Why is Game Development so Expensive?

The cost of game development has soared in recent years, even as the games market has struggled to generate growth in the post-pandemic period. In this blog, Omdia Principal Analyst Liam Deane explores the factors driving this rapid growth in development costs, what studios can do about it, and how technology vendors can capitalize on changing market dynamics.

How much does it cost to make a video game? In the case of Cyberpunk 2077, released in 2020, the answer is an eye-watering $174m. Development budgets are usually closely guarded, but developer CD Projekt Red published Cyberpunk’s total development costs in a report to shareholders following the game’s troubled launch, providing a rare public insight into the soaring costs of AAA game development. Subsequently, additional figures have surfaced through leaks and legal disclosures, revealing even more staggering sums for other titles: $212m for 2022’s Horizon Forbidden West and an estimated $300m for Spider-Man 2, released in 2023.

These revelations  confirm what has long been understood within the industry: development budgets approaching or exceeding $200m have become the norm for modern AAA games. In fact, even these figures greatly understate the total cost, which can be several times higher once marketing costs are included. For instance, overall lifetime costs for 2020’s Call of Duty: Black Ops Cold War reached $700m, according to a recent court filing by the game’s publisher, Activision.

These figures are especially striking given that a decade ago, only a few blockbuster titles had ever crossed the $100m threshold. But with the last two console generations, development costs have accelerated at a pace that raises real questions about the sustainability of AAA games production. 

The mobile games sector, meanwhile, faces a parallel challenge. While developing for less powerful mobile devices is generally cheaper, the cost of user acquisition is rising rapidly and can often exceed the core development budget by an order of magnitude, threatening a similarly unsustainable cost spiral.

Figure 1: Game development costs have risen to unprecedented levels

Sources: Omdia, company reports

At the heart of this cost spiral are advances in gaming hardware. However, these improvements tend to yield diminishing returns in perceived image quality, meaning each meaningful step forward in graphics quality requires disproportionately more raw rendering power than the last. This has long been the case, but the trend has been exacerbated by a slowdown in the rate of CPU and GPU processing power gains in recent generations. Crucially, even if the hardware can keep pace, human effort cannot be scaled in the same way. As vastly bigger and more detailed games become technically possible, they also require far more work to create. This process is now approaching a tipping point where costs have begun to accelerate at an alarming rate.

In theory, studios could stop pursuing ever shinier graphics and larger worlds. But in practice, market dynamics make it difficult to break out of the graphical arms race. On consoles, publishers must pay platform holders up to 30% of their sales, whilst those same platform holders are not only exempt from this tax, but are subsidized by it, giving them far greater financial flexibility. Creating visually impressive graphical showcases helps sell hardware, which in turn generates further revenue, fueling a virtuous cycle—but only for the platform holder. 

Even Nintendo, which traditionally is less focused on graphics, has just released a console, Switch 2, with performance upgrades as its primary differentiator. Although third-party publishers do not benefit directly from the hardware-software feedback loop, they still cannot afford to have their games appear outdated compared to visually advanced first-party output which define consumer expectations.

Mobile challenges

These pressures play out differently in the mobile games market, where graphics are typically less central to a game’s appeal. But the economics of mobile game development are also troublesome. Though the potential return on investment is much higher in mobile, thanks to lower core development costs and a bigger target market, the chances of success for any individual game are much lower. With hundreds of thousands of games available across major app stores, far more than on PC or console storefronts (see figure 2), the challenge becomes clear. The reality is that success is highly concentrated with most revenue is generated by a tiny percentage of the total titles.

Figure 2: Mobile app stores are especially swamped with content
Sources: Omdia, Sensor Tower, Steam

In such an unpredictable market, publishers have little choice but to hedge their bets launching new games in the hope of landing a breakout hit, and ruthlessly culling those that fail to gain traction. While the development cost of any individual game is typically modest compared to a traditional AAA title, publishers still face formidable development costs across their portfolios. 

Factor in marketing spending and these challenges faced by mobile publishers become even more daunting. Given the lower engagement levels of mobile gamers, aggressive paid marketing is virtually the only available channel to attract players, frequently at a cost that far exceeds the core development budget. Perhaps the most dramatic recent example is Scopely’s Monopoly Go, for which the company has spent over $1bn marketing (and yet remarkably still managed to turn a profit).

This dynamic of mobile games spending $10 on user acquisition in the hope of generating $11 in revenue has made the market fragile and vulnerable to minor shifts in market conditions. That fragility was vividly demonstrated by Apple’s introduction of ad tracking restrictions on iOS in 2020 which severely disrupted the market. Compounding the issue, much mobile user acquisition spend goes on advertising in other mobile games, feeding the marketing budgets of competitors and further fueling an upward spiral in user acquisition spending.

Making games development pay

Given these challenges, it’s no surprise that the post-Covid slowdown in games market revenue triggered a major wave of layoffs across both AAA and mobile studios as companies desperately looked to cut costs. Yet job cuts are far from the only cost-cutting lever available to games companies. Other approaches may take longer to yield savings but ultimately do far more to support growth in the long run.

For instance, following the Cyberpunk debacle, CD Projekt Red announced it would abandon its in-house game engine in favor of Unreal Engine for its next project. The shift is expected to reduce costs associated with maintaining the engine and make it easier to hire engineers familiar with a standardized platform. Expect to see more of this approach in the future, and not just for game engines. Third-party and open-source tools for areas such as testing to analytics to backend infrastructure are becoming more widely adopted offering greater efficiency than each studio developing its own solutions. 

In the long term, AI-assisted development tools promise large increases in productivity. But while the industry is increasingly attuned to AI’s transformative potential, it will take time for these tools to be developed and optimized for a wide variety of game development tasks, and for developers to find the most effective ways of proving their value. Even then, it’s far from certain that AI will resolve the industry’s cost challenges. In a competitive market, companies may feel compelled to increase output rather than reduce costs.

Taking a broader perspective, almost every major trend we see in the games industry today can be traced back to the growing cracks in gaming's traditional economic model, from the constant search for new revenue streams and volatile merger and acquisition cycles, to the proliferation of start-ups offering AI and other tech solutions.  The solutions are far from obvious, but one takeaway couldn’t be clearer: game developers must find ways to improve efficiency and productivity. This will mean continued tough choices for many studios but also presents an unmistakable opportunity for those who can put themselves on a more sustainable footing, and for the tech vendors and solution providers who can help them to do it. 

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