Valuing a Video Game: Does Score Determine Value?

Abstract

Video game development is both expensive and risky; it can take years to complete a game and future cash flows are unpredictable. To predict the future cash flow of the video game accurately would lessen the risk of the companies involved in the creation of the game. Cash flow, and thus the value of the video game, can be seen from the sales of the game. In turn, this affects the revenue of the company and, therefore, the stock price. As sales are based on the number of people purchasing the game, people's opinion of the game affects its sales. To measure the general opinion of the video game, a compilation of all of the scores the game received from critics can be found on Metacritic, an aggregate scoring website. As sales can be influenced by expectations and fans, both new intellectual properties and all games (which includes both the new intellectual property and franchised games) must be examined. Because scores are given within the week after the game releases, discovering a strong correlation between scores and sales would allow for companies to predict the future cash flow of their games after the first week of their releases. Additionally, correlations between scores of sub-categories of the general score, such as graphics or concept, would show what consumers value in games and, as a result, what should be focused on in game development. To find the correlation between scores and sales, a regression was run between the data points of the games' one year sales and scores. By studying games released for the Xbox 360, a console made by Microsoft, it can be concluded that there is not a strong enough correlation between one year sales and scores to predict the future cash flow of games. There is a higher correlation with the unique intellectual property games compared to all games, but it is still not enough to make a reliable prediction of future cash flow. That being said, games with scores higher than 90 out of 100 on Metacritic will virtually be guaranteed to have sales over one million. As for sales in comparison to sub-category sales, there is no strong correlation, but gameplay, graphics, and sound have the highest correlations. Finally, there is no correlation between scores and stock price movements, as even the stock price of companies creating games with scores over 90 still do not all have positive movements. These findings show that score cannot determine the value of video games. It can give an idea of what sales will be, but not much more. Most importantly, it shows that games with scores of 90 and above will most likely have sales of over one million, which gives the companies involved in their creations a base that the sales will reach. Concerning stock price, there is no link between score and stock price movement, which is justified somewhat by the lack of correlation between sales and score. Nevertheless, with the revelation that sales will be over one million for games with scores over 90, perhaps investors should place more value on companies that earn those scores with their games.