Editor’s note: Tadhg Kelly is a game designer with 20 years experience. He is the creator of leading game design blog What Games Are, and consults for many companies on game design and development. You can follow him on Twitter here.
The opening of the London Games Festival marks a month of industry- and education-focused events that take place all around the city. It starts with an event called Games Invest (attached to the Eurogamer Expo) where various developers, investors, and interested parties get together. The main topic is typically how to get games funded, and in past years its tone has often been somewhat depressing. Many such events in the European startup space are.
Typically this is because of the conservatism of European investors. A speaker at an event like Games Invest might sound a high note of ambition (such as following blue-ocean strategies or lean-startup thinking), but in practise they tend to be terrified of risk. So the conventional wisdom holds that Europe is doomed to be the poor man of the startup world because, while it’s easy to find small bits of seed and angel funding, and funds will also invest at IPO stages, the Series A layer just doesn’t meaningfully exist. (Actually it does, but the kinds of European startups that get that sort of funding tend to be very unadventurous).
Games startups get double-harsh treatment in this scenario. While it’s already tough for a technology startup to convince investors, what they are proposing is usually a solution to a perceived problem. A Wonga has a clear and scalable proposition that could potentially deliver huge returns. However investors in general tend to believe that games are a hit-driven business. So even if your game product is massive, investors tend to think it will only ever be temporary. They may like the lean startup as an idea, but in practise the kinds of investment they want to make in games are for platforms, portals, aggregation solutions and so on. Those are the businesses that investors believe will transcend the vagaries of hit-driven economics.
They’ve overcome this problem in the film industry using mezzanine and convertible-debt rather than venture financing. This involves essentially loaning money to the producer in exchange for the intellectual property rights, which are then bought back through earn-out clauses. Some people have thought to apply the same model to games, but it rarely works well.
The thing is, the belief about games being hit-driven is somewhat misinformed. When we say “hit-driven,” we often mean a piece of content that grows hot very quickly, but also cools off and (hopefully) leads to a long tail of revenue. The music industry is the classic example of this with its charts and hit parades, one-hit wonders, Gangnam-style sensations and rapid turnaround. In music, the pressure is always on to generate new hits and to remain relevant. The games industry is similar to music and film in that hit games tend to spread quickly. It’s also sometimes true that a hit game can tail off (such as Draw Something) if it proves to have no depth. However where games differ radically from both film and music is in their development and their fan relationships.
Games are developed like software. Iteration and experimentation are vital, as are fairly flexible delivery times (Blizzard is famous for its “done when it’s done” approach to making games). This does not sit well with the fixed production schedules and milestones that mezzanine financing schemes bring and usually results in bad games (hence defeating the whole point of financing them in the first place). However well-iterated games show much more staying power than the vast majority of films or music could ever hope to achieve.
Great games spawn franchises, leading to increased sales for release after release. They commonly show multi-year growth patterns, whether at retail (Borderlands 2 is likely to sell far more than Borderlands) or online. Fans usually find a game type that they love, play the hell out of it, evangelise it and then buy the next one. Loyalty and continuity across multiple years (or even decades) is very important, and (if the game is great) that loyalty can potentially last forever. That’s why Grand Theft Auto can sell 15 million copies every couple of years, Call of Duty sells 20 million units every year, and World of Warcraft, whose salad days are probably gone, retains around 9.1 million subscribers. It’s why most of the geek world is patiently waiting for Half Life 3.
Franchising can also work laterally. Nintendo uses a number of key characters like Mario to sell many types of games, for example, as does UK war-game company Games Workshop. Zynga has attempted something similar by appending the suffix -Ville to many of its games (though whether that really works, who can say).
In practise the smart money should be looking not to companies who have an idea for a game, nor those who simply have a distribution or technology platform (those are a dime a dozen these days). It should look for franchise potential. Likewise, those who develop games should be thinking whether the game they want to make can really extend into franchises. Only when those two mindsets line up does real value tend to be generated, but wrong-headed understanding from both sides still persists.
Until (hopefully) now.
Enter The Crowd
In the games industry the whole idea of crowdfunding caught us with our pants down, and we’re still trying to understand what it means. We stare in disbelief at some of the amounts being raised, wondering aloud whether the whole thing is a massive bubble just waiting to be burst. For many of us it seems like a temporary madness that will pass before the industry gets back to the regular business of developers and publishers. For a few of us (myself included) it’s much more than that, though.
