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State of Independence

Rob Fahey casts an acquisition-focused eye over Europe's development market

To an outsider, the fortunes of the game development industry must seem downright bizarre. Despite year after year of solid growth for the games market as a whole, development seems to follow its own curious cycle. Five years ago, at the height of the last console cycle, it seemed that every week brought news of a game developer going bust. In more recent years, as we approach the apex of the present cycle, it seemed that new studio start-ups were the order of the day.

This cycle isn't "boom and bust", though. Rather, it's just the mechanisms of a creative business in action - a gradual bubbling in a great pot of talent and business acumen in which new studios form from the mass, then rise and fall according to the complex intersection of currents in the business environments. Some go pop early on, returning their constituent talents to the pot where they go on to form new studios - others rise to the top, become bloated and then gradually leak core talent who find the small studio environment more attractive.

Of course, that grossly oversimplifies the situation, as any metaphor must, and it ignores the frustration and suffering inflicted upon many developers who have to uproot their entire lives when their company goes bust. Independent studios are no environment for someone seeking job security.

What's of great interest right now, however, is another process entirely in our somewhat clumsy metaphor. That's the process by which publishers cherry pick studios from the pot, lifting them and their talent right out of the independent sector - although some of those talented individuals will generally go back to smaller, independent studios over the course of a number of years anyway.

A spate of acquisitions in recent years have seen some of the world's most successful developers becoming in-house studios for top publishers. The process arguably kicked off when Microsoft launched the Xbox, buying several major studios (including British team Rare) in order to advance its credibility as a games company.

The past few years, however, have seen an acceleration. Even those who expected to see industry consolidation would probably have been taken aback at the suggestion that by mid-2008, studios including Bioware, Pandemic, Bizarre Creations, Creative Assembly and Lionhead would all be publisher-owned.

Take into consideration that two of the world's most successful game franchises of recent years - World of Warcraft and Grand Theft Auto - are also created by formerly independent studios, now wholly owned by their respective publishers. It's clear that there's now immense strength in the publisher-owned studio end of the market.

So strong is this sector, in fact, that acquisitions have become something of an arms race for some publishers. Disney and Warner Bros, both keen to stake out their territory in gaming, are widely believed to be on the prowl for new acquisitions - Warner Bros having already bought Traveller's Tales. Sony, keen to cement (or restore, depending on who you listen to) its reputation as a market leader, has also been snapping up its development partners in recent years, while Sega's buying spree a few years ago netted it some of the most talented studios in Britain.

At the same time, questions are being asked about the intelligence of proceeding with studio acquisitions at this rate. The traditional view that internal studios offer cost benefits compared with external studios is widely disparaged within the industry, and indeed runs contrary to conventional business wisdom in almost any sector. Meanwhile, high-profile publishers including Microsoft and Activision Blizzard are shedding studios rather than buying them.

A few factors need to be considered when looking at this picture. Firstly, those publishers who are continuing to acquire developers tend to do so for a specific reason. For Disney and Warner Bros, it's all to do with establishing a market presence (expect the oft-rumoured entry of News Corporation into the sector to be followed by several months of cash-splashing, too). For Sony, it's about winning the battle for hearts and minds with Microsoft. For EA, it's about proving that John Riccitiello can turn the publisher into a champion of the medium - and reverse years of skyrocketing development costs and stagnant revenues while he's at it.

Secondly, many publishers are learning tough lessons about how to manage developer acquisitions. All too many high profile acquisitions in the past have ended up, a few years later, with the publisher left holding the hollow shell of a once-great studio. They own the brands, they own the name, but they have none of the creative staff, none of the structure and culture which generated success in the first place.

EA was particularly guilty of this - Westwood and Bullfrog are notable examples - but many other publishers have made the same mistakes. Lessons have been learned. Studio cultures are now much more likely to be respected and allowed to flourish as independent units within the business, treated essentially as incubators rather than as internal resources to be managed and controlled.

But while publishers debate the value of developer acquisitions - and how to handle them within a business model - things are changing rapidly in the independent development space, too.

Faced with a diversification within the medium and the blossoming of whole new sources of revenue and means of distribution, developers are forgetting the messages of doom and gloom from a few years ago (when enormous next-gen team sizes looked set to crush the independent sector). Instead, they're diversifying to meet these challenges - often in ways which a larger publisher would have difficulty in managing.

So, with one eye on their acquisition potential, it's worth looking around a number of different models which are emerging in the independent development space in Europe - some of which may be the next fertile areas from which publishers will harvest studios.

Perhaps the most traditional development studios in the region are companies like Kuju, Eurocom and Climax, all of which are generally focused on work-for-hire development for a number of publishers. Other, smaller studios, such as Dundee-based 4J Studios, also compete in this market - which includes everything from high profile projects like Climax' Silent Hill Origins for Konami, through to largely invisible work on cross-platform ports of big games.

Some of these studios are very successful - although that success is more often measured in units sold rather than in the Metacritic scores other publishers and developers like to bandy about. As acquisition targets, however, they're largely uninteresting. Unless a publisher desperately wanted to add some development resource to their internal structure, fast, the benefits of having Eurocom, Climax or 4J in-house would be minimal. They bring little or no IP with them, and little promise of generating any great IP - and in-house, you'd probably end up paying more per game than you do simply by contracting them externally.

