Canadian video game makers find new, creative ways of making money

If the traditional method of making a buck on video game sales is like producing a blockbuster movie hit, then the new models of making money are more like selling TV episodes over iTunes.

Representatives from Canadian video game shops met at the GameOn Finance conference in Toronto Oct. 27 to discuss the challenge of finances.

In a $27 billion worldwide market that’s reaching more demographic groups than ever before, making big bucks on video game sales should be a piece of cake, right?

Wrong.

Developing a major video game can often be a multi-million dollar endeavour. For independent developers making content out of their garage, it’s not easy to come by that sort of cash, especially in the middle of a global recession.

That’s why some game developers are experimenting with new financing models, says Jason Della Rocca, senior consultant and founder of Montreal-based Perimeter Partners.

He said the coventional model that requires you spend all of your money to develop the game is very risky. “You have a lot of gatekeepers controlling what gets on the shelf and who gets funding.”

Once it’s on the shelf, you hope your game is the odd one that is a hit and sells a lot of units, so you make up your costs plus earn a profit. But developers are finding alternative and less risky models driven by access to an online audience.

“You spend a little money developing enough of the game to release in beta form,” Della Rocca says. “You can start generating revenue and gaining traction for the game, then further spending development money that matches revenue for the game.”

Having good metrics about who is playing the game and how much is the first step, he adds. Then developers can determine if it’s worth developing more content for the game to keep a large group of players interested — or stop spending on the game if it isn’t very popular.

Cash-strapped developers in Ontario can look to the government for a lifeline in an economy where venture capital has dried up, says Karen Thorne-Stone, president and CEO of the Ontario Media Development Corp. (OMDC).

OMDC is a provincial agency with a mandate to stimulate job creation in cultural industries, including interactive digital media.

Game developers can apply for funding “from the moment of concept to the time a game project or other kinds of screen-based projects get to a later stage,” Thorne-Stone says.

A new program in the Fall, the Intellectual Property Development Fund, will specifically help gaming shops meet some of the costs of early stage concept development.

The Interactive Media Fund can provide up to $150,000 to a game project and an industry jury makes decisions on funding applications.

The Interactive Digital Media Tax Credit means that up to 40 per cent of expenses associated with labour costs can be refunded to developers, and the Computer Animation and Special Effects Tax Credit could also assist game makers.

The video games industry is an important one for Ontario, Thorne-Stone says. “There are really solid indications of support from the province.”

Developers can being their search for funds on the OMDC Web site. Once they identify a source, they may consider one of the following financing models.

Traditional – hit or miss

This is the model used by widely recognized games such as Microsoft’s Halo franchise. Similar to big-budget Hollywood blockbusters, millions of dollars are put into production and then a product is released on to retail shelves.

But the game industry has a one in three hit ratio, says Gregory Short, executive chairman of Carlsbad, Calif.-based Electronic Entertainment Design and Research Inc. That’s better than Hollywood’s hit and miss ratio, but not exactly encouraging for most developers.

“If your game costs $10 million to make and you’re spending some money marketing it, you’ll have to sell 450,000 units just to break even,” Short says.

Since this development cycle results in a boom and bust sort of pattern for the developer, it is not uncommon to see firms firing staff and then hiring staff a few months later. Labour is the most costly asset for a developer, Della Rocca says. But those peaks and valleys can be avoided by having several projects going on at once.

“If you’re a studio and you have a dozen of these going on at once, then you can monitor them to see which one is going flat,” he says.

Micro-transactions – the $100 bowling ball

This is usually done by releasing a game that is free to play online, but then charging players who want some sort of extra features in the game. Those features could be purely aesthetic (a new hat for your avatar) or functional (a tool you can use to advance more quickly in the game.)

New York-based Large Animal Games had success with this model after switching over from downloadable content, says partner Wade Tinney. Sometimes the players are willing to make transactions that aren’t “micro” at all.

“We have a virtual bowling ball in one of our games at $100 – and people are buying it,” he says.

The firm incorporates real brands into the game and companies such as Swatch are buying the opportunity to get their brand on virtual goods. Large Animal provides metrics to customers about how players interact with the brand.

Soon, they’re also looking to implement a subscription model so players can buy virtual goods a-la-carte, Tinney says.

Downloadable Content – getting past the gatekeeper

Simply put, this is when players must jump a hurdle to download your game and play it. Often there is a fee attached to the game, and sometimes it’s free. But you need to either gain access to an existing downloadable games marketplace, or attract attention to your own self-publishing method.

San Rafael, Calif.-based Telltale Games has enjoyed success by releasing downloadable, episodic content based on established fictional universes. Those creative licences include Wallace & Gromit, Sam & Max, Bone, and CSI: Crime Scene Investigation.

It’s not easy to attract well-known players to work with, says CEO Daniel Connors.

“We put out high quality content on a monthly basis, we had to nail that first,” he says. “Once we did that, a lot of companies wanted to partner with us.”

Telltale sells its games over many systems including Nintendo’s Wii Ware, Valve’s PC-based Steam and Microsoft’s Xbox Live Arcade.

Good marketing is the key to making money in the downloadable content business, Connors says.

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