Analyst Opinion - Making games differently – from production, to financing and distribution: Many have noted that the gaming industry seems to be recession-proof. Monthly sales figures continue to show growth in the market. Even though NPD’s figures for March are off 17% from the same period last year, NPD themselves noted that Easter generally provides a spike in sales, which fell in April this year and March last year. If you look at overall Q1 08 figures, there was 0% change from Q1 09, while software was down just slightly at 2% for the quarter, hardware and accessories were up 1% and 3% respectively.
So even though the industry seems to be maintaining its position at retail, established publishers and studios are crumbling under the weight of swollen overhead and development costs. Development costs for current generation consoles have ballooned to $15-$25 million for two platform SKUs and $25-$30 million for all SKUs. That is twice as much as the last generation of consoles, with much of the cost increases attributable to the graphics complexity of consoles themselves.
When companies are faced with mounting market pressure the short-term strategy is to announce layoffs, which is precisely what many game companies have done. EA estimates they will save $120 million with their layoffs. From July 2008 until now there have been over 60 companies that have publicly announced layoffs, with the majority of these layoffs coming just in the past four months.
I have tallied up these figures and a staggering 8450 game industry professionals have been laid off since July. Of these, roughly 6300 or 75% are from North America, with the remainder coming from the UK and Asia. Game Developer Research’s latest Game Developer Census 2008 Report published November 2008 estimated the North American gaming workforce to be 53,900. That puts the current game industry layoffs in the North American market at 12% of the total workforce.
On top of the layoffs, at least 13 studios including Microsoft’s ACES Studio and Ensemble Studio have announced they were closing. A handful of others are on life support, operating with a skeletal workforce and actively looking for buyers. Yesterday’s news that 3D Realms closed its doors make it just another casuality.
There is a silver lining here. These layoffs have provided a shift in the industry. Most notably it has motivated change. People are looking “outside the box”, contemplating new business models, production models, and distribution models.
The real story here is there are 6300 industry professionals in North America alone looking for something new. Many people are looking at the current market dynamics and starting their own small development studios. With this desire to branch out on their own, they are part of what I am calling the Gaming Renaissance Movement.
What these new studios lack in financing and slick marketing, they are making up for in creativity, vision and sheer grit. Many of these startups are self-funded by groups combining their severance packages. However they get going, these talented individuals are making up a next wave of independent studios and are the future of renaissance gaming.
The talent is there. Companies like Oceanhouse Media, already a successful new iPhone game studio was started by Michel Kripalani, previously of Autodesk and Presto Studios. Earlier in 2008, the creative directors from Naughty Dog started Big Red Button Entertainment to make console games.
There is also Appy Entertainment, started by a group of executives from High Moon Studios who are building games and software toys for the iPhone and iPod Touch. Appy’s CEO Chris Ulm says, “Despite the economic meltdown, this is an incredibly exciting time to be creating new projects. It’s the Wild West right now – no one can say with certainty exactly what will catch on with this rapidly growing market. Apple’s App Store is a total game changer that demands fast development times, frequent updates and extremely focused experiences that tie into an understandable brand identity.”
“We’ve really had to radically rethink every aspect of development,” Ulm continues. “We can’t afford to be just game developers – as a micro-publisher, we have to be constantly thinking about marketing, sales, public relations and - God help us - even merchandising! The best and worst thing about this new model is the freedom to do projects that would never be considered in larger organizations. The flip side is the marketplace is highly volatile and extremely crowded (there are now over 40,000 apps on Apples App store). But the installed base is growing very fast: well over 30 million today and almost certainly double that by the end of 2009, so if you can stand the chaos, it’s a once-in-a-lifetime opportunity.”
Obviously these new companies have some hurdles. Mostly they are entering the market at a financially volatile time. Some would say it is during these downturns when new opportunities emerge. There are certainly several components that are playing a deeper role.
Read on the next page: Tools and Funding
Up until a few years ago middleware was still viewed as taking the easy way out. Today, middleware usage is becoming an accepted practice for many development teams. It was the launch of this last generation of consoles that really made middleware a more accepted part of the production pipeline.
Back in 2002, I estimated only 8% of all games were using middleware and projected middleware use would be at 65% by 2007. In a recent Engine Survey done by Mark DeLoura, 55% of survey respondents stated they are currently using some form of middleware. I was a little aggressive in the adoption rate of middleware. It obviously has taken longer to get middleware integrated into production pipelines. But there are so many more middleware tools available now than were even imaginable back in 2002. There are now categories of middleware - the engines: game, MMO, mobile; the A.I.; the physics, the audio.
Emergent Game Technologies is one company that stands out for its developer support. The company has established a “Game Technology Initiative” to enable more independent developers’ access to their tools. Kick Start was launched in November to directly support these early stage developers. Geoffrey Selzer, Emergent’s CEO notes, “The game industry is in a crisis. It is too hard to make games and too hard to maintain an IP franchise. The liquidity of game development is stifling growth.” Emergent estimates developers and publishers spend $400 to $500 million annually on redundant core technology development. I actually think the figure is higher than that.
Selzer explains, “There is a new face emerging for AAA game development. The next generation of gaming is inspiring new types of content. The medium of gaming is changing with more storytelling and game playing being introduced through episodic games, MMOGs.”
Emergent launched LightSpeed at GDC last month in an effort to address some of these key issues. Scott Johnson, the company’s president continues, “Rapid iteration and prototyping are key ingredients. LightSpeed changes the way developers will present to publishers. Gamebryo was created for an engineering–driven development. Now with LightSpeed we are working to address the requirements of artists and creative teams.”
Everyone agrees the financing model is broken, with traditional funding routes for startups all but gone given the economic crisis. The National Venture Capital Association came out with the 1st quarter 2009 figures - for Media & Entertainment VC investment was down 45% from the previous quarter, with only $217 million invested. Not only are VC’s investing significantly less, they are investing in much smaller amounts. And the number of first-time deals plummeted from 324 in Q1 2008 to 132 for the same period this year. Investment numbers haven’t been this low since Q1 1998 – that is 11 years!
With VC funding not a viable alternative at the moment for many startups, the only alternative is to get creative. As previously mentioned, many of these renaissance companies are being funded from severance packages. If you look around there are additional options out there.
One model emerging for game funding has been used in the film industry for years using completion bonds. In the film industry an insurance bond is issued to cover the cost of production should something happen and the film is not produced, giving the lender a guarantee of payment.
In the film industry films are produced and upon completion the project is closed and production teams disperse to find new projects to work on. This of course has not lent itself to the games industry because production teams can not disband as easily. But what if there was a way to use the completion bond concept of the film industry on a game project basis, whereby a publisher could make an investment in a game from a developer that is backed by a guaranteed insurance policy.
This is precisely the approach Seahorn Capital Group is working on. Seahorn is an executive production and management consulting firm working with a number of development teams using this approach. The first publicly announced partnership is with Big Red Button Entertainment.
Marc Jackson, Founder and Managing Director of Seahorn Capital Group explains, “Completion-guaranteed deals have been used successfully on a small scale in games, and we are starting to see greater interest from both the development and publishing communities. The movie, TV and construction industries have been using such guaranteed structures for decades. They realize the risk management benefits and access to alternative sources of finance far outweigh the incremental cost of such arrangements. Our industry stands to benefit enormously from adoption of proven project finance techniques, especially independent game makers and producers who can now offer end-to-end solutions and mitigate risk for publishing partners."
There is also industry veteran Dave Perry, who will be showing his website www.gameinvestors.com at E3 this year. “I had so many people contact me looking for money I decided to create an open-forum website to try to solve this problem for the industry”, says Perry.
