I was actually in at the very beginning of this in the late 70s and early 80s. Back then if you wrote a game you had to manufacture, market and distribute it yourself. You became a publisher because there was no other way to market. This is what happened at Bug Byte and Imagine in Liverpool, the owners of the companies were, initially, the guys that wrote the games. Once you were up and running, other game writers, who couldn’t be bothered with all the publishing work, came to you and asked if you would handle their stuff too. This was the beginnings of our industry.

So what do game publishers actually do?:

• Provide finance for the entire industry. This is not just paying studios, in stages, to develop a game. It is also the publishing costs which can often be far, far more. For one top console game the total cost is now into the tens of millions, so this isn’t insignificant. However, some development studios make the big jump to self financing their work, then they own the IP and can choose how it is published.
• Take the risk. This is a pretty big job, especially for current generation console games, most of which don’t make a profit. This is partly why many of the world’s biggest publishers are making losses just now whilst the industry booms.
• Market the game. It is a simple fact that with zero marketing a game will have zero sales. The game industry is a very young and fast changing industry so much of its marketing is inefficient and over expensive. Which means that many publishers aren’t doing a good job here, another reason for their losses. However what marketing expertise there is in the industry resides mainly with the publishers.
• Create and build brands. A lot of the industry for a long time just piggy backed other people’s brands, so had no equity in their IP. We used films, books and celebrities. And it wasn’t good. Now the industry is growing up and nurturing its own brands with some startling successes (GTA) and a lot of painful growing pains.
• Physically manufacture, warehouse and distribute inventory. Logistics. This is a huge pain. Vast amounts of plastic and cardboard are used to move digital information around the world. The problems boggle minds. Just getting the timing of everything and the inventory levels right is impossible, it will always go wrong. So retailers are out of stock of one game whilst another game is remaindered in the discount bin.
• Manage the whole industry. People only buy consoles to play games. The games are everything. And the publishers have total control over the games. So they have total control and power over the industry. So they decide what happens, how it happens and when. A big responsibility and, to be fair, they tend to try and act for what they perceive to be the good of the industry. We don’t have any significant Enrons yet.

The most important thing about the traditional game publishing business model is that there are enormous competitive advantages of scale. The bigger you are the easier it is to run your business, if you much smaller than the biggest players then you simply cannot compete. This is why we have seen so much publisher consolidation, the laws of economics mean there should only be a handful of global publishers. It is what happened to film and recorded music.

However events are not just conspiring against global publishers, they are conspiring against publishing per se.

• The cost of making games is, in many cases, coming down. This is partly down to better tools, libraries and middleware. It is also down to the far smaller scale of product required for many platforms, including some of the big ones like XLA and XNA. Which means that we have returned to the age of the bedroom coder, or to loose affiliations of a few people working together on a project. This has become massive. There are now more games being developed this way than in formal studios.
• With the above the risk has come right down. You make a game in your spare time, if it works you buy a fast car and a holiday, if it doesn’t you just shrug your shoulders and try again. Which is exactly what happened in the old 8 bit days. I know, I was there!
• Platform proliferation. This has really crept up on us. About a decade ago there were two viable platforms, the Playstation and the PC. Now there are lots. Xbox 360, PS3 and Wii, each of which is multiple platforms because of the online offerings. Xbox 2,  PSP, DS, iPhone, Android, nGage and of course the PC, which is also now mutiple platforms with casual gaming, MMOs, portals, boxed games etc etc. A big global publisher just cannot do it all any more, they have to cherry pick.
• Product proliferation. It used to be very simple, there were a handful of genres and it was easy to keep up and publish a stream of releases into each one. Now we have total fragmentation, an infinity of genres. Just look at the thousands of iPhone games to see how diverse and sometimes bizarre gaming has become. This has left the big global publishers dead in the water, they don’t understand what is going on and even if they did they are too slow witted and cumbersome to do anything about it.
• Marketing has changed and much of it is now free or nearly free. The traditional big publisher marketing model of throwing millions at television advertising is outdated, inefficient and an immense waste of resources. But they continue because of inertia and because they know no better. These days we have something called the interweb and with no money (or very little) and a little time you can run a very effective global marketing campaign. And the smart people are. Popcap is a prime example.
• Digital distribution. This is the big one. Without plastic and cardboard it is difficult for publishers to justify themselves. As we have seen with iPod, once you remove physical inventory most games come to market without a publisher. This leads to an explosion in creativity as tens of thousands of new games appear that a publisher would never have given the time of day to.
• Brands. The publishers have actually been mostly very bad at creating and building brands. It is a new thing to most of them and they don’t know what they are doing a lot of the time and it shows. Individuals can build brands too. They often have in history. All it takes is an instinctive feel for the brand experience they are creating, the brand image they are presenting to the world and the brand values they need to maintain and they have cracked it. The Oliver Twins did this with Dizzy.

So, as you can see, the big global publishers look like a threatened species. Everything is conspiring against the reasons for their very existence. So expect another period of rapid change. Publishers who adapt quickly away from plastic and cardboard and who learn how to profit from genre and platform proliferation will survive. Those who hang on to the old business models of physical stock, AAA blockbusters and TV advertising will go the way of the Dodo.