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Opinion: Is It Time To Start Pre-Selling Games?
Opinion: Is It Time To Start Pre-Selling Games? Exclusive
January 25, 2010 | By Tim Carter

January 25, 2010 | By Tim Carter
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    24 comments
More: Console/PC, Exclusive



[In this in-depth analysis written for Gamasutra, freelance designer and Core Talent Games founder Tim Carter explains the concept of entertainment pre-sales, and proposes the game industry adopt it.]

There are basically two ways to finance a game: get a publishing deal or self-finance.

There are nearly 40 ways to finance a film. Why do we continue to insist there is nothing that games have to learn from film?

Let"s look at one key finance practice that exists in film (and television) but has yet to take root in games: pre-sales.

What Is A Pre-Sale?

You might think a pre-sale means to go onto the Internet, tell your customer base what game you are making, and then ask for them to purchase copies of it in advance.

That’s not a pre-sale in the traditional sense, at least not in film and television. And it is not what is referred to in this article.

A pre-sale is the purchase of the rights to a project for a certain territory and duration, prior to the project being made.

Who sells and who buys? In film, a producer sells (roughly equal to a game industry studio) and a distributor or studio buys (roughly equal to a game industry publisher).

Because a pre-sale is a purchase order, it can serve as collateral. The producer can “bank it” – borrow money and use this to execute on production of the film. There are often departments in major banks that specialize in lending this money, based on these purchase orders.

There are also completion bond guarantors, companies that specialize in insuring productions so that if something goes wrong, the costs are covered.

Pre-selling is a flexible but complex system that insulates core creators from the risks required to make a new film, which can make it possible to finance innovative titles. The game industry has nothing like it, and so the risk in creating an innovative new game title is almost always put on the shoulders of a developer.

What Makes A Pre-Sale Possible?

There are a few things that make pre-sales possible in film. If we pay attention to these, and try to implement them in our industry, we should be able to do pre-sales of games as well. These elements are:

- Sales data
- Production standards
- Insurance
- The blueprint
- Sizzle

Combined, these factors could mean that 1.) a developer would be able to sell a project before it is even prototyped, and 2.) a distributor would be able to place a purchase order for a project that exists only on paper –- even where production can be in the tens of millions -– and still know there is a solid chance the production will succeed (in a technical sense). And if it doesn't, the investment will be recovered.

Sales Data

In film and television, a pre-sale is possible in part because a distributor has a sense of how many units he is likely able to sell of a given title. He can make a fairly predictable “low-ball” estimate of this. Obviously everyone wants the project to be a hit, and go off the scales, but most don’t. A pre-sale is based on a likely estimate of the recoup of the project.

The distributor has this sense because he has sold so many projects in the past that he has a large database of case records to look at. He can essentially average the units sold in similar genres with similar calibers of talent and figure out how much a project will move. This database and long experience helps makes the pre-sale possible.

In the game space, certainly publishers and distributors -– even digital distributors like Steam –- can make these estimates now with some degree of predictability. They have several years and thousands of case studies to look at. If there is a willingness to pursue this route, a purchase order or pre-sale begins to be possible, provided the other ingredients are there.

Production Standards

The next element that makes pre-sales possible is the predictability of production. We aren’t speaking of whether or not a film achieves the mysterious qualitative “X” that means it will become great art. Rather, we’re speaking of whether or not there are standardized processes and suppliers that can be put together with a screenplay and, with a fair degree of predictability, lead to a reasonably high-quality film. If the film missed its aesthetic mark, at least you have a “well-made” piece of cinema that can be sold -– at least you have something.

In the game space we're facing the commoditization of production. Ten years ago if you were going to do a game, you would seriously devote a lot of time to making a new engine. Other engines had limited features made for different games; they were not being peddled as much as middleware; the documentation and support resources were often lacking; there weren’t large numbers of personnel trained in their use. Today, have engines such as Unity, Gamebryo, Torque and Unreal, engines with solid documentation and large pools of talent familiar in their use.

The same can be said about less tangible processes like asset creation, design, and project management methodologies.

Everything is becoming standardized, and thus able to be commoditized, in the game industry. This makes the process predictable, meaning the remaining central variable -– Is this design vision fun or not? -– can be tackled without all the other variables getting in the way. If a design does or does not work, at least you know you can monetize the actual game that is going to contain it: you can get it out there to sell units. This helps make a game pre-sale possible.

