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Can Film-Inspired Project Financing Work for Games?
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Can Film-Inspired Project Financing Work for Games?

September 20, 2012 Article Start Page 1 of 5 Next

In this extensively-researched piece, former Ubisoft associate producer Yann Suquet, who has a masters in corporate finance, takes a long hard look at precisely how films are funded and pulls apart the question of whether the same could work for games.

Publisher financing has been the dominant financing system in the video game industry for more than 20 years, and is a system we're all very familiar with. It involves two players: the publisher with the money, the distribution connections, and the marketing savvy -- hence the power -- and the studio with the ideas and the development expertise. Forgive this Manichean picture.

This financing system is a subject of much debate in our industry, and that mainly on two points. The first bone of discontent is the milestone system. Typically, studios that sign a development contract with a publisher will sign it in one of two forms.

The first one is called a "work-for-hire" contract, and is where a publisher contracts a studio with the development of a game and pays a previously agreed upon fee, upon delivery of milestones.

The other is the "royalty advancement" model, where a studio pitches an idea to a publisher, who -- for the argument's sake -- agrees to finance the development of the game. The publisher finances the development through royalty advancements that are paid out in installments against the delivery of milestones.

This system causes two problems for the studios. The first is that it can create a gap between a studio's payables (studio overhead costs and salaries in particular) and receivables (payments from the publisher). Studios have recurring expenses but less predictable revenue: if a publisher wants to have a change made and decides to withhold the milestone payments until this change is made, the studio is left in a tough cash position. With this system, the studios can be left at the financial mercy of their publishers.

The second problem is that the milestone system severely constrains game development for the studios. Under both contracts, the publisher retains a large part of the creative control and makes sure his vision is carried out with regular control through the milestones: he hedges his risk by making sure the development is going according to his plan -- which is understandable since he's paying for the development, marketing, and distribution. This prompts independent developers to complain that their creativity is being restricted and that their work is transformed into mere execution.

The second point of discontent is a direct expansion of the previous one, and is a question of the overall balance of power and reward between publishers and studios. The publishers bear the financial risks for the project so they tend to take a large part of the revenue and the credit, and retain ownership of the Intellectual Property (IP). The balance of power and reward clearly tilts in favor of the business side of the game industry, and not in favor of the creative side.

It seems only logical that people would start thinking about financing their games with alternative financing methods that could address these issues.

Concerning the issue of milestones, one often stumbles upon opinions of industry professionals across the internet who ask if it wouldn't be just as good if games weren't financed on a milestone basis. Wouldn't game development work just as well or even better if a financier -- be it a publisher or someone else -- trusted the team they invested in with the development of the project?

The problem with that question is that it has no answer. Of course, you might get lucky and successfully finance a project where, let's say, the financier pays the studio the whole budget upfront, never intervenes or controls the development process, and only receives the final product at the agreed upon date and to the exact specifications. You might even get luckier and finance a streak of successful projects like that.

However, there is no way to draw a definite conclusion as to which ones are good financing methods and which ones aren't. A series of successful investments is not proof that a particular financing method is good: the part left to chance is just too big.

This is also true for publisher financing. Publisher financing is just the result of decades of accumulated experience in game development, so one might think it's the most adapted model for financing games the industry has come up with, yet. But that doesn't make it the best method and it shouldn't stop people from looking for alternatives.

The question that can be answered, however, is the question of balance of power and reward. With a specific financing model comes a specific structure or contract that defines the rights and duties of the parties involved. By thoroughly analyzing a specific financing method, it is possible to draw conclusions as to what would happen if it were applied to game development today.

That is what this article ambitions to do, concentrating on a financing method that is widely and successfully used in the motion picture industry today and which therefore raises much interest in the video game industry: project finance.


One of the most prominent critics of publisher financing in recent times has been NESTA, the National Endowment for Science, Technology and the Arts. NESTA is an independent body with the mission to make the UK more innovative. In its report The Money Game: Project Finance and Video Game Development in the UK, dated February 2010, NESTA argues that while publisher financing has had largely positive effects on the industry, it is also hindering its further development in certain ways. It further argues that project finance like it is done in the motion picture industry could solve many of the addressed concerns.

(In this report, NESTA focuses its argument on the UK, but its arguments are relevant to the industry in general.)

