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Scottish companies must adopt a new survival strategy

DESPITE THE HUGE success of the latest version of Grand Theft Auto — San Andreas, times have been pretty tough for the computer games industry and it is going to get much, much tougher.

 

Various well-known and substantial British computer-games development companies, such as Eidos and Argonaut, have put themselves up for sale after making substantial losses. US-based BAM, which earlier in the year merged with Scotland’s VIS, was recently delisted by NASDAQ and one of the biggest publishers, Acclaim, has gone bust owing more than £60m. Infogrammes, Europe’s largest games publisher, is urgently engaged on renegotiating its huge debt with its banks.

 

And the health of this industry is a particular issue here in Scotland, as we have a higher proportion of our workforce engaged in the digital media and creative industries than other competitive economies. Some 7 per cent of the workforce, earning over 4.5 per cent of Scotland’s GDP.

 

On the face of it, it is difficult to see what is wrong. The global computer games market is worth over $20bn annually and continues to grow steadily. Scotland continues to create blockbuster titles such as Medal of Honour, Carmageddon and State of Emergency, not to mention the global top-seller, Grand Theft Auto, which in its various versions has amazingly sold over 30m copies.

 

In reality, it is difficult to make any money in such a hit-based industry. Of the 35,000 or so games released each year, only a few hundred will actually sell enough copies to make any real profits. The equation is a difficult one — it costs around £2m-£3m to develop a blockbuster game, which means that you have to sell between 750,000 and 1,000,000 copies before the development costs can be recouped and the title moves into profit.

 

However, the games consoles these games run on, the Playstation 2 and the X-Box, are now getting a bit long in the tooth and are due for replacement. Sony has announced that its next games console, Playstation 3, will be released late next year with Microsoft not far behind with an X-Box 2.

 

Unfortunately, the power and sophistication of these new console designs will mean that the development costs for a blockbuster game will rise dramatically. It is likely that the average budget for a next-generation game will end up around £6m-£8m and, since it is unlikely that the price of games will rise (most agree that £40 is quite enough to pay for a game), the inevitable consequence is that only games that can sell over two million units will have any hope of making money.

 

This will lead to a huge consolidation in the industry and almost certainly a fundamental change in the way it is structured. It will become increasingly impossible to continue as an independent games development company, instead it is likely that the business model is likely to move towards the structure familiar to the movie business. The number of publishers will likely reduce to a handful, maybe four or five main players, and they will directly own much of the production capability.

 

This is the model that already works well for Rockstar North, the Scottish-based company formerly known as DMA, now owned by New York’s Take Two and which is responsible for the development of Grand Theft Auto.

 

Most of Scotland’s games-development capacity will have to follow a similar path — or else it will perish. 

 

Ian Ritchie is a non- executive director of VIS Entertainment.

 

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