Homework #5

How Retail Games are Made

By: Emily MorgantiDecember 26, 2011

Forget iCloud. Do you remember floppy disks?

"When Apple decided to make their 3.5-inch floppies blue, every floppy went to blue. Then when IBM decided to go with shell gray on the 3.5-inch HD floppy, everyone else went to shell gray," recalls a sales manager for a CD/DVD manufacturer whose involvement with video games and computer software dates back to the 1990s. "One year our biggest client bought over 100 million floppy disks. The next year I would have been surprised if they bought 25,000 when they moved to compact disc."

 

Any game you bring home has the same basic components: a disc, an "Amaray case," and the "case wrap" that displays artwork and text. Some games have a cardboard sleeve that slides over the case, called an "O-ring." And many PC games still come in small cardboard boxes. Over the next three pages in these captions, we've broken down the production process, with images provided by Telltale Games and Coral Graphics. [Note: Emily, the author of this story, worked for Telltale from 2006 to 2009.]

Today he sees the trend repeating, but this time publishers are leaving behind physical media completely: "There used to be an industry need for both DVD and CD and our biggest worry was our competition. Now the biggest worry is technology changing."

He's talking about the rise of digital distribution, and he's right to be worried. With downloadable games on the rise and retail revenues on the decline, the shift toward digital delivery that hit the music industry hard a decade ago is becoming a threat to packaged video games. For now, retail games are still generating more revenue than downloads, but DFC Intelligence recently predicted that this could change by 2013.

As far as former EA executive Bing Gordon is concerned, the move away from packaged games is inevitable. "Physical media's just going away," he said to 1UP earlier this year. "I think we are moving from paper and plastic to digital, and there's a generation that's going to come up and go, 'That paper and plastic just feels wrong. This excess packaging -- it just feels wrong. Having to have used stuff around just feels wrong.'"

It's easy to list the pros of digital distribution: it saves money, it's convenient, and it doesn't leave behind an environmental footprint. If video games follow the music industry's lead and physical media fades into obscurity, is that so bad?

 

Step 1: Planning: Publishers usually squeeze manufacturing into the final weeks before launch, but they might start planning up to a year in advance. Working backward from the release date, the operations team comes up with a due date to provide final artwork and game files to the manufacturer. The schedule is almost always tight: "We may get a heads-up that it's coming down the road, but for the most part we receive the files to produce proofs about seven days before publishers need us to ship," says Coral Graphics' Lee Ramsey.

What It Costs

What exactly will we lose if packaged games go extinct? Jobs, for starters. Unlike many retail products that are outsourced to China and other countries, in the U.S. video game manufacturing is kept close to home to minimize shipping time and expense. And the same vendor often handles all aspects of manufacturing, from printing and disc replication to assembly and distribution.

"I loved inventory and manufacturing," says Scott Fry, who worked in operations for a game publisher from 1999 through 2006. "It's such an important function of what's going on at a company and a lot of people don't realize that. They don't think about those pieces that need to come together." It seems game companies want it this way, since none of the publishers we reached out to for this article wanted to speak on the record about retail manufacturing.

So how much does all of this cost? It partly depends on packaging decisions -- what type of paper is used, the length of the manual, the number of colors printed. Volume also makes a difference due to bulk discounts for materials. PC games are cheapest at a dollar or less per unit, while DS games with their chip-based cartridges -- manufactured exclusively in Japan -- could cost $12 or more. Other platforms fall somewhere in between. Coral Graphics' Lee Ramsey, a 20-year veteran of the entertainment packaging industry, estimates that a standard game's printed components cost less than 25 cents; the rest of the per-unit price comes from the Amaray case, disc, and options such as shrink wrap.

 

Step 2: Pre-Press: Before mass production begins, artwork and the game go through approvals, with the manufacturer sending art proofs and "check discs" (final game discs based on the gold master) to the publisher for sign-off. These are physical items that need to be shipped back and forth, which can add days to the process.

These prices can fluctuate for reasons seemingly unrelated to the video game industry -- like unrest in the Middle East. "Amaray cases have had a significant increase over the years because they're a petroleum-based product. So as the price of oil goes up, they go up," says Ramsey. Discs are also affected; Ryan Anderson, who has worked for disc manufacturer Duplium since 1998, estimates that the price of the petroleum-based polycarbonate used to make DVDs has doubled in the past three years. Paper has also had a staggering price increase -- about 40% in three years. Since these fluctuations aren't added to the retail price, they eat into profit unless manufacturers and publishers can find ways to offset them.

