James Portnow of Divide by Zero offered up his take on how his studio handles work for hire. Its a great read and I would recommend it to any developer or studio who is considering whether or not to take on work for hires in order to stabilize cash flow. There is definitely pros and cons to the decision.

The Potential of Online Distribution

As reported by Gamasutra, a joint study by DFC and GamerNDA, showed how the nimbleness of online distribution may extend a games shelf life dramatically. The study tracked user activity for Left 4 Dead across the PC (via Steam) and the XBox 360. While throughout most of the study, the PC and XBox activities were relatively on par with each other, the two major deviations were to the advantage the PC numbers. These deviations were attributed to promotions offered by Steam.

DFC's main takeaway from the study is that the flexible, quickly-adaptable nature of online distribution services like Steam allow for developers to use a broad variety of promotions and incentives to keep their game communities fresh; individual promotions like the Survival Pack had a positive effect on both platforms, but it was the one-two punch of that DLC plus the follow-up free weekend through Steam that had the mot meaningful impact on the game at any point on either platform.

This shows that one of the potential advantages of online distribution: the ability to easily slash prices to dramatically increase shelf-life. However, while the number of users may have increased on Steam, it was primarily due to substantial price cuts and free trials that were not necessarily available (at least not in the same volume) for XBox. Thus, while the number of user's increase, the revenue stream per user most likely plummeted as well. Due to the nature of these promotions, more users do not necessarily equal more money. What I would like to see are the week over week revenue streams for the PC v. XBox 360, to compare if the revenue stream under Steam tapered off more slowly than the revenue stream for XBox.

But despite my comments above, I don't think that these numbers are completely useless. What they do show is that nature of online distribution permits developers to extend what have become increasingly short shelf-lives for games. Naturally, by offering promotions, the revenue per user will diminish, but the secret will be to offer the right incentives at the right time to get those users who would not normally purchase the game (or the service) to do so, ultimately garnering more revenues than you would have if no discounts were offered.

Put in in Writing: Developing Your Business Plan

Whether you just are starting to draw up plans to develop your first game, or if you've just signed a huge development deal with EA: Congratulations! You're an entrepreneur. Not only do you love developing games, you want to make a living doing it (not to mention be your own boss).

If you think about it, an independent game developer is no different than Bill Gates, Steve Jobs, Walt Disney, Nolan Bushnell, Sid Meirs, Will Wright or any other entrepreneur that has walked the face of the earth. And, there is no reason that you shouldn't treat your business any different than they do. Thus, you should probably start at the same place as every other entrepreneur does when starting out: write a business plan.

OK. So what is a business plan?

In a nutshell, a business plan describes how you will operate your business, haul in the dough and how much it all costs (yes, all those things that you don't want to think until you have to). What specifically is in a business plan is discussed in greater detail below.

A business plan is NOT a "Game Bible" (i.e. a portfolio of game content). While, the content of a game(s) should be discussed, it should not be the main focus of your plan. Rather, your business plan should describe how you will use the content of your Game Bible to turn a profit so you will have more money to develop more games and make even more money.

Why do I need a business Plan?

Unless you have natural business acumen, taken a business course before, or have run your own business before, you may be thinking, "Why do I need a business plan? I why should I care about that stuff now?! If I just develop a great game, money will come flying in the door! Besides, that business stuff will just bog me down ane take too much time away from developing my game."

While a business plan may take time, if you ever wish to develop more than one game in your career or build your tiny outfit into a full fledged studio, you will eventually need to bang out a business plan. And, the best time to do this is when you're just starting out (believe me, you won't have the time to do it later). Besides, there are numerous advantages to having a business plan:

1) You have something in writing.
By putting your business model into writing, it will give you a solid and well defined plan to your end goals, whatever they may be. It also forces you to tie together any ideas swimming around in your head, so they do not get lost. Writing out your business model also gives you a something to refer back to when you have a new idea to see if it is relevant to your current model and what would need to change if you want to implement the new idea..

Once common misconception about a business plan is that once it is set in stone, that it should never change. This is somewhat of a half-truth, in reality business plans change all the time due to changes in technology, the economy, a new competitor, or just a radical new idea that would improve your business model. The true purpose of a plan is to keep you focused and on track with your business model and any change to the plan should be well thought out.

2) You will need one if you ever want funding
Some of you may have grand ideas that will require a massive infusion of capital (that is, you need lots of money to get your product to market). If this is the case you will eventually be shopping around for some form of financing whether it be in the form of a bank loan, a strategic partnership with a larger company (e.g. a publisher), an angel investor, or a venture capitalist. Any of these investors will require a business plan. If you wait to put a plan together until after an investor asks for one, you will loose credit in its eyes and it may cost you.  Having a plan ready to present to an investor, shows that you have thought your business through, aren't just some hack looking for free money, and, ultimately, will put you in a better position to negotiate the terms of the investment.

