Why are games so expensive?

An album costs less than a tenner, and a DVD around £20 – so why does Grand Theft Auto IV carry a £50 price tag? Tim Ingham investigates the economics of an industry that's bigger than Hollywood

Long before they see the "game over" screen, Xbox, Wii and PlayStation fans have already taken a big blow – to their wallets. The average price of console games makes them seem an exorbitant luxury in these recession-hit times, although the industry that creates these technological marvels tends to disagree.

It turns out that the £50 you could splash out for a new PS3 or Xbox 360 game doesn't go very far when you factor in all the costs of getting the disc into your hands. The budget required today to develop a blockbuster release can dwarf even the film industry's best. The Oscar magnet Slumdog Millionaire cost $14m to make. Last year's critical darling of the video games world, Grand Theft Auto IV? That cost more than $100m. Even lower-cost games on Nintendo consoles Wii (£35-£40) and DS (£25-£30) often demand budgets that would make the average movie mogul raise an eyebrow.

Michael French, the editor-in-chief of Develop, the industry magazine, says: "Each console generation has demanded a bigger development cost – these guys live to take advantage of what's under the hood of the latest thing. Xbox 360 and PlayStation 3 in particular have driven the need for bigger teams of artists, animators, programmers, actors and more. The average development cost for today's games is around £7m, double what was spent a decade ago. I expect GTA IV's budget will be eclipsed."

The lion's share of the £50 you hand over is taken by the retailer selling the game, and the publisher that distributes it, markets it and usually bankrolls its creation. Just as development budgets have skyrocketed, so have promotion costs. For the biggest titles, publishers regularly spend in excess of £2m on marketing.

"The publisher actually ends up with a fairly small share of a game's recommended retail price," says Peter Stone, general manager of Konami UK, the label responsible for the epic Metal Gear Solid 4, rumoured to have cost $50m. "We pay the marketing, manufacturing and development costs. Large portions are also eaten into by retailer margins and VAT, so publishers only take what is necessary to cover overheads and – in the event of a hit – turn a profit."

So are you feeling sorry for these giant publishers yet? Didn't think so. But it's impossible to ignore the huge financial risk they undertake when launching their biggest titles. The world is playing more games than ever – the market researcher Media Control GfK puts global games sales at $32bn last year, topping DVD revenues for the first time.

Yet the big names of the industry are running into financial trouble, largely for failing to produce the geese that lay the golden eggs demanded by shareholders. Electronic Arts – best known for the football game FIFA and The Sims – lost $641m in the final quarter of 2008, despite putting a string of highly rated games into play. Midway Inc, owner of the Mortal Kombat series, was this year sold by owner Sumner Redstone for a paltry fee and delisted from the New York Stock Exchange.

Long before million-dollar development budgets existed, entertainment software retailed at slightly lower prices, even if the difference wasn't as much as rose-tinted gamers of yesteryear may remember. Back in 1993, a new-release game for either of the two market-leading consoles, the Sega MegaDrive and Super Nintendo (SNES), sold for £35 to £45.

Nick Gibson, director of industry financial experts gamesinvestor.com, explains that the cost of creating a Golden Axe or Street Fighter II was much less than it would be for today's big hitters, but the manufacturing cost of making the cartridges (the format of the day) brought its own perils. "On a pure price-for-price comparison basis, one could argue that gamers today get a fair deal," he says, "as £34.99 in 1993 translates to just under £49.99 today when inflation is taken into consideration. However, the problem with comparing them is that 1993 games were lower-cost to develop but much more expensive to manufacture – up to £25 per title."

According to industry insiders, today's big high-street retailers take about one-fifth of your £50, which helps to fund distribution and their biggest cost, rent. The platform holder – Microsoft, Sony, Nintendo – takes a hefty slice for its investment in developing, marketing and selling consoles. Sony, typically spends well over £1bn designing a new console – and then sells it at a £100 loss per unit.

It's not all bad news for gamers, though. Due to less preclusive retail laws than our European neighbours and a fiery price war between specialist chains, supermarkets and online stores, it really pays to shop around. A new copy of Sony's epic "make it yourself" platformer LittleBIGPlanet can now be picked up for about £15, just three months after its release.

The second-hand market is also burgeoning, with trade-ins offered by Game, HMV and independent retailers. These can save consumers £10 or more on that month's biggest title. Terry Scicluna, chief operating officer of Game, says: "The UK market is incredibly competitive. Consumers get great value, and that's before you take into account special offers and weekly deals. We work hard to offer the best possible prices on new and trade-in games."

But, even with these perks, is buying a new game actually worth it? When we can pick up a DVD player for the same price, is £50 too much? Again, the industry doesn't think so. "Measured on a per-hour basis against the cinema, for instance, games offer wonderful value," says Rod Cousens, chief executive of the UK publisher Codemasters. "It's a market that has seen prices essentially capped while development costs, marketing costs, manufacturing risk and cash outflow periods have all risen."

Wonderful value? It might not seem so next time you hand over your credit card for a must-have game. But in terms of pleasure and fun, it's hard to deny that the games market is starting to leave other forms of entertainment sobbing in its wake.

Play day: Bargain basement titles

Metal Gear Solid 4: Guns of the Patriots (PS3) – £19.99

Perhaps the closest to a cinematic experience a game has come. Gob-smackingly gorgeous.

Wipeout HD (PS3) – £11.99

Available for download over PlayStation Network, 'Wipeout HD' is a futuristic racer. Soundtrack kicks ass, too.

Braid (Xbox 360) – about £10

Bedroom genius Jonathan Blow became famous for creating this philosophical platforming classic. One of the most innovative games.

Unreal Tournament III (PC) – £9.99

UK firm Mastertronic re-issues older titles at a budget price – and this shooter is one of the best. Has an online multiplayer mode, too.

Super Mario 64 (Wii) – about £6

Twelve years ago, Mario met 3D. Still gorgeous.

Uno (Xbox 360) – about £3

This virtual game of cards is one of the most addictive things you can do with your fingers.