In recent years there has been a transformation in the way people think about games. As development costs skyrocket and video game companies compete for the same customers, more studios are finding success in markets that traditionally have not been well served by the industry.

The traditional approach to video game development and marketing is no longer working, as can be seen from the recent problems experienced by Electronic Arts and others. Under the new paradigm, large game companies have to rethink the way they do business. The most successful ones are partnering with small innovative studios, creating tools that help facilitate community-based development, and focusing big-budget resources on their most successful franchises.

Bigger companies have to place bigger bets, but have less control over distribution and competition in an increasingly diverse marketplace. Today big bets are riskier and the payoffs are potentially lower, as top-down companies of the 20th century are being transformed by industry ecosystems dominated by free agents and startups.

In a market saturated with thousands of games, only a few titles will generate the sales needed to make big budget development ventures profitable. Studios that deviate from proven formulae or offer too many game titles risk losing considerable sums of money as they try to compete with low cost startups.

Major developers are under unusual pressure to deliver the next blockbuster, as the failure of a big budget title has the potential to bankrupt a company. In such an environment, most publishers will continue to fund safe bets (games that use proven engines and follow well established story lines).

Some large developers excel at developing partnerships with small independent studios that are leading the way in innovative game design. The spectrum of games developed by these independent studios often push the boundaries of technology and redefine the way we think about games.

Independent studios, like independent filmmakers, are typically more innovative than large studios. What they lack is the funds to bring grand ideas to fruition. Large publishers and studios need to enter into partnerships with independent studios as a way to build relationships with some of the brightest minds in the industry.

This use of open innovation recognizes that large companies can no longer conceive, design, develop and market new products and services all on their own. No firm has all the knowledge capabilities, money or time needed in today´s costly environment. Firms can and should use external ideas as well as internal ideas, and internal and external paths to market, to advance their technology.

[Innovation and Marketing in the Video Game Industry: Avoiding the Performance Trap by David Wesley and Gloria Barczak will be available in print and ebook editions in May 2010. It is currently available for pre-order on Amazon.]