Archives For July 2011

Today, I decided to post an interview with Damian Harburger, the CEO of Metro Games. Metro Games is one of the largest, if not largest, Facebook game developers in South America.

Lloyd: Please tell me a little about the history of Metro Games, when you started it and what was your vision? What are the biggest differences between what you originally thought Metro would be doing and how the company has evolved?

Damian: MetroGames was founded in July 2007, with the objective of becoming the largest gaming destination, a spot that was empty at the time: the idea was to create the Facebook or the Youtube of games.

By mid-2008, the company had ten web multiplayer games and its own platform almost ready. But with the great impact Facebook had on the gaming industry, MetroGames started to port its games for that platform. In less than a year the company released six titles, becoming one of the top 10 developers on Facebook, reaching 2MM DAUs.

Throughout 2009 we released 10 games on Facebook, and based on the success Farmville was having, in the last quarter of 2009 we started developing our first resource management game.:Towner. This game was key to learn about this format, which led in the release of our most successful social game so far: Fashion World.

In February 2010 we received an investment from Playdom. Only five months after Playdom’s investment in MetroGames, the team tripled its size from 35 to 110 and we consolidated as one of the most succesful new companies in the social gaming arena.

By the end of 2010, we opened a Mobile games division, with the objective of replicating our success in new platforms like iOS and Andorid.

Lloyd: What do you think is different about being based in Argentina as opposed to California?

Damian: There is actually not much of a difference. Our goal is to entertain people by providing them with high quality fun games. With globalization, location is not really important nowadays. (Just think of Rovio’s Angry Birds, developed in Finland)

Lloyd: What disadvantages do you face being an Argentine company?

Damian: Besides a few hour time difference with the Bay area, I cannot think of any other disadvantage.

Lloyd: What advantages have you found being in Argentina rather than the US?

Damian: Definitely the most important advantage is the possibility of having great innovative professionals at lower costs, if compared with US salaries.

Lloyd: Given your location, have you focused on the local South American market?

Damian: Not really. Most of our users are from the US and Europe. However, we hold a big piece of Latin America’s social gaming market.

Lloyd: What opportunities do you see for social game companies in Argentina and overall South America?

Damian: I see great opportunities for social game companies in South America. The quality of human resources is both abundant and highly skilled, and even though candidates do not bring much specifically related previous experience, with some coaching they are good to go in a really short period of time, and this is clearly compensated by the creativity they show. Like in any other business, finding the right people is key in order to be successful. In addition, the user base has been growing steadily over the past couple of years. This is partially due to the fact that internet access and usage in most of South American countries have expanded considerably and also because people in the region have finally lost their fear of internet transactions. If we add that to the fact that the economy in the region has been explosively growing for the past decade we get a massive and much more mature and profitable market to serve.

Lloyd: I noticed you were the first social game developer on Tuenti, what have your experiences been like on other social networks?

Damian: Our experience with Tuenti has been great so far. We got there first and that gave us some clear advantages over the rest of the developers. Nowadays, Tuenti users relate to our brand in a very positive way and they are always asking us for new games and features, which is great. Besides from Tuenti and Facebook, we have not placed our games on any other social network.

Lloyd: Overall, what type of opportunities do you see off of Facebook?

Damian: iOS and Android are hot and going to be even hotter within the next few years. Those are platforms where a small developer with little or no money, but with a great game, still has a chance to succeed.

Lloyd: Thank you Damian and I hope for your continued success.

An old friend of mine, Daniel Marks, recently suggested I write a blog entry on different ways publishers and other IP holders could structure deals with game developers. Given this suggestion, I wanted to look at the many ways to create mutually beneficial deals. Before talking about deal structures, I want to stress that I intentionally used the phrase “mutually beneficial” not as a throwaway but as the only way to work with developers. If you create a deal that is not sustainable or simply bad for the developer, you will almost certainly end up with a bad product or no product. The developer may agree because of cash flow issues but once a better deal is available, you will find yourself without a team. Even if you avoid that pitfall, having an unhappy developer is a recipe for creating a game everyone is unhappy with.

