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Withstanding the Collapse of the Middle

What happens when the mid-tier drops out of the retail console space? Gamasutra speaks to developers like n-Space and WayForward as well as veterans of Bizarre Creations, Pandemic, and BottleRocket to find out.

A little more than a year ago, developer n-Space faced near-closure after massive layoffs. Even though 2010 was a record-breaking year for the Florida-based studio with seven shipped titles -- including Call of Duty: Black Ops for DS and TRON: Evolution - Battle Grids for Wii -- the turbulent nature of the games industry reared its ugly head.

Several titles wrapped up in August 2010 and future deals kept slipping through the cracks for n-Space, most famously known for the Nintendo-published Geist. Not only that, two of the studio's primary partners, Activision and Disney Interactive Studios, were going through massive restructuring, according to n-Space president and co-founder Dan O'Leary.

And it certainly didn't help that Nintendo's two platforms, Wii and DS, were facing serious problems for third-party developers such as n-Space, which has primarily focused on Nintendo's hardware.

"You know, the Wii has struggled from the beginning for third-party but really has had a hard time since 2008, 2009. And it's just gotten worse," O'Leary said in an interview conducted last year.

"The DS, the piracy problems just became so rampant, and given the size of the ROMs that we make for the DS -- 64 megs -- it's not hard to find and download the ROMs in an instant. That's a real problem."

O'Leary hoped to find interest in development for the more buzz-worthy 3DS. The president said the company's "expertise on 3DS was clear, but most [publishers] weren't ready to bite back then."

It seemed as if the writing was on the wall, but n-Space managed to do something many others developers couldn't: bounce back.

The Revenue Stream

Developers don't own the revenue stream, according to Carey Chico, former executive art director and producer at the now-defunct Pandemic Studios. He noted that developers want to make a great product and think they will be rewarded with cash. However, publishers own not only the revenue stream, but the users as well.

That's not the only problem, either. Even with a fantastic idea, fewer and fewer publishers are willing to take a risk.

"If you don't have a win [like Call of Duty], will a publisher take a $30-million risk on you?" Chico asked? After Pandemic's closure, he co-founded Globex Studios LA, which creates and publishes a range of online games and MMORPGs.

Chico explained that if a studio or team doesn't have a previous high-grossing product under its belt (something like Call of Duty), the risk to the publisher is much greater. In the current climate, Chico noted, publishers won't take a chance on a studio without a huge past success, which wasn't a problem a few years ago.

"[Publishers] can't see past their noses half of the time," said O'Leary.

This low-risk, high-cost environment spells many troubles for independent developers as well as second-party studios, like Pandemic, which Electronic Arts closed in 2009. Chico said the developer, known for open-world action games like Mercenaries, was expected to sell more than 8 million copies of its games before it was shuttered.

Independent developers must plan accordingly and be versatile to survive. Developer BottleRocket found this out the hard way and never recovered after its fallout with publisher Namco Bandai over Splatterhouse, according to former Namco Bandai America producer Michael Boccieri, who now works for Backbone Entertainment. He worked with several members of the ex-BottleRocket team during the subsequent development of Splatterhouse internally at Namco Bandai.

"As a developer who has worked within the work-for-hire side of the industry, I can say that often times a studio has a lot riding on the successful continuation and completion of a development contract with their publisher(s)," Boccieri said in an email interview. "It seems that without the revenue generated from the Splatterhouse project, BottleRocket was unable to make payroll and ultimately was forced to close shop."

"Work-for-hire studios often can find themselves in this sort of situation, particularly with large contracts that leverage a significant percentage of studio resources."

And planning isn't easy in the games industry, in which the wind can change direction at almost any moment.

"There's only so much you can do as an independent developer when you have to be very reactive about your planning," O'Leary noted. "You can only plan out 18 months, or in Wii and DS world, maybe nine to 12 months in advance. Unless you get multi-title deals, which are pretty rare these days, you just have to plan for that nine-month window."

The only answer for independent and mid-sized developers, like n-Space, becomes very clear with all this in mind: self-funded and self-published games in different markets.

"You have to have a plan to make money which can't rely on the hopes and well wishes of publishers," said Chico.


