Monday, June 9, 2008

New Money: The End of Battered Developer Syndrome Edition



I know this pain
Why do lock yourself up in these chains?
No one can change your life except for you
Dont ever let anyone step all over you
Just open your heart and your mind
Is it really fair to feel this way inside?

You could sustain
Or are you comfortable with the pain?
Youve got no one to blame for your unhappiness
You got yourself into your own mess
Lettin your worries pass you by
Dont you think its worth your time
To change your mind?

Some day somebodys gonna make you want to
Turn around and say goodbye
Until then baby are you going to let them
Hold you down and make you cry
Dont you know?
Dont you know things can change
Thingsll go your way
If you hold on for one more day yeah
If you hold on
It's a tough world out there for independent development. We are going through an attrition. Teams are getting bigger, burn rate is higher and time between deals is longer.  For years and years and years a developer's only choice has been to sell to publishers, and the number of publishers are consolidating.  As a result, battered developer's syndrome is overtaking the development community.  I do not in any want to make light of spousal abuse or the plight of its victims, but bear with me for a bit.

The victim of an abusive relationship develops low self esteem. They stay because they believe they are stuck and have no alternatives. They start to rationalize the way they are treated, and enter new abusive relationships because they think they deserve it.  The overlap with the DSM IV definition hit me when I read the recent New York Times Article article about Shigeru Miyamoto.
“What’s important is that the people that I work with are also recognized and that it’s the Nintendo brand that goes forward and continues to become strong and popular,” he said by way of comparing Walt Disney’s role in the larger brand with his. “And if people are going to consider the Nintendo brand as being on the same level as the Disney brand, that’s very flattering and makes me happy to hear,” . . . With a net worth of around $8 billion, Nintendo’s former chairman, Hiroshi Yamauchi, is now the richest man in Japan, according to Forbes magazine. (Nintendo does not disclose Mr. Miyamoto’s compensation, but it appears that he has not joined the ranks of the superrich.
Miyamoto-san is regarded by many as the greatest game designer of all time. I realize not all people measure success by their financial return, but his labor as a salaried employee made his boss the wealthiest man in Japan.  Miyamoto-san is not some salary dude who's contribution cannot be directly traced to performance of the company, he is the performance of the company.  It appears he has not been recognized financially on a scale commensurate with this contribution. Culturally or corporately, this concept was passed on to him. His reference to Walt Disney sounds strikingly like a rationalization of the benefits bestowed upon him for his contribution. I am sure he is genuinely happy, but I am not.  Of course it is not my place to tell him or Nintendo how he should be compensated but there is one big difference between him and Walt Disney, Walt Disney was really, really rich.  

Financial abuse is not the only type heaped upon developers.  I am not talking about individual abuses like non-payment of royalties because developers just can't sue, adding features or additional marketing art without additional compensation, stealing key team members rather than signing the developer again for a sequel, or forced conversion of royalties into equity investment.  I am addressing those provisions developers come to accept as "standard,"  termination for convenience, publisher IP ownership, high earn outs, weak sequel rights, "key manning" certain employees, sometimes even restrictions on equity sales.  Publishers have good reasons for all of these things. I was one, and I did. They are making tremendous financial commitments in the form of non recourse loans, collateralized only by something which may be delivered and may work . . . and developers lie. I know its shocking, they do. These are good excuses, but the real reason the deals are one sided, is because they can be.   For most developers, publishers are the sole source of capital and therefore hold all the cards. The net effect of one sided deals, is a weakening of the development community and, in the long run, suffering for the publishers. Diego Angel taught me a deal must be fair to both sides, or else it just won't work.  He sold his developer for close to mid 8 figures and retired to Colombia.  

Developers are on odd commodity. I remember very little of my college econ classes -  it all happened in the midst of a smoky haze - but I do remember the big x representing supply and demand. Publishing and development isn't like that.   I don't know what letter would represent the market, but it would be something with another leg on it representing tremendously time sensitive downward pressure. If a developer does not have a team in place, a publisher will be concerned about hiring risk. If they do have a team in place, they are burning cash and losing deal leverage on a daily basis.  There are developers out there who get better deals, some, even great ones, these are the ones who are able to access outside capital, or invest royalties from prior titles, both exceedingly rare situations. The market is about to change and the funny line may be removed from our supply and demand graph. More developers will have access to capital.

The same market forces which drove Hollywood studios to seek outside capital are at play in the game business. Budgets are going up, release windows are getting crowded, rentals are undermining primary sales and product must appeal globally. Hollywood is taking money from private equity funds, banks and even Arab Nations to help fund expanding budgets of blockbuster films. The opportunity to invest in Hollywood is so attractive today, there is more money than there are deals,  and producers of content are benefitting by the reduced cost of money.  Studios are using cheaper money to increase budgets, and producers with track records are able to access capital to fund their own films.   Money is plentiful and production resource is scarce.   It's the supply and demand thing. 

