Gaming industry still plagued by dearth of financing; publishers fill void with “above-normal returns”

An almost insatiable global demand for online games, combined with generous tax incentives throughout Canada, are continuing to drive growth in this country’s gaming industry – but stakeholders warn they still face an uphill battle in attracting financing. Part of the reason, says the managing director and CFO of Toronto-based Bedlam Games, is the high cost of developing a game. Jim Laird, whose company develops console video games, says it costs on average $10 million to develop a game from conception to completion. While games are highly profitable – Britain’s Grand Theft Auto, for instance, has raked in $700 million in revenues – developers usually end up with the short end of the stick as financiers, also known as publishers in the industry, pocket the lion’s share of the profits, Laird told a panel discussion Tuesday at the annual Entertainment Industries Summit in Toronto, organized by Insight Information. “Publishers are pretty much the only financiers out there. There are huge above-normal returns for publishers.” The global game industry market is expanding rapidly. In 2006, it generated $32 billion in revenues, according to a study commissioned by the Ontario Media Development Corp. last year. Despite the recession, its revenues are expected to hold steady, with some studies saying the industry will continue to grow at a 10% annual rate for the next five years. In Canada, the demand for digital game products is expected to outpace global growth. “It’s as big as music, it is as big as Hollywood,” said Laird. Growth has been credited to the evolution of multiple platforms. For instance, the introduction of Guitar Hero, where fans simulate guitar sounds to the tune of various rock music songs, is an example of an innovative new platform. Its release on mobile phones, as well as on Windows and Macintosh systems ensured widespread use and popularity among audiences, a move which garnered windfalls estimated at US$2 billion. As well, the advent of games with simple patterns like Pogo, which appeal to a cross-section of young and old alike, and the growth in social gaming, like Mafia Wars on Facebook, has spurred tremendous growth and popularity in games. Yet, even though 69% of heads of families in North America play video games, the industry is still struggling to attract revenue through advertising. In alternate reality games, a new form of an interactive online game based on television series, ads are still “tricky” and can “turn off” an audience, said panelist, Patrick Crowe, co-president Xenophile Media, a Toronto-based cross platform production company. Laird agreed: “It’s not been figured out, but there may be money in it. It’s probably not a good idea to place a coke ad in a futuristic game happening in 2025.” Panelist Pierre Le Lann, co-CEO of San Francisco-based gaming software developer Tribal Media, said in the future, games may make additional revenues from product placements, although he conceded this might raise ethical questions as the lines between content and advertisement become blurred. Another source of money for the industry may rest in producing a video game component to popular films. But the panelists said the journey is still fraught with uncertainties as the process is still in its experimentation stage. Some trials have resulted in failure. For instance, a video game component of the popular Spiderman movie was a flop among game enthusiasts.

Gaming industry still plagued by dearth of financing; publishers fill void with “above-normal returns”

Broadcast | October 21, 2009

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