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Games Fund or Publisher 2.0?

Are indie funds just the old-fashioned publisher model by another name, asks Jonathan Newth

As the market for games continues to grow unabated across a range of new platforms there is a new ecosystem of businesses jostling for position in the fast evolving market. The well established value chain and associated business model of developer - publisher - distributor - retail (with platform sitting alongside at all points) no longer makes sense in a digital world; many would say it never really did.

Over the past twenty years there has been much talk of film finance production models holding out the promise to IP creators of being able to fund their titles independently of the traditional game publishers. This would allow them to take more ownership of their destiny, including, crucially, retaining ownership of the IP. This model never took off and was at its heart flawed.

The raw statistical chance of recouping an investment in a mobile game is laughably small

Traditional games publishers fulfil a number of functions; only one of which is project finance. Early in the games market ('80s and early '90s) this was essentially cashflow finance, as the predominant commercial model was advance against royalties and in a high proportion of cases royalties exceeded the development cost. As the market grew it became more hit driven, development budgets soared and the expectation of royalties became just a hope for most developers.

From the publisher perspective they were now actively managing a portfolio of investments, with the big hits paying for the operation of their ever growing businesses, as well as the misses. Publishers needed to own IP in order to control their businesses and decided which titles to back and which to just push out the door. Ultimately the value of a publisher became the portfolio of IP it owned and controlled.

So why did games funds not provide a viable alternative financing mechanism for indie developers? At its heart an investment fund balances risk and return; funds tend to fall into two categories, high risk/high return and low risk/low return. In order to generate a high return a fund would need to back a number of hit titles and take a substantial portion of the upside (and the upside for sequels).

The only way to realistically manage this is to fund and undertake marketing and actively manage the portfolio, this includes managing how titles are positioned at retail. This means high risk funds realistically have to own IP to make sense; suddenly a high risk games fund looks a lot like a publisher. The low risk fund model either requires the level of finance provided to be comfortably less than the value of the asset being created, which in a hit driven world means only partially financing the project, or for the developer/publisher being funded to have a strong enough balance sheet to be able to repay the loan should the game not make its money back. This has ruled out the majority of indie developers.

In the end the game funds that were established found a role providing off balance sheet finance to medium to large publishers who wanted another financial management tool.

Over the last twelve months there have been a spate of new mobile game funds targeted at indie game developers including W3i's fund, StarFund and TinyFund. So have some of the fundamental changes of the last few years altered the value chain and market ecosystem in such a way as to make viable non-publisher indie game finance and to give indies more control of their destiny?

As the market grew it became more hit driven, development budgets soared and the expectation of royalties became just a hope for most developers

I think the answer is probably not. Whilst development budgets are substantially lower on mobile than on console, the market is even more hit driven. The raw statistical chance of recouping an investment in a mobile game is laughably small. These new funds do offer indies the opportunity to retain some (or all) of their IP and are taking market risk, so if the market is still hit driven something else must have changed.

The answer is that a portfolio of IP is no longer the sole determinant of valuation; in the digital world the community of players which a business 'owns', which it can reach out to and cross-promote its games to, is now the key asset. Zynga's valuation comes from its quarter of a billion MAU's, not its portfolio of game IP's.

The one thing all these new digital funds have in common is a desire to retain and control their communities; the fact they are able to build communities is a very real benefit to indie developers. In fact it's probably more valuable than their ability to provide finance.

However whilst these are called a fund, most look a bit more like publishers, act a bit like publishers and crucially retain ownership of the most valuable asset created - the community. These new funds provide a new way of doing business; for savvy developers with their eyes wide open they are a great option; for traditional publishers they are yet another of the myriad of new threats they have to face this decade; perhaps they are the model for Publisher 2.0.

Jonathan Newth is senior partner of Tenshi Consulting. He was previously co-founder of UK developer Kuju.

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