Acquisitions signal a sea of change in the video game biz

In the world of video gaming, the days of the successful indie software developer may be numbered. Analysts and developers alike view the recent spate of acquisitions of third-party hotshops by Sony, Microsoft and, to a lesser degree, Nintendo as part...
May 1, 2001

In the world of video gaming, the days of the successful indie software developer may be numbered. Analysts and developers alike view the recent spate of acquisitions of third-party hotshops by Sony, Microsoft and, to a lesser degree, Nintendo as part of an inevitable trend fueled by stark economic reality: As the number of hit games decreases while the cost of making successful franchises increases exponentially, financial necessity will force independents to merge with deep-pocketed gamecos.

Schelley Olhava, a senior analyst for California-based IDC, notes that while, on one hand, this kind of business strategy is nothing new, ‘I think consolidation is starting to get a little faster and more intense than it was in the past. And it has become more glaringly apparent because Microsoft is making a lot of acquisitions.’ So far, to help gear up for the Xbox debut, Microsoft has acquired Digital Anvil, which produced Freelancer (a PC game follow-up to Starlancer), MechWarrior’s FASA Interactive Technologies, Halo creator Bungie Software and Access Software, whose LINKS golf series has sold 1.94 million units according to figures supplied by The NPD Group. The trend is not limited to console manufacturers, evidenced by the recent acquisition of Blue Byte Software by Ubi Soft Entertainment.

But as Olhava points out, ‘basically, Microsoft is the new kid on the block in this industry, so they need to do whatever they have to do in order to make sure they come out with the Xbox on time, and the right quality of games for it.’ Microsoft’s strategy to achieve that appears to lie in forming strategic alliances with established gamecos.

At the 2001 Tokyo Game Show in March, video game powerhouse Sega announced an 11-title publishing alliance to premiere a roster of upcoming Sega games on Xbox. The first titles slated to debut on the console include the tentatively titled Jet Grind Radio Future and GUNVALKYRIE, as well as the latest versions of Sega GT and Panzer Dragoon. Microsoft’s chief Xbox officer Robbie Bach believes that not only will Sega deliver great Xbox games, but the alliance will help Microsoft establish a benchmark for Xbox gaming on- and off-line. On the on-line side, and in an effort to help connected gaming make the switch from novelty to necessity, Microsoft has partnered with Japan’s NTT Communications to create a high-speed broadband web gaming service for Xbox that’s slated to launch late in 2002. Microsoft’s Japanese Xbox division will provide support to developers creating web-enabled Xbox games.

Near press time, video game controller/accessories manufacturer Radica Games inked a licensing deal with Microsoft to design, produce and market peripherals for Xbox, and the company planned to debut the range at E3 this month. The Gamester-branded products, officially licensed by Microsoft and emblazoned with the Xbox logo, will hit retail this fall.

Microsoft’s penchant for quality gear and games is something Perrin Kaplan, VP of corporate affairs for Nintendo, shares. ‘You don’t go to the movie theater because the seats are cushy-you go for the movie. You buy the system because of the game. A box is a box, whether it’s Xbox or Sony’s PS2 system, or our Gamecube.’

The race to get the best games on an exclusive basis is the strategy behind the acquisition frenzy of the big three console manufacturers. On the flip side, the investment to get that quality just keeps getting greater, a primary reason small companies, in turn, find security in having a huge corporate parent. Jason Rubin, co-founder of Naughty Dog-which was recently bought by Sony-observes that ‘the video game industry is changing, and the budgets are getting larger. The risks are getting bigger, and the payoffs are getting greater.’ Such is the case with Naughty Dog’s three Crash Bandicoot titles, which, according to PC Data, have sold approximately seven million units to date, earning around US$180 million.

Ontario, Canada-based Silicon Knights-which announced its acquisition by Nintendo at E3 last year-had several hits as an indie since it launched in 1992, including Dark Legions, Too Human and Blood Omen: Legacy of Kain. Nintendo’s Kaplan says that the quality of those games is what attracted Nintendo’s interest. ‘They are just a really creative group of folks, and they are not so big that they can’t make creativity and art the priorities.’ Silicon Knights president Dennis Dyack, in turn, says he found Nintendo to be just as committed to getting the best game as he was. ‘As a developer, Silicon Knights has always striven to create the best games and the best experience possible. And we’ve worked with other publishers, but never found a match. They were more interested in the bottom line-how cheap can we make this and how fast can we get it out.’

There has also been a growing disparity, in terms of budgets, between what Rubin calls big titles and lesser titles. He says it used to be that ‘a big game would get a US$2-million budget and a small game would get US$500,000. And now a big game is getting US$10 million to US$15 million, and a small game is only getting US$1 million to US$2 million. So there’s a huge difference in the amount of investment that companies are making in these titles. And frankly, more than ever before, the haves and have nots are separating.’

