The Economics of Exclusivity Revealed Through Redaction Errors

The recent court hearings surrounding the FTC's challenge to Microsoft's acquisition of Activision Blizzard have unveiled some intriguing details, courtesy of a Sharpie-wielding individual who is likely having a terrible week. Documents from both Sony and Microsoft, intended to be censored, were instead clumsily redacted, allowing the figures to remain legible in the court's scanned documents. Although it is unclear who was responsible for the error, the insight gained into the companies' businesses has been fascinating, ranging from the size of Microsoft's Azure cloud business to Sony's estimate of around a million PlayStation owners who exclusively play Call of Duty. The leak that has garnered the most interest among consumers is the confirmation of the development budgets for Sony's major first-party titles, with both Horizon: Forbidden West and The Last of Us Part 2 having cost over $200 million to develop. The surprise surrounding these numbers is understandable, as they are comparable to Hollywood blockbuster budgets, yet the costs involved in game development are less apparent. If anything, Sony's figures for the costs of these games are likely conservative, as they may not account for indirect costs related to resources from other parts of the company. One thing that is certain is that the marketing budget is not included, which, for Hollywood movies, is typically around half of the overall outlay. For reference, Horizon: Forbidden West has sold approximately 8.4 million copies, and The Last of Us Part 2 has sold over 10 million. While both games are profitable for Sony, this is largely due to the unique economics of being a platform holder with a significant first-party software lineup. Sony retains all the money from first-party titles, except for the percentage earned by retailers for physical copies, and earns a cut of the sales of third-party games on PlayStation. This allows Sony to justify large budgets for its games, as they generate more revenue per unit sold. The economics of a platform holder building games for its own hardware are distinct, enabling Sony to afford high development budgets while maintaining a relatively old-fashioned pay-to-play business model. Other publishers do not have this luxury, and their options are to either reduce development budgets, adopt more aggressive monetization strategies, or enter into exclusivity deals with platform holders. The discussion surrounding the FTC case and the Activision Blizzard acquisition is largely centered around platform exclusives. Satya Nadella has expressed his dislike for exclusives, which is understandable given the 15-year head start Sony has had in building its first-party studio system. There is a reasonable discussion to be had about the difference between Microsoft buying publishers to make their games exclusive and Sony striking deals to make games like Final Fantasy XVI exclusive to PlayStation. The question is, why would a company with a major title limit its potential audience to one platform? The actual economics of exclusivity deals are more complex than simply being paid by platform holders. By becoming a PlayStation exclusive, a game like Final Fantasy XVI gains the economic advantages of a first-party title, with Sony likely waiving its platform fee and absorbing some marketing costs. This is more significant than any subsidization of development costs or savings from single-platform development. Understanding the logic behind exclusivity from a third-party perspective reveals the complexity of the arguments surrounding this topic. On one hand, exclusivity is anti-consumer, denying access to a game for business and competition-related reasons. On the other hand, exclusivity is currently the best way for companies to maximize their income from game sales, reducing the need to rely on post-launch revenue. The incentive for exclusivity depends on the competitive landscape between consoles, with publishers balancing the number of sales lost against the increased revenue per unit on remaining sales. For now, exclusivity remains a powerful economic tool for select games, and its appeal to third-party publishers is likely to grow as development budgets continue to rise.