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How indie film financing could shape the future of games

Cloud Imperium Games' Ortwin Freyermuth discusses the real promise of crowd funding for games

As we see more game projects reaching out for crowd funding, this method of financing is increasingly debated and scrutinized for its potential in the games field. Most recently on GamesIndustry International, Rob Fahey debated the viability of this funding vehicle for different types of projects - is it just for "newcomers," or shouldn't it be also "an opportunity for established developers to embark on risky projects." At the same time, Fahey, as many others before him, points to the inherent risks of crowd funding to badly burn backers as there is currently no ability for backers to distinguish "well-planned projects" from "disasters in-the-making."

Crowd funding for games is in its infancy, not unlike presale-based independent film financing was when it came into existence a few decades ago. A look at the structures and mechanisms which the independent film financing world developed to become a mature funding source can give insights for the nascent field of independent game financing. Taking advantage of changes in market conditions then, the independent film financing model matured over the years and now allows every year for hundreds of movies to be made outside of the major studio system, with budgets from a few hundred thousand dollars to $80 million and more. Using Internet-based marketing and publishing, the crowd funding model has the same potential to develop and become a true alternative to publisher financing for games projects of all budget sizes and provenience.

At the same time, the direct Internet access to a worldwide community of game fans opens up markets for projects previously perceived by traditional publishers as "niche" or "risky." In this regard, Fahey's observation that crowd funding just "removes the risk" even for publisher-owned projects does not fully capture the real opportunity of a "direct-to-consumer" fundraising and publishing method which actually benefits from the current publishing structure in the games field.

"traditional publishers usually require forecasts of several million copies to justify any project investment - big budget sequels to known properties are not surprisingly the preferred option for these publishers"

Just as the film business in its first commercial phase during the last century, the games business went through its first phase over the past twenty years resulting in a market consolidated to a few large publishers. These "traditional" publishers have developed large overheads that need to be amortized over the limited number of releases they can handle annually. Consequently, these publishers have to opt for larger budget game developments, which then demand support by equally large marketing budgets. As a result, traditional publishers usually require forecasts of several million copies to justify any project investment - big budget sequels to known properties are not surprisingly the preferred option for these publishers.

The more consolidated the market and the larger the few dominant distributors become, the bigger the budgets required for their projects. As this process continues and intensifies, it leaves more and more types and genres of games outside of the publishers' realm while a worldwide gaming community is yearning for them.

This typical development is well-known in the motion picture industry where the major studio system at this point is almost completely focused on "tent pole films," opening up a fairly large market for the independent film industry. Consequently, independently financed companies are able to create films outside of the studio system, using alternative means of financing via international pre-sales and distribution for projects which become "commercially viable" in a more cost-efficient alternative eco-system. In the U.S., the major studios quickly realized the opportunity to offer their domestic distribution apparatus to suitable independent projects while bearing only a portion of the production cost (if any) via a minimum revenue guarantee paid upon delivery.

Such a payment helps the independent producer to finance and defray the production cost. At the same time, such an arrangement keeps the studio's payment off their balance sheet during the lengthy production period. A payment much closer to the revenue-generating release of the film is beneficial to publicly traded studios which are required to release quarterly financial reports. As a result now quite a few of the larger independently financed films end up being distributed domestically through the traditional studio system under "pick-up" or "rent-a-studio" arrangements.

Similar consolidated economics can apply in the games field. However, since the gaming community is particularly well reachable via the Internet, the games field is exceptionally well suited for the even more effective method of direct-to-customer crowd funding and even publishing (via proprietary sites established by developers, or typical commercial online publishing sites such as Steam, and others). Independent "direct to customer" developers and publishers are nimble and can operate far more cost-efficiently than traditional publishers, so that a few hundred thousand sold copies will often suffice to justify a project investment. This "lowers the bar" to enter the market for a variety of games projects that become "commercially viable" in a "direct to consumer" environment. And obviously, some projects originally perceived as "niche" may prove to have a much greater potential - again something well-known from the independent film business.

The experiences made in connection with the crowd funding campaign for the space sim Star Citizen may serve as a case in point. When Chris Roberts and I founded Cloud Imperium Games to launch the effort, we were not only drawing on Chris' legendary abilities and track record as a game designer in this field, but also on a combined experience of three decades in independent film financing and production. Traditional publishers had declared the space sim genre - after very successful runs in the Nineties - as "niche" and "risky" if not "dead." Both for reasons of financing and creative control, we decided to take the project directly to the interested game community. It became, by far, the most successful crowd funding campaign in the games field (or any other field), with more than $44 million in development funding raised to date, and it may serve as proof of the potential for this funding and publishing approach, if applied properly.

Based on our experiences, we decided early on that, just as in the film world, our games project needed to be sufficiently advanced and prepared before we could take it out to "the market," i.e., the interested gamer community. Consequently, Chris spent over a year building the game's backstory and creating a prototype in CryEngine that could be presented at campaign launch. Using our own funds, we engaged a small group of writers, designers, and engineers to assist in this process. Rather than opting for the Kickstarter site, we created our own platform to establish a frictionless, direct relationship with the interested community. This allowed us also to fine tune our Terms of Use for a favorable legal and tax treatment.

"A "look over the fence" to the area of independent film financing again provides an insight as to the mechanisms developed in that field, some of which may be a template for future crowd funding of games projects"

We learned a lesson when our initial platform was not stable enough and collapsed intermittently during the campaign. Due to our limited funds, we had commissioned the site design to a small developer. (Kickstarter graciously allowed us to create a parallel campaign on its platform to receive funds during our site outages. We since used the campaign funds to partner with a Canadian platform developer, and together we have built a very stable and advanced platform which now is not only serving our site, but is currently readied for other developers who are interested in following our path.)

