GAME START-UPS CONFIDENT DESPITE TURBULENT TIMES

Last month, when the video game industry's developers gathered at the annual Game Developers Conference in San Jose (CA), the forum served as a support group for an industry weathering turbulent times.

Indeed, next-gen software sales are falling short of expectations, current-gen software unit sales fell 29% in Feb. on top of a 26% drop in Jan., and average pricing for current-gen software continues to erode.

Meanwhile, developers are finding that designing leading-edge games for the new consoles is an extraordinarily expensive task requiring much larger teams that are working practically blindfolded, never having laid eyes on two of the three pieces of hardware for which they are building. While Microsoft's Xbox 360 console launched in November, Sony announced that its much-anticipated PlayStation 3 would be delayed from this spring to November. There is still no word on when the secretive Nintendo will release its Revolution console. What is clear is that gamers are withholding software purchases until they get a peek at what the Sony and Nintendo consoles have to offer.

While there's little fun in building games these days, there's something to be said for an industry that manages to breed new and enthusiastic developers. Perhaps that's because the start-ups envision themselves as sleek and trim, able to maneuver the treacherous waters more easily than their bigger, more entrenched counterparts.

"We're a very small company," says Rick Giolito, "and when we need to adapt, we don't have to turn a barge here. But when you've got a $700-million company or, in some cases, a $10- or $11-billion company, it's very, very difficult to turn."

Giolito, who is president of Trilogy Studios, knows the difference firsthand. He and his two partners -- CEO Michael Pole and COO Mark Skaggs -- were all execs at the behemoths that are Electronic Arts (EA) and Vivendi Universal Games (VUG). But they left and opened Trilogy's doors in Santa Monica , CA just five months ago, confident that the new studio would succeed because of its size and new ideas.

Giolito was most recently VP and executive producer at EA-Los Angeles, responsible for IP development, and was the creative force behind the "Medal Of Honor" franchise; Skaggs had been VP and executive producer at EA-Los Angeles on "The Lord Of The Rings, Battle For Middle Earth" and the "Command & Conquer" series; and Pole served as executive VP, worldwide product development for VUG and had held similar positions at EA and Activision.

Trilogy's strengths, according to Giolito, are the track records of its executive team (which enabled it to raise the capital to launch the studio), its plan to build new IP instead of creating sequels or games from licenses, and its intention to distribute digitally its first game -- “Daybreakers,” a first-person shooter for PC and next-gen consoles -- instead of shipping it in boxes to the shelves of brick-and-mortar stores.

Digital distribution has more than a few advantages, notes Giolito, not the least of which is cost savings -- almost 100% of the production money goes into building and marketing the game, eliminating the cost and replication of media and their physical distribution.

“While we're focused on the early-2008 release of ‘Daybreakers' right now -- and have plans for three games right behind it -- we're really rolling the company's dice on the success of digital distribution of original IP,” Giolito explains. “We're building an infrastructure that will allow us to roll out high-quality content for digital distribution to consumers on a very regular basis -- in other words, distributed episodic content.”

Giolito says that the episodic nature of the games will enable his team to get a handle on the high cost of developing next-gen games, “an expense that is breaking the backs of a lot of developers and publishers,” he adds.

“The problem is that whenever a publisher signs up to do a game, it's like signing up to do a major motion picture … and that's very, very risky for them,” Giolito explains. “That's why you're seeing so many sequels and licenses, because when you do a game like ‘The Godfather' or ‘King Kong,' you've got that marketing hook you can count on.”

The Trilogy team chose to take an alternate route, deciding to mimic the TV business which, it observed, is skilled at creating new IP and launching it quickly through pilots.

“No one in TV signs 26 episodes up front,” says Giolito. “You build a pilot, get it out to the consumer, and if the response is positive, you build more. That's what we intend to do -- stay in close touch with the gamers who will tell us what they like and don't like. We'll be able to tune our games according to their feedback -- just like a TV series. Our goal would be to release an episode once a month.”

An added advantage will be that episodic games allow certain cost savings that standard games do not -- all the environments and characters can be reused from adventure to adventure.

Taking the TV metaphor one step further, Trilogy is considering future revenue streams that involve partnering with “like-minded, Hollywood production companies,” meaning in TV or movies. “We're talking to companies that look to the video games industry as an opportunity to generate content,” says Giolito. “We're thinking that such a partnership could result in something very interesting, but that's not our first priority right now.”

At the moment, Trilogy intends to insure further savings by keeping design teams tight; it currently employs 22 and expects to grow to no more than 40 people with additional production handled through outsourcing.

“Listen, I know firsthand how difficult it is to manage very large teams,” Giolito confides. “At EA, the biggest problem was holding a vision together and managing and delivering high-quality content across teams of 150 or 200 people. It's very, very hard and I don't believe in that at all. What we're going to do here is stick to a small core team.”

