SPECIAL REPORT: Rising budgets, new studios and surprise deals have brought 2006 to a tremendous close for Western games production – $600m was invested in European and North American studios over the last 12 months, taking the year’s spending past the $1bn mark.

Development: the $1bn game

Last week UK developer Kuju announced that German investment group Catalis had offered to pay £4.4m for all shares of the studio, the latest in a string of deals that has seen investors write big cheques to developers or publishers swoop for studios in ‘06.

While the proposed Kuju purchase is not final, little seems to be in its way: the Kuju board has backed it, with business development director Ian Baverstock saying the acquisition would rightly raise the studio’s stature.

He said: “Development has been pretty undervalued, but development is the key that is always there: people always need someone to make the game. So its value to those people with a long-term vision is higher than it would be to those thinking in the short-term.”

Ian Hetherington, chairman of Evolution and Realtime Worlds, which two weeks ago got $31m from US VC team NEA to build its online activity, agrees that there has been a change in the perceived worth of studios: “People are starting to identify where developers sit in the value chain and, certainly in the online space, it’s clear where they sit – at the top.

“I think it’s an optimistic message about development globally,” he said, adding the new wave of ‘superdevelopers’ rising through the ranks "will, with financial independence, now go on to do great things.”

Clearly the money spending is not limited to Europe. In the US, 2006 was witness to the growth of what was already the country’s biggest independent, Foundation 9. It has spent some of a big $150m investment it got from Francisco Partners earlier in 2006 on adding Amaze and Shiny to its ranks in recent months.

Commented Chris Charla, F9E’s executive producer: "There is definitely a refocusing on quality, innovation and originality happening at all levels of the business now, which is incredibly refreshing.

"I think sometimes people see publishers being risk-averse – as their shareholders demand – and mistake that for publishers not valuing innovation. If we as developers can help lower risk by proving concepts either with self-funded demos, outside game IP activities, or via ‘small games’ on Steam or XBLA, I think it enables us to drive better deals, and also lowers risk for publishers. Everybody wins."

But Wedbush Morgan analyst Michael Patcher is not surprised by the amount invested in developers in 2006, saying that the very nature of larger teams makes a tide-change inevitable: “We’re seeing a shift in power from publishers to developers. Some of the acquisitions are by publishers to sustain the status quo, while others are an attempt to capture profits at the developer level and shift the publisher role to a distribution service.”

Kuju’s Baverstock doesn’t think publishers or retailers are to be pushed aside, but: “In the long-term you have to look at a model where the creative talent is the key driver. At some point down the line consumers are going to be more interested in the creative talent rather than who publishes a game or sells it to them.”

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