Thursday, December 10, 2009

Encapsulated Businesses For Indie Development

Justin Vincent recently wrote a blog post about what he calls the Venture Matrix, which is basically a way to create a huge company out of a lot of little companies-- or, alternatively/additionally to make it easier to launch successful startup companies. It's a long article, and it starts out with a lot of semi-tangential discussion about centralized necessities, but if you look down at the heading The Birth of Companies and on, there are some really novel ideas there; or rather, he's cleverly applied some best practices from good programming to real world business, and that in itself is quite novel.

The article is well worth a read, and it flows well with a lot of things I have been thinking about recently. I've always worked for small businesses, but often I've had very large businesses as key clients, and so I've had an opportunity to see it from both ends. I much prefer being in a small company because of the autonomy and room for creativity that provides (and the increased possibility of returns if the business does very well), but there's a key aspect often missing from small companies: security. That in itself can be a good thing, because it can prompt the business to be proactive where larger companies might be lethargic. But...

The Inevitable Challenge Of Traditional Small Businesses
On the other hand, lack of funding can lead to lack of certain expertises among available staff. In the past I've been in a company where we had excellent programming staff and support staff, but sales staff that couldn't sell the product, and a very novice marketing staff. That business actually did okay based on word of mouth alone, because clients liked our product and told other clients, but how much better might things have gone if we'd had really excellent sales and marketing staff to match our excellent product?

Or, to cite another example, I once did some contract work for a small company that had developed the world's smallest (at the time) cell phone motherboard. It was about half the size of anything else on the market, back when cell phones were much larger; the possibility of such a motherboard was staggering, because it would have allowed for phones the size of today's devices about 3 years before those actually hit stores. Unfortunately, the company was completely unsuccessful in selling their work because they didn't have the needed expertise on the business development end of things.

I love Justin Vincent's talk about encapsulation in his article, because that's exactly what is needed for companies like these. A lot of startups are product-focused, and they know how to make a product that is really unique and useful inside some niche. But unless they just happen to be lucky enough to have staff who are really ace at sales, marketing, and business development, that great idea is likely to languish in obscurity or at least not reach its full potential.

AI War, for example, has done extremely well for an indie game and is still seeing a significantly growing playerbase every month, but marketing has always been a huge challenge for us. And none of the success we have seen would have been possible without all our digital distribution partners, and our upcoming retail partners. It's still quite a challenge to launch a product even in the digital marketplace, and I had to essentially work two jobs for years and luck into the right partnerships in order to make it happen.

My Ideal Approach For Indie Development
I have been thinking for the last few months about how the ideal setup for indie development would work. In other words, how to maximize output from indie developers, maximize revenue for them and their partners, and in general serve the gaming consumers the best by getting them the widest possible variety of truly quality titles at reasonable prices. Here's the ecosystem I imagine:

Indie Development Company: This obviously already exists, but currently the indie developer has to do most everything -- game development, support, funding themselves, marketing, business development, and so on. In my imagined environment, the indie development company would mainly be responsible for game development and technical support/patches (basically what AAA game development companies are responsible for).

Digital and Retail Distributors: These companies also clearly already exist, and I think that they by and large serve their function admirably. The challenge for most indie developers, however, is actually getting the notice of these distributors. The challenge for these distributors is that they get so many totally crap submissions that it is hard to evaluate what is good and what is not. This is very similar to the book publishing industry, incidentally, which leads us to...

Indie Game Agents: These currently do not exist, not in the sense of the book publishing world. Certain well-connected individuals can act as agents, and in fact there are regional sales agents for retail, but they don't act as quite the career partner and liaison that you see with book author agents. More to the point, most indie developers don't even know these agents exist, and/or don't have any way to contact them. It basically requires having the right network connections, and a track record of existing success in the digital market. If you're unheard-of, then forget about it at present. So, the theoretical agents would be:

1) Available for submissions from all indies (acting as talent scouts), as with book publishing agents.

2) In exchange for an ongoing commission (10% to 15% of what the indie developer earns) but no upfront fees, will handle coordination of marketing, sales, business development, and so forth in both the digital and retail spaces. They would basically be the indie developer's business guide, advocate to business associates, and so on. Again, like book publishing agents.

3) These agents would be known and trusted by the distributors based on their past successes in finding diamonds in the rough that went on to be successful, and so if your game were to catch the eye of an agent that would be a sure-in to digital distribution at the least. These agents would be the valuable filters to the distribution pipeline, and the net effect in the short term would be to get more quality titles through. Fact is, a lot of indie developers themselves are not persistent enough or good enough at describing their work to catch the interest of distributors who have so much else to do. Right now, to get even digital distribution deals, you have to catch someone's eye at just the right time.

Advertising/Marketing Agencies: These certainly exist, but these are vendors, not partners, in almost every case. They perform a service for a fee for anyone who can pay the fee, and then their work is done. They have no stake in the success of the product (they don't even have to like the product, let alone fully understand it), and they are inaccessible to anyone who can't afford the upfront costs. In the ideal model for the indie market, these agencies would be full partners on an individual game's public image, coordinated by the game agent.

In other words, they would handle the details of advertising and marketing, as overseen by the game agent (who would also be responsible for selecting a good advertising/marketing agency), and they would not see any return on their work except a percentage of sales revenue. This could be anywhere from 5% to 10% of what the game makes in total. This is akin to having a talented in-house advertising/marketing staff, since they have a vested interest in making the products they represent quantifiably more successful.