Insurance

Even given the above, it is still possible that a film can go totally off the rails, and all the money put into it end up as a mass of useless footage. Therefore, completion guarantors exist. These are parties who insure production of a film that has not yet been made. The ability of completion guarantors to do their job depends in large part on the commoditization of talent and production elements in the film industry -- the clarity of the key risk factors when it comes to making a film.

By examining these elements, a completion guarantor can quantify the risk and thus insure a production. Naturally this makes it possible for a distributor to gamble the many millions it puts in when it agrees to buy a film that does not yet exist.

As an example of how the film industry looks at risk, you might follow this link, which details Telefilm Canada’s policy on completion protection with a specific decision flow chart to identify the risk-level in a production, actual criteria for defining risk levels, and other conditions and information.

Why can’t core risk factors in games also be analyzed in a systematic way? I’m certain many publishers have done this already. If the completion bond guarantors were to move into the game space and work with game producers, they could accurately assess risk for new game projects as well. This would help make the pre-sale of a game project possible.

The Blueprint

After several decades of experience, the film and television industries have come to realize that the screenplay is a fundamentally essential element of any new project.

There is some myth in the game industry that holds that in the film industry a screenplay is a rigid blueprint for a film, that once it is written it contains all answers for making the film. Nothing is further from the truth. In a screenplay, three words can cost millions of dollars, involve a hundred people, and be interpreted in a thousand different ways. The screenplay is very much a living document that requires interpretation.

But the screenplay is solid enough in film that the parties that be respect it and will even purchase it, and it will become the focal point of planning for a film. It is commonly said in film and television that a bad film can be made from a good script, but a good film can’t be made from a bad script.

Thus, the screenplay makes a pre-sale possible. It is, essentially, a communication tool around which many core creators circle, core creators who add their creative stamp to the film that ultimately arises out of this printed blueprint. But as a communication tool, it is a central intent that makes it possible to attach a variety of external elements.

As a designer, I fervently believe the same can be said about games. Too little focus is placed on the design as a core blueprint. Reasons for this abound, and many game designs are badly written.

Game designs written by programmers might be terrible because programmers write in a way that machines can understand, placing every microscopic verb or noun lest the machine get confused. Game designs, on the other hand, need to be read by human beings. Presenting a bloated, unreadable 500 page document that explains every possible detail but does not shape the experience to teach and excite a human reader may be counter-productive.

Game designs written by artists might be terrible because they are too mushy and intangible, too conceptual and intent-driven, without defining specific execution in the form of concrete design decisions and game mechanics.

A balance must be found.

The game industry’s roots are in print. We can go back to H.G. Wells' instructions for toy soldier war games. Charles S. Roberts produced, in the 1950s, the first modern war games, printing and selling them via a mail order company under the name of Avalon Hill, forwarding concepts upon which many computer strategy and simulation games rest even today. In the 1970s, Dungeons & Dragons -– a set of rulebooks –- appeared and introduced the concepts of roleplaying upon which titles like World of Warcraft firmly rest.

Every board game in existence has a set of printed instructions and a printed graphic virtual space. These examples already demonstrate the financial worth of printed game designs. TSR alone has sold millions of dollars of printed gaming materials. These documents have worth.

Electronic games, conceptually, rest on the bedrock of this pioneering. (The computer graphics are surrogates for the printed graphics, although the computer does obviously make much larger verbal systems possible.) However, while the design element of games in the electronic space is still a communications-based one, it is largely informal. It is ad-hoc, often reduced to people simply talking and taking the “programmer’s shortcut” of going straight to code without documenting their design decisions.

A game design document is an intent-based communication tool. It is a living document at the front end of a game. That the final outcome it points to needs to be adjusted based on the many small decisions made during actual game development does not mean that it cannot form the central hub around which a deal can be made at the early stage. Film has already proven this over and over. This is why hands-on directing, not writing, is considered the primary task of filmmaking. Yet screenplays are still bought and sold, sought after and worked over. Patiently.

If we begin to treat the game design document as a salable literary property, it could open up a new market. This will require a lot of work and standardization, but it can make the pre-selling of games possible.

