[In this in-depth analysis originally posted on his weblog and then on big sister site Gamasutra, veteran game developer Jeff Ward crunches the numbers to craft a sobering look at the realities of independent game development business models.]

I'm looking at releasing an Xbox Live Indie Game in the next few months. Recently, along with colleague Darius Kazemi, I started doing a little bit of math about indie game numbers, and it's gotten me wondering whether you can actually support yourself, and a company, on indie games -- indie, in this case, meaning a smallish team experimenting with interesting gameplay concepts and styles.

Now, I understand that since this deals more with money than passion, it may end up alienating me from the indie community, but as a developer I want to see small experimental games flourish, and I want to see those people developing them do well for themselves. This analysis questions whether or not that's even possible under our current thoughts and models.

We've been seeing recently a number of small game companies really hitting a wall when it comes to funding. Introversion had a post on their blog about their money problems, and Mommy's Best Games, though still pushing ahead, made it clear that the numbers on Weapon of Choice were not good.

We've had rants from game players about alternative funding models and suggestions from Gabe Newell about public funding for games. What can we take from all of this? What can we do for funding models?

This whole thing starts with one piece of information: How many copies of a single game does a developer need to sell per year in order to support themselves? Let's start at a baseline of $40,000 per year for a single developer. This may sound like a lot for indie developers and, let's face it, it really is. But it should be a pretty good baseline number, for a lot of reasons. Include taxation and taking into account health insurance costs and the possibility of supporting any person other than yourself, and $40k starts to sound pretty slim.

Now we need to figure in loss to distributors. Let's ignore distributors with upfront costs and approval processes, such as Xbox Live Arcade, PlayStation Network, and WiiWare, because even developing for these services usually requires either an already-proven game or proven team, and we're assuming neither. This leaves us with iPhone, PC (in various forms, two of which we'll focus on), and Xbox Live Indie Games. For each platform, you need to look at distribution numbers, likely price points, and gross income, meaning the income after your distributor has taken its fair share.

iPhone

Let's start with the newest (and, by all accounts, sexiest) guy on the block, the iPhone. Most apps on the iPhone sell for $.99 to $3, with Apple taking 30 percent off the top. Selling on the iPhone is really all about staying new, staying fresh, and staying on top of the most popular list. In order to do that, you need to stay at the lower price points to encourage impulse buys. That means staying at around $.99 for as long as possible. Here are the numbers:

Price   Developer Cut   Sales Needed
$1 $.70 57,000/year
$2 $1.40 28,500/year
$3 $2.10 19,000/year
$5 $3.50 11,400/year

So at the largely standard rate of $1, a single developer needs to push 57,000 copies of a game per year in order to support himself, or to push multiple applications which can reach that number. With the number of iPhones on the market somewhere around 6 to 10 million, how many sales can you expect? Mac Rumors reports that four apps easily hit almost a million sales, but what's the data like for games, and indie games at that?

The most telling post probably comes from the developer of Dapple, who wrote a very long post on how much money he actually made on the product; he has sold a total of about 500 copies. In addition, this post on the price of apps versus their popularity shows very few indie games in the list and very little money being made, Fieldrunners (essentially an App Store Launch Title) being the notable exception.

Is it possible to be an indie and loved on the App Store? Only indies who have accomplished this can tell you, but 57,000 copies is a really hard number to hit with something interesting or experimental.

Xbox Live Indie Games

So what about Xbox Live Indie Games? Their developer cuts are exactly the same, although the $2 price point doesn't exist, and the highest amount you can charge is $5. Until recently, $2.50 was the lowest you could charge, requiring about 22,800 copies to be sold per year. Unfortunately, sales figures came up very short for most developers. Total download rates are low, as Indie Games were hard to find on the dashboard until recently, and good apps are very hard to find, so I believe most people have been ignoring the service entirely.

Sales for most games topped at probably around 5,000 copies since launch, far from the required 22,000 to support a single developer.

PC

Finally we come to PC. On the PC, you can expect to be able to charge more, but sales numbers tend to be lower and more is expected of a finished product. Games average anywhere from $5 to $30, even from indie developers. Hosting it on your own or through Steam, you get more of the pie. Steam unfortunately doesn't publish numbers, but PayPal does, and we can use it as a baseline. Assuming that you're looking to get above $40,000 here, we're going to use PayPal's range for $10,000 to $100,000, which is 2.2 percent + $.30 per transaction.

Price   Developer Cut   Sales Needed
$5 $4.59 9,000/year
$10 $9.48 4,000/year
$15 $14.37 2,800/year
$20 $19.56 2,000/year
$30 $29.04 1,400/year

Looking at these numbers, it's almost obvious why most successful indie developers start on PC. Even with the PC market shrinking (this talk from GDC shows that you can expect PC sales numbers in the hundreds of copies, thousands if you're lucky), you get to keep a lot more of your money, and the audience is self-selecting. People interested in indie games tend to have PCs and may buy your game.