On top of material costs, console games have a few dollars in per-unit royalties attached, regardless of how many copies end up selling. Then there's freight, both inbound to the warehouse and outbound to retailers.

The cost of goods may be a far cry from what we pay at retail, but since many manufacturing expenses are due up front and retailer payments don't start rolling in until two or three months after release, publishers can't count on initial sales to fund manufacturing. "Everyone's playing a cash-juggling game," Anderson says. "It's made people more responsible in their ordering patterns and inventory levels. We have thrown away a lot of dead product over the last 10 years, but now we're seeing people keeping an eye on that, making sure they don't have more cash going out than they have coming in."

In spite of the money-juggling, the paper and discs that make up a retail game are inexpensive compared to other aspects of its production. "In the scheme of things, larger publishers on a console release are spending more money to produce that game than Hollywood blockbusters are spending. It's unbelievable the amount of money that goes into these games," says Ramsey. "Manufacturing is a very small percentage of the overall expense.

 

Step 3: Manufacturing: The publisher decides how many copies to order, a number influenced by pre-order sales. Then the manufacturer fires up the machines. Derrick Chandler of Avarto estimates his company can make 1 million to 1.5 million games in seven days.

When Things Go Wrong

Since manufacturing schedules are tight, even a small delay can become a big problem. When Sony, Microsoft, or Nintendo rejects a game or ESRB submission takes longer than expected, the operations team and manufacturers need to find ways to compensate. "If schedule delays happen, they take the time away from us and our turn times shrink. We're pretty much at the mercy of the publisher and their release date agreement with the retailers," says Duplium's Anderson. Running extra machines or putting more people on the job might speed things up, but ultimately replicating, assembling, and shipping thousands of games takes a certain amount of time, and there's too much money at stake for a release date to slip.

"We have contingencies for machine breakdowns -- on-site maintenance, several machines doing the same thing," says disc manufacturer Avarto's Derrick Chandler. "If one machine goes down, it cuts down the total number off the line at any given time, because each machine is assigned a certain amount of units to produce each day. So they'll double the production on a single line, and then they'll bring the other one back online after maintenance."

Running out of materials can also lead to trouble, but former materials manager Fry says it's easy to avoid: "You buy a specific amount over to allow for pieces that get jammed in the machine -- 10 to 15 percent that's going to go immediately off the top to scrap because it's coming off the machine in the wrong way or it's damaged in transit." But even with good planning, disasters can happen: "I remember once we had a bunch of printed components for a GameCube game coming in on a truck, and there was a huge storm. The trailer of the truck leaked and damaged a good chunk of those front liners and back liners. Any kind of water damage, forget it. That's why having the printer on site is great -- it cuts down on the shipment costs of all that paper and all the transit cost is saved."

Then there are the issues operations managers have nightmares about. A show-stopping bug. A gaming website's watermark inadvertently printed on the packaging. Serial numbers mysteriously missing. Gamers are incensed at the idea that a publisher might knowingly ship an imperfect game, but with thousands of units coming off the line each hour and the release date looming, you can't really shout, "Stop the presses!" Instead, the publisher tries to come up with a solution that doesn't involve starting over. Bugs might be addressed in a "silent rev" in the game's next printing or with an online patch. For those rare issues that render a game unsellable, they have to work with retailers to modify the product, or recall it entirely.

 

Step 4: Assembly: Next, assembly begins -- as long as any components produced off-site have arrived. Since only a few plants are licensed to manufacture for each console, multiplatform games usually have some pieces shipped in. Machines automate the process, with people pitching in for unusual products such as collector's editions.

Recalls don't happen often, says Chandler, but they do happen. "For the retailer, it's cumbersome. They just want to put products on the floor, and they hear from the publisher, 'Hey, don't put that out.'" In this situation, the publisher would communicate with retailers about the situation, and Avarto would pick up the tainted games and replace them with new ones -- hopefully before they're made available for sale. Since games coming off the line are evaluated throughout manufacturing, such issues are fortunately rare: "Usually we know within 24 to 48 hours if there's a bad master; before it reaches the retailer we'll know to hold product or take that batch and segregate it until we find out what the problem is."