Some of the money which is not making it's way into Hollywood and other money, is moving into the game space. To Hollywood it is not so much, to us it is a lot of money. More money than needed to support the current crop of developers, and at least as much outside capital as is spent by the major publishers on an annual basis. These sources of capital rely exclusively on external development and will not only afford opportunity to developers, but may even challenge the publishing oligopoly to break from their traditional deals. The new money is more willing to take risk on new IP and more willing to look beyond the Metacritic score of the last title. So who are they?

The first source of money was the first source for the film business. In film it is called a negative pick up, I don't know what it's called in games, but it's been going on for about ten years.  If a developer is able to secure a commitment to repay the budget within a reasonable period of time of release of the game, sometimes up to a year, a bank will loan the developer money to develop the game. The developer must also acquire a bond, guarantying on budget and on schedule production. The bond company will do due diligence to make sure the developer is able to do what they said they can do and will sign off on each milestone to make sure they are doing it.  The advantage to the publisher is they don't have to pay for the title until after it is released. The advantage to the developer, is they sell a game the publisher may otherwise not have purchased. The disadvantages are the cost of the bond sitting on top of a publishing deal and the deal itself which looks pretty much the same as a publishing deal without the outside funding. The deal may be incrementally better from a higher royalty offered by a publisher if the bank was willing to accept less than a 100% commitment, which some are willing to do, but most feel about the same. This is because the developer is locking in distribution at the beginning of the deal, it is still considered high risk and they will not receive the larger financial return associated with signing at vertical slice or beta.

The next kind of money is new and just entering the market. It is more like a venture investment and these sources are pretty exciting. A number of funds, rivaling the major publisher's overall production budgets in size, have either recently closed or are in process of closing. These funds come in a variety of flavors, but can be characterized by a greater willingness to take risk on new IP.  They see a stagnant IP market as opportunity. Some have distribution requirements and their investments must be vetted by their distributors. Others are able to greenlight on their own. These guys move faster and give better deals than traditional publishers. They have to. If they do not, the developer has no reason to choose them over a publisher with a proven track record.  They also do not have the one-size-fits all deals offered by the publishers.  IP ownership can go either way and royalty rates and advance earn outs are negotiable.  The only restriction is the deal must make sense.  Deals are bespoke to each situation.  The disadvantage of these deals is the developer doesn't know if the title is going to get support once the title is completed. When it comes time to market and distribute the titles, the ones distributing through publishers may suffer affiliate label issues, the ones distributing themselves, may not be so good at it.  

Finally, the studios are coming.  Disney has been in business since before Jan Smith put the tent over her car many years ago.  They are a full-blown publisher in every sense of the word, developers should not look for anything special there.  Warner launched Warneractive, Time Warner Interactive and iNscape, mushed them together, closed them down and now relaunched ten years later as Warner Interactive.  They own Monolith, but look externally to work on the licenses and with the new president in place, are threatening to acquire original IP from developers and expand it into other media.  They are not quick to pull the trigger and so far their deals look like traditional publishers, but they are actually making them.   The exciting movement is happening at Universal and Paramount.  Both announced a willingness to commission developers directly and release, or partner for release of projects based on their IP.  This will not only give them more control over development, but move them higher up on the revenue tree.   Fox is yet to announce any plans, but it used to operate a top publisher.  Fox Interactive published the Die Hard Trilogy, Alien v. Predator and Gex, prior to turning to a licensing model.   

These are not the only new players in the market, but they do represent a significant draw from the development pool.  The increased demand will very likely have the same impact it had in the film business and move us from a buyers' market to a sellers' market for those developers who are able to survive the current attrition.   This does not mean marginal developers, or unqualified developers are going to be able to get deals, but it does mean developers with track records will be able to make easier transitions from one game to the next, the deals cycle will be reduced, and a market will once again open up for splinter groups from internal publishers. It is already happening.   

So developers, you don't deserve it and you have options.  All you have to do is hold on for one. . . maybe a few more days.  




3 comments:

Saúl G said...

While I certainly agree with your general analysis on the huge disbalance and financial abuse in typical developer/publisher relationships, Miyamoto is probably not the best example. No matter what the NYT article seems to imply, Miyamoto holds a directoral position at Nintendo and probably receives exactly as much money as he wants.
On the other hand, the same article specifically describes him as "happy", and I would argue that in Japan happiness is a much rarer commodity than money.

Keith said...

Thank you for the comment. There is no question Miyamoto-san is happy. His happiness comes from the creative freedom afforded by success, which is indeed rare, and probably more gratifying on any continent than money. However, the money he "wants" is not always the money he deserves. My argument is he deserves more when there is such a large disparity between his compensation and the wealthiest many in Japan. While he is not asking for it, they should certainly try to embarrass him with their largesse.

Saúl G said...

Thanks for your reply. While I'm not sure I agree on the largesse thing, your point probably is that the monetary profits from Miyamoto's work were largely reaped by "higher-ups" in the company with (apparently) a minimal fraction going directly to him.

However, I believe it is general wisdom that if you want to "strike it rich" you need to go out on your own. Being under the company umbrella also means your work is not your own, and by large this is not limited to the videogame industry.

Then again, this is probably veering off the topic. Company/employee relationships and publisher/developer relationships are completely different things, and certainly the second should not be like the first.