The Birth of a New Game Studio,
Part One: Humble Beginnings

In the old days, crafting computer games involved a few thousand dollars, and one or two guys writing tight code in some dark, tiny room. Today games have become extremely sophisticated pieces of software crafted by large teams with multi-million dollar budgets. Game companies have left the tiny, dark rooms worldwide and some of them have entered the stock market.

Exactly one year ago, after our first visit to the Game Developer's Conference, we decided to take the big leap and started a new game studio in Barcelona, Spain. We had been interested in the industry for years, and GDC 2000 was the spark that helped us make the move. As you can imagine, we are not EA or id Software... at least, not yet. We really began moving in early September, and just recently we have reached a stable status. Still, the last year has been a crash course on teamwork, finances and project management. We have faced problems that the big players wouldn't even notice, but which are certainly familiar to other newborn studios. Now, we are coming back to GDC 2001 with some working code, some nicely done art, and great expectations.

Before we attend GDC for the second time, we think it might be a good idea to explain how our development studio was born, and the problems we found along the way. By sharing our story firsthand, we can become an example to others. If it all works out, and our titles hit the shelves sometime soon, the series of articles we are starting today could become a useful reference to industry newcomers. If it all goes wrong, the value of these articles will be even greater, as an example of what can go wrong.

The first entry in the series provides some background information: market research, teamwork and product design and architecture. Future articles will focus on industry events, technology, art, and more. The road ahead is long and winding -- let's get started.


Background research

Creating any kind of company is always a complex adventure, and some advance planning is required. Does your idea really make sense from a business standpoint? Will you eventually make a living out of this? Many companies start just out of pure enthusiasm -- quite understandable in a creative industry dominated by young professionals. Still, it is a good idea to dedicate some time to write down the formulas that drive the business, and get a broad feeling of what we are really doing. Later on, this base research can be helpful when the time comes to make important decisions.

In our case, our first discovery was that games work more or less like books (I was lucky to know the book business from a past project). There are two parties: the writer and the distributor. Writers work on a royalty basis, getting more money as sales increase. The big difference between books and games comes from the fact that games take several people (and maybe more time) to create. The average game can take no less than 25 people working 18 to 24 months. So, paying these big teams until the royalties arrive seems a big issue. Luckily, we saw that advance payments can be negotiated with the publisher, to make sure everyone is OK until the game ships.

The business model for a retail game can be roughly expressed in the following terms: leaving taxes aside, the distribution channel (Electronics Boutique, Media Play, etc.) gets about 50 percent of the total price. The other half is divided between the developer and the distributor. The statistics here may vary, but the developers seem to get between 10-25 percent of the total depending on the risk and appeal of the title. These numbers are usually decided depending upon the developer's track record (less royalty for new companies, logically) and projected sales. Getting a good deal is more or less like getting a loan from a bank: the more reliable you are, the better the conditions.

While researching this we also discovered that a successful title sells about 350,000 copies, and only a few games go beyond one million units. Top-of-the-line games such as Final Fantasy on a console or Myst for PC go way beyond that, selling in excess of six million units each. Sales seem to depend on how good the game really is, and can also be deeply influenced by the marketing used to attract the audience. Choosing a good publisher is a must: if you do some pretty basic math between costs and sales (and considering the percentage the developer gets) you will discover that the break-even point can be between 100,000 and 250,000 copies sold.

As we are based in the sunny Barcelona, Spain, we also did some research on our own country's potential. We learned that Spain has a market penetration of PCs of about 20 percent (versus 50 percent in the United States). Although this is a bit disappointing, the main problem in Spain is software piracy which, depending on the source you listen to, ranges from 50 to 70 percent. In any case, this is definitely not good news for any new game studio wanting to make a living. Finally, we found out the very important fact that a AAA game sells about 100,000 copies in Spain. Thus, creating a studio only for the internal market does not seem to be a wise move: under optimal circumstances you will barely reach the break-even point, and never pass beyond that. All this analysis led us to decide to give the company a global focus, and declare that exporting is definitely the way to go for us.

One might ask why we start a company in such a hostile environment. Spain does not seem to be a good place to sell many games. Well, strictly, that is true. On the other hand, maybe it can be a very good place to create them: production in Spain can be significantly cheaper (about one third less) than in higher-cost countries such as the United States, while return on investment will be the same. In other words, salaries and fixed costs are lower here, and theoretically, the game will generate the same return as if it was done in one of the more expensive countries. That's the same reason why some big-budget Hollywood movies are filmed outside the United States.

Also, Spain has a long history as a videogame producer. In the early 80's many companies emerged, and made Spain one of Europe's main game producers. Now, the tradition lives on with companies such as Pyro Studios (Commandos: Behind Enemy Lines) and Rebel Act (Blade of Darkness), both selling quite well worldwide. The main problem for the Spanish industry has traditionally been a lack of investors willing to take the risks involved with such projects.

So, our research results show that we need to sell between 100,000 and 250,000 units to become profitable, and that the exact number depends on the negotiations with the publisher. As the break-even point cannot be reached by sales in Spain alone, the company has to start from the very beginning with an international focus, trying to reach a worldwide audience. This simple formulation has helped us a lot to focus our vision.

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Product Design