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A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
March 30th, 2007

By Brent Holliday
Greenstone Venture Partners

BC's Content Creators

It’s so easy when you know the rules,
It’s so easy all you have to do,
Is fall in love.
Play the game” – Queen, Play The Game

Digital media is hot.  Over $4B in Venture Capital in 2006 was invested in the broad category of digital media (everything related to digital entertainment from social networking to digital music to semiconductors).  Included in the broad category of digital media is the video game industry, which is especially important in this neck of the woods. 

In breaking down the digital media investment to content creation, it looks like the jump in investment in companies related to creating digital content (read: games) went from US$300M in 2005 to US$725M in 2006.  Now this space gets even more exciting when you consider that venture investment in pure content creation has been very low for over a decade and is a poor indicator of how well the sector is actually doing.  Game development is seeing a huge resurgence due to the trifecta of console releases in late 2006 and early 2007 (new Xbox 360, PS3 and the Wii). The broad video game business (including mobile, web based, etc.) is somewhere around $30B a year, with the games being about $15B of that.  Happy talk prognosticators see this reaching $80B in five years driven by the demographics of gaming. 

To wit, folks my age were the first gamers.  We played Pong, Intellivision and Atari in our youth.  We are now over forty (some of us very recently… thanks for the cards), and still into gaming through on-line casual games.  We are getting more free time as our kids age and we are getting our kids all of the latest consoles.  We will spend more time gaming over the next twenty years as we spend less time raising kids.  Then there is the Nintendo generation right behind us.  These are the 25-35 year olds that grew up on Nintendo and Sega.  They are the hard core gamer generation and are all playing World of Warcraft and Second Life at the moment.  But their time is getting crunched, so they are looking for less “time-sucking” games as they get busy having families. Finally, there is the new game generation.  They all have cell phones, they understand social networking and they play games.  They are getting older and are starting to get jobs over the next few years.  More disposable income means more revenue. 

As I sat at the first Digital Fusion Forum, held by New Media BC this week, I pondered the local video game scene and thought about some of the up and comers here that might make it big in this new boom for games.  We have the impressive legacy of Distinctive, Radical, Black Box and Relic which became Electronic Arts Burnaby, Vivendi, Electronic Arts downtown and THQ respectively.  These huge studios are employing over 2,500 and cranking out some of the best games in the world.  But what about the start-ups, the new kids on the block that are looking to take advantage of not just the boom in gaming, but the changes to the gaming industry that are afoot?  Who are they?

In the classic video game studio genre (making games for consoles or handhelds or the PC and selling them through familiar distribution), two local companies I have met are doing very well.  Next Level Games www.nextlevelgames.com (disclosure: my younger brother works for them) is a four year old company that made the huge hit (over 1.3M units) Super Mario Strikers for the Nintendo platform only.  They have many other projects under their belts and are around 100 employees.  The Mario Strikers game was a coup as they became the only studio outside of Japan to ever make a Nintendo game using the signature Mario characters.  This goes to show the level of talent that they have as Nintendo does not entrust the core characters to just anyone.  Another bright light is Deep Fried Entertainment www.deepfriedentertainment.com. They are a more recent start-up focusing (for now) on the handheld gaming market.  I saw their first effort and I am not sure I am allowed tell you what it is.  But safe to say it will be an impressive game when released.  They are a very talented bunch and appear to have a competent strategy going forward.

The biggest change to the industry in the next few years will be the digital distribution model.  In five years, you will not be shopping at Future Shop for your video games… they will be downloaded to your console or PC.  Another big change, which I alluded to in the demographics discussion above, will be the emergence of high quality games that don’t take 12 hours of continuous game time to complete.  As the hardcore generation has less time to devote to gaming, the shorter, but still high quality, gameplay will be huge.  This leads to episodic games that deliver monthly or quarterly segments, similar to comic books.

