The time has come to drop the idea that publishers are the only source of games financing
But I had a baby. Despite this being my second one, I forgot quite how time-consuming a newborn can be. So, with apologies, here is the slightly delayed final installment on finance.
Traditional role: For the past twenty years, publishers have been the primary source of finance for games development. The traditional model is for a developer to create, at its own expense, a prototype of a game. If the game is greenlit, the publisher provides the developer with an advance to make the game, which will be offset against royalties earned by their game on release.
Canny developers seek to make a profit on the advance alone, since few games generate substantial royalties for the developer. Although it doesnít always work:
"Revolution hasn't received royalties since 1997. Those were the days when royalties weren't actually a myth", Charles Cecil, CEO, Revolution Software
One of the main reasons that publishers have dominated the financing of games is that it has been very difficult to interest financial institutions in investing in games companies, particularly developers. Those that have invested in developers such as Argonaut, Elixir, Lionhead, Red 5 and VIS Entertainment have either lost all of their money or struggled to make a good return.
As a result, most investors seeking exposure to the games industry have invested in publishers, which have a large portfolio of games and the ability to absorb the risks of a number of their games turning out to be flops.
In turn, developers have needed to seek financing from publishers to invest in the large teams needed to create modern AAA games. And the cost of games has exploded over the past decade.
A triple-A PlayStation game might have cost a couple of million dollars to make. By PlayStation 2 this number was approaching $10 million while PlayStation 3 titles can be $20 million or more. It is tough for any independent developer to finance any games at this level of expense, let alone build a portfolio.
As for self-publishing, you can forget it. The costs of manufacturing, distributing and marketing a AAA title can be four times the size of the original development budget.
"Call of Duty [Modern Warfare 2] cost $40 million to $50 million to produce, about as much as a mid-size film. Including marketing expenses and the cost of producing and distributing discs, the launch budget was $200 million, on par with a summer popcorn movie." - LA Times, November 18, 2009
New role: The alternative sources of financing in the new world of digital distribution are only just emerging.
For many developers, self-publishing means investing some of their hard-earned profits into small games that can be easily distributed. Finance becomes less a matter of securing external investors and more about ensuring that the studio has enough resources to finish the development of an iPhone or PSN game.
There are new alternatives. Some developers are investigating EIS or other tax-efficient vehicles to raise external development. R&D tax credits, regional grants and bank financing all play their part.
Developers are seeking to widen the pool of money providers to include the military and educational establishments (for serious games), broadcasters and advertisers.
It is only a matter of time before a new breed of games producer emerges: not the current 'line producer' responsible for milestones, targets and delivery, but a Hollywood-style producer who secures the game idea, the developer, the financing and the distribution.
On the day that happens, the Golden Era of Gaming will have begun.
Nicholas Lovell writes a blog on the business of games at www.gamesbrief.com.
He is the author of How to Publish a Game (which covers finding financing for your game in detail) and teaches masterclasses on making social games.You can download the first two chapters of How to Pubish a Game for free at www.gamesbrief.com/htpagfree.