Investment Partners: The last big problem for indies is funding. Creating a game takes quite a long while to do, and this requires money for staff salaries, contractor pay, health insurance, licensing of development tools, possibly office space (for those that aren't virtual offices), and so on. Really polished indie games are likely to cost anywhere from $200,000.00 USD to $400,000.00 USD (or more) if the staff isn't being paid a pittance upfront in hopes of later return. The idea of the investment partners is that they would be contacted by the game agent, or directly by the indie developer in a few cases, and they would provide upfront funding for projects that can demonstrate their worth.

That doesn't necessarily mean a detailed and rigid design document, given that part of the strength of an indie developer is their ability to innovate and use iterative design techniques. Rather, it's a matter of proving out the team and their ability to execute and refine solid ideas. That could be based on past products (spare-time, second-job type affairs), or based on a prototype. Some of the products an investment partner picks up will flop, as is the case with any such market, but the idea is that the investment partner is structured in such a way that even if 9 out of 10 indie projects they take on do not make a positive return, they as a company still see a positive return based on the 1 out of 10 that is a much larger success.

With the advertising/marketing partners and game agents in place, the likelihood of success only goes up. Additionally, for the savvy investment partner that invests only in indie developers with a history of past success (whether that means commercially-speaking, or in terms of potentially marketable ideas brought to fruition, or whatever the criteria is), the return is likely to be much higher. I could see several tiers of investment partners forming, with higher-percentage-taking investors that might prefer higher-risk investments, and lower-percentage-taking investors that only the "premium" indie developers with mega-hits under their belts could have access to. Arcen would likely be slotted with an investment partner somewhere in the middle of that spectrum, for instance.

What Would This Sort Of Indie Development Approach Really Change?
It would provide a way for indie developers to start small and stay small, which has many advantages as noted in Justin Vincent's article. I am dismayed that so many indie developers basically create a pet project as a way to then launch into the larger industry. Indie development shouldn't just be about launching yourself into AAA development. I started indie, and I want to finish indie, if at all possible.

What does indie really mean, anyway? It does mean smaller projects (not multi-million dollars), but also projects with a lot more creativity -- and therefore risk. It means having freedom to experiment, and less structure to the start of the development process. There is less known up front, and more discovered as you go. With expert developers, you'll get products that would never come about any other way. If you take Jonathan Blow, give him some money and some time, then stay out of his way, you can trust he'll come out with something amazing that he'd never create if he was working at someplace like EA.

Is it possible to be an expert indie developer? You bet. This subject probably deserves a post all of its own, but for now let it suffice to say that there are examples all around the industry. Even just purely from an ROI standpoint for investors and partners, I think that's something worthwhile to cultivate in a more structured way from the business side of things (let alone all of the larger creative benefits to the industry as a whole). The goal is to give the indie development business more structure and security, have encapsulated partners who are better at handling the things that your average indie developer is poor at, and then just let the indie developers do their work.

The investors and partners will of course want to keep an eye on the developers, especially the not-yet-fully-proven ones, to make sure they don't go off on a crazy tangent -- but otherwise they need to just trust that the developers are doing what they need to do to make an innovative product that people will want to buy. If a developer doesn't deliver, which occasionally one won't (these are humans we're talking about), then that developer will likely have an extremely hard time of ever getting significant funding again. So the onus is still on them to deliver a very solid product.

In the end, you wind up with a team of companies that are all focusing on what they are best at, working together to create, deliver, and market products that are superior to what one of the companies could ever have hoped to achieve alone. In terms of percentages, each might have to take a lower amount than they might otherwise prefer (this especially applies to the indie developers themselves), but given the increase this is likely to have on sales volume, the actual amount of revenue received by each party would generally be higher in the end. All of the businesses I just described in my imagined indie ecosystem should be able to be profitable, even quite profitable, if they do their respective jobs well.

And that's still with a $20 or less price point for the games, which is good for consumers. Also good for consumers: if indie developers have the time and money they need to be secure and just focus on creating amazing products, you'll see better products. That's a win for everyone.


Anonymous said...

Only problem is that you need to find a way to stop the VCs from gaming the system with the recoupment rules like they do in the record industry (where recoupment is calculated based on the royalty rate payable to the artist rather than the net income generated by the record and where advances can be recouped against any other future albums).

Otherwise dodgy accounting abounds and your indie developer will end up like the average record label artist and never see a single cent of their royalties.

Christopher M. Park said...

Well, no matter what your business is, you have to have confidence in your business partners, that is for sure. Having a good lawyer and accountant is pretty much a must.

Anonymous said...

I really like the article, especially the part about the agents. This is something we really need, and something that shouldn't be that difficult to figure out, as, just as you pointed out, we do have a proven model for that in book publishing.

On the other hand, about investors... As I see it, the problem here is that most investors would want some rights to have a say in what you do with their money, and then you're not that independent anymore. In fact, I'm afraid that this model would be almost the same as the traditional publisher / developer relationship was a few years ago (before publishers started to actually buy out most developers).

Christopher M. Park said...

Well, the tricky thing about investors is finding the right ones. I've worked with a number of small company investors in the past (indirectly, at least), and the right ones can be a real boon. The wrong ones, which you're likely to find as often as not I'm sure, can of course be nightmarish. I think that in my scenario it would be important for investment groups to basically become b2b brands based on their reputation in the industry, so that you'd know which ones you might want to work with (if they want to work with YOU, which is then always the next challenge as an indie). There's never a perfect solution, but I feel like an ecosystem like I described would get as close as possible to the ideal for companies that are not inherently self-funded in some manner.