3) It gets you thinking about things that you might not think about until its too late.
President Eisenhower once said, "In preparing for battle I have always found that plans are useless, but planning is indispensable." By putting your business model onto paper, it forces you to plan and think about the future. A business plan contains forward looking budgets and financial information; thus, you will be able to gauge how many units you will need to sell and at what price you should sell them at to make a profit. Also, a business plan's budget will force you to plan how to eventually pay for things such as legal expenses, marketing and distribution costs, office space, insurance, any other expenses you may not need right now but will be required in the near future.

What goes in a business plan?

This is a question which will get you ten different responses if you ask ten different people. You can search Google and it can point you to dozens of sites specifically created to tell you specifially what goes into a plan and how it should be organized. My personal experience is that a good business plan will contain at least the following:

1) Executive Summary.

This is a one or two page summary of all the sections in your business plan. This should be short and sweet; think of it as the teaser for the rest of the plan. Typically someone will read this first before they decide to read on. If they don't like what they read or if there is not enough information to understand your business model, they probably won't read any further.

2) Market Descriptions.

This section covers your understanding of the Market as a whole. Basically it is there to show that you've done your homework. It also will describe where your business fits into the market, any competitors you may have (A helpful hint: if you don't think you have any competitors, you need to think harder and broader), and why and how your business will be in a better position than your competitor's. This might seem simple, but it actually requires the most research than any other section if it is done right.

3)Description of the Business.

This section is the meat of the plan will describe your business operations and business history in detail. It will cover how you plan to monetize your product (i.e make money off of your games), including your preferred payment structure and method of distribution. It will also discuss your business' projected goals in the short and long terms. Some of these goals should include possible exit strategies if your business goes south or does very well. Some possible exit strategies could be merging into another business, taking the company public, or selling the company and/or its assets. Normally, this section will also cover your product description. But, because you will be developing numerous products, this may be more general than in typical business plans. The best thing to do here is describe what is already in the pipeline and the type of games and niche you see the business developing in the future.

4) Financial Statements.

This section will contain the business's expected revenue stream (be realistic), budget, pro forma balance sheet, income statement, and cash flow analysis. While most of these may seem like big mumbo-jumbo terms to you, they are important numbers that describe the financial health of your business. Like instructions on writing a business plan, a quick search on Google can lead you to great instructions on how to form these documents. (All I have to say is Excel will become your best friend.) If you are an early stage company, most of these figures will be pretty simple or you will not have enough information to put them together. But take the time to learn how to write and understand these documents now; it will definitely help you in the future. And, if you become fluent in financial-ese, you will gain more respect from those you do business with.

5) The Core Team.

This may be the most important part of your business plan. The ultimate value of your business is in your team; the people making and marketing your products. So in your business plan you need to discuss who are the key members of your team. Include a bio for each key member which discusses their relevant experience. And, if possible, state if any of the members have collaborated in the past and what projects they worked on.

Conclusion: A Guide to the Big Picture.

As you can see, putting a business plan together can be a lot of work. However, once it is together, it is very rewarding. You will be able to see the "big picture". It will be easier to make decisions because you have a better understanding and guide to what you need to do to succeed.

Why Publisher's Aren't Going Anywhere

Last week I read an editorial by Rob Fahey discussing the rapidly evolving relationship between publishers and developers in this new era of digital distribution. Fahey's thesis can be summed into the following:

A publisher does more than just distribute and sell games; they act as the developer's fancier and marketing source. And, while digital distribution will certainly change the role of the publisher in the future, until the developers find alternative sources of financing and marketing their projects, developers' need for publisher's isn't going to change for a while.

Fahey goes on to point out that these alternate means could be accomplished either through the developer honing his own business skills (in marketing and finance) or by outsourcing the project to third parties. Aptly, he goes on to say that the latter choice would probably consist of reinvented publishing houses (similar to the change that is occurring in the music industry today). And, given the size of the industry, its history, (no offence but) the culture of developers, and absent some gigantic industry push to educated developers in business, I would say that Fahey is correct to assume that these third party providers are the most likely outcome.

As a side note, I would like to throw out a third option. Developers who want nothing to do with publishers should consider seeking to bring on a business expert onto their team from the start. Someone who has experience in marketing and raising money, who can sell the product to potential investors--possibly someone who used to work for a publisher? I dunno, just a thought...

What to Do When Someone Won't Pay

At every point in a developer's career, there will be a time when he does work-for-hire or enters into a contract with a publisher; and despite the fact the developer does everything he was asked to do, the other party doesn't hold up their end of the contract. While I don't wish this on anybody, it does happen. What is important is that the developer recongnizes that this is part of doing business and he should conduct himself in a professional manner.