Trilogy isn't the only independent developer that's learned some lessons from experiences at Electronic Arts. While San Francisco-based Perpetual Entertainment has been in business since mid-2002, CEO Joe Keene still considers it a start-up. Keene had held a variety of executive posts at EA, including COO of EA.com, VP of corporate development, VP of worldwide publishing, and COO of EA's Maxis studio. Perpetual's co-founder, president Chris McKibbin, is also an EA alumnus, having been COO of EA Canada, COO and general manager of EA's Origin Systems studio, and general manager of programming and production for EA.com.

“What we learned from our time at EA was that if you want to focus on any one slice of the business, you have to do it independently and not be part of a huge corporation,” Keene explains. “Chris and I had a very particular view of what was going to happen to gaming over the next 10 years; we believe that everything will be going online in one form or another, and that more and more people will want to play games with other people in a connected environment.”

Which is why Perpetual's first project is a massive multiplayer online game (MMOG) called “Gods & Heroes: Rome Rising,” an action/adventure/role-playing game which it is co-publishing with Sony Online and which will be released this fall. It will be available for PC only although the Perpetual intends to consider console titles in the future.

The driving force behind the game is Stieg Hedlund who is best known for being the lead designer of the incredibly successful game “Diablo 2” by Blizzard Entertainment. Hedlund subsequently left Blizzard to become creative director of publisher Ubisoft and then joined Perpetual.

While gamers will play “Gods & Heroes” online, Perpetual's plan differs from Trilogy's in that it won't distribute it online; gamers will find the MMOG the old fashioned way -- in a box on a store shelf.

“Down the road, there will be opportunities to increase our margin by not having to bear the cost of manufacturing,” explains Keene . “But, for the foreseeable future, we think the best way to get a game to market is by using the traditional retail distribution model.”

While Nielsen NetRatings reported just this week that almost 68% of U.S. Web users access the Internet on high-speed lines -- up from 74 million last year to 96 million -- Keene believes that bandwidth limitation inhibits a large number of gamers from purchasing large games online.

“Besides, retail provides other advantages, the main one being that it's just a very well-understood and well-established model for advertising and promoting the game,” says Keene .

While some MMOG publishers are experimenting with new revenue models -- including games that are supported solely by in-game advertising -- Keene describes “Gods & Heroes” as more traditional -- gamers will buy the game and then pay a monthly subscription fee for ongoing play.

“That is the model used by [Blizzard's MMOG] ‘World Of Warcraft,' the game that has demonstrated to the marketplace that it is possible to do a multi-million-subscriber online game,” says Keene . “When you take that number of players and multiply it by the monthly revenues that MMOGs can earn, you find yourself with a very powerful economic model that's hard to replicate in the traditional game space. It's a good example of why we believe in online gaming in the first place.”

As with Trilogy Studios, combating escalating game development costs is a top priority for Perpetual. That's one reason Sony was signed as a co-publisher in order to distribute the game.

“They have a great retail distribution entity and we didn't feel that we wanted -- nor did we have the ability -- to re-create the wheel,” says Keene . “We may consider digital distribution in the future but, at the moment, this was the best step for us.”

Similarly, Perpetual reined in costs by making extensive use of outsourcing to beef up its design team which, Keene admits, is much larger than a typical MMOG development team would have been just a few years ago.

“What's really driving up the price of building a game is art,” Keene says. “PCs and consoles have become much more powerful, gamers are expecting more lifelike images on their screens, and we end up needing to employ more artists who can create those assets with their complexity and detail.”

At any given time, the number of people working on “Gods & Heroes” team tops 125 which, Keene says, isn't unusual for a high-end game but is considerably more than even a big developer like EA would have used a few years ago. He predicts that, when completed, “Gods & Heroes” will end up costing $12-$15 million to build, almost double what a typical MMOG would have cost five years ago.

“And that's not bad when you consider that some leading-edge games today cost $30 or $40 million,” he adds. “It's fair to say that, as a start-up, we've been as frugal as we could afford to be.”

The abilities of both Trilogy and Perpetual to hold tight to their purse strings and to try innovative ideas are what these independent developers hope will allow them to compete with what Trilogy's Giolito calls “the big-money traditional publishers who are going to be very slow to adopt new strategies like digital distribution because it's not their core business.

“The large publishers are joined at the hip with their brick-and-mortar partners and it's very difficult for them to change,” he adds. “But if you pick up the business section of the ‘LA Times' today, on the front page is Microsoft talking about moving to digital distribution and that it might have to take a short-term hit to do that. The other traditional publicly owned publishers will only do it when somebody else proves it will work. That's what so great about being a small, independent company like us; we can still take chances.”