(A note to pirates: Look at those numbers and see how much you're taking from that developer, and the numbers each developer has to hit before even becoming profitable. That, more than anything, should make you think twice about piracy.)

Hitting these numbers is possible, but not probable. It's quite obvious, to me, from these numbers why most successful indie devs are one man shops, making fairly quick games. This model doesn't scale to multiple developers, and definitely not for multiple years.

Alternative Funding Models

So what about Gabe's suggestion of running a "stock market" for games where you can invest in projects, get a game out of it, and possibly see a little bit from the net profits off? So far, we've seen a commission system partially work.

Let's assume that for these systems, we're talking about multi-developer, multi-year projects. Still talking indie, let's assume four developers over a year and a half. Not taking into account taxes, office space, servers, or anything else, this totals $240,000 that needs to be raised over the course of a year and a half.

Though this is potentially possible, there are other concerns. If a person invests in this game with a promise of returns on the net profits (after other expenses and taxes), he needs to understand the risks involved. After all, if a game company never hits that $240,000 number, and can't survive long enough to complete the game, that money is lost. Attached to this is the idea of due diligence. Each investor is now an investor in your game, and has possible legal rights. If you just take the money and never finish the game, they might be able to sue you. What is there in place to protect the investor and the developer if this happens?

Provided these legal issues could be worked out, how much net profit would you be looking at losing, and how much would you charge for each point of net profit? What would developers look to gain, and what would investors look to gain?

First, let's start with a game that sells about 20,000 copies at $20 each on PC using the numbers above. We're assuming these are good games that have a following, otherwise they wouldn't have been funded in the first place. That totals $391,000 in revenue on the game, and let's assume for argument's sake that we have $41,000 in expenses for the game. That leaves us with $350,000. Assuming we split to end up getting the funding we need, here's what the graph looks like:

Percentage of   Valve of each  Total      Revenue to   Revenue    Revenue to
net available point net invested investors per point developers
70% $3500 $245,000 $245,000 $3,500 $105,000
60% $4000 $240,000 $210,000 $3,500 $110,000
50% $5000 $250,000 $125,000 $2,500 $125,000
30% $8000 $240,000 $105,000 $3,500 $245,000

That's pretty grim. Only in the 70 percent case do the investors come out just breaking even, and the developers have enough to fund half of their next game. Is it possible? Maybe. But is it worth it for the investors? How many times will an investor lose most of their money from games that aren't finished, or games that don't break 20,000 to 30,000 copies before they just kind of give up investing? How much work is required of developers just to set up the legalities to make sure they don't get sued, and their investors don't get screwed?

Another funding model for indie devs is to keep titles relevant from year to year, maintaining sales of the title up while you work on the next title, and into your third. By keeping these games selling, you can start to see actual profits. However, this also means consistently releasing games year after year, and surviving until these games come out. This takes a lot of startup capital, or at least the ability or desire to eat ramen for years on end, with only the smallest chance of reward.

Conclusion

These numbers make it really obvious to me why most indie (and, in some cases, non-indie) business models exist, and why they produce the games they produce. To be successful, you need to be in one of a few situations:

- A single developer who makes a good title (Crayon Physics developer Petri Purho, for example)
- A single or set of developers with short release cycles to keep multiple games relivant over short periods of time (almost all iPhone developers)
- A developer who has an already-popular game and is able to get on one of the more visible services like Xbox Live Arcade, PlayStation Network, or WiiWare (thatgamecompany, The Behemoth, 2D Boy, Number None)

This is why indie games experiment the way they do -- shorten the development cycle, concentrate on mechanics and prototypes, keep art resources and requirements low, release lots of games quickly. There needs to be more available. I'm sure there are indies out there that want to experiment with things that take longer development cycles -- weird dynamics, involved dynamic art styles, strange narrative structure -- but can't for survivability reasons, and that's a damned shame.

So maybe there's not a good living to be made in indie games. Even with alternative money sources, it doesn't look like you can sustain a business, even of a small number of developers, without targeting AAA numbers, which seems to have a quality bar that almost requires a AAA team.

Obviously, the math that is wrong somewhere, as we've seen success stories happen, but is it worth it for me (or anyone else) to attempt the struggle when the reward seems to be mostly more struggle? Is there an answer I'm missing? Is there money to be made, or even survivability, in remaining truly independent? If there is, can it be done with more models than what we have now?

[Jeff Ward is a professional game middleware programmer, amateur game designer, armchair media theorist, and user interface speculator. He is currently the Lead Architect at Orbus Gameworks, providing metrics middleware to game companies, and is currently looking at releasing his first independent title to Xbox Live Indie Games, apparently for very little reward.]