Negotiation

Before doing anything else the developer should to attempt to amicably negotiate with the debtor (i.e. the party that owes the developer money). Negotiation is truly an art form that takes practice and time to get good at it. As a side note, I highly suggest to go read "Getting to Yes." It is the seminal work on negotiation strategy and is a must read for anyone who is running a business and will need to negotiate anything at some point in his life. But to briefly summarize how to negotiate in this situation, the first thing to do is to jot down a couple of points prior to confronting the debtor:

• What each party wants and needs and why he or she wants/needs it. It may not intially be clear what the debtor's wants and needs are, but it is something to keep in mind as the negotiations unfold.


• The leverage of each party. Leverage is essentially power; the more leverage a party has the more likely the outcome of the negotiation will favor that party. In this situation the developer will most likely have some leverage due to the terms of the disputed contract but the debtor will also have leverage due to the fact that she holds the money. There may be additional facts that could add more or less leverage to either side (such as the debtor is overseas and out of jurisdictional reach of the courts). Note that, as more facts come to light, a party's leverage can change over the course of the negotiations.


• What is each party's BATNA. The BATNA or Best Alternative to a Negotiated Agreement is just that. In this situation, most likely the developer's BATNA is that he won't get paid, but there could be other factors as well. The debtors situation will most likely be she gets to keep the money but risks losing her reputation. Like leverage, as the negotiation unfolds, BANTAs can change and bring a party to settle.


• Possible creative solutions. The point of a negotiation is to arrive at a settlement. While neither party may be completely happy with the settlement, it will be one that both can live with. Sometime the solution will be one that's outside the box

Once all this information is written down, the next step for the developer is to amicably approach the debtor. The developer should call the debtor directly (not email or IM) and courteously remind her that the bill is due. Be polite and try to find out why the debtor is not paying. If possible, try to work out a payment plan that works for both parties. If the developer has anger management issues, to initially avoid a phone call and just email the debtor(make sure one or two people review the email before it is sent to ensure that it wont be constructed as aggressive or offensive); only call if the debtor does not respond to the email. Remember: the goal here is not to scare the debtor off or get into a pissing match; but rather, to find out the debtor's needs and wants and see if there is a solution that will serve both parties.

Hire a Lawyer or Collection Agency

If the debtor does not respond to negotiations or essentially tells the developer that she is not paying and to "go pound sand," the next step is to either hire a lawyer or a collection agency to take care of the problem.

Lawyers

While many developer's think that they are not able to hire a lawyer to solve this problem due to costs, there are plenty of lawyers out there that will work for a contingency fee. A contingency fee means that the lawyer will work for free, but if he is able to collect any money, he will take a portion of the award or settlement. However, the client (i.e. the developer) normally still pays for "costs," which include such items as phone calls, copies, filing fees, etc. Many times these costs can be settled after the case is over, so they can be taken from any award or settlement as well. If the developer has a "slam dunk" case, the lawyer may be willing to absorb the costs as well.

Also, many times a contract will have an "attorney's fee's" clause in which the looser of any dispute will pay the other party's attorney's fees. This means that the developer will receive the entire debt and the debtor will have to pay the developer's attorney's fees. Be careful though as this is a double-edged sword: if the developer loses his claim, not only will he be out of the debt, but will also have to pay the debtor's attorney's fees.

Collection Agency

A collection agency is a business that will act as an agent for the developer to collect an outstanding debt. The agent will do all the legwork for the developer to hound and negotiate with the debtor into paying the debt. The agency normally charges 30% - 50% of whatever it is able to collect depending on the credit rating of the debtor and how long the debt has been outstanding.

Which is best?

One of the best advantages to using a lawyer is that he can also recover what is known as "consequential damages." That is, any additional foreseeable damages the developer incurred that were directly caused by the lack of payment. For example, if a developer can't make payroll because the debtor did not pay, and consequentially has to take a loan from the bank to cover his expenses; the interest on that loan would probably be considered consequential damages and the debtor would have to compensate the developer for the interest paid.

An advantage to using a collection agency over a lawyer is that the developer does run the risk of having to pay the lawyers "costs" even if the debt is not recoverable. A lawyer's costs can quickly accumulate and can run into the $1000 range even for very small cases. Furthermore, hiring a lawyer can be a long and involved process, and can take valuable time away from a developer's business. On the other hand, a collection agency works independent of the developer and normally only bothers the developer if additional information is needed.

