**This article is currently an update to yesterday’s update of Christian Svensson’s original interview with Patrick Klepek at the MTV Multiplayer Blog . There is a ton of new material so if you saw it before, check it out again. It is important to note that: 1) this is now officially out of control (in the best way possible) 2) I am jealous of Klepek’s industry-leading haircut . — Patrick Klepek recently got to sit down with our own Christian Svensson (The guy who cures all your burning itches by answering questions in our Ask Capcom forum) for an interesting interview for the MTV Multiplayer blog . This wasn’t your typical interview of the, “How did you make Final Fight: Streetwise so awesome?” variety. Instead, the article focuses on the sales side of the gaming industry and all the behind the scenes action that you generally never hear about.

“The sales life cycle of a product is shrinking,” said Svensson. If a game undersells its first month at retail, it’s finished at retail. Often, though, it’s quicker: if a game underperforms its first week, it is more than likely “dead on arrival.”

Predicting how well a game will sell is an extremely difficult, yet extremely important aspect of the business.

Capcom keeps a warehouse of additional units in case a game has a surprisingly strong launch or sudden surge in sales. They have extra “Devil May Cry 4” inventory just sitting around in case a retailer calls up and says they need another 30-40,000 units. If they don‒t have those units immediately available, the retailer may just cancel the order entirely and move onto the next big game. “Demand may not be there [anymore] if a request goes a week ignored,” said Svensson.

The beauty of working here is that I can go directly to the source, and as I was typing this up, Christian just happened to wander by my cube. Usually I would beat him off with unopened copies of Streetwise, but this time I let him stick around because he offered to fill in a bit more information here on the Capcom blog.

One of the questions we often get has to do with why can DVDs or music CDs stay on shelves forever and games don’t. What I’m about to write is a gross-oversimplification but here’s a part of the issues: A big part of that has to with the fact that the cost of goods (or COGs) as we call them. On those types of goods, COGs are next to zero and production timelines for those goods is also very, very fast (there’s no approval process and loads of localized manufacturing capcity) so inventory risk and time to market is very fast. As a result, there’s not a lot of risk to a producer/publisher carrying CD or DVD inventory or meeting demand on very short schedules. Conversely, games carry a significant COGs load beyond the materials cost of goods in the form of a licensing fee to a first party. Without getting into details that take me into dangerous NDA territory, suffice to say, on a per unit basis, COGs can add up very quickly such that managing inventory and forecasts is very important. If I made an extra 50,000 units of a music CD that cost me $0.25 a unit, it’s probably not going to imbalance a P&L. When I make 50,000 units of something that costs upwards of $10 a unit, all of a sudden, there’s an extra half million dollar plus load on the project that may well have brought the project into the red (or in the event of something that’s already not meeting forecasts, turning a papercut into a gaping wound). Tied with this is the fact that the DVD business and CD music business often have their goods “on a string”… and they can do this because of that lower cost goods issue. If the products don’t sell, the retailer sends them back to the publisher/distributor (and the risk to them is again, less than $1 a unit). In the case of games, at least in the US, products aren’t on a string so the retailer carries some bit of risk. That said, that risk is mitigated with price protection (marking down the price on the game/providing a credit to the retailer such that their wholesale price is actually much lower than it started) until the goods actually do move through the channel.

So, combining the COGs issue with the production turn around times referenced in the article, you can see that sometimes there are risks layered upon risks. If can I get production times down, I don’t have to carry as much inventory in the barn to meet trailing demand, which means a publisher’s exposure is lower. Conversely, a longer production time means that the forecasts initially have to be that much more accurate lest you be stuck with significantly more inventory and sunk costs than you wanted (or on the other hand, a lag before you can meet pent up demand for a product you’re short on… which may or may not be there when you actually get goods back in stock). Remember, COGs never change regardless of what price you actually see those products being sold for. 🙂 EDITING: I’ve seen some interesting responses to my comments around the Net. I think there are a few elements people are missing: 1. How I defined “dead” – to a publisher, that means that retail isn’t reordering any more of your game beyond what you’ve already placed. That doesn’t mean, you aren’t going to sell copies beyond the first week or month. On average, the active reordering lifecycle for a product is about three months. Big hits, like DMC4 or RE4 will sell for years, but those are not the average. 2. You’re missing who is calling the shots on whether something is dead or not – Retail does. If something isn’t moving as well as a retail buyer had hoped and inventory is clogging up his shelves, the buyer “turns off” the SKU. That means, no more potential for reorders. I see some claims of “well ship more, the demand is out there, etc”. I assure you, we want to make sure we sell as many copies of every game we ship we possibly can. It’s almost retarded to hear the claims of “you didn’t ship enough of XYZ”. We’re a business. There’s almost no reason why we wouldn’t want to ship more product provided it’s actually moving through channel. That said if it’s not moving, no we don’t want to ship more, get our retail partners pissed at us for clogging their shelves and only have it cost us more money to mark it down. Common sense guys. 3. Why don’t you just make more in small quantities? There are minimum production run requirements that vary by platform, usually of several thousand pieces (again, refer to the COGs issue above). If a publisher is carrying several thousand pieces of inventory in their warehouse, and they’re doing that across 50 titles or more… all of a sudden I have an awful lot of capital sitting there stagnant. Very bad. Auditors hate that by the way. Sometimes we do build to order runs on some products, so if orders are “evergreen” (meaning a retailer or distributor won’t cancel them) we’ll accumulate them and eventually do a production run. Again, that’s what happened on Ace Attorney and slowly over time continue to feed the market. But that’s an exceptionally rare case. Some retail realities for the US: There are about five or six retail accounts that represent around 70% of the business. Not getting carried by one of the majors is a pretty significant blow to one’s potential sales. Combined with that, most of these five or six retailers have very limited shelf space, such that not getting placed is highly likely to happen, especially on new IP or niche products. That said, Ace Attorney 1 did the vast majority of its sales without support from the majors. Aside from the first order that Gamestop placed, we went on to sell about 200% more than the day one number via just distribution (who distribute on our behalf to smaller outlets that we don’t directly handle). I want to stress, neither I (about 8 years on this side of the business) nor my boss (about 25 years in game publishing) have ever seen anything like that happen for any title we’ve ever shipped. It’s extremely, extremely unusual (and a testament to the stregth of the product and the value of word of mouth). I’ve seen a number of people in comments on other sites calling for digital distribution as the solution to some of these mechanics. If you read this blog regularly, you may have noticed that Capcom is becoming a leader in this space … that’s not to say retail isn’t valuable (it is and will always be) but I am looking at digital distribution as a way of getting significantly longer sales windows that can allow for more creative endevors the right opportunity to find an audience before they get managed off the shelf. By the way, there’s now a thread on our boards where there’s more questions and more answers about this part of our business. If you’re interested in what you’ve read, definitely look on page 2 at the post I wrote at about midnight last night. 🙂