DLC Econ 102: Opportunity Cost and Character Selection

Authors Note: This article was written before Roy and Ryu’s files were found in the 3DS version.  For now, I am assuming this is a rumor until Nintendo officially announces the characters as DLC.  I will address those characters when the characters are officially announced.

In DLC Econ 101, I talked a bit about how Diminishing Marginal Utility presents a limiting factor for DLC. For the second part, I want to focus on opportunity cost and how it relates to character choice, namely third party character and veteran characters. With the recent ballot, many fans are looking towards third party characters, like Rayman and Shovel Knight, to be added to the new Smash Bros game. However, much like how Diminishing Marginal Utility limits the number of characters, the opportunity cost of each character may dictate who gets added and who does.

But first, what is opportunity cost? Investopedia defines opportunity cost as “The cost of an alternative that must be forgone in order to pursue a certain action.” In other words, you give up something by do another action. For instance, if you decide to go to a movie instead of working, your opportunity cost will be the money you could have made working. Essentially, opportunity cost is the cost of what you gave up. Time and resources are finite, so you will have to make choices of what you can and cannot do with the alternative coming at a cost.

Because Sakurai and his team can only make so many characters, there is a huge opportunity cost with making any character because any character made is foregoing making, and selling, another. Much like the example of the movies and work, the team has to make a conscious choice on which characters they will include as adding any character is another character forgone.

Opportunity cost can be calculated, but for this article, I’ll talk about it in more general terms.

Third Party Characters

Each character has a distinct cost associated with their inclusion. Third party characters, in particular, as very high compared to other characters. But why? For all third party characters, Nintendo will have to share the revenue with the owner of the IP. Although the company would receive advertising for their character at Nintendo’s expense, they won’t let Nintendo profit from using their IPs for nothing. Very likely, the companies will require Nintendo to pay them for using the character. This means that Nintendo’s revenue will be reduced when developing another company’s character as DLC and, as such, will forego profit by developing this character and increase their risk.

To illustrate this, at $4 per character, revenue from selling 1 million characters would be $4 million dollars. But let’s say they produce a third party character instead, and the other company requires $1 per character sold. This means for 1 million characters sold, Nintendo only gets $3 million in profits. This represents a 25 percent loss in revenue, and our opportunity cost (the cost of an alternative), would be $1 million dollars. In order to make the same $4 million dollars, Nintendo would have to sell an additional 333,333 characters, which represents a 33 percent increase in sales that would be needed to make the same profit. While this may not seem like much, let’s compare this to the total number of potential buyers. With the 3DS version selling 6.19 million units, Nintendo will have to sell the character to 16.16 percent of Smash fans for the first scenario verses a 21.53 percent in the second scenario. And if we say revenue is split 50-50, then Nintendo would need to sell twice as many characters to make the same profit. All the while, Nintendo will likely be at risk for all of the development cost.

In order to justify these characters inclusion, the third party characters will need to sell substantially more than a Nintendo character. In the example above, the character would have to 33 percent more than a Nintendo character. In the Mega Poll, Rayman was the most voted newcomer, above King K Rool, with 1,329 votes to King K Rool’s 1,125. Rayman received 18 percent more votes than King K Rool. If we assume that Rayman will sell 18 percent more than King K Rool, then in order to make the same profit, Ubisoft can ask for no more than 61 cents on Rayman. Otherwise, Nintendo would be better off adding King K Rool to the game over Rayman. Furthermore, the vast majority of the responses to the poll were from English speakers. In Japan, Rayman only got 3 votes. As I mentioned in a previous article, roughly one third of all sales for Super Smash Brothers for Wii U/3DS were from Japan. This means any character that is not well known worldwide, like Rayman, would have a greater opportunity cost. Many fans may note characters like Banjo and Kazooie who are known in Japan and cite Phil Spencer, the head of Microsoft Xbox divisions, willingness to work with Nintendo. However, remember that Nintendo would have to sell more characters and the revenue is contingent upon what Microsoft wants. As a large public company, they may demand more of Nintendo to the point where it would still be more feasible to use a Nintendo character given the limit time and resources.

This analysis does not take into affect other cost, such as legal cost and production time. A lot of things can happen and with such a thin margin for profits, it may make even negotiations unfeasible. For example, the developers may be left sit on their hands to being working on the character until an agreement has been reached, and if negotiations fall flat, this could be wasted time which could have been used instead to make a Nintendo character. In the end, adding any third party character is a gamble in many different ways.

Veterans

Another class of characters that is unique are the veterans fighters, characters who were in a previous Smash Brothers game. Unlike the third party characters, these characters have a lower opportunity cost that that of new characters. This is because these characters are easier to develop and may even generate more revenue.

Unlike new characters, like K. Rool, the veteran characters already appeared in a Smash Brothers game. This means these characters are cheaper to develop for two distinct reasons. First, these characters have already been made which reduces development cost. Melee is a very old game, and, as a result, Mewtwo had to be recreated from scratch. Second, the character has already been conceptualized. This means that a character can go right into the programing/modeling stage as how the character will fight has already been decided. Furthermore, it will be easier to balance these characters as they were already in a Smash Brothers game and their abilities and properties can be judged against the prior game.

Moreover, these characters are, in some instances, more popular than new characters. In the Mega Poll, the most popular characters were veteran characters, with Ice Climbers getting the most votes of any character. Furthermore, on many fan polls, these characters generally placed higher than others, usually in the top 10. As such, it appears consumers would be more willing to purchase a veteran character rather than a new one. This has been well understood in consumer research as consumers tend to buy familiar products, for reasons such as consumers hearing of it, their parents using it, and it has been around for a long time.

Closing

To close, let’s compare the opportunity cost of each type of character. As I mentioned above, the lower the opportunity cost, that is, the cost of a foregone alternative, the better. Based solely on this, we can assume Nintendo will include characters with the lowest opportunity cost. As I discussed above, the highest opportunity cost will be third party characters as they require a greater deal of negotiation and the IP owner may require Nintendo to pay a percentage of sales. Next would be a new Nintendo character, which has a lower opportunity cost as Nintendo is the IP owner and negotiations to use the character will be much easier. A veteran would have the lowest opportunity cost as the character has already been included in a Smash Brothers game which mean the character is more familiar to fans and would be cheaper to make and design.

So, from highest to lowest, here is the opportunity cost for each type of character

• Third party character
• New Nintendo Character
• Veteran character

In regards to Snake, we can assume he would have a lower opportunity cost than other third party characters as he was a character in Super Smash Brothers Brawl. Furthermore, the negotiations would likely go smoother as Nintendo worked with the character in the past. However, other veterans will have lower opportunity cost.

Nintendo appears to take to heart these facts I mentioned above. So far, Mewtwo and Lucas are the only DLC characters to be included. It may be that Nintendo will produce more veterans as DLC characters and focus more on New Nintendo characters rather than third party characters, if at all.

Agree? Disagree? Let me know in the comments. Please feel free to field any questions there as well. Thanks for reading!!