Studio bosses from the likes of Rare and Avalanche explain why

Special Report: Game budgets â??in sudden declineâ??

The industry’s relentless pursuit for greater technology, higher production values and more comprehensive gameplay offerings has driven development costs to astounding and perilous new heights.

But today there is evidence to suggest that game budgets have reached a plateau – a critical mass that will not likely be superseded until the next generation of game consoles flood the market.

In fact, in a move said to be spurred by the recession’s deep impact on credit and confidence, many say that publishers are now offering less money for game projects.

Develop has heard from multiple game designers throughout the year – many, but not all, speaking off the record – who claim that average production costs have unexpectedly been trimmed by publishers.

Some told us that high-priced AAA projects are still fully backed by their publishers but, in the wake of a global financial crisis, there is an insistence that blockbusters need to be delivered as safely and cost-effectively as possible.

Others claim that it’s the double-A titles that are really suffering – with publishers channelling investment to the more dependable brands and leaving little for the external studio.

Avalanche Studios’ Christofer Sundberg is one of the developers willing to speak openly on the subject.

“I have seen development budgets go down,” he says. “We’ve always been in the $20 million-plus budget area, but last year I saw things adjust to over $10 million, and I think it’s a sign of the global economy and the bad times we’ve gone through.”

Sundberg’s revelation is echoed by numerous studio heads that Develop got in touch with throughout year. Many had kindly asked for their comments and budget estimates not to be published, though none had disagreed with the suggestion that high-end development costs were in decline.

It is an eye-opener as unexpected as the global financial crisis itself.

The seemingly relentless increase in production costs was once as much a certainty as rising house prices, but the recession’s impact on credit lines and confidence in business has brought about significant change in the industry.

A striking number of studio closures, layoff measures and project cancellations offer a stabbing wake-up call for those calling the game industry ‘recession-proof’. Though the worst is behind the sector, publishers remain wounded and highly cautious with their cash.

One studio head at a high-profile international developer – speaking on the condition of anonymity – said that risk is “frowned upon more than ever”.

He said: “Certainly what I know from talking to biz-dev guys, it really seems like budgets are dependent on the IP.

“As I understand it, publishers are still quite keen to fully back their AAA products, and they’re prepared to pay for it. But, certainly from my experience, anything that has an element of risk to it has less investment.

“The global recession is bound to have had an impact on the availability of money – though it depends if the publisher is cash-rich or has credit lines which have dried up.”

The source also pointed out that publishers are “switching to more internally-developed projects” – a measure that will no doubt allow for greater control over costs.

Electronic Arts is one of the few publishers which has spoken publicly on its reduction plan for external partnerships. The firm’s COO John Schappert recently said EA is “modelling a reduction” in its distribution business as it concentrates on higher-margin titles.

Our source added: “Clearly there are several publishers feeling the financial squeeze, and it’s made them look again at how much they’re actually investing.”

It’s a perfectly understandable situation. In the last 18 months confidence in the industry has tumbled. Some of the biggest publishing empires became the canary in the mine for the rest of the sector, as the likes of EA and Sony cut thousands of staff from their business arms, while Activision and Microsoft have issued hundreds of redundancies.

Others have fared far worse, with Midway, Grin, RedOctane and 3D Realms being just a handful of the numerous businesses that have been forced to close doors.

However, the recession is not thought to be the only reason why development costs are declining. Rare studio head Mark Betteridge agrees that budgets have gone down, but suggests there are more factors in play than just weakened credit lines.

“Look at things like the rise of mobile and handheld devices, or the increased use of middleware, or the growing number of sequels where old code can be re-used,” he says.

Other designers and studio heads Develop contacted had agreed that budgets were declining due to the elongated mid-cycle of consoles, though others spotted that the rise in sequels was in fact a result of publisher pessimism.

“To me, it’s important that the industry does get a handle on development costs,” Betteridge adds.

“The important thing we need to keep a focus on is that a large amount of money will be spent on researching concepts and content, which is something that developers need to prove that the investment in the project is worth it.”

“Sometimes, especially when you have a big team, there’s an urgency to run a studio into production as soon as possible.

“You might have artists or coders getting paid as employees with little to do because a game isn’t yet in production. However there’s this tendency to run a studio into production before the core gameplay concept is proven.”

Betteridge calls for the industry to reduce risk by making clearer divisions between prototyping and production. He says that studios and publishers need to predict and manage their business better.

“If we [Rare] went to Microsoft and said we’re going to build something that costs, say, ten or twenty or thirty million dollars, the issue won’t necessarily be the budget but instead the estimate and if it is accurate. As the industry is maturing, it does need to get better at that.

“A lot of the time when studios have run into problems it’s because the game budgets have been underestimated. I still think the industry takes a naive approach to estimating budgets when compared to other industries.”

Our source from the independent studio agrees, adding that if studios don’t control costs, the publishers’ hand will be forced.

“If a publisher’s not completely certain that their new game is going to be a hit, or come out at a busy time, then they’ll decide quickly to delay it, or even can it,” said our source.

“Development budgets are only half the story, remember. Even when a project is past-the halfway point, a publisher still has an opportunity to cut their losses, because development budgets only make up half of the costs for a AAA game – the rest of the money goes in the growing need for marketing.”

Only a year ago the Krome CEO Robert Walsh warned that development costs were rising gravely fast. He said that production spend had at least doubled since the last generation.

Yet the nature of today’s decline in game budgets may not be the medication he was hoping for.

The game industry is a cut-throat business because it is hit-driven, with high investment putting the stakes at an all-time high. Though budgets are falling to more cautious sizes, dried-up credit lines and guarded venture capitalists has kept the risk-factor as high as ever.

Money has leaked out of the development cycle, but studios – especially independent third parties – are as vulnerable as ever.

In fact, our source believes that developers who just stick to game design are running the biggest risk.

“Any developer that relies on big publishing deals is going to have trouble these days,” he says.

“Studios ultimately need multiple revenue streams to make sure their income is steady.

“Publishers need reliable technology to deliver on, and independent studios are still well placed to deliver that – it’s already where a lot of really good technology is coming from.

“Big IPs can fall down when they’re based on bad technology and average IPs can do well when they’re based on good technology. Independent studios that have their own technologies are the ones that are succeeding. Look at the likes of Crytek and Epic; things like the Unreal Engine 3 and CryEngine 3 are providing security and platforms to get a steady income off of.”

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