Not only is the production budget of a video game an integral factor, but now manpower is also an essential issue. Silicon Knights’ Dyack recalls, ‘It’s funny because when we first incorporated, we were four people, we did all the stuff on our home computers, and it didn’t really cost us anything. That’s not possible anymore. We need teams of people to be competitive. On average, it takes 16 months to make a game. It takes talent to do that. It’s not something that three or four college students can whip up on the fly anymore. Those days are gone. Some companies have as many as two or three hundred people working on a project, just to keep it going in the right direction.’ All of which points to the technological maturation of both developers and consumers, which, in turn, creates a less fertile environment for independent studios.

‘When the industry was younger,’ says Dyack, ‘there was the philosophy that if you created a game and put it in a box, it would sell. It was a new thing, and people couldn’t get enough of them. Now we’re at the point where everyone is making games that no one wants. If you go to a local Electronics Boutique, you have 5% of the games making 95% of the money because all the other ones are not very good, and the quality is really low.’

The bottom line, he says, is ‘you just can’t throw a game together anymore. We used to make 20 games, and 70% of them would be profitable. Now the average company makes 20 games, and they’re lucky if 5% are profitable.’

Nintendo’s Kaplan agrees. ‘While there are thousands of games to pick from across the platforms, the real money is made from the blockbuster, triple-A titles.’ But Kaplan points out that for any kind of combined development effort on these mega-games to work, it’s important to have the right marriage between companies.

There are a couple of factors integral to these marriages, she says. ‘Number one, the ability to come up with creative, interesting and new ways to play video games. Then, obviously, there’s the chemistry between companies.’

Naughty Dog’s Rubin agrees that chemistry is all-important for long-term success. ‘Companies sell for many, many different reasons, and I think a lot of company purchases are forced marriages. `Here’s a lot of money, come work for us. You don’t know us, we don’t know you and we don’t know how we work together. But we’ve done some good games in the past and we’ve got a lot of bankroll, so let’s get together and see what happens.’ I think more often than not, that ends in, if not tragedy, then simply not getting your money’s worth out of the purchase.’

However, Rubin says the only way to stay truly competitive is to align with a larger company, like Naughty Dog did with Sony. ‘Because we knew it would be harder and harder to get a publisher to support a title done by an outside party, it made sense for us to join internally. And from Sony’s standpoint, instead of creating a franchise with a character they didn’t own-in our case Crash Bandicoot-they are spending advertising dollars and helping themselves to create something bigger than just a video game character.

‘For example, wouldn’t it be nice if Crash Bandicoot could be a TV show for them? If they could sell shirts… if they could own the character and didn’t have to negotiate every time? Well, we gave them that ability with this character, and in return they give us the advantage of bigger budgets and greater reach. Because of that, the game has a better chance of striking a chord with the public, and we have a better chance of succeeding. And this is definitely a hit-driven business.’

Interestingly, both Dyack and Rubin compare the current trend of independents being snapped up by corporate giants to the film industry. ‘These days, every action film has to show that much more than the previous one or it’s considered an also-ran,’ he muses. ‘The gaming audience is equally sophisticated-if not more so. In that sense, they demand the absolute utmost in technology. And it costs.’

Dyack says he feels history is simply repeating itself. ‘What the video game industry is going through right now is what many people have coined a paradigm change that is really parallel, in my opinion, to the film industry in the early 1940s and 1950s.

‘If you look at the film industry when it first started, before the camera technology was standardized, basically small companies who could do good technological tricks with film were the most successful. However, once the camera became standardized and everyone could pretty well do those tricks, the people who could write the content then started to become successful. And also, all the people who created content merged into larger companies.’

Dyack says that with the new generation of consoles being so technologically similar, it’s content, not hardware, that is the key to success. ‘On the previous systems, it would be hard to tell a story, it would be hard to bring a character to life. That’s not the issue anymore; now the issue is having the talent to bring that character to life.’ Essentially then, it’s the people who can create the best games who are going to do well, not the people who can simply implement the tech.

And as investment in games grows, it will become more difficult for small companies to compete, leaving most little choice but to sell out. As a result, notes Dyack, ‘the industry is probably going to shrink; the number of people making games is probably going to get smaller, but the quality of those games is going to get much higher. So that tends to move toward an amalgamation.’

Although the implications of the ever-escalating costs and risks involved in the creation of video games seem dire for many small companies, overall it signals long-term health for the industry as a whole. As Kaplan says, ‘I don’t think it will hurt the industry. I think the cream will rise to the top.’

In the end, despite the seemingly and inevitably fewer and fewer independent software companies staying alive, Rubin says there will always be a few that prosper. . . success that is vital to the overall health of video gaming. ‘It’ll be the few independents who thrive that will keep the industry in balance.’

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