First, let’s start with the traditional deal structures, flat fee contract work and a recoupable development fee against future royalties. In the former case, a developer prepares a budget for a project based on their expected hours, their labor and materials cost and a degree of profit. They are then paid the fee over various milestones (i.e. first playable, alpha, beta, launch). If the publisher changes the requirements or scope of the game, the cost is adjusted to reflect the new scope. Once the product is delivered, no further money is owed to the developer. With a recoupable advance, the developer is still compensated for the costs of creating the game (or a portion of these costs) but also receives a share of the revenue the game generates. The recoupable development fee is still paid in milestones as with the flat fee structure. The developer is likely to take a lower development fee because it has long-term potential to make more. Royalties normally range from as low as 5% (when it is a proven IP or concept and little innovation is required of the developer) to 25-35%. A key benefit of the flat fee approach is that the Publisher knows exactly how much the project will cost. For the developer, they are guaranteed a profit they are comfortable with. In the latter approach, the developer is more incentived to create a product that will resonate well with the market. The publisher, however, could be left with a large liability if the game is a hit.

An increasingly popular model for creating games is co-production. In this model the developer will bear some or all of the development costs in exchange for a larger share of the revenue. The exact ration depends on how much of the costs the developer is willing to bear and how valuable the assets provided by the Publisher (or Licensor) are. A base case would be a company provides a very strong IP (for example a major movie), the developer creates a social mobile app at its expense, and the two parties split revenue evenly. This model works particularly well when a Publisher or Licensor has a very strong IP or strong distribution channel. Thus, the developer can estimate the return they would have for financing (or partially financing) the project. I have seen many successful implementations of this model by traditional entertainment companies looking to move into the online or social gaming world, where they don’t want to finance a game but have an IP that works well in the space. Thus, they are able to monetize their IP better than simply licensing it or not having it exploited at all. For the developer, it is an opportunity to get a higher return than just a small profit on a flat fee basis or a relatively small royalty.

There are also variants on all of these models. Although I cannot cover them all, I will throw out some options to get you thinking. In a flat fee model, there can still be incentives for success (defined by the publisher). If the game is finished early, there could be a bonus. If revenue exceeds certain thresholds, bonuses can be paid. In an advanced royalty model, the royalty structure could be tiered so as sales grow the royalty rate decreases (or increases) to limit the publishers exposure or to provide more incentive to the developer to create a hit. Also, a portion rather than the entire development fee might be recoupable, so the developer can start earning royalties sooner. With a co-production model, the revenue share can shift based on performance or based on marketing efforts by the Licensor. As I mentioned, there are thousands of permutations, the important thing is finding a model that gets all parties focused on the same goal.

One other issue in structuring agreements is how to deal with issues specific to social gaming. Currently, very little social game development is out-sourced, largely due to the complexities and demands of running a game once it is live. Milestone payments in getting a game to launch do not deal with the real issue of how to compensate developers to maintain a live game. As the social gaming industry matures, however, I am seeing more and more developers and publishers proposing creative ways to use the external development model to scale their businesses. A couple of models that I feel are most likely to create that mutually beneficial nirvana are committing to a monthly payment and a retainer plus royalty model. With the monthly payment option, the game publisher would determine how many engineers/artists/designers are needed to support the game, then pay a developer a fixed monthly fee to keep this personnel dedicated to the project. In the latter case, the publisher would pay a monthly retainer but also a portion of the games revenue (anything from 1 to 50 percent). The retainer allows the developer to dedicate resources to the project while the royalty incentives them to keep the game strong.

Finally, international rights can be an important tool in structuring a development deal. A developer might retain rights to a game outside of North American in exchange for a lower development fee. The developer could then syndicate those rights to third party or publish it themselves. Many publishers and license holders are focused on specific markets, by picking up rights to markets that they do not value highly, the developer can generate a higher return on the project without any cost to the publisher/licensor.

As I mentioned at the beginning of this post, the most important element of structuring a deal is finding a structure that is mutually beneficial and aligns everyone’s interest. There are many ways to get to this end result, just be creative and be fair.

Much has been made of the difficulty in attracting and retaining strong people in the social gaming industry; I have repeatedly heard the northern California region described as in an employment bubble. Despite the increasingly depressing unemployment numbers throughout the US, social game companies in northern California are finding it close to impossible to get good employees (even at outrageous salaries) in the Bay Area.

Rather than swim in an increasingly crowded pool, these companies should be looking abroad to grow. Continue Reading…