Digital Distribution

"[n-Space was] too much relying on traditional boxed products with traditional publishers," O'Leary realized. "And [n-Space] was too reliant on Wii and DS, which had been really good choices. It put all of our eggs into one basket."

Diversification is key for independent studios. And O'Leary knew his studio must look at alternative business models and marketplaces to rebound and thrive in the future. A prominent way to fix the revenue stream for n-Space and other developers revolves around digital platforms, especially iOS (as well as Xbox Live Arcade, PlayStation Network, Nintendo's 3DS eShop, etc.).

WayForward (Might Switch Force, Contra 4), unlike many independent developers, continues to drum along at its own beat as others fail. The studio understands the importance of digital platforms and self-funded, self-published games, according to CEO John Beck.

"So, from my perspective, and there are others at WayForward who might see this differently, it's all about digital distribution and not having to sell your concept to a publisher," Beck said in an email interview.

"When you consider that DSiWare basically meant we could make a DS game and didn't have to find a retail publisher, you start to see why it was an obvious move for [WayForward]."

While DSiWare seems to have a rep for being unprofitable, Beck noted that the company has had profitable results. As such, the company looks to continue its handheld development on Nintendo's digital services.

"When you have certain content that is available exclusively on dedicated gaming devices, it really helps to set that content apart," Beck said. "The eShop will be a major part of our strategy for handheld games going forward."

Thus, developers become their own publishers, finally owning the revenue stream and users. As such, independent studios have to rely less on major publishers and potentially high-cost deals.

"More payment models definitely mean more ways to earn revenue and keep your development doors open," Boccieri said. "The lines between publishers and developers continue to blur... this is only a good thing for those willing to explore the new opportunities afforded by new commerce paradigms."

Add in low development costs, cheap prices for consumers, and ever-lasting shelf life for products and places like the App Store seem like a whole new world for developers. But everything with the App Store isn't as rosy as it may seem.

n-Space started pursuing the iOS market in 2010 with Golf Cart Ranger. On the day the game broke into the top 200 of all games on the App Store, it sold less than 200 copies, according to O'Leary.

"From a business point of view, [Golf Cart Ranger] was a disaster. We spent somewhere around $50,000 developing it. We've sold a little bit over 8,000 copies."

While n-Space learned valuable experience in the App Store with Golf Cart Ranger, it also highlights how bumpy the transition from boxed games to digital goods can be, O'Leary noted. Independent developers must find the right mix of investment and advertising on App Store games. Studios must find a business model that fits their sensibilities.

Ultimately, developers like n-Space can't follow the same method as two guys in a garage on iOS, O'Leary said. He elaborated that subscription-based models and outsourcing projects, with n-Space producing, might be viable options to explore.

It's a whole new world with iOS, O'Leary said.

The Middle Market Suffers

While digital distribution serves as a key ingredient for independent developers currently as well as the future, it also helped eat away the middle market of games. Many third-party and second-party studios made games that were good, but not at the epic scales critically and commercially of titles like Call of Duty and Assassin's Creed.

With low-cost games and free-to-play games available on digital platforms, many consumers fill their time with these in-between big franchises. "To scratch their itch, they turn to free-to-play or Facebook or to $1 purchases on the App Store," O'Leary said. "So it makes it hard on the middle ground."

Pete Collier, co-founder of Hogrocket and a former senior level designer at now-defunct Bizarre Creations, agrees that consumers understand their money can be better used with smaller purchases to fill the gaps between tent-pole releases.

"There is a flight to value on the part of consumers," said Collier, who makes iOS games now. "Value can be found at the low-cost end of the spectrum with free-to-play, Facebook and iOS games where you get a lot of bang for your buck. At the high-end of the spectrum, gamers have flocked to the games/franchises where it is most likely they'll also get value for money."

The low end of the spectrum basically bottoms out with the success of digital platforms, and the high end rises to incredible heights in regard to development costs. Requirements for a console game rose very dramatically with the PlayStation 3 and Xbox 360, according to Chico, who knows firsthand from his time at Pandemic. He estimated somewhere between $50 million and $70 million was spent on the now-closed studio's last project under EA.