Sizzle

So we have covered the quantitative elements of risk, the basic question of “Can we get this thing in the can or not?” What about the qualitative risk, the “We got it made, does anybody want to see it?” question? A pre-sold script might be turned into film that looks pretty good, but is otherwise terrible. Even though it is produced to a high standard, it might bomb. How does a distributor in film address this last most intangible part of risk?

This is where we cross the line from rational to irrational. We start to think of things as if they were magic, like star power. Things that the rational, technical- and often scientifically-minded developers of games tend to dismiss as frivolous.

But are they?

To be honest, this magic forms a lot of the attraction of investors to the film industry. And it makes sense. If you wanted to make money on a ledger, you’d be better off investing in something like toothpaste or potash. Investing in people who are going to make a piece of entertainment initially out of thin air and claim that the masses will flock to it like droves? Any old-school banker would think you’d have to have your head examined.

Well, this is entertainment. Ultimately, it’s about magic. And, here distributors take a page from the centuries-old practice of art patronage. They bet on names. Creators. People. Because the content of what they make cannot be explained scientifically. (Art that is created in a systematic, pseudo-scientific way is deemed formulaic.)

So if the source of magic and mystery in a piece of entertainment can’t really be owned -– if it defies scientific definition -– then what is the most tangible, grasp-onto-able thing that can be defined?

That would be the key creator, the core talent.

This has been important throughout history, even in as collaborative an art form as film. Think of sports or politics. Leaders are identified, and when they walk in the room, or out onto the field, they have an aura, a magic.

We need to embrace this. It’s the sizzle, not the steak.

Distributors listen to this in film. This is why people with sufficient cachet -– people who merely attach their name to a project -– can get it greenlit and pre-sold. As far as risk assessment goes, this reality must help to mitigate the danger: after all, stars aren't stars by accident; they do their own risk-assessment. If a star attaches his or her name to a project, even a project being shot in the dead of winter in a period genre using lots of special effects, helmed by an unknown director, and with children and animals to boot (read: a high risk production) -– the star must believe the risk is worth the while, and others will listen to that assessment.

But most of what a star brings is their credential as a recognized leader at what they do: his aura is going to rub off on the film because he is (hopefully) going to give a great performance. That’s the magic.

And there is something else here. It sounds stupid, but investors in films want to rub shoulders with these people. They want to be a part of Art (with a capital "A") getting made. They want to attend the wrap party, the premiere, and the awards ceremony when the film turns out to be not only a financial hit, but a success -– an influence on culture.

So what do game developers need to do to develop this sizzle?

First, they need to follow suit with the rest of Western civilization in acknowledging the core value of individual creators. Recognizing studios or teams doesn’t cut it. Critics will search through a creator’s life to find out what was happening when he or she wrote this book or painted that painting or directed this film; even when that creator is, like Shakespeare, a member of a team.

When game developers act in a scientific manner ("we," not "I"), it undermines their own worth as creators of culture and entertainment. The atom of culture is the individual creator.

Game designers need to promote themselves as creators. They need to get agents to represent themselves. They need to have award ceremonies that celebrate them as individual creators. They need to be allowed to take off a year to think over their next project. They need to be able to have five or six projects in the works -– projects that vary wildly in subject matter -- because they follow an unpredictable muse. They need to be valued because they contain a magic spark.

This too will make pre-selling possible in the game industry.


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Comments


Alistair Doulin
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Great article Tim!



Our industry so often copies films in all the wrong ways and you've brought to our attention an area we _should_ be investigating.



I'd be interested to hear your thoughts on who you think could pioneer such a system within games. Valve is an obvious contender to me as they have the money and knowledge. I know that loans are given for game development even here in Australia, I just wonder what the reception from banks and similar institutions would be for such a system.

Tim Carter
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Alistair, any major publisher could begin committing to pre-purchases right now. At a recent GameON Finance convention in Toronto, an attendee from a major bank in Canada - a person whose department specializes in lending money based on pre-sale purchases in film and television - outlined how they do this in film and how they could do it in games as well. But I haven't heard of any publishers or developers taking them up on their offer.