It helps that retailers hold onto new releases for a few days before putting them out. Until about five years ago, shipments were timed so the game arrived at the store on launch day. But most retailers, led by Wal-Mart, have now adopted a "street date" policy, receiving new releases up to two weeks in advance but not putting the game out until launch. This policy also helps protect against factors that might delay a shipment such as bad weather or traffic, so that new releases show up in stores as advertised.

Even when manufacturing and distribution go off without a hitch, there's always the chance that a game won't sell, sticking publishers with lots of paper and discs to dispose of. As tempting as it is to envision mountains of bad games dumped in the desert, the publisher's first line of defense is to sell off the inventory via in-store promotions and price drops, and finally fire sales to liquidators who then resell it at discount prices. After all, recouping some money off a dud is better than none.

 

Step 5: Distribution: Staff pack games into cartons, load them onto pallets, and board them onto big-rigs to drive to a warehouse that could be hundreds of miles away. From there, they get distributed to stores in small shipments via UPS or FedEx, or in larger freight shipments to distribution centers for retailers like GameStop. Either way, it takes plenty of manpower to get the games across the U.S., not to mention gas.

But due to limited shelf space, retailers can't hold onto an unpopular game indefinitely. "If it's sitting at retail and not selling, you can't ship retail the new products you want to ship them or replenish the products that are selling -- it forces your hand to take action and figure out what to do with that stuff," says Jason Horstman, a former operations manager for a major video game company. "Generally retailers would like to be able to send it back if it's not selling, but there's a cost involved to them to send it back, and to the publisher to receive it. We'd prefer to take a pricing action to get rid of it. That might work, but you might need to admit that nothing will work."

"There have been situations where we've thrown away a lot of product that goes into the landfill because liquidation companies aren't interested," admits Anderson. He points out that publishers are manufacturing in smaller batches these days, so at least when a game gets scrapped, they throw away less than in years past. And the industry is moving toward greener packaging, which in theory eases Mother Earth's pain if excess inventory needs to be tossed. But there's no getting around the fact that retail games leave behind a footprint -- potentially a large one, if a publisher overestimates a game's success.

Cost Reductions

The main difference between a retail release and a download may be the existence of a package, but even this distinction is shrinking. "It's become so vanilla nowadays," says Coral Graphics' Ramsey. "Everyone's very conscious of the bottom line, so in many cases they're using the minimal package possible to get out to retail."

If you've been playing games since they were on floppy disks, you probably remember big, colorful boxes that screamed at you from store shelves. These tended to include thick, full color manuals, maps, code-wheels, and other "feelies" as publishers call them. At the beginning of the last decade, game boxes began to shrink significantly. Publishers trying to increase their profit? To some extent. "For a long time, gaming costs came down on their own," says Horstman, who worked in video game operations from 1994 to 2005. "As CDs became more of a commodity, up until about 2000, the prices just continued to drop. Then that downward mobility slowed and we started to look at where else we could drive cost reduction."

 

Fittingly, we received the Sam & Max manufacturing photos tossed around this story burned to a DVD, rather than via FTP or one of the many digital file distribution services game publishers use these days.

Shrinking the box size from the then-common 8-inch by 10-inch to today's 5.25-inch by 7.5-inch was one solution, but publishers didn't come up with this on their own. The driving force behind this small box revolution was actually the most prevalent "big box" retailer, Wal-Mart. Horstman recalls that around 2001, "Shelf space became an issue, and retailers wanted to look at how you could change the footprint of the packaging. Wal-Mart was a huge driver of that."

It's no surprise that when Wal-Mart speaks, publishers listen -- investment firm Wedbush Securities estimates Wal-Mart has a 25% share of the retail game market. "Some publishers initially wanted two boxes, one for Wal-Mart, and one for everywhere else," says Horstman.

"The thought was that people pick up the box and look at it; they didn't walk in knowing what they wanted," he continues. "It was believed that the big format helped drive sales." But when publishers saw that smaller packaging didn't hurt sales and it saved them money, they adopted the new standards across the board. Within a few years, big boxes were entirely replaced by the so-called "mini retail."

 

Hundreds of game discs look a lot prettier when photographed from the right angle.

