Costs hit next level

Talent and tech put pressure on budgets

With average video-game development costs quickly approaching the realm of small film budgets, game publishers are starting to feel a lot of the same pressures their Hollywood counterparts feel.

Top vidgame titles cost between $10 million and $15 million to produce, a figure fueled by more sophisticated technology and ever-mounting user expectations that push publishers to make increasingly realistic audio and video — goals that require more talent, people and time to achieve.

Publishers expect costs will keep rising as next-generation consoles from Nintendo and rollouts of Sony’s PlayStation 3 and Microsoft’s Xbox 2 are expected over the next couple of years. “It becomes more expensive to develop for a new platform because of the increased density of content,” says John Batter, general manager of Electronic Arts Los Angeles.

Another reason for skyrocketing costs is that licenses for games based on upcoming movies often are secured less than 12 months before their launch, says Nick Gibson, analyst at Games Investor Consulting. “In order to coincide the two media’s launches, games publishers will double or triple the average development team size to get what would normally take 18-24 months completed in time.”

Voice talent costs are also rising. Stars — even big ones — used to work for minimum industry wages to lend their voices to games tied to their pics. Many are now asking for a much larger piece of the pie. “It’s not in the millions yet,” says Activision prexy Kathy Vrabeck. “But it’s definitely in the high six figures.”

Vrabeck says paying film stars a lot of money for voice-overs definitely makes the games more realistic. But publishers like to get more bang for their buck. “There’s a public relations value to it if the star is willing to help market the game, but if they’re not, no one is really sure if it’s worth it.”

In many ways, game publishers face a lot of the same risks as movie producers. They have to pony up wads of cash for development and marketing before they know if a project will be a hit. In most cases, the publisher funds the development of a game in the form of a royalty advance. Large publishers like Activision often fund their own development. “I have to manufacture millions of units and pay royalties whether I sell or not,” Vrabeck notes.

But recently, more publishers have been following Hollywood’s lead and using completion bond or gold-master funding.

Publishers also mitigate their risks by making lots of sequels and extending franchises of previously successful games. Blockbuster sequels include “Madden NFL 2004” and “Tony Hawk’s Underground.” “Of the top 50 titles last year, nearly 40 were sequels,” Vrabeck says.

The key is to make the sequels more challenging than their predecessors. “Core gamers are sophisticated and have a good grasp of what works,” says Doug Lowenstein, president of the Entertainment Software Assn. “If it’s not fresh and new, it’s not going to sell.”

While films can sometimes make up for a flop at theaters with DVD and video sales along with TV distribution, a dud game is often dead on arrival. Still, Gibson says there are some ways to recoup money, though none is a sure bet. “Examples include mid- and budget-price points and bundling (games) with hardware.”

Analysts say publishers will increasingly outsource parts of the production to reduce costs and risk, and game development will mimic the project-based development approach used for films. “While the kernel of a project’s development team will be retained within a games development company, an increasing proportion of the development process is being outsourced, such as art, animation, music and even the core game engine,” Gibson says.

Hoping to capitalize on some of the outsourcing, Alex Seropian — founder and former CEO of Bungie Software — recently launched Wideload, a development studio for video-and computer games. “We focus our efforts on the preproduction of games, working on concept, making sure the hardware works, testing game play and (online performance),” he says. “Once we have something we think works well, we take it to the publisher.”

Seropian says by focusing on pre-production and keeping a small internal team, he can cut the cost of making titles by 40%.

Meanwhile, rising expense is forcing many small companies into selling out. “It is a major contributor to the current consolidation of the global independent games developer market,” Gibson says. “(But) it will not result in the end of independent development — only a reduction in its size.”