Kuju, however, also arguably belongs to another class of developer, where it sits alongside studios like Frontier. These are firms who have ambitions in the field of original IP - ambitions which Frontier has most recently realised with WiiWare title Lost Winds. It next hopes to make a splash with narrative-driven action game The Outsider, which if successful could be the game that puts Frontier firmly on the radar of acquisitive publishers. Kuju's own original IP ambitions have, thus far, been more muted, but all it takes is one break-out hit to sell a studio.

Other European developers have found success by focusing on a niche market, and doing it extremely well. British teams Firefly Studios and Slitherine have both found markets for their historical wargames, and enjoy significant success in those niche markets - although Firefly has big ambitions for forthcoming RPG title Dungeon Hero. On the continent, a whole ecosystem of small studios working in fairly specific (often nation-specific) niches exists - a good example being Egosoft, developers of the "X" series of space trading simulators. Another British team, Splash Damage, has done well by focusing on tactical combat first-person shooters.

None of these companies is exactly an obvious acquisition target, although a big break-out hit for any of them could change that. However, publishers do sometimes plump for a niche developer in their takeover plans.

Sports Interactive was a ripe cherry when Sega picked it off the tree, thanks to the immense success of the Championship Manager series and the studio's enormous cachet among fans. Less obvious, perhaps, was Activision Blizzard's recent acquisition of FreeStyleGames - a British studio whose B-Boy title, despite being good, wasn't a headline grabbing commercial success.

However, the studio's obvious competence with music products was enough to make it slot perfectly into Activision's model, which calls for increasing focus on the Guitar Hero franchise and brand. Any other niche developer could equally find a publisher knocking if the planets happen to align on their particular talent set.

Another class of European independent studio - and perhaps the most interesting of all - is the growing group of successful MMO independents. Despite the fact that the MMO marketplace is nothing short of ruthless to those who compete in it, and is reputed to have enormous barriers to entry, several European firms have managed to build successful businesses in this space.

Some, like Funcom - whose recently launched Age of Conan is still in the afterglow of a great launch, although worrying reports suggest that it may be haemorrhaging subscribers - have done so with the benefit of massive investment, often from capital firms outside the games market whose eyes light up at the mention of World of Warcraft. Scottish firm Realtime Worlds, whose All Points Bulletin (APB) title is due to launch next year, is another in this group.

Others have sneaked into the MMO sector through back doors of their own devising. Icelandic firm CCP Games, creator of cult hit Eve Online, has created an astonishing niche market for itself - and in 2006, merged with US pen-and-paper RPG giant White Wolf, with a view to creating a new MMO based on the company's World of Darkness role-playing product. British firm Jagex, meanwhile, has built an alternative MMO market by using a browser-based game which appeals to a casual market left cold by many other MMO titles.

With the exception of Funcom, these firms certainly tick the "strong original IP" box - and CCP Games, in particular, must look like an attractive target from some angles, thanks to the wealth of IP owned by White Wolf. However, integrating an MMO firm - especially an unconventional one like Jagex or CCP - into your business model is extremely difficult. It's hard to see where the possible knock-on benefits for the rest of the business would be. An acquisition would be a portfolio addition, nothing more, and that's not what most publishers are seeking.

Of course, it's also worth noting that not every developer even wants to be sold - in fact, a great many of them have no desire to become part of a major publishing operation (or at the very least, to make sure that if they're bought, it's for a very big price tag). Some are even finding new ways of functioning within the industry to avoid just that - ranging from bulking up, through to co-operating with other development studios on mutually beneficial schemes that replicate some of the advantages of a major publisher structure.

In Britain, Kuju now has around half a dozen studios scattered around the country, each with a unique identity and approach, while Rebellion (whose CEO, Jason Kingsley, has been outspoken in his criticism of internal studio economics) went through an acquisitive spate a couple of years ago, buying Core Design from Eidos and Strangelite from Empire.

German firm Crytek, too, has been piling on the pounds. The company now has studios in Hungary and Ukraine, and in July it added Black Sea Studios to its roster of development locations. In France, meanwhile, smaller studios like Darkworks have been organising themselves to take advantage of scale benefits they would otherwise miss - like combined investment in engine research and development projects.

Of course, six months could make a huge difference. All it takes is one blockbuster to make a studio into the hottest acquisition target in the business - and two years ago, who had even heard of Media Molecule, a tiny British start-up whose first full game is about to be the cornerstone of Sony's Christmas strategy for the PlayStation 3? Perhaps, rather than waiting for the hit and then buying the studio, publishers should be looking at incubator projects that bring the talent in-house before the hit is even released - a slower but arguably more fruitful approach.

For those seeking to bulk up quickly and stake their claim in the market, however, buying a big studio will always have a certain allure. With media companies increasingly seeking to make their presence felt in videogames, the only thing that will put the brakes on the acquisition gravy train is the fact that demand is outstripping supply - and even then, every new blockbuster creates a new studio that's ripe for the picking. Expect several more transactions in the coming year.

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Rob Fahey: Rob Fahey is a former editor of GamesIndustry.biz who spent several years living in Japan and probably still has a mint condition Dreamcast Samba de Amigo set.
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