A developer could go to Steam with a solid team, solid designer, solid design document, and pitch, and I'm sure Steam knows how many units of a typical similar game they would move. But that would mean Steam would take on the risk instead of the developer (though with the help of a completion guarantor - so that risk would be mitigated). Publishers/distributors in games seem risk-averse, and haven't stepped up to the plate to the extent needed in pre-sales.



Of course, to be fair, the process of implementing a deal from a paper design is not solidified yet. But time will amend that.



We attempted to execute a pre-sale with a major casual games publisher. We approached them with a solid design for a reasonably simple but we believed innovative casual game. We had a production partner with a track record. We had identified a source of insurance (like a completion guarantor) which was able to insure our accounts receivable in the event the publisher did not like the final product. We requested a purchase order from the publisher to trigger the process. With that we could have gone to the bank, gotten a loan based on this PO. Furthermore we could have banked the Ontario Government Tax Credits (also applied for a provincial grant, but that's besides the point), and essentially finance the prototype in a pre-sale manner. If the publisher liked it, they could have given us the full publishing deal (the advance), we would have made the remainder of the game, and everyone would have been happy. (If they didn't like the prototype, our insurance would have kicked in - but we didn't want it to go that way, naturally. Nobody makes money if the prototype doesn't work.) This is the way a lot of films get financed.



But the publisher drew a blank stare. They thought we were talking Greek - even though films are financed this way all the time, they just couldn't wrap their brains around it. They wanted to see an indie team with a working demo, and so on. Admittedly there was some risk, but with a solidly detailed design, and established middleware, I think that a lot of that risk is mitigated now. And we really were going to bust our ass to make the game work.



Anyway, to us the prejudice against even considering a pre-sale process we found to be truly a frustrating experience. Very narrow minded.



In the end, we have secured an indie team and are now executing on a self-funded prototype in the old-fashioned, developer-bears-the-burden manner. But this was a disappointing missed opportunity to pioneer a new way to finance games by simply borrowing an established method from a parallel entertainment industry.

Derek Smart
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It will never happen in games because of how the system is setup to favor publishers.

Tim Carter
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But it doesn't "favor" publishers to not facilitate innovation?



How is it an either-or situation?



Wouldn't getting innovative titles to the forefront favour both the designer/developer AND the publisher?

gren ideer
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This article sounds like it was written by a designer.



Designers are not the only ones in the industry who have potential for star power. Many of the earlier stars were programmers (think id) where having a solid team will lend to success. What about art direction which has a huge impact on how a game is received? Music is an obvious choice as well that can have an impact similar to movies.



Also, there are examples in film and tv that praise the studio and not the individual. Think of the weight the name Pixar has.

Tim Carter
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Gren, that is fine for 10 years ago. But it's 2010.



Also, if we can promote art directors, lead programmers and so forth as stars, then we could do this. But the key here is promotion on the terms of what the larger society considers culturally significant. Making a game engine that has a 25% boost in framerates with no additional hardware might be significant to developers or hardcore gamers, but is it meaningful culturally or does it draw kudos, etc?



I don't know the answer to that, but I know that parties with money would invest if there were real Star Power there. (That's why they invest in films - not just to make money, but to be part of something.)



This is also why we need to see individual names pushed forward. Because our larger society cannot connect with a team as a driver of culture. It has never done that. It sees culture as a product of individual people, whichever "department" they are innovating in.

Corey Sharpe
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Until people can wrap their heads around this proven concept for video games, it probably won't happen for a very long time. We need to ask ourselves, "Whose going to be the first to do this?" Once a couple of games are financed this way and are successful, then we'll finally start seeing some 'star power'. I just hope it'll be sooner rather than later.

Mark Cooke
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I know of at least one completion bond financed game that is in production today. So this form of financing is being experimented with in the game industry, at the very least.

Peter van der Watt
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I have a question.



If the game industry funding bodies are so narrow minded why not simply approach the film/tv funders and pitch then game idea to them?



Could one not assume that creative funders like that would be open to new revenue streams because in the end I'm fairly certain that they are in the business to make money first and be apart of the process second? Especially considering how games are affecting culture now...

Robert Green
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The one main problem I see with this approach is that games simply aren't that profitable. If the average game easily made a return, then I'm sure you'd have smart investors lining up to participate in such a model. As it is, profits are too uncertain, timelines are too often broken and success too difficult to discern from design alone (unless that design is the sequel to a recent successful game) for anyone to want to risk millions of dollars on it.