In the B-to-B market of independent film financing, projects need some "sizzle" to raise interest with industry buyers at the film markets. We decided that similarly we required a campaign concept and convincing marketing materials to launch the project to the gamer community. Firstly, we elected to announce Star Citizen at an event that would already attract gamer and press attention: GDC Online 2012 in Austin. Thirty days prior to the announcement we launched our future platform as a "teaser site" and promoted it on fan websites and via social media. The teaser site quickly attracted tens of thousands of registrations by curious gamers. (Any form of paid advertisement was neither in the budget nor did it seem appropriate in the context. To this date, CIG has not spent one cent for paid advertisement.) In the week leading up to GDC Online, Chris went on a national and international press tour, which had to be expanded due to the high interest by the press. Finally, a fast-moving trailer produced from actual in-engine footage of the prototype was shown to the press and at the GDC event. It quickly gathered hundreds of thousands of views on YouTube.

Following the overwhelming response and support by the interested gamer community, Cloud Imperium has been able to significantly expand the vision and size of the project - another benefit of an independently financed development. Star Citizen is now developed in a community-facing manner with pre-alpha releases of selected modules to the pre-buying community as the project advances. This keeps the backers informed and engaged while allowing for continued fund raising to expand the game as desired by the community.

While the Star Citizen case is a first to take crowd funding to this new level, it does show the potential of this fundraising method when pursued properly. However, as many commentators have pointed out, if crowd funding is to mature as an alternative funding source for games of all budget sizes, it will ultimately need to include safeguards against insufficient planning or plain abuse. Several projects, even some with raises in the seven digits, have failed already to deliver on their promise. A "look over the fence" to the area of independent film financing again provides an insight as to the mechanisms developed in that field, some of which may be a template for future crowd funding of games projects.

For a variety of reasons, film financing developed as a B-to-B mechanism: once a project is sufficiently advanced to be presented to the international distributors in each local territory (usually during international film festivals and markets), interested distributors enter into contractual commitments contingent on production progress and delivery of the completed film. Those commitments are interim financed by a bank, which provides the production financing. As a bank requirement, a completion insurance is obtained by specialized entities which protect the financing bank by guaranteeing that the film will either be completed and delivered on time to trigger the distributor payments, or else the funds expended will be returned to the bank as an insurance loss.

The completion guarantor employs experienced production personnel who first vet the project budget and schedule as to its feasibility within the financial and schedule parameters set by the producer. Throughout the production, these specialists continue to monitor the production and if necessary, intervene to keep it on budget and schedule for a timely completion. All distributor payments received prior and during production or upon delivery of the film are handled by a collection agent (unless they are made directly to the bank).

A more mature crowd funding mechanism for games projects should ultimately use some of these mechanisms. And given the benefits of a B-to-C market, the structure can even be simpler and more cost-efficient.

Firstly, the direct access to the customers via the Internet allows not only for a true test of the project in the market. It also eliminates the need for sub-distributors and interim financing via a bank. Therefore, crowd funding for games can be particularly cost-efficient by avoiding costly fees in the distribution chain as well as bank financing costs.

On the other hand, if crowd funding is to mature as a reliable method for customers to support the development of a favorite game via an early pre-buy (as opposed to an enthusiastic donation with uncertain outcome), then this method will require a vetting process of the proposed project to ensure that the development and delivery is properly planned and secured for the proposed amounts. This could indeed be accomplished by completion insurance complete with experts who vet the developer's schedule and budget, not unlike in the field of independent film production.

"as more and more projects may fail to deliver on their promises due to lack of planning or oversight, crowd funding for games will become increasingly difficult, with selective customers shying away from supporting projects unless they receive safeguards"

The collected funds should be handled by a collection agent or the insurance company itself, to be paid out pursuant to an approved cash flow. Any unforeseen changes in the development process would be reviewed and approved by experienced specialists who monitor that process - something very familiar in the film production process as well. The completion guarantor would assure that the project will either be delivered to the early buyers as promised, or return the funds. Based on the fees charged in the film business, the insurance premium for such a completion guarantee and associated monitoring would probably be around 5 to 7 percent of the development budget.

A matured crowd funding structure using completion insurance and collection agents will also provide an infrastructure that will encourage other investment sources to be combined with collected customer funds: e.g. equity investors and banks which could pre-finance tax credits and R&D credits available for game development in many locations. These additional investment sources are often used in the independent film business for commercially promising projects.

For obvious reasons, developers for now may prefer to avoid the complications and hindrances of the above process. But as more and more projects may fail to deliver on their promises due to lack of planning or oversight, crowd funding for games will become increasingly difficult, with selective customers shying away from supporting projects unless they receive safeguards as described above. The above mechanisms would not only counter such customer concerns, but, as demonstrated, also offer additional investment sources for independently financed games.

The described structure could either be provided by specialized crowd funding platforms for games, or they could be offered in connection with existing platforms such as Kickstarter. Some projects would obtain the completion insurance to encourage pre-buys and equity investors, and others may not - which will inform the interested gamer and financing communities whether or not to support the game via a pre-buy.

Given the tremendous potential that crowd funding offers as an alternative to publisher-financed games, it is quite likely that the above mechanisms will evolve. In such a safeguarded environment, with developers properly preparing their project and launching it with a well-prepared online marketing plan, crowd funding can make many more games projects "commercially viable" and available to an interested and enthusiastic gamer community.

The author is co-founder, vice-chairman and general counsel of Cloud Imperium Games, and an entertainment and computer game lawyer as well as a veteran production executive with 25 years of experience in the media industry.

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