The hype started with Tim Schafer and Double Fine generating over $3.4 million on a campaign looking for $400K. Following on from this initial success, a number of other long-time luminaries have done likewise, and this has not been limited only to gaming legends. The Ouya project, to create a lean console that could play app-style games, won just under $8.6 million through the same route. Similarly, real-time strategy game Planetary Annihilation pulled in $2.2 million. Crowdfunding has also helped many game makers at smaller scales, such as helping my friend Mike Bithell raise completion funds for his indie game Thomas Was Alone.
However crowdfunding raises some questions.
The first question is whether the funds raised through crowdfunding indicate the size of the addressable market or merely a small part of it. So far the signs are that the latter is true. The Kickstarter-funded game FTL (which raised just over $200K) seems to be doing very well, for example. Then there is Minecraft, a game that was effectively crowdfunded by being sold at a very early alpha stage. According to Minecraft.net it has sold 7.5 million copies of the PC version alone, and the Xbox version has sold 3.6 million copies.
The second question around crowdfunding is whether the whole thing is just a hype bubble waiting to pop. At Games Invest the key speaker this year was John Vaskis, head of the games vertical at Indiegogo. Vaskis talked about efforts being made to encourage more game projects. He imparted key information such as the value of a strong video, the importance of “stretch goals” (if you reach your target early, you need new targets to keep encouraging funding) and so on. He also revealed that the average investment by a fan in a project on Indiegogo is $79.
All of this sounds very encouraging, but the reaction from the conference attendees was less optimistic. On a panel, my friend and fellow consultant Nicholas Lovell wondered whether crowdfunding has reached the top of the Gartner Hype Cycle and is about to dive into the trough of disillusionment. However he also cited its power at small as well as large scales, specifically with reference to a book project by Zoya Street named Dreamcast Worlds. Many wondered just how many projects fail to gain funding, and also what would happen if a major scam was perpetrated through crowdfunding.
The third question is around delivery. Those who make games know that the amounts being raised by some crowdfunding projects are actually on the small side. Tim Schafer’s $3.4 million may sound like a lot, but it’s actually a dwarf compared to the budgets of most console games. So what happens if the crowdfunded project turns out to not have enough money to finish a game? What if, 75 percent of the way through development, it transpires that the game is not very good? On the same panel, Alex Chapman (a leading games lawyer at Sheridans) suggested that while invested projects are built to make money and hopefully please the fans, crowdfunded games are meant to please fans, with profit being optional. This screams risk.
Suspicion of the new is natural, of course. However I think crowdfunding is a demonstration of what I call marketing stories. It shows how players are motivated by causes in which they believe (such as the idea that adventure games are not dead, or that indie consoles should be a real thing), and put their money where their mouths are. Marketing stories are increasingly the most important factor in determining success or failure in many industries (replacing older forms of marketing like advertising), or what Seth Godin calls tribalism.
In a sense, crowdfunding’s real value is not the money that it generates, the success of what individual projects deliver, or whether it is currently overhyped. Those things help, but really what crowdfunding should be thought of is as the best market-research tool we’ve ever had. It gives us a way to look into the tribal minds of the players who care, the ones that are most likely to spread the word later by correlating not just what they have already bought, but what they intend to buy. Crowdfunding of games is a way to validate franchise potential (while maybe easing some of those Series A blues into the bargain).
Some have already started to recognise this potential of user voices and tribes. Valve has recently deployed a service named Steam Greenlight, for example, which asks users to vote on which games they would like to see published on Steam. I personally think that by tying this to votes rather than funding somewhat misses the point (because it’s easier to vote to say you would like something than to buy it, so the data may be skewed). Another project named Gambitious has launched in the UK. It’s attempting to bring crowdfunding and equity investment together under one roof, which may or may not work.
The point is that, rather than making games in isolation in the hope that they will hit, the tools have emerged to poll audience intent first and even turn that into a production budget. The exact form or site on which that happens is less relevant than the longer term trend of fans connecting to developers with real money and expressing the stories that they want to be a part of. And that is a long way from finding its true peak. My hope is that game investors everywhere realise that, through crowdfunding, their fears of risk can be mitigated.
Then, finally, we might see a funding structure for games that actually makes sense.