The only way to mitigate this risk is to fund a number of different games in different genres. And once you do that, you'd realise that you can cut costs by sharing some resources accross the projects. And then you're a game publisher.

Derek Smart
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@ Mark



Completion bond financing has been around for many years now. I personally know of at least four (or maybe five) games funded that way. Its not a new concept in gaming. Even putting the funding in escrow and paid out on milestones, is a similar strategy that is in play even today.



@ Robert



You hit it right on the head. Which goes back to my first post about how publishers "game" the system to their favor. Can we all go home now?

John Petersen
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Why pay off the creator when all you have to do is steal it and take their cut too?



I'm pretty certain many games are pre-bought... Investments. Alot of depends on who you know or who you do.

Anthony Hart-Jones
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I really think this idea has a lot of potential, once you get that first break. It seems like the kind of thing where you need to get one publisher to try it and succeed, then the top brass at the others will start asking their people why they are not doing it too.



The fact that you could take the traditional route, even if it was disappointing that you had to, actually adds a lot from my perspective as a designer. Pioneers you may be, but a viable plan-B never hurts.



One thing I would say, a stereotype I know, is that innovation seems to be the domain of the indie and that often means some major risk on a creator or team with no cachet. EA would not have funded Crayon Physics or World of Goo, if only because it is not something they fully understand. The trouble is, the next big indies are going to have to trade on your reputation. The risk is smaller when you are backing something with a $5k budget, but so is the pay-off and surely that will affect the chances of getting backing or even offering it yourselves...



I am really excited to see where this goes next, if only because I think the industry does need a bit of new blood and that will likely come from a change in the funding department.

Tim Carter
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@ Peter: There is a cultural difference in the way film does business vis-a-vis the way the game industry does.



Film looks at its business heavily as an entertainment industry influenced by years and years of art patronage. Go back to theatre, go back to fiction writing, music, even visual art. It's an industry about more than money - it's about culture and "sex appeal".



Games are heavily influenced by retail. The game industry sees itself as pushing packaged goods. Because of this there is a lot of blandness in games, vis-a-vis culture.



I think that is the fundamental difference.



We are trying to make that inroad now, but a fundamental problem is this cultural disconnect. If parties from the game industry can speak more on terms that film understands, I think they will get their attention. But ultimately I'm convinced that games are not so far away from film - both are screen-based entertainment. It's just a matter of translating the deal into something both games and film can get.

Joe Tringali
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The issue is not "Games and Film are similar", it's that games and film are created in completely different ways, with completely different risk areas.



For example, someone who funds a made for TV movie, understands the process from start to finish. They pay a writer, hire a crew of people that have specific jobs, and audition actors. Once they're chosen, and the script is there, they shoot it, everyone knows exactly what to do, and the product goes to edit. There is a specific market for the movie/tv/dvd, and while it can certainly under-perform, that happens on the merits of the product. There are always exceptions, but actually CREATING a film is not a terrible risk.



Games are the opposite. You're funding (sometimes) new technology, a longer development cycle, with an unfortunate track record of schedule slippage and competing for a market that supports blockbusters, and few (if any) can predict them. Instead of funding something on the merits of the director / screenwriter / actors and assuming the rest of the crew will do their job, you're funding it on the merits of a complete development team, who are lucky to have a few previous titles together. You have no idea of the key developers involved in previous titles, and if they're still even with the company. You're also involving a business entity (the development studio), and trusting them to have enough business savvy to not fall apart while developing the product. In film, you're investing in an individual product, and paying the staff to help you put it together, and then they leave for the next opportunity.



I personally feel that we should move away from trying to copy other forms of entertainment funding, and start really looking at what's relevant to games. The core problem is when your financiers are also distributing, which is why publishers are rich, and most content creators are not. Publishers hold so much of the leverage, they're funding development, marketing AND control if/how your product gets to market? With those terms, how could anyone expect a profitable deal?



Digital Distribution is changing some of that for the better, but developers need to examine the other 2 key areas, and do what they can to address the risk. Sometimes the answer is self funding, sometimes it's not, but we cannot expect publishers to front 100% of the risk and then offer a high royalty. There are big publishers that offer distribution deals, but expect a completed product and some form of marketing investment.



