Friday, June 03, 2005

Game Financing

I’ve been thinking about games like Boiling Point and the implications for the financial structure of the gaming industry. Clearly, that structure is broken. Talented developers can’t get funding for their games, and when big publishers do fund games from third-party studios, they’re often both released prematurely and with zero marketing behind them. So these big companies fund games and then guarantee that they’ll be D.O.A.

That is, um, stupid.

Add to the mix the amount of attention the gaming industry is receiving right now. Finally, people get it. The same dumb asses who have been writing for years about how games are played exclusively by losers have turned into gaming remoras. Suddenly, for all these people who were clueless for the last decade, it’s the next big thing.

It’s not hard to figure out why.

If you totaled up how much time people spend watching television, it would show a steady decline over the last decade. Actually, it’s been on a decline for several decades. Films? Same thing? Sure, box office records are set almost every year—because they keep raising the ticket prices. Ever notice how Hollywood never wants to tell you how many people are seeing movies, only total box office gross? That’s because fewer people are going out to see movies. Meanwhile, the gaming industry tracks both revenue and units sold, and the increase in units sold during the last decade has been phenomenal. Yes, this is going to be a sorry year for the gaming industry, and I’ve written at length about that in past columns, but that’s what happens during the transitional period between consoles—it’s not indicative of the health of the gaming market in general.

What does that mean? It means that everybody wants a piece of the gaming industry. Money is circling around, trying to get in, and it’s not easy. The existing financial infrastructure of the gaming industry can only absorb so much money. There are a few major publishers who have disproportionate control over the gaming market, and there are a limited number of financial inputs.

Money’s funny, though. It makes its own path.

Here’s what I think is going to happen. During the next five years, the financial paradigm for game development is going to change dramatically.

Yes, I used the word “paradigm.” Believe me, I’m just as appalled as you are.

Here’s how the paradigm changes: smaller developers are going to transition away from going to publishers for money to fund development. Instead, their projects will be funded by venture capital. Some of it will be stupid money, inevitably, but some of it will be very, very smart, and that smart money is going to raise the quality of released games. A huge publisher like Atari doesn’t seem to be able to adequately monitor their third-party projects, but a venture capitalist is going to be more closely connected. And venture capitalists have access to a much wider variety of skillsets and expertise than game publishers.

The first thing a smart venture capitalist will do is look at what games have been released in the PC market the last five years and find out what’s been successful and why. It won’t take Einstein to figure out that for smaller games, it is the KISS OF DEATH to release a grossly unfinished game. Remember Temple of Elemental Evil? Could have been RPG game of the year in 2003. Had a thousand bugs. Died.

Pirates of the Caribbean? Also could have been game of the year in 2003. Had a thousand bugs. Died.

Anyone who studies the business of gaming will notice that the phrase “had a thousand bugs” and “died” are usually seen in extremely close proximity to each other. When a publisher has fifty other projects, they might ignore that correspondence for some of their smaller titles, but those same smaller titles will be more important to venture capitalists, and they’ll quickly understand that releasing less buggy games is a clear way to differentiate their products from the major publishers.

It’s easy to burn one bridge if you have fifty others. If it’s your only bridge, though, you might think twice before setting it on fire.

I don’t know to what extent this will happen with consoles, but there’s no question in my mind that this is where the PC market is headed. People make a serious logical error when they talk about how PC’s will always be more powerful than consoles: which PC’s are they talking about? Probably 80% of the installed PC base is weaker than the original Xbox. Yes, the highest end PC’s might be more powerful than Xbox 360 or PS3, but what percentage of the installed base are we talking about? 2%? At an absolute maximum, I think it would be 5%. So for 95% of the gaming base, the new consoles will be more powerful than their PC’s. There is no way around that math.

However, and this is a big however, the PC gamer base is plenty large enough to make money for developers and publishers. It’s just that the sweet spot for making money is going lower in terms of unit sales. Games that only need to sell 10,000 units to be profitable are going to be the right place to be financially, and that’s where the venture capital will eventually settle. Games of that scope are also ideal products for digital distribution, which eliminates the need to be begging for retail space. Digital distribution greatly enhances the opportunities for outsiders who want to financially invest in the game industry. It’s another trend that erodes the power of big publishers.

So what does this mean for us? I think it’s almost all good. The PC will be the premier platform for innovation. There are overwhelming constraints on innovation when a game has to sell 100,000 units to break even. Those constraints are largely gone with a 10,000 unit goal.

It’s already happening. What are the three best PC games I’ve played this year? Darwinia, Mount & Blade, and Fate (which I’ll talk about next week). Darwinia is a low-budget game from an independent developer. Mount & Blade and Fate are basically garage games. And they’re terrific.

At some point, and it will be soon, venture capitalists who want into the gaming industry will see that the games making noise are these smaller games, and they’ll start looking to fund some of these projects.

So there will be a thriving PC gaming scene, but it’s going to look different than what we have now. At the top, most of the tier one games will be ports from consoles. Below that, though, will be an entire layer of games that can only be found on the PC, and they’ll be innovative and fresh. For every Katamari Damacy on the consoles, there will be five on the PC.

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