‘Halo 3' guns for $150 million
It’s being billed as the biggest day in entertainment history.
When “Halo 3" comes out Tuesday, the video game is expected to pull in more than $150 million in sales in 24 hours. By comparison, “Spider-Man 3" blitzed box-office records when it took in $151 million at theaters during its three-day opening weekend in May.
So are games really a bigger business than movies? Not quite.
Although the revenues from games have grown rapidly in the last few years, they are dwarfed by the sums of money generated by Hollywood blockbusters.
Much has been made of the increasing similarities between games and movies, but actually their economics remain far apart.
“It’s apples and oranges,” said Jim Ward, who straddles both worlds as senior vice president of Lucasfilm and president of LucasArts, the company’s video game division. “You have different price points, different distribution models, different business models. To me, the only thing they have in common is that they’re both entertainment experiences.”
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.
Of course, not all movies and games see this type of return. Most games lose money. And the typical Hollywood studio generates overall margins in the 15% neighborhood, said Derek Baine, senior analyst at SNL Kagan. “Halo” and “Spider-Man” are considered major blockbusters that help make up for the losers and smaller bets.
So how does “Spider-Man’s” Peter Parker stack up against Master Chief, the hero protagonist of the “Halo” franchise?
In terms of cost, “Spider-Man 3" weighed in at about $400 million to make and release in 107 countries. Producing and marketing the DVDs cost an additional $100 million, and Sony spent tens of millions on such expenses as overhead, profit participation and residual payments. In addition, stars Tobey Maguire and Kirsten Dunst and filmmaker Sam Raimi are believed to get portions of the box-office tally.
The total cost to Microsoft for “Halo 3": a little more than $60 million. Development costs will probably be just above $30 million, given an elite team of 300 full-time artists and programmers working for three years on the game at Bungie, the internal Microsoft studio that created the games, said Michael Pachter, an analyst at Wedbush Morgan Securities. Bonuses to key developers and artists will probably add $25 million to the tab, Pachter said. Though about $15 million to $20 million in television marketing will be spent promoting the game, the majority will be footed by marketing partners such as Pepsi, Burger King and Pontiac that want to ride the “Halo 3" hype.
Significantly, Microsoft has avoided paying costly licensing fees because it owns the rights to the “Halo” franchise. And because Master Chief and his crew are digital, Microsoft is also spared having to write six-figure Hollywood paychecks.
When it comes to revenue, “Spider-Man 3" again is expected to smack down “Halo 3.” After shattering the opening weekend box-office record, the movie ultimately grossed $890 million worldwide. From those ticket sales, Sony will pocket about $450 million. The title is expected to be a top seller on DVD and in Sony’s high-definition Blu-ray format this holiday season. Sony will reap $750 million from the video disc sales, analyst Baine said. Television and video-on-demand rights around the world are expected to generate nearly $170 million.
Altogether, Spidey’s third outing will probably bring in $1.366 billion in revenue for Sony.
Master Chief’s take-home pay isn’t expected to be as lucrative. The game may sell as many as 10 million copies at an average retail price of $70 for a total of $700 million in sales, said Colin Sebastian, an analyst with Lazard Capital Markets. Of that, Microsoft will get about 80%, or $560 million.
The revenue potential for “Halo 3" is constrained by its narrow fan base -- young males. Though Microsoft is trying to make the game more accessible to other types of players, Halo’s audience is “hard-core geeks who are into mature content,” said Jesse Alexander, executive producer for the “Alias” and “Heroes” TV series and a “Halo” aficionado. “It reaches a very specific market. And that’s OK. But it’s just not the same audience as the movie and TV business.”
Where Master Chief will probably score a decisive hit is profit margin. Although “Spider-Man 3" will generate an estimated $628 million in pretax profit for a 46% margin, according to SNL Kagan, “Halo 3" is looking at a profit of more than half a billion dollars and a margin of upward of 90%.
“Video games are potentially very profitable,” said Thomas Tull, chief executive of Legendary Pictures and a financial backer of Los Angeles video game publisher Brash Entertainment. So although the overall dollars are smaller for games, “on a percentage basis, they’re pretty attractive.”
For Microsoft, there are other benefits that are not easily quantifiable. The game, for example, is expected to spur people to buy its Xbox 360 console. It will also drive subscribers to the company’s online game service, where Microsoft can sell additional game content such as new levels, weapons and maps.
“The total contribution to Microsoft is more than just the revenue from sales of packaged games,” Sebastian said.
Bottom line: Although blockbuster games such as “Halo 3" don’t always play in the same league as Hollywood hits, their relatively low costs mean they can still pack a powerful punch when it comes to profit.
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Master Chief versus Spider-Man
Maker: Microsoft Corp.
Cost: $60 million
Estimated revenue to company: $560 million
Estimated profit margin: 90%
Maker: Sony Corp.
Cost: $400 million, plus $100 million for DVDs and more for other expenses
Estimated revenue to company: $1.366 billion
Estimated profit margin: 46%
Source: Times reporting
Though sales of video games have grown rapidly in recent years, the category is still relatively small compared with other forms of entertainment.
Projected sales in 2007, in billions:
*--* U.S. Worldwide Games $10.4 $37.5 Music 10.5 35.6 Cable TV 98.1 172.3 Movies 36.7 84.3 *--*
Source: PricewaterhouseCoopers Global Entertainment and Media Outlook 2007-2011