Final point, developers need to stop expecting publishers (or anyone) to invest in "art" for the sake of it. Games are a business, with a proven demographic and long list of games that failed because of niche, completely unmarketable ideas. Products sell because they're marketable. They can still be unique, innovative and different, but they need to appeal in some way to people who actually buy product on the specific platform. Until devs realize this, they're not going to secure the money necessary to be successful.

Gregory Kinneman
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A well written article enunciating the differences between how films and games are pre-sold.



@ Robert



While many games are not profitable, there's the occasional Rock Band, CoD:MW 2 or The Sims. In the music industry 90% of bands don't make a profit, but the other 10% makes up for that. Often film studios will have many movies that do nothing original and exist purely so the studio can finance an artistic film that will probably flop, but that might win them some awards. In that way the studio both earns money and reputation.



Tim's idea could be great, but I worry about the star-power that a programmer or designer can have. It's far easier to worship a movie star who appears before your eyes talking to you than someone who spends months toiling to create a thrilling game. Almost nobody knows who edited The Matrix, but the movie would be awful without them. Everyone knows the stars and (maybe) the directors.

Eric Carr
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Hmm, interesting idea. I would really like this to work. The issue I have (other than the phrase "the sizzle") is that a Game Design Document isn't worth anything by itself. They change, they flow and most importantly, there is no guarantee that what works on the page will work on the screen and be "fun" or "interesting" or whatever word we're using now.

Heck, even having "Star" players doesn't guarantee anything. Spore had top talent and still went over budget.

Having said that, I want this to work. I really do. But due to the circumstances inherit to our industry, we're going to have to find a method that works for us. We can't just copy film.



@John, "Why pay off the creator when all you have to do is steal it and take their cut too?" Um, no. Just no. Hasn't anybody told you that ideas are worthless by themselves? Execution is *everything*.

Anthony Hart-Jones
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@Joe



I am not sure that I agree with the whole attitude that games are so different from film in terms of the new technology. We have Epic and the Crytek pushing the envelope and matching what Weta and Pixar do for film, but the average games studio is using standard technologies these days precisely because it is a good risk-averse strategy.



Where I agree wholeheartedly is the track record angle; games studios change staff almost as fast as the recruitment agencies can find new candidates. I think this is actually more to do with the games studios being monolithic entities that exist separately from their staff. The closest we have to the ad-hoc teams with fixed management that film has... probably EA Sports, with their annual cycles of hiring and firing every time they make the latest Madden/NHL/FIFA.



What I think Tim and company are trying to do is to make an ad-hoc studio each time so that it matches the business model they want to follow. It's not about making the film industry's model match the games industry's development process, it is about making a games development process that will match the film industry's model. I think it would be nice if it worked, which is reason enough to support the idea.

Joe Tringali
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@Anthony



I personally think it's better to find a more advantageous funding solution that fits how things are done, as opposed to change how things are done to match with another industry funding methods.



It would take a cataclysmic collapse of the current game industry to change things around to match the film studio system model. There are also big hurdles in place including, requiring one-platform, unionization, standardized technology, and a completely new business model / position for publishers. There is too much money to be made by first parties and publishers to change how things work.



I've been involved in running a dev studio for a long time, and I'm just not a believer in ad-hoc project development. Team synergy is so critical in developing great games, and you don't get that by pulling together 100 random people, even talented ones. I've seen developers hire 50-75 people at once to build a console title (which is as close to ad-hoc as the industry has atm), and most of the time the end result is a fiasco.



It's fun to debate opposing points of view, and definitely enjoy reading Tim's articles.

Reid Kimball
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I think it needs to be reiterated what Tim tried to say regarding film screenplays and in general what film production is like. Screenplays are like a blueprint guide, a very clear, easy to follow guide that carries a lot of weight. The rest of the film crew, from director to costume designer can read the screenplay and interpret what needs to happen to make the film work.



There is room for them to reinterpret it, suggest changes, additions or deletions and it does happen, ALL THE TIME. A director can get a brain fart at 3 AM and the next day shoot a completely new scene. An actor may read the script knowing which part she is to play and then suggest several lines of dialog be changed. The script may be updated and then the scene acted. But then in the moment, she utters a completely different line of dialog. The director, may accept or reject it.



