find this logic compelling, I am not convinced that Square employed such a model for Tomb Raider.

In the end, no matter how you shake it, it does seem a bit baffling that 4 million units sold fails to equate to profit. I think the most likely explanation is due to poor project management. If this is the case, then I can only imagine that someone of reasonable standing at Square will be looking for a new job.