"Both ends of the spectrum seem to offer lower risk exposure for the investment dollar than the middle ground," said Boccieri.

And then there's the economic financial crisis that hit the world in 2008. The after-effects continue to impact the middle market. Extra money has dried up and really hurt independent developers hard, Chico said. Publishers had to make a choice.

"In the current economic climate, the time of companies making high-cost but middle-of-the-road titles is over," said Collier. "That's the reality. In times of economic uncertainty, the middle is always squeezed."

"When times are tough and people are capable of less purchases, why would [publishers] take the risk on the middle ground? This, I believe, is why we've seen the strengthening of established IP and the collapse of the middle."

Like Collier alluded to, consumers also had to make a choice.

"The economy robbed people of their disposable income, and what money and time they had to spend was divided," O'Leary said. "There [are] so many choices that range from free-to-play, to a dollar, to $30, $40, $50, $60."


Diversify

No doubt about it, times are rough for independent developers. While no simple strategy works, especially with the current turbulence, one word continually kept popping up from developers.

"[Studios] have to be able to diversify," O'Leary said.

If it's true that focusing on a single platform or only on traditional boxed games will no longer work for independent studios, what should they do? All options must be explored, according to O'Leary, who noted n-Space looks outside the box and self-funds projects today.

Beck absolutely agreed, stating that "Diversification is really how WayForward has insulated itself and survived. Would it surprise you to know that in some circles [WayForward is] known as the leader in the field of EEG biofeedback games?" he asked. "I'm not kidding. No really, I'm not kidding."

"WayForward is also a leader in kids' educational content. Bet you didn't know that. We have probably done more educational content over a longer period of time than any other independent in the industry."

O'Leary also said specialization could be an option, albeit a risky one.

"[Studios] have to be super focused on making one game of one type for one platform and be the absolute best in the world at that," he said.

Collier believed specialization with an established franchise could work and would have helped Bizarre as a second party.

"In retrospect, I think Bizarre would have benefited from being put to work exclusively specializing on a core established racing franchise rather than a new IP," said Collier. The studio was shuttered after its first title for Activision, Blur, failed to find an audience.

But for many, that's not the best strategy, according to Chico. He reinforced agility and diversification. A team that is agile can bounce back and search for the next patch of blue ocean, he added.

O'Leary attributed his versatile team for n-Space's quick rebound, which happened within a week. He said it helped tremendously to have great personnel and to be in the right place at the right time.

And once back up and running, n-Space started to diversify immediately. While the studio continues to develop quality titles for Nintendo platforms -- like Square Enix's upcoming Heroes of Ruin and Atari's Rollercoaster Tycoon for 3DS -- it's also working on two Kinect titles and within the Facebook and iOS spaces.

O'Leary said these developments are on top of two recent releases, which are smaller-scale, noncore gamer titles: Jaws: Ultimate Predator for 3DS and Jillian Michaels Fitness Adventure for Kinect.

"Both [games] were done with new partners and released under our imprint Checkpoint Games, a newly-formed brand exclusively for these kinds of business opportunities," O'Leary explained. "We've even supported the simulation and training industries some this year filling in the nooks and crannies of our development capacity to create additional profit, stability and opportunity."

Not only did n-Space rebound through diversification, but the studio continued to move forward with this strategy in hand. O'Leary noted co-funded and self-funded games also are important to the company's future, though "nothing has clicked just yet."

The Future

With the state of flux of the gaming industry, it's a wonder whether the middle market and independent game studios will survive. While n-Space and WayForward continue on, many others face a difficult road. Recently, Silicon Knights and Team Bondi have endured major staff losses and closed up shop, respectively.

But the ever-changing creature of the industry, as Chico called it, also acts as hope for the middle market and independent studios. Boccieri shared the same hope.

"I would argue, however, that there is probably a new way for development investment that would lead back to mid-tier development agreements whilst mitigating risk," he said.

Chico added that along with new markets and middle grounds, it's important to look at history, too. PC was king, declared dead in the early 2000s and now arguably reigns supreme with Facebook and free-to-play games, he said.

In the meantime, the ability to diversify will play a major role for all independent studios, as well as second-party studios, as the landscape continues to shift.

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