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The number one rule of risk, and why it matters to your games business

By on September 20, 2013
FlickrCC theFayj

In the old days, publishers had reasonable control over the channel to market (or, as we used to call it, shops). Each week, a few games would be released. Gamestop, GAME and other retailers would stock them in the New Releases section. Some people would buy them simply because they were new, and publishers would use consumer marketing to build awareness and trade marketing to bribe encourage retailers to display their products more prominently than those of their rivals.

Why were there few releases? There are many reasons, but the main one was working capital. It cost a lot of money to make a game: tens of millions of dollars even for a standard console release. It costs the same or more to market a game. You also have to pay Sony or Microsoft a royalty for publishing on their platforms that is often around $7 per unit. So if you hoped to sell a million units in the first month, that’s another $7 million. But it’s worse than that. You have to pay all of those costs before the product hits the shops – in some cases, many years in advance.  When a consumer buys a game, you don’t get the money: the retailer does. Some retailers can take as long as three months to pay their suppliers, and those suppliers are often third-party distributors who can take another three months to pay the publisher. So a publisher has a massive investment in game development, and a requirement for working capital to support a game launch that can run into the hundreds of millions of dollars per title.

Small wonder few companies could afford to publish games.

The working capital requirement led to increased risk management practices. With this much money at stake, you need processes to ensure that only the right projects get funded. You need greenlight documents and approvals processes. You also get key executives focusing on arse-covering, making sure that if a project bombs, it was a collective decision, so they don’t get fired over it.

Perversely, in order to reduce risk, big companies actually increase risk. The marketing team notes that other games with multiplayer gameplay sell more units, so they insist all games must have multiplayer. Designers add more levels. Artists add more explosions. Writers add more narrative. Marketers spend more money to make sure that the public are aware of the title and encouraged to buy it. Expensive consultants are engaged to provide realism (or “blameability” – an external scapegoat is a great thing to have). Each of these steps may reduce the operational risk that the game bombs.

However, each of them also increases the financial risk. Each additional feature, each month of delay, each new marketing gimmick or additional content increases the amount of money that the company has at risk.

Here is the rub: the operational risk is a risk to the individual. If the product fails, the individual executive’s career is at risk. But if they can show that they ticked every marketing, production and design box, they are safer. If they can show that asked for more money but were denied it by the suits, they are safer. If they spend lots of money on consultants, they can fire the consultants and keep their own jobs. Whereas the financial risk is borne by the shareholders and the company as a whole – including all the staff who work on the game.

We have spent two decades encouraging and incentivising every important decision maker to accept vast increases in financial risk (which doesn’t affect them a lot) in order to reduce operational risk (which does affect them). This is the antithesis of Lean Startup thinking. It encourages scope creep and feature bloat. It is damaging to creativity, to the viability of the industry and, in the long run, to quality, because it is very hard to polish a sprawling gameplay experience designed by committee.

As more and more game developers leave large organisations and work in small teams producing independent games, they run the risk of taking this dangerous misunderstanding of risk with them. If you work in a big games company, I think you should change because your existing way of doing business is silly. If you work in an indie studio, I think you should change your approach to risk because sticking to the old way is likely to destroy your business.

I urge you to remember this one simple rule: every time you decrease operational risk, you increase financial risk. If you remember basic physics, you will remember that energy can not be destroyed. It can only be transformed from one form to another. Risk is not entirely different. You may be decreasing your personal risk, or the risk of the project failing, but you are also increasing the financial risk for the company. You are decreasing the number of attempts you get at making a blockbuster. You are increasing your concentration risk.

So next time you think it would be good to delay a project so that you “release it when it is ready”, be aware that you are not reducing risk, you are merely changing it from one form to another. And if you are not sure what risk you have just increased, go and figure it out. It is really important.


Photo credit: Fayjo

About Nicholas Lovell

Nicholas is the founder of Gamesbrief, a blog dedicated to the business of games. It aims to be informative, authoritative and above all helpful to developers grappling with business strategy. He is the author of a growing list of books about making money in the games industry and other digital media, including How to Publish a Game and Design Rules for Free-to-Play Games, and Penguin-published title The Curve: