"Where will the money come from?" is probably the most important question game developers face. Even with the most ground-breaking, unique, industry-shaking idea, it’s the cold hard cash that brings that idea to life. Or doesn’t.
Money was the topic of conversation at the recent GameON Finance in Toronto, Canada. Fittingly taking place in the high-ceilinged ornate meeting hall of a former downtown bank, the event drew an eclectic mixture of established game developers and new studios, venture capitalists, consultants, agencies and investors who came together to discuss ways for game-makers to secure funding for their projects.
Traditionally, game funding is secured through loans from a venture capitalist or by partnering with a publisher. In return, however, developers must often part with shares in the company, seats on the board of directors, royalties from game sales, or even fork over rights to the intellectual property (IP) that they’ve created.
"Traditional publishers, especially from the console world, come from a standpoint of seeing game developers at the bottom of the value chain," said Margaret Wallace, co-founder and CEO of New York-based Rebel Monkey. "Rebel Monkey wasn’t interested in getting caught up in an endless cycle of doing work-for-hire; we own our intellectual property, so that ruled out a lot of publishers out the gate."
The good news for casual game developers, according to the general consensus among GameON panellists, is that they have a better chance of retaining control over intellectual property and other assets because the overall cost of producing a typical casual game is far, far less than the millions of dollars it now takes to produce triple-A big-budget titles for next-generation consoles like the PlayStation 3 and Xbox 360.
Rebel Monkey, for example, retains ownership of its intellectual property, acting as its own publisher, by forging strategic partnerships with key players in the industry that fit with Rebel Monkey’s business model and, most recently, raising $1 million in a Series A round of financing from Redpoint Ventures.
Derek Sidebottom, director of human resources for BioWare, used the company’s recent Xbox 360 hit Mass Effect as an example of how the stakes of hardcore games are increasing. A top-tier retail videogame game now costs between $10 and $40 million to make, employing development teams of 80 to 150 people. It’s an industry trend that has forced BioWare and others to adopt a hit-driven "go big or go home" mentality.
Because the stakes are now so high, it’s increasingly difficult, if not impossible, for a brand new studio to secure the kind of funding needed to dive immediately into a triple-A game. It’s also becoming harder to find venture capitalists willing to invest in a project that’s risky or original.
Randy Thompson, managing partner of Argon Venture Partners, explained that venture capitalists are by necessity cautious and sensible because they’re playing with other people’s money. In other words, they would much rather invest "granny’s pension fund" in a known quantity, such as a developer with a proven track record or a product that is guaranteed to sell like a license-based game or sequel.
"The problem right now in the industry is game publishers are extremely risk-averse," added Bob Jacob, founding partner in game development agency Interactive Studio Management. "As costs increase, publisher paranoia has increased and they only want to work with developers that have a track record."
The tone of the conference remained upbeat, however, as various panels and case-studies explored alternative revenue streams like in-game advertising and digital distribution. Capybara Games CEO Tom Frencel noted that digital downloading gets rid of the cost associated with packaging and shipping "boxed" versions of the game to retail stores and make it much easier for developers to self-publish their own games while receiving 70% – 80% of the royalties.
Gamelab Co-Founder Eric Zimmerman predicted that the biggest shift that needed to take place in the industry was not an economic one, but a cultural one – specifically, the culture of investors.
He compared the game industry to the film industry, pointing out that people invest in films for all kinds of diverse reasons including cultural importance, glamour, patronage (helping a young, visionary director get his project off the ground), and so on. With games, however, "we don’t see that. It’s all about the bottom line. The people investing in games these days aren’t gamers, therefore they don’t see the cultural value of it."
Zimmerman predicted that in 10 to 15 years, the young gamers of today will have grown up to be investors and will be better equipped to understand the inherent cultural value of investing in games. "Until then, we still have a long way to go until we are not a geeky cousin to other kinds of mass culture."