In this move toward cheaper packaging, big boxes haven't been the only casualty. Gone, too, are thick, colorful manuals. "On the console side, when they first came out every manual was 56-pages, 4-color process printing throughout," says Ramsey, who has worked on game packages for every console since the first generation PlayStation. "Now you're lucky to get an eight-page book that's one color. It has nothing to do with retail space; the booklet is inside an Amaray case. That's the publisher asking 'Do we need to spend 45 cents on each of these books, or can we take these down to 12 cents?'" As Avarto's Chandler points out, shrinking the manual also saves on shipping: "I've heard some people say they're going to do away with the manual altogether. It eliminates the extra weight in the case, and when you move a lot of games to a specific retailer and each has a 56-page manual, extra weight is extra cost."

Reducing weight happens to be one of Wal-Mart's green initiatives -- guidelines that affect decisions on everything from packaging materials to the cartons used to ship games to stores. For example, in 2009 many console games started shipping in cases with cutout areas to reduce the overall amount of plastic. "Before, no one wanted to use those cases because they were thought of as flimsy and cheap. Now everyone uses those cases," says Duplium's Anderson. Such changes save money and are beneficial to the environment. But if the main difference between a retail game and a digital download is the package, as packaging continues to shrink, what exactly are we left with?

Will Retail Ever Die?

With packages strictly standardized, there's less and less incentive to buy a game at retail when you can get it more conveniently (and sometimes cheaper) as a download. With movies and TV shows, in spite of the rise of Netflix and video-on-demand there's still a market for DVD box sets. Does the same hold true for games?

"Some franchises are so strong on their own -- take Madden. People are going to buy a new Madden game every year regardless of the package. They're buying it because they want the newest gaming experience," acknowledges Ramsey. For releases that don't have that built-in recognition or publishers who want to give their game a little something extra, however, packaging is a relatively inexpensive way to differentiate.

 

Coral Graphics' Back to the Future special edition featured custom game boxes, and thus had to be assembled by hand.

This has been true for Telltale Games, who re-releases their downloadable episodic games as disc-based collector's editions. Coral Graphics worked on the most recent of these, a Back to the Future special edition in the form of a Hill Valley Historical Society archive with a photo album, Doc Brown's "original" notes, and a commemorative postcard. As the project began, "I asked what's your retail date, when do you need to have this? They said, 'We're not in a rush, we're going to put this on our website and base our order to you on presales,'" Ramsey recalls. "When you have a loyal following you can do that." [Editor's note: Emily, the author of this story, worked in Telltale's marketing and public relations department from 2006-2009.]

Fry enjoyed the challenge of working on products like these: "It was more stressful but it made for a more interesting day, and it felt better to know that you were pulling all of this stuff together into a really exciting piece. You knew people would dig it -- they would love the lenticular on the front of the package, or the trading cards or special maps inside. It's more costly, but the package means more if it seems like you're getting more value for what you're paying. So I would always fight really hard for things like that, because I thought it was important to have a package that looked damn good."

But collector's editions are exceptions, and a few special packages can't change the fact that each year downloadable games are taking a bigger bite out of retail profits. With digital distribution, the expenses and labor of manufacturing go away, the environmental impact is nil, and turnaround times can be much faster, without the logistical headaches of eleventh-hour mistakes. Is that where we're headed? No more games at retail?

 

When you look at them from the right angle, these Back to the Future boxes look less like product packaging and more like a game of Jenga.

Not just yet, say those involved in game manufacturing. "Not everyone is tech savvy or an early adopter," says one operations manager. "You still have moms and grandmas who want to buy games for their children, to give as a gift. And what about browsing, going into a store to figure out what you want to buy? That's not the target for all publishers out there, and definitely not at all times of year, but in the fourth quarter it's very important."

Coral Graphics' Ramsey agrees: "It has to get to the point where the bandwidth across the United States, especially in the rural areas, can handle the larger files. Some parts of the country don't have the ability to handle these large files and have the same playing experience -- it's going to be staggered and slow, and that's not what the gamer's looking for." Considering Wal-Mart's rural presence, their influence on manufacturing starts to make more sense. For all the restrictions the retailer imposes, their end goal is to get shoppers into stores. That's something digital downloads can't do.

"It's still a significant business. Several retailers are invested in this and are willing to work with publishers to make retail product a value-add," says Horstman. "Download is the future, but it has to be as consumers want it, not as companies force it on them. I firmly believe it'll be many years before packaged games go away."