BLOG: Why are so many game developers struggling to generate revenue?

Video content:

Video: the mobile game 'Ridiculous Fishing' by Vlambeer is one of the greatest hits of the Dutch gaming industry .

The digital games industry is a lucrative business: in 2015 it grossed $73B worldwide. Nevertheless, a recent report profiling the economic development of the Dutch game industry shows that of 320 Dutch game developers recorded in 2012, 110 have ceased operations over the last four years. Furthermore, estimated revenues remained stagnant, at between €155M and €225M, and the average number of employees at game developers decreased from nine full time employees (FTE) in 2011 to seven in 2015. Why do so many game developers struggle to generate revenues?

Like many other entertainment goods, games are a hit-driven business. And while this is nothing new ‒video games have been a hit-driven business since the early 1980s ‒ implications for game developers are magnified in the context of digital distribution platforms such as Apple’s iOS, Google’s Android, and Valve’s Steam.

Pareto principle

Sales distribution in markets for entertainment goods typically follow the Pareto principle: a small share of the goods (20 per cent) accounts for a disproportionally large share of sales (80 per cent). Although it was initially believed that the distribution of sales would become more equal on digital distribution platforms, the opposite appears to be true. Facilitated by very low entry barriers and zero marginal costs for production, digital content platforms now enjoy a glut of supply. For example, there are nearly 500,000 video games on Apple’s App Store, most of which are from small game developers.

Overwhelmed by the abundance of choice and huge variance in quality, consumers tend to rely on a range of quality signals to guide their selection. These signals include games’ sales ranking, ‘star feature’ placement on the platforms’ storefront, and big marketing campaigns. The result is a growing discrepancy in sales between the ’head’ and the ’tail’ of the market.

Unequal distribution

My own research shows that this is true even for a relatively underpopulated platform like Steam. Games launched on Steam in 2014 have a Gini coefficient of 0.58. This is a standard measure to express income inequality. The number indicates that players are less equally distributed across games than income in any OECD country to date! To compete with a top ranked games such as Clash of Clans would require deep pockets full of marketing budget and close relationships with platform owners. Add to this the platforms’ liberal pricing policies for content creators, which have led to over 75 per cent of the games now being either free or free to play, and we start to see why small Dutch game developers struggle to make ends meet.

Video content:

Video: 'Sky Chasers' by the Dutch Lucky Kat Studios is an example of what game developers like to see on digital platforms: quality content from an independent studio.

Independent firms

Notwithstanding these dynamics, every now and then a game from an unknown game developer does rise to the top of the ranks. Games like Minecraft and Angry Birds are exemplars of what many game developers want these marketplaces to be: platforms where users consume content with real quality from independent firms rather than mediocre but licensed content from incumbent marketing machines.

Alas, a recent market report shows that the top ten bestselling games on many digital distribution platforms comes increasingly from incumbent publishers with licensed content, big marketing budgets, and longstanding relationships with major platform owners. An era of consolidation, akin to the home video game console industry in the 1990s but this time without a cap on market entry, has been set in motion. For every top ten game by a small game developer there are now hundreds of thousands of games that neither generate revenues nor recoup costs.

Vicious cycle

I would contend that at the core of the Dutch problem are aspiring game developers that don’t realise the odds are stacked against them. They either ignore or don’t see the many commercial failures and are blinded by the very visible but relatively few successes in the marketplace. It’s also very unlikely that undergraduates on video game degree programmes are aware of the dynamics mentioned here. It seems that many educational programme directors have tapped into students’ upward perceptional biases by offering dedicated degree programmes that promise the necessary skills to kickstart a career in games. In 2015, the Netherlands had 44 dedicated video game degree programmes, which produced 733 potential job seekers - and this number is projected to grow in the coming years.

However, after graduating, eager students are faced with becoming part of an excess on the labour market and most fail to find employment with incumbent studios. The number of workers in the Dutch video games sector has remained stable for the last four years at 3,030 FTE. Furthermore, rather than leaving the industry, many go on to found their own firms of small teams, to release their own niche content on digital distribution platforms. And as the data make painfully clear, usually with little or no success.

This is an excerpt from a longer and more detailed post on Rietveld’s blog, which includes an in-depth analysis of the Dutch gaming market and proposed solutions for the Dutch gaming industry.

Joost Rietveld is Assistant Professor at Rotterdam School of Management, Erasmus University (RSM).

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