The goal of the site is to get projects in front of the publishers and investors, so all developers get a fair chance. Perry continues, “We will be inviting publishers, global distributors and hundreds of media and entertainment investors to look at the opportunities the developers present. If they can’t get funding in that environment, then it’s time to go back to the drawing board.”
Perry adds that a developer needs to consider a few things when starting out:
(1) They need to understand the pressure the publishers are under and pitch accordingly. It doesn’t mean they can’t be creative; they just need to be sensible. Publishers are trying to protect themselves from risk. There are many ways to reduce risk, but probably the number one way is to find great team members that share a vision, and show “something” working, as the investors call it “put some skin in the game”.
(2) Publishers are investors too. They look at the risk and invest money into projects they believe in. So just how far can you get in an idea, to show the risk is under control? That’s one reason why you see so many iPhone / Facebook / Flash games, as it’s a great way to test ideas at a very low cost.
(3) Opportunities are key. In reality you might have walked past a guy this week that would have funded your new company, but you’d never know. Our business misses out on countless opportunities simply due to the talent having a small set of contacts to raise money with. Just image you know 5 people and all 5 say no. Is it over? Should it be?
Read on the next page: Partners
Another equally important step is fostering strategic partnerships. Partnerships can provide viable growth options particularly during an economic downturn. There are many opportunities out there for developers who have products and looking for partners.
In the casual games there is one company in particular that has made supporting third party developers part of it’s own growth strategy - Big Fish Games. Big Fish has close to 600 independent developers from all over the world creating games for its portal. As a result Big Fish is able to highlight a new game everyday. As the largest distributor of casual games Big Fish openly solicits games from independent developers, providing revenue sharing on game sales, marketing support and free localization.
"At Big Fish Games our developers are like customers, each of whom has distinct needs and success criteria. As such, we adapt the structure of our partnerships with developers around the world in a variety of ways,” explains Nate Webb, Director of Developer Relations at Big Fish Games. “We work as advisors, starting basic guidance and gameplay feedback to help developers tailor their games for maximum conversion from trail to sale. To further enhance sales we offer developers free localization services to ensure that their IP is distributed broadly across the world through Big Fish Games' branded portals.” Webb continues, “Big Fish Games started as a small independent developer so we understand and are sensitive to the challenges developers face when bringing their IP to market. From contract to launch to support to royalty our approach is frictionless. At Big Fish Games we allow developers to focus on what they do best, create great games. By partnering with us we give them access to the widest audience for casual interactive entertainment."
OnLive is another company worth watching as they expand their support to include smaller developers. "OnLive is working with developers of all sizes because we fundamentally believe that great games come in many forms”, says John Spinale, VP of Games and Media at OnLive “At GDC 2009, we announced partnerships with major publishers like EA, Ubisoft, and Take Two. At the same time, we announced that we're working with smaller developers, like 2D Boy, the guys who created the 'indie' hit, “World of Goo."
Spinale further explains, “Because the OnLive platform is so easy to develop for, we think that a lot of smaller developers will embrace us. And, because we offer a wholly online platform, we think the smaller independents—who have more flexibility to be creative—will do a lot of experimenting with new types of gameplay and new models for delivering games. That's something I'm very excited about, personally. Basically, OnLive offers developers an incredibly powerful, very flexible platform that allows them to do what they do best - be creative and focus on making great games, big or small."
In the mobile space there is Gamepot USA who, last month, quietly announced they opened a US office. With head offices in Japan and revenues of $38 million, Gamepot USA is looking to expand its global partnerships with online game companies and developers.
Be sure that this gaming renaissance movement is going to greatly impact the types of games that are made and the way they are made. It will be important to foster that growth, and look for creative alternatives. Yes, there will be hurdles but the swell is there already. People are resilient and they will continue to innovate in new and different ways.
As a market analyst Wanda Meloni has tracked entertainment, graphics and digital media trends and technologies for 15 years.