Then there are the special effect heavy films, like Pirates of the Caribbean. When it comes to developing the technology that powers the facial animation tools, then the production processes between film and game blur even more. The only difference is the medium it is output to, frames of film or bits of code.



All of this is exactly like game development. Until more people can see and appreciate the similarities between film and games, the industry won't be able to use new funding models and we'll still be stuck with the few options we have.

Raymond Chua
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I'd like to expand on Reid's comment with an over simplistic example...



Animation follows a closer analogy to games. For instance, Pixar has a group called the Brain Trust that creates and directs the story. That's like game designers coming up with the concept. Believe me that even this process can be as iterative and nonlinear.



Then a core team of technical animators, character designers, and storyboard artists come together to break down the requirements and discuss major challenges ( hair rendering, subsurface scattering, fluid dynamics etc.) A game will have many hurdles like addressing real-time performance and game play mechanics.



For games and animation: Can it be done with the tools we have now? Pixar and the Avatar team both had to develop new technology from scratch to achieve the creative vision of their directors. Game development certainly has elements of no compromise - shipping a game that doesn't crash or suck.



But in both cases, games and animation are entertainment products and production of both have heavy risks involved. Mitigation of risk involves improving the production process and financial management.



Software developers will try agile, scrum etc to better the odds. Maybe a proven game engine will fast-track the process. I'm sure many of you know more about this than me. Done right, it's on time and on budget, and everyone can rejoice. There's a lot of software R&D for animation studios too.



Developers and animators the same want to achieve a positive end-result. The end-result is what really matters. Nitpicking over industry difference is purely academic. Isn't it interesting that games are becoming more cinematic and films are becoming more immersive? Regardless of industry, I want to structure a successful venture and will use the approach that gets me that end-result. What's so wrong about borrowing a good idea elsewhere if you get that result?



Ray

Raymond Chua
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Here's the crux...



Financial management, however, is the weird beast in the risk equation. It's about managing the business, not the product.



Completion insurance and presales are merely tools. A presale demonstrates to the producer that someone will buy it after it gets made. Why build it if someone won't buy it? Risk is reduced when you have a buyer before significant expenses are initiated. This approach has helped indie film-makers with a track-record finance their project. No presale means shelving the project until there's interest later. Can the game studio use presale? Tim attempts to explore this and addresses some points.



For instance, a presale works by presenting a sales package: script, budget, schedule, key talent like director, casts etc. It's basically a business plan. The film industry has a developed market for reviewing these business plans in order to achieve a presale. It's so developed that even spec scripts (without the packaging) can start bidding war between major studios in Hollywood. So presales depend on a mature market that understands its risk and potential.



Most comments so far acknowledge this: that the game industry is quite young, but is it too late to jump on this bandwagon? Let's address this carefully.



Presales require certain economic and market conditions. Even completed films can't find buyers for dozens of reasons. A film genre might be saturated. The actor is getting bad press so buyers aren't hot for the property. Bottom-line, distributors lack the confidence to sell this film at a profit. So presale isn't the panacea. It will depend on the appetite of buyers. The so-called middleman (distributor or publisher) takes on risk and expects to be financially compensated. A presale merely gives the middleman pre-emptive rights to a hot valuable property before someone else grabs it. But the distributor needs access to capital first before it can pre-buy.



Distributors have a process to distribute products to the marketplace effectively. This process had revenue potential that the investment community examines and finances according to their valuation. Games are influenced by the retail model so valuation follows that path. That is, game publishers need a completed product to sell first before it can feed the retail chain. A game is easy to manufacture, but hard to invent, so financing it is limited and risky from that perspective. Films have multiple channels for distribution. Each channel funds the film by squeezing it's rights. Thus financing an unmade film is spread out. That's how distributors mitigate or diversify their risk.



However, markets aren't static so the risks keep changing. The downside to presale is the dependence on exclusivity. Tie up all the rights to a hot property and exploit all the territories. Great idea but this changes with digital downloading doesn't it? How you do regulate the internet? How do you protect parallel markets? If presales are drying up, blame the fact that you can get content free or cheaply online. Soon everything we consume will be digital. For some, digital equates cheaper. Thus the long-tail economic forces drive down the marketplace and its ability to finance. We can't create segmented markets for the same digital content easily.



