Here's the genesis of our debut post for P2P, the section of Level Up where folks outside of Newsweek who are observers of the videogame industry--journalists, bloggers, analysts, academics, politicians and even regular gamers, as we said in our announcement in the previous post--can be heard. In mid-February, Ars Technica's gaming section, Opposable Thumbs, ran a column asserting that THQ and Pixar's title Cars was significantly more profitable than Microsoft and Epic Games' Gears of War. We thought not, and wrote a response explaining why that was highly doubtful. American Technology Research senior analyst P.J. McNealy pinged us a week later to suggest that the overall profitability for a particular title was far more relative than either camp had acknowledged. Our blog antennae went up, and we asked McNealy to answer the following question: "What are the various factors that affect the profitability of a given game?" He graciously agreed; his reply is posted below:

Profitability is certainly at or near the forefront of many discussions on the videogame sector these days, with the Xbox 360, Playstation 3 and Wii now all on the market. The numbers that are bandied about--$10 million to $20 million for development, $5 million to $20 million in marketing costs--highlight how critical profitability is given the consequences of a having a $35 million game underperform or not sell at all. However, determining profitability is akin to picking a winner in the next-generation console wars: it depends on when and how you are measuring the results. It can be influenced by many factors, and not just limited to the following:

1. Is the source of the IP for the game licensed or internally developed; and is it a sequel? Certainly internal IP has better margins, but the marketing and advertising spend on a new internal IP can be higher in order to get the word out above the noise. Also, when a game becomes a franchise that supports sequels, the sequels can be more profitable because of lower engine development costs, lower marketing, etc.

2. How is a publisher having a game made? Is it a port from an Xbox 360 game over to the PS3, then muscled down to a Wii game? Is the Wii version being made by a different studio? Or does the game require separate development engines for the Xbox 360 and PS3 versions? Is it an internal or external development team?

3. Does the game hold potential for incremental high-margin revenue from downloadable content or in-game advertising? These two new and emerging avenues will likely help bolster profitability of games moving forward, primarily on the Xbox 360 and PS3.

4. Is the game being made exclusively for one platform (i.e. only one of the the three major consoles), which likely means the publisher is getting paid to not go cross-platform? If not, how many platforms is it being made for?

If the profitability filters listed above don't already have your head spinning, you can always factor in whether or not the publisher expenses its development costs as they go or writes them down over a multi-year period. So good luck with the Gears of War vs. Cars debate. I think that debate can't and shouldn't be resolved for another year or two.