Local companies looking to take advantage of these changes include Hothead Games www.hotheadgames.com, Jarhead Games www.jarheadgames.com and Klei Entertainment www.kleientertainment.com. All three of these companies started with teams that left the larger video game studios and all three wanted to make games in a less expensive manner yet deliver quality experiences.  Jarhead takes the episodic or “smaller” game theory to existing genres like first person shooter games.  The art and game play are familiar, you just get a quicker game and pay less.  They are doing very well working with this model.  Klei is focused on the Xbox Live Arcade where games are on display and downloaded for play for a lot less money than a game from Future Shop.  They have their ticket into the select few companies that are available in Live Arcade and are making episodic games that repeat characters but change the game play.  Finally, Hothead is focusing on independent type content to make episodic gaming.  They refer to themselves as the HBO of video games whereby they use cult content (like Penny Lane Comics) to make their games as opposed to large ticket licenses like Harry Potter.  All of these companies are looking to take advantage of digital download as a way of increasing their own cut of the final sale to the consumer.

Advertising and marketing are changing dramatically in our on-line, mobile world.  TV is not as lucrative for advertisers as it used to be because we are entertaining ourselves through other media, including gaming.  Two local companies are inserting themselves at the leading edge of a new trend for companies to increase their brand awareness and get their message to the new media.  Three Wave Software www.threewavesoftware.com is a multiplayer world/map company for first person shooter games.  They add new exciting levels for gamers to download for the most popular multiplayer games.  They get paid by doing deals with large brands to be inserted into the world.  Just as the movies started doing marketing “placement” with Will Smith wearing Oakleys, etc., the gaming market has figured out how to insert brands into games.  Google just bought Adscape, a company doing the ad placement in games as a service.  Microsoft bought Massive late last year to do the same thing.

Shift Control Media www.shiftcontrolmedia.com is a very new company that looks to take the branding and marketing message of large corporations one step further than Three Wave.  They make games around the brand and marketing message.  These aren’t silly little Flash animations that you see today, but are actual video games, either downloaded or bought in store that are built for the brand.  It is a fascinating concept when you consider that a highly targeted free or very cheap game with interesting gameplay has already been a success for large companies like Burger King.

At the edge of gaming, rapidly converging with it due to the success of massively multiplayer games, are the social networks or communities that are focused on entertaining.  Two BC companies worth mentioning here are poised to be huge players by picking a targeted demographic and delivering very interesting original content.  Horizon Interactive in Kelowna has created Club Penguin www.clubpenguin.com (which if you have a 7 to 10 year old, I highly recommend) and it is a runaway success.  A community focused on bringing kids together to do fun games and interact is only as good as it is safe.  Horizon has focused on safety which makes parents breathe easier.  They have a free version and a monthly subscription.  The subscription allows the user to accumulate winnings from the games they play and trade it in for furniture and accessories for their igloo and/or clothes for their penguin.  Well, the jealousy of a 9 year old girl seeing a tricked out igloo her friend has usually leads to the parent signing up.

Rip.TV www.rip.tv is a community site for extreme sports that makes its own high quality material as well as aggregating other material around the subjects that they cover.  They have only been launched for a few months, but are serving up a million video streams a month already.  They have a great strategy of delivering free high quality content which will drag the highly interested under 30 male away from the grainy cell phone camera YouTube type content.  It seems to be working.

I have had the opportunity to meet with or talk to the CEOs of these companies and they are pumped.  I am sure there are others out there looking to cash in on the boom in digital media from our neighbourhood.  We are rich in digital media talent and ideas here and this sector is certainly one that will be key to our technology industry success.

What Do You Think? Talk Back To Brent Holliday

Something Ventured
is a bi-weekly column designed to supplement the T-Net British Columbia web site with some timely, relevant and possibly irreverent insight into the industry. I hope to share some of the perspective and trends that I see in my role as a VC. The column is always followed by feedback (if its positive or constructive. I'll keep the flames to myself, thanks).

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