Here's how it works in general terms for the packaged game industry:
- A development company creates a new title. Sometimes they are funded by a publisher and other times they build on spec.
- A publishing company begins marketing the title. Sometimes a developer will handle their own marketing and distribution, but most developers are divisions of or partners with larger publishing companies.
- The publisher works with manufacturing and distribution subcontractors to get copies of the game to retailers.
- Publishers and retailers begin negotiations to how they will work together to sell the title. While there has always been some partnership between publishers and retailers in the video game business (going at least as far back as the Sears branded Atari 2600), the relationship has become more elaborate in recent years. Consider the coordination required to develop pre-order bonus DLC for instance.
- Retailers purchase copies of the title in order to stock their locations. These purchases are far more complicated than simply filling out an order form, but the purchase transfers risk from the publisher to the retailer in general.
- End users purchase the game from the retailer.
Notice that for these sorts of games, the customer sits at one end of the supply chain and the developer sits at the far end. Along the way, each party takes a slice of the profits and a slice of the risks as well. The more risk a company takes on, the more money they stand to make or lose. In particular, a developer who builds a game to spec risks losing everything if they can't sell it to a publisher, but also stand to make more than usual if the game sells well. On the other end of the chain, a retailer may see their profit vanish if they can't move copies of a game they invested heavily in.
Now it isn't talked about much these days, but there is also a risk for the consumer. Once the seal is broken on the game package, no retailer will take it back no matter how garbage the game in question turned out to be. The industry seems to be doing its level best to get consumers to take on more risk through tactics such as pre-orders and DLC. Fortunately, there are remedies a consumer can take in order to reduce risk. Two of the simplest are buying used and selling unwanted games to retailers who sell used games. Used games provide consumers with an outlet to take risks on games that might otherwise have a harder time selling.
Ironically, one category of games that has no true used market is annual sports titles, such as the one that kicked off this round of controversy. Smackdown vs. Raw 2011's shelf-life is about one year, which is not really enough time for a robust used market to develop. Unless the game is total garbage. Since there is always a newer edition right around the corner, used copies of sports games begin gathering dust within weeks of a game's release.