Friday, January 26, 2007

Design on a Dime: The MMO-IT

Before the geek squad starts picturing the IT department of an MMO studio, please read my first Design on a Dime post, in which I lay out an MMO financing concept based upon the investment model of an REIT. Thus, MMO-IT stands for Massively Multiplayer Online - Investment Trust.

Lets assume for a moment that I know something about finance and a little about the online game space, and I decide to build this investor pool. For the math whizzes in my audience who needed a calculator during yesterdays lesson, the total investment dollars at play in my proposed model is $10,000,000. (1000 investors at $10,000 each) This is a very conservative assumption when considering the scope that most speculative investors want to work in, and I personally would contribute $10K to a plan like this, were it set into motion.

So I have my first investor, me... Easy sell, but the next 999 are going to need more than faith and my good looks to convince them. So here is the financial pitch:

I have no idea what an MMO costs from concept to gold, but I am going to assume that $2,000,000 would be sufficient to launch a decent MMO. If I am way off, feel free to lambaste me in the comments section, and I'll gladly adjust my assumptions. I am also going to assume, that any fully-funded design studio can go gold, regardless of the quality of their product, and with creative marketing, can sell 25,000 units in the initial launch, before closing down due to lack of subscription interest. This will be the metric assumption I use for a failed project.

Lets assume a 20% success rate for fully funded design studios, and 250,000 units sold as our standard for 'success' with a 200,000 subscription pull through.

When looking for quality MMO design options, I shop my $10MM to five studios, in order to diversify and spread my risk. My failed investments generate gross revenue of $1,250,000, netting me a $750,000 investment loss, while my successful title launches with a net profit of $10,500,000, and an annual gross revenue of $3,000,000 assuming no additional units are sold.

If we assume the development cycle lasted four years on all projects, then after our first full year live, our MMO-IT will have grossed $17,800,000 and netted $7,800,000 in that same time frame. So how did we do with our $10,000? Each investor now has $17,800 after just 5 years, which is an annualized return of 16%. Not too bad.

Our success story was a relatively small game, and our failures were very, very bad sales numbers and we still turn a decent profit, with fairly low risk. If we have no pull through, we move 125,000 units from 5 different titles and gross $6,250,000 with a four year development cycle. In that scenario, our investors only lose $3,775 each. That's a very palatable loss given the potential gain with just one mildly successful title. Throw in a World of Warcraft or an EQII into our success pool, or manage a 40% pull through and we are talking serious returns on our investments with a very short time horizon.

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