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Take-Two Interactive and Rockstar Games announced that Red Dead Redemption 2 sold through more than $725 million worth in its first three days of sales. That indicates roughly 10 million copies sold at the outset (and if you consider average game prices, 12 million units at $60 each), according to analyst Ben Schachter at Macquarie Research. And it means that game sales could hit 15 million or 20 million copies sold by the end of the holidays, he said. Based on my own take, that means the game could be profitable by the end of the year.
These numbers help me come up with a revised amateur analysis of Red Dead Redemption 2’s costs and revenues, which I started in my DeanBeat column on Friday. Take-Two said Red Dead Redemption had the highest-ever preorder level on the PlayStation Network. Those preorders likely included more collector’s edition units, raising the average price, so the likely number sold so far is around 11 million copies or so, said Michael Pachter, analyst at Wedbush.
Red Dead Redemption 2 has sold about 70 percent as well as Grand Theft Auto V in its first three days. Schachter’s own estimate for sales in the initial quarter are at 15 million copies, a conservative number, and he said that investor expectations are at 20 million copies. If Red Dead stays at the 70 percent level, 20 million is doable by early December, Schachter said in a report. With an average rating of 97 out of 100 on review aggregator Metacritic, the prospects look good. I’ve finished the game’s extensive campaign, and I believe it’s stellar.
Pachter believes a higher number is possible at 25 million in the first quarter. He noted there is still too little data available, based on three days of sales. But Call of Duty games generally do about 40 percent of sales in the first three days. Based on that thinking, 30 million is possible, and 25 million is likely for Red Dead, Pachter said in an email. You can start to add to that initial revenues from Red Dead Online, the upcoming online version of the game where players can spend additional money on virtual items.
“There are a lot of puts and takes to this, but the initial sales make us more optimistic about the holiday and beyond,” Schachter said. “There are likely higher preorders now, more digital, so that pulls forward sales. However, with Red Dead Online still to come, we think Thanksgiving to Christmas could be solid for Red Dead.”
Now we can come to some of my own analysis. With a $60 price, about $43 (based on an estimate from Baird Research’s Colin Sebastian) comes back to the publisher Take-Two Interactive and its studio Rockstar Games. That’s because digital stores take a chunk of revenue, and retail distributors also take their share. At 20 million copies sold, overall revenue for Rockstar Games would be $860 million.
How about the costs? A lot of that depends on how many people worked on it, how much they were paid on average, and for how long. Rockstar listed more than 2,800 contributors to the game in its thank-you note, but obviously it was only handful at the beginning of the project more than eight years ago.
Take-Two’s capitalized software costs — the measure of how much it has invested in software that hasn’t launched yet — give us a clue. Take-Two’s balance for those costs is $733 million. That’s the amount invested in all software at the company, which has about 4,200 employees across 17 studios, according to Strauss Zelnick, CEO of Take-Two.
If Red Dead Redemption 2 only had a 17th share of the costs, that would be $43 million. But we know that’s impossible for a game this big, with 2,800 contributors and an eight-year development span. Pachter believes a good rule of thumb to use is about 200 people working for 8.5 years, at maybe $100,000 in cost per person. That equals about $170 million in development costs, or about 23 percent of the overall costs of games in development at Take-Two.
We know, however, that Rockstar’s costs were probably higher. Rockstar shared some details as it tried to defend itself from allegations that it forced employees to work overtime in order to finish the game. Jennifer Kolbe, head of publishing at Rockstar, said in a statement to GamesBeat last week that the company logged 67,000 employee weeks this year, and only 20 percent of the people had to work more than 60 hours in a week, and only 0.4 percent of the time was for people who worked more than 80 hour weeks.
So 67,000 divided by 52 weeks leaves us with 1,288 employee years worked on Red Dead Redemption 2 during 2018. That sounds reasonably accurate, as Rockstar has said it doubled the size of its previous team and the number was over 1,000 people, or double the size of the 2010 original game, Red Dead Redemption. That gibes well with the notion there were 2,800 contributors. But, obviously based on the fairly low capitalized software costs, that Rock star doesn’t spend a ton on its people and it also didn’t have them working for a full eight years. So I’ll take Pachter’s estimate and beef it up some, so that maybe 300 people worked for eight years at $100,000, on average. That gets us to $240 million in development costs for the game. (Here’s something that muddies the picture: Companies can decide what software development costs to capitalize, or take out of expenses, and which costs to simply expense).
I’ve also heard different estimates as well on the marketing costs for the game, which could run $200 million to $300 million. Let’s take $300 million, giving us a total cost of $540 million, which is lower than my previous estimate in the DeanBeat column by a large margin.
So we take revenue estimated at $860 million, and then costs of $540 million, and this game will have a profit of $320 million by December 31. Add to that revenues from Red Dead Online, which are likely to be good. The breakeven point would be about 12.5 million games sold, and that looks like we would hit that number just about any day now.
Pachter estimates that Take-Two gets $100 million in revenue per quarter from GTA Online, which has been out for five years. That’s been a huge success, with the peak quarter at maybe $125 million. It will take Red Dead Online some time to ramp up its revenues. But it’s a conservative bet to say it could generate $50 million per quarter for Take-Two, or an additional $200 million a year. It will have costs as well, but not nearly as much as it took to create the game.
“We think that Rockstar has learned a lot of lessons from GTA Online that it will deploy to increase the engagement for Red Dead Online,” Schachter said.
Keep in mind that Rockstar and Take-Two continue to make money from the five-year-old Grand Theft Auto V, as well as GTA Online. The only question is how to split the resources between GTA Online, Read Dead Online, and whatever the next billion-dollar game from Rockstar will be.
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