Sorry, game over: Canadian software firms fall victim to fierce competition.

Abstract:

The most popular computer games are on CD-ROM, and the Canadian software industry is having a difficult time keeping up with competitors. Games have become more sophisticated, with many costing $1 million and up to two years to produce.

Full Text:

John Lowry was racing against time. For months, he pleaded with bankers, negotiated with creditors and pitched his ideas to investors, hoping that someone would extend a financial lifeline to his Discis Knowledge Research Inc., a small Toronto-based software company that was struggling to make it in the computer-games business. “Our competitors have deeper pockets than we do,” Lowry, the company’s founder and chief executive, told one group of prospective investors earlier this year. “That’s why we are here. We do not want to be in the poor-starving-artists business.”

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Despite his pleadings, time finally ran out on Lowry. On Aug. 7, Discis, the publisher of one of Canada’s few homegrown hit computer games as well as a widely praised series of children’s books on CD-ROM, closed its doors for good. With revenues of $5 million last year, the company left more than $3 million in debt and a string of angry creditors. Among them are the designers of its most successful game, “Jewels of the Oracle,” who claim to be owed more than $400,000 in royalties, and three college students who say they were not fully paid when Discis halted development work on another game earlier this year. “This is not an easy business,” Lowry says. “Learning about the marketplace has been a very rude experience.”

If Lowry has found the business rude, others consider it downright nasty. Often described as a mega-billion-dollar industry that generates more revenue than Hollywood, the electronic games market is now claiming more casualties than a high-tech war game. Traditional video game sales have gone stale while manufacturers race to introduce technology that can keep up with their biggest competitors-games stored on compact discs that are designed to be played on a personal computer. At the same time, publishers of computer games are still recovering from disappointing sales last Christmas brought on, in part, by a glut of titles. By the end of 1995, there were at least 1,700 games available on CD-ROM.

In the end, predicts Brian Beninger, the Victoria-based founder and former director of Sanctuary Woods, a publisher of CD-ROM games and so-called edutainment software, it is likely that only a handful of full-service companies will survive. Although it continues to produce children’s titles, Sanctuary Woods withdrew from the games and entertainment market this spring after losing $18 million last year, a result Beninger blames on stiff competition and fickle consumers. “It is a market that is always inventing itself,” he says. “It goes in cycles, only the cycles are not moving on a 50-year basis like steel or oil. They’re moving on a five-year cycle, and by the time they’re all sorted out everyone is moving on to something else.”

These days, in fact, the industry is changing almost as fast as an IndyCar on a computer-generated racetrack. When it appeared in 1972, Pong, the first successful video game, captivated audiences with a square ball that bounced across a black screen. In the early 1980s, Nintendo and other manufacturers began selling cartridge games that could be played at home on a television. The current generation of games for computers began to attract widespread consumer interest only two years ago, when CD-ROM drives became standard equipment for home computers. IDC Link Inc., a New York City-based consulting company, estimates that there will be more than 23 million CD-ROM drives in use in the United States by the end of this year.

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Today’s computer games are almost as complex as the technology that drives them. Although some games are still sold on floppy disks, true gamers favor CD-ROMs, which can hold far more data and hence are better suited to high-resolution animation, digital sound tracks and eye-popping special effects. The best games are often packed with “eye candy” such as computer-generated models of real people and full-color environments that can be viewed from any angle. As the industry has evolved, the solitary computer nerds who once developed games in their basements have become largely a thing of the past. Most new games are produced by teams of artists and animators working with professional musicians and, in some cases, well-known actors who play starring roles in video sequences that help advance a story line. Former Star Wars heartthrob Mark Hamill, bad guy Christopher Walken, and comedian Joe Flaherty have all been featured in recent games, as have Steven Seagal’s karate chops.

It all adds up to enormous budgets and exhausting production schedules. A typical game takes up to two years and $1 million to produce, says Chris Gray, whose Toronto-based company, Gray Matter, designs games for industry giants Microsoft Corp. and Sega of America Inc. But even big budgets and movie stars are no guarantee of success. A mere 10 per cent of all new game titles turn a profit, says Paul Giurata, managing partner of Catalyst Resources, an electronics consulting company in Palo Alto, Calif. The top one per cent-an estimated 24 titles last year-account for 42 per cent of all sales. “If you are going to play in this marketplace, you have to be in the top 10 per cent,” says Giurata. “Otherwise, we cannot see a way to set up a sustainable business model.”

Unfortunately for smaller companies, success often depends more on marketing than entertainment value. Marketing budgets can run up to three times production costs, much of it spent trying to buy a spot on store shelves. Chain retailers typically charge steep fees for display space and marketing, forcing some publishers to hand over as much as 15 per cent of sales just to get a game into stores, says Sharon Spring, vice-president of marketing for Merisel Canada, a Toronto-based computer products distributor. Lowry, for his part, says that one U.S. retail chain charged Discis $19,000 to ensure that “Jewels of the Oracle,” an elaborate puzzle game that leads players on a quest to enter a mysterious ancient city, was prominently displayed. “If you are not an established publisher, the chances of getting a title on the shelf are virtually zero,” he adds.

But demanding retailers are only one of several factors behind Discis’s death. Like Beninger, Lowry says his firm has had trouble keeping pace with the market. Lowry was something of an innovator when he, his son David and former Apple Canada software developer Richard Wah Kan established the company in 1988. Working from their homes, they and a team of programmers spent two years designing educational CD-ROMs for young children. The resulting “Learn to Read” series took off when Discis began offering schools a bundle of 10 discs, along with a CD-ROM drive, for about $1,000. Discis sold $1 million worth of discs in 1990, its first year of production, and double that in its second.

Discis was also on the leading edge in 1995 when it spent $1.5 million to publish and market “Jewels of the Oracle.” “What we saw was a growing base of computers installed in homes,” says Lowry. “I personally thought ‘Jewels’ would sell over 250,000 copies.” The game was popular, but sales stalled at 80,000 when Discis ran out of marketing money. At the same time, sales of its educational titles fell flat as competitors launched hundreds of less expensive titles. “The bottom line is that teachers won’t spend five cents on it if they can get it cheaper in a store,” says Lowry.

The bottom line for Discis was a serious cash-flow problem. Earlier this year, the company stopped developing its own games and began hunting for cheaper software titles that could be released at the rate of about two a month. The theory, says Lowry, was to spread the risk around and “make our world predictable,” a tall order for anyone in the technology field.

Although Lowry’s gamble failed, new players continue to bet on the computer-games market. Ottawa-based business software giant Corel Corp. is among the latest entrants. It plans to release its first four CD-ROM games this month. Five more will follow by Christmas. Despite the odds, Gail Williams, director of Corel’s CD Home Product line, says the company believes it would be a mistake to stay out of the games market. Games now account for nearly half of all consumer CD-ROM sales, and the market is expected to keep growing by about 40 per cent a year. “You have to go with the flow,” says Williams. “If we are going to diversify, we have to take some risks.”

The challenge for any publisher is to keep up with the latest trends. These days, the demand is for network software-games that can be played by several people at once over a computer network or on the Internet. “CD-ROM was going to be the next big thing, and now the Internet will be the next big thing,” says programmer Aurel Langlois, who helped produce “Jewels of the Oracle” and is now a director of Electramedia, a computer-games producer in Toronto. “I think they are right about the