:MeetPi

It’s always nice when you bag a CEO one day and the next day another industry leader comes out and agrees with you.  Well, kind of.  Gabe Newell, founder of Valve (the makers of Half-Life and the digital distribution platform Steam) was at the DICE summit in Las Vegas talking about the growing importance of digital distribution in the games industry [Game|Life].  Okay, probably not so surprising that one of the key digital distributors is talking up digital distribution, but Newell’s predicting that the next generation of consoles, the role of digital distribution will be incisive.

Newell’s argument is that Valve’s experience with Steam has shown that the value in digital distribution is in the information it provides about sales and user activity.  So, a console that collects this information and uses it to connect publishers with consumers is going to fare well. But what happens when the console or digital distributor is also the publisher? Microsoft and Apple take on this role with XBLA Community Games and App Store respectively.

I can’t see a publisher like Activision or EA going anywhere in a hurry, but the ground is starting to move (again) and companies that are not flexible enough to ride the shift are going to crumble.  Short to medium term, then, we might see publishers going into contracts with digital distributors to get their games out and provide metrics in return.  The big publishers are still the only entities with enough cash to fund AAA game development.  Longer term, if a digital distributor is big enough, if digital distribution becomes a primary way to purchase games, and if digital distributors have enough relationships with developers, then for all intents and purposes, they become publishers.

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Over at Wired Game|Life they’ve covered EA’s response to the global economic crisis.  In a nutshell: the GEC is good for the game industry because it will destroy all the small companies that produce lots of crap titles for consoles.  Some would say it’s EA’s seemingly infinite capacity to extend franchises beyond all reason (eg: the Sims + various expansions, numerous EA Sports titles, etc.) that spawns most of the crap of game store shelves.  Other might argue that EA’s behavior tends towards the monopolostic and their reluctance to try anything new when they can make a quick buck from putting out another Sims expansion pack is retarding industry creativity.  Still others would argue that the game publishing model (of which EA is a sterling example) that makes it all but impossible for small or medium sized developers to get a fresh title funded is more to blame for the crap on the shelves.

It’s perhaps a little ironic that it’s small studios who may be well placed to reap the greatest rewards from the GEC.  If digital distribution turns out to be the new game publishing and distribution method of the next decade, it’s today’s small developers who’ll be tomorrow’s major labels, and they won’t be interested in doing publishing deals with EA.  Publishers like EA may find themselves whining about the evils of online distribution in much the same way that the once arrogantly powerful record publishing industry was.  I’m sure that small startups riding high on digital distribution and staffed by the talented people left in a ditch by EA’s kinicide will weep real tears.

Why so much venom towards EA?  Well, as companies go under and real people lose their jobs through no fault of their own, fat cats like EA’s CEO John Riccitiello stand in front of slides proclaiming that the way to stay in business (nay, PROFIT) in a recession is to cut, cut, cut.  Gee, I wonder if Riccitiello would be so gleeful if his salary and share options were cut each time he cut one of the EA “family”. I’m guessing not, but then he’s got nothing to worry about.  A certain amount of humility would go a long way, Mr Riccitiello.

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So what does the Global Economic Crisis mean for the Australian game industry?  We probably need to answer this question by looking at the industry itself.

The Australian games industry is an interesting beast.  It is made up of some 70 developers ranging in size from around 200 employees, right down to one or two person operations.  All Australian developers are privately owned, which means their
financial data is not in the public domain, since they don’t have
shareholders to report to.  This makes it pretty difficult to get a clear idea about the exact shape and size of the industry.  From a report by the Australian Bureau of Statistics, who surveyed 45 Australian game companies, we can pretty confidently say that most employment, game production and income is generated by the top ten or so game companies. Many companies, including those not in the survey (only companies with Australian Business Numbers were surveyed) are quite small and focus on contracting to larger companies, doing ports or doing mobile and casual game development. 

Many Australian studios are independent, which means they are not beholden to any single publisher.  This gives them a great deal of flexibility in deciding what they will work on, but it also means greater uncertainty, as they need to compete with others developers for the rights to make a game.  Other studios which are owned by larger developers or publishers have more certainty, but less autonomy.  While the studio itself is run day-to-day like an independent studio, budgets, game features and development timetables are determined by the parent company.  The exact nature of this relationship is complex, and the amount of autonomy the local studio has differs from studio to studio.

Both independent and owned studios have challenges they need to face in the current economic climate.  Perhaps the most exposed are the owned studios – like Pandemic.  If a studio is owned by a larger publisher, then the fortunes of the development studio is linked to the fortunes of the parent company.  As the economic crisis hits the game industry the larger publishers are engaging in belt-tightening, which includes layoffs.  For a company like Electronic Arts, which employs thousands of people in an array of studios worldwide, this means cutting the worst performing studios free.  From what I have read in the Australian game media, Pandemic is an exemplary case of how ownership by a large publisher can be disastrous for Australian companies.  A failure to deliver a major title (a game based upon the latest Bat Man movie, The Black Knight) coupled with geographic remoteness and economic turmoil means that Pandemic became a ripe target for EA closures.  To EA’s credit, they appear to be allowing the studio to go it alone, with their assets (eg: computers, dev kits) and a new game that they’re currently working on.  With any luck a new independent studio will arise from the ashes of Pandemic Brisbane.  If it were me, I’d name the new studio “Phoenix”.

If Pandemic Brisbane provides a clear example of the risks for owned developers, then the risks for independent developers are less clear.  Many – if not most – Australian independents are in the small game/casual games market or mostly work on ports, which tend to be referred to as SKUs in the industry (Stock Keeping Units).  So, if an original game is released for the PC, a publisher may employ other companies to do versions of the same game for XBox, Playstation, Wii, etc.  Star Wars: Force Unleashed came out with a number of SKUs (Stock Keeping Units – essentially a unique product; the industry typically refers to ports or different versions of the same game as SKUs – different, yet the same), one of which (the Wii version) was developed by Krome Studios.

A clear danger for Australian independents is that this work may dry up if the costs and perceived risks of outsourcing SKU work to Australia scare off publishers.  To date the financial crisis has seen the value of the Australian dollar fall next to the US dollar.  This makes Australia a more attractive development environment for US publishers because it lowers development costs.  The problem is that by hitching their wagon to US publishers with the value of the dollar as the link, Australian developers become dependant upon the exchange rate – and when it changes the industry will flounder.

With these dangers come opportunities.  When I get a chance, I’ll post about them, too.

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