The Economics of Halo 3

The L.A. Times has an interesting article today looking at the economics of video games vs. movies, in particular, comparing Halo 3 and Spider-Man 3. When Halo 3 hits stores at midnight tonight, it's expected to rack up about $150 million in sales in the first 24 hours, roughly the same as opening weekend for Spider-Man 3 back in May.

But that's where the similarity ends. According to the article:

Movie budgets, for example, regularly careen into the hundreds of millions of dollars, whereas game budgets rarely break $30 million. That's a fraction of the amount studios spend on marketing alone.

Movies also generate far more revenue, largely because they have sales outlets other than theaters. Games have one shot -- at retail. As a result, the movie business is projected to hit $84.3 billion globally this year, more than double the $37.5 billion forecast for the game industry, according to PricewaterhouseCoopers.

What makes the video game business tantalizing is the potential profits. For Sony Corp., the estimated profit margin for "Spider-Man 3" is 46%, according to entertainment research firm SNL Kagan. Microsoft Corp., which publishes "Halo 3," has the potential to see a profit margin of 90% or more for the game, according to analysts.

Sony Pictures spent upwards of $500 million on Spider-Man 3, while Microsoft's total cost for Halo is estimated at just over $60 million. See Bill Gates and his crew are pretty clever. For one, they own the rights to the Halo franchise, avoiding costly licensing fees that are common in games based on movies, TV shows or books -- an important factor when deciding on the flagship game for their XBox platform. For another, much of the television marketing being done for the game is being funded by marketing partners Pepsi, Burger King and Pontiac. And with all the hype around the game, they're getting massive amounts of news and industry press coverage, which is all basically free.

End result? Higher margins and a comparable net profit on an order of magnitude smaller investment. Which model is more attractive to you?

Think about your business. What lessons from this comparison can you apply to your own situation? Are you paying licensing fees where you could take ownership instead? Could you find marketing partners to help increase your reach while reducing your costs? What are you doing to encourage word of mouth? How can you turn a little bit of buzz into media coverage? And, of course, the million-dollar-question: how can you create a product so compelling that people will pre-order it and still stand in line for 3-4 hours to get their copy because they just can't wait one more day to try it