So which one should a developer use? A good rule of thumb is: if the debt is greater than $5000, it is probably better to use a lawyer. However, the best thing to do is go in for a consultation with a local lawyer (normally its free) and she will tell you the merits of your case, the likelihood of recovery, whether or not she will take the case on contingency, and give you a fair estimate of the additional costs associate with the case. If, at the end of the day, the costs and risks of going to trial is going to be more expensive than using a collection agency, then the collection agency is probably the best bet.

Small Claims Court

Alternatively, if the debtor is in the United States, and if the debt is small enough (it varies from state to state), the developer could file a small claims action against the debtor. This would require the developer to pay a filing fee to file the claim, pay a service processor to deliver the claim to the debtor, and make a trip out to the debtor's local courthouse to stand before a judge and argue his case.

For more information on filing a small claim suit in any particular jurisdiction, contact the nearest state courthouse to the debtor (normally state courthouses are done by a county by county basis). The court's website normally has great information on how to file a small claim. Or, if no information is available, call the courthouse, the clerks are (normally) very helpful.

Self-Help

If hiring a lawyer, even on contingency, is too expensive, the developer doesn't want to give up 30% - 50% of the debt, and small claims is not available, the other option is to engage in what I refer to as "self-help." Self-help can easily be described as a doing the same thing that a lawyer or collections agency would do, but on your own . If the developer gets to this point, I would seriously recommend taking an hour or two to talk to an attorney about his rights under the disputed contract. I do not recommend using self-help unless there are no other options.

The developer should carefully read his contract. And he should make sure that he has followed all his duties under the contract and note which duties the debtor has not followed. Also, there should be some sort of "breach" or "default" provision which will describe what should happen if a party does not follow the contract. The developer should make sure that the debtor has breached a specific term in the contract. Normally contract provide that a party needs to provide another with X days written notice to cure a breach in the contract.

The next step is to write what I affectionately call a "nastygram." A nastygram is a notice letter that essentially says "Hey! Your in breach of our agreement! Pay me or I'll sue/send a collection agency to get my money." The letter typically consists of six parts:

1. State the purpose of the letter.


2. State what the non-breaching party's requirements were to complete the contract and how those requirements were fulfilled


3. State what the breaching party's requirements were under the contract and how those requirements were not fulfilled; and


4. Give the breaching party an opportunity discuss the matter with you and to cure the problem within X days (the number of days required under the contract)


5. State what the developer will do if the breach is not cured. (Don't be over dramatic or threaten anything illegal. Just state something simple like "You will be contacted by my attorney/collection agent to settle the matter.")

If the debtor does not respond to the nastygram, the developer can either write the debt off or follow through with the letter's threat of legal action (see above). Furthermore, the developer can tell his fellow developers the TRUTH, and recommend not using the debtor because he did not pay his bills. However, this should be done tactfully, as the developer wants to maintain his own reputation.

The developer should never do anything to "take revenge" on the debtor including engage in threats or acts of physical violence, vandalism, or interfere with any other business contracts of the debtor.

Foreign Debtors

If a debtor is in a foreign jurisdiction, it can make it more difficult to collect the debt. However, the recommended actions above don't necessarily change. But, a collection agent will probably charge a higher percentage, or you may need to find an attorney that specializes (or practice) in that particular jurisdiction. Also, some jurisdictions (Russia, for example) have very weak collection laws which severely reduce the developers leverage regarding the contract since there is not much that can be done to collect if the debtor party does not want to negotiate.

The Wall Street Journal published a great article regarding how game developers have been sucessfully applying new monotizaiton strategies. Most of these strategies show that relatively few dedicated fans are needed to support an entire studio. Examples of these studios cited in the article include Flashbang and Three Rings.

Towards the end of the article, an excellent point is raised: "Depending on the genre or how the game actually plays, pursuing ideas like microtransactions or subscription models may not make sense."

What I draw from this is the importance of considering a monotization strategy from the initial development stage. Assuming that a developer is designing a game with the intention of turning a profit, the initial development plans should answer the question "How will I make money from developing this game?" And if that answer includes a a subscription or microtransaction model, then the developer should work to add features into the game to support that model. If the developer waits until after the initial stage of development, this could lead to useless or clumsy monotization features being written in as mere afterthoughts.

To the Great White North: My Apologies

Since my post about Canada being placed on the USTR Priority Watch List, I have received some comments from some Canadian brethren that my initial post makes Canada out to be in the same boat with Russia and China in regards to piracy, which was certainly not my intention. Upon reflection and further review of my initial entry, I can see how it can be interpreted in that manner. I have since updated the post further to reflect that my initial thoughts were aimed at the US developer who deeply wishes to retain the full US protection of his IP.

Whether or not Canada actually belongs on the Priority Watch List is another debate completely. Here are some links to explain the debate over the controversial USTR report:

• A history of Canada and the USTR relationship
• The Copyright Alliance Response
• and Michael Geist's Response