According to NESTA, publisher financing has been beneficial to the video game industry in three ways:

First, publishers have been the primary source of funds to an industry worth an expected $78.5bn in 2012 according to Reuters, and that represents tens of thousands of jobs worldwide. NESTA recognizes that the staggering development of the video game industry was almost exclusively made possible thanks to publisher financing.

Secondly, publisher financing has provided developers with a high sense of security, as publishers rarely back out of signed publishing agreements with development studios. The developers can therefore count on a regular and secure flow of funds as well as on more generalized support (relationships with distributors that ensure visibility for the game, etc.) over the duration of their projects.

Finally, publisher financing has been around for 20 years. Relationships have been built between the parties, and in particular between publishers and retailers, reducing to some extent the risk of shipping a game to market -- which benefits everyone.

While this is all positive, NESTA further argues that overreliance on publisher financing might actually prevent the (UK) video game industry from unlocking its high growth potential.

The first major drawback, according to NESTA, is that in this type of financing structure, the publisher retains ownership of the IP, which is "a crucial source of long-term value". The direct consequence is that it is getting harder for (UK) studios to "[leverage] their creative talent and ingenuity … at least with publisher-backing". Additionally, NESTA argues that the studios do not get a big enough share of the profits of the games they developed.

Secondly, NESTA argues that publishers do not commission or finance enough innovative game concepts, and that that financing policy hinders the industry's creativity. As the biggest financial risk lies with the publishers, they would rather finance proven concepts, all the more since development costs have increased dramatically in comparison to the previous console cycles.

This trend is actually amplifying late into the current console cycle: in an environment dominated by strongly established IPs, large publishers are commissioning fewer original IPs, as the investment and risk to establish a new IP are considerable. For example, in an interview with at Gamescom 2010, Alain Corre, executive director at Ubisoft, stated that "especially in this part of the cycle of the consoles, we [at Ubisoft] are cautious now to introduce new brands". So the trend is for publishers to commission fewer original IPs as the development budgets escalate, and to take even fewer risks late into a console cycle. According to NESTA, this makes it very hard for innovative studios to leverage their potential.

Finally, while publisher financing is adapted to the development of console and PC games, NESTA argues that it isn't to the development of social and online games, as they "require substantial support and a sustained stream of content updates after release." Hence publishers would rather have their in-house studios develop those games. As a consequence, development studios that do not have access to other sources of financing will be unable to seize growth opportunities in those promising markets.

In NESTA's eyes, publishers are, to some extent, crippling the video game industry. In order to solve this, "new financing instruments are needed". These instruments are already being effectively used in the motion picture industry, a more mature creative industry than video games. Indeed, "[the film industry] offer[s] production companies a wider range of financing options, including project -- as well as corporate -- finance drawing on external investors".

External corporate financing is basically your average financing method for a company. The company will finance itself, either through debt (from a bank or on the financial markets) or equity (issuing shares, usually on the financial markets).

For NESTA, introducing project finance instruments would have very positive consequences on the video game industry, as they would allow the studios to leverage their creative talent and find an alternative to the constraining publisher financing deals.

For one, in a project finance deal, studios would be able to retain their IP. NESTA assumes that external investors are not interested in keeping the IP; as such, the studios could then exploit it through different channels and reinvest the proceeds in innovation and growth.

Secondly, external project finance could be a solution to financing riskier projects. By co-financing a game, both the publisher and the financier reduce their financial commitment (hence their financial risk) so in theory, they could finance more innovative, riskier games. Their investment would then roughly have the same risk profile than before.

Finally, project finance would help our industry grow by attracting capital from external financiers. Indeed, NESTA argues that project finance is a better way to invest in the game industry than buying a publisher's stock. The performance of standalone projects is easier to monitor than when projects are bundled together. When investing in a publisher's stock, financiers invest in the company itself, which has numerous projects; hence they do not know how their money is spent and if it will provide the expected return. By investing directly in a project -- in this case a game -- they will have a better overview of their investment.

NESTA sees film-inspired project finance as a way to unlock huge potential for the video game industry in the UK and by extension, for the video game industry in general.

But can film inspired project finance deliver on NESTA's hopes?

To answer this question, this article is going to first explain the basics of project finance before analyzing how project finance is applied in the motion picture industry. It will explain its mechanics and highlight the reasons that push film studios and project financiers to sign that kind of deals. It will then draw conclusions as to what the results could be in the video game industry.

Article Start Page 1 of 5 Next

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