The true challenge today is that all of us make digital content. The indie film-maker and musician are fast learning that nothing is what it seems now. The old artists have benefited from a mature market that financed their creative whims and extravagances with generous advances. Digital distribution marks the end of the rich middle-man and his proprietary distribution network. The artist must directly reach the audience, be it through iTunes or whatever. That means self-funding their creations too. Digital distribution is like a limitless retail shelf. It only cares about filling it with new stuff and riding that long-tail economy. Think about it: When does a retailer ever finance the potato chip maker? No it's about revenue sharing or retail mark-up.



Here's how the game industry can be innovative too. Digital distribution. Micro-transactions. Freemium or free-to-play. New business models offer alternative revenue models or channels. If a game studio employs these models, that's direct marketing to the consumer and cuts out the middle-man. Any boost in revenue will self-fund future game developments. But the game studio will become sole distributor and developer of their own products. Similarly, the old Hollywood studio model vertically integrated the whole process. This factory approach encouraged formula driven movies. Doesn't this sound like game publishers today? How do you run all these business units profitably and not compromise on quality or originality? And if you're starting a new game studio, you still need to raise funding or bootstrap your first game. That a tough hurdle. And it's not flexible.



In the end, Hollywood decoupled the business units (distribution, talent management, content creation). Each specialized unit can independently finance a part of a film or television show. Units are assembled and reassembled to create new products - all still managing risk. Now it's easier to address the diversity of entertainment. Indie art-house, blockbuster, children animation, horror, comedy, you-name-it. Consumption of media is fast moving. The industry must be agile enough reach their fickle audience with the appropriate content.



Ray

Mark Harwood
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Interestingly enough, there was an interview on the radio last night suggesting that financing a film with presales of foreign rights rarely happens anymore.



http://www.npr.org/templates/transcript/transcript.php?storyId=12
4535538



DAVIES: So an independent film, when its made, there is no assurance that a major studio will distribute it. So how do people finance independent films?



Mr. EPSTEIN: Well, there's been many different attempts to finance independent movies. Sometimes it's rich people finance independent movies. People like William Randolph Hearst made films back in the 1920s. For a long time they were financed by selling the rights to the film in foreign territories - Germany, France, Japan. And by selling those rights and then borrowing money on the contract that they would be paid for those rights, they were able to finance the movies. But this has become exceedingly difficult in the last few years. And this year, 2010, its almost impossible to find enough presales to finance a movie.



DAVIES: So in other words, you would sell the assurance that once a film finishes its American run, that the foreign rights would belong to whoever is putting up the financing and then use that promissory note, in effect, to get a bank loan or some other kind of investment. But you dont really know at that point what kind of success it'll have and whether itll have a foreign audience, do you?



Mr. EPSTEIN: Well, you dont - you know, if youre a foreign distributor, you dont have to put up any money. You just sign an agreement that if the film is finished and if it plays - sometimes as a contract it has to play in American theaters - you will put up so much money for the rights to that territory. Let's say Germany. So you agree to pay $10 million for the German rights to the movie if it's delivered. Then the movie producer has to go to a bank and say, I would like to borrow $10 million on this note. The bank will say, well, how do we know it'll be finished? Then you have to get a completion bond from essentially an insurance company which says that we guarantee that the movie will be finished, and that bond might cost you another million dollars. So it's a very complex process, raising money, and this process made much more difficult recently because of the end of, say, the DVD market abroad or the shrinking of it abroad.



The end of independent distributors in America - some people are no longer sure the movie will be released in America, so foreign distributors dont want it -and the growth of local film industry, all these things have come together, so these days it's very hard to finance a film other than from investors or angels, however you want to describe people who are willing to risk money for the pleasure of seeing a film made.

Tim Carter
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@Mark Harwood: Some of the challenges pointed out there are native to film, such as the shrinking DVD market or the decline of independent FILM distributors. Those issues don't apply to games. Different marketplace.



Next some of the problems he points out are classified as "problems you want to have". For example, if you get $10 million for pre-selling into the German territory, but pay $1 million to the completion bond guarantor, that's still $9 million to make your film. I don't know about you but having $9 million bucks to work with isn't a bad thing, all things considered.


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