Video game developers seeking greater control over original intellectual property (IP) have found an unlikely ally in a new financing model borrowed from the film industry.
Granville Island-based Big Sandwich Games Inc. has concluded one of Vancouver’s first “bank and bond” deals involving Sony Computer Entertainment America, Royal Bank of Canada (RBC) and Export Development Canada (EDC) for its new PS3/PSP title, Hoard.
The exclusive Sony digital download, which will also be available for PC and Mac, has been under development for the past year and required Big Sandwich Games to embrace a new business model to bring the project to fruition.
“We’re going from the traditional developer-publisher relationship to effectively being a publisher ourselves and working with what used to be a publisher more in the capacity of them being a distributor,” said creative director Glenn Barnes.
He added that the arrangement had several advantages: “We own the IP. We get a much larger amount of the back end than we would otherwise if we were just a developer.”
Big Sandwich Games negotiated a deal with Sony for a lump-sum completion payment and then used the promise of that payment to secure bridge financing from RBC. EDC provided the loan guarantee to RBC.
According to Barnes, the arrangement lowers the risk to Sony more than it would in a traditional developer-publisher relationship.
“If we can’t finish the game, they don’t have to pay us,” he said. “They can walk away.”
While the studio had to take on marketing and quality assurance expenses for the title, the experience has prepared Big Sandwich Games for future “bank and bond” deals (it’s already working on its next one).
According to design director Tyler Sigman, the digital distribution of video games has allowed for these types of financing deals to be structured, but they don’t necessarily work for larger AAA console titles typically developed by big studios.
“Most developers either secretly or not so secretly want to create their own IP, maintain creative control over it and then share as much as possible in the sales,” said Sigman. “In our last couple of projects, we were creating IP for other people.”
Sigman added that maintaining ownership of IP over its lifecycle is attractive professionally and financially.
“When it’s your own money that you are spending on everything, because you have to complete to get that payment, you really have to be smart with what you are spending your time and money on,” said Sigman. “There is a lot of pressure to make a good game because you are not just trying to check a box, deliver something and get paid. This is our IP. We stand to do well if it sells well.”
Barnes said the agreement was the “longest, most difficult deal” he has ever put together. The biggest challenge was getting Sony and RBC to come to terms.
“As far as we know, and as far as the bank has told us, we are the first company in Canada to do this,” said Barnes.
RBC is looking more closely at digital media and is excited by the potential that bank-and-bond deals represent, said Warren Tsoi, an account manager with the knowledge-based industries segment of RBC’s commercial banking team who was involved in the transaction.
“This is a gap where we think we can help developers complete their projects and help grow the industry in Vancouver.”
Sean Murch, director of business development for Next Level Games, said developers maintaining IP ownership is an attractive feature of the funding model.
“It really does provide for small to mid-sized studios to grow and thrive under that model using their own original IP,” said Murch.
“It’s getting tougher and tougher out there on the third-party works-for-hire development scene. It really is an opportunity to maintain and grow studios and build residual income.”
Bank-and-bond deals represent “a lot of opportunities for our small and mid-sized development studios in Vancouver,” according to Murch.
Barnes believes such deals in Vancouver are “going to have a huge effect as you see a lot more of the control being held by the developer as opposed to the publisher.”
With that control comes more financial risk, but it’s worth it.
“We are in control of the projects that we do,” said Sigman.
“It’s just, can we get the financing together and get publisher buy-in as opposed to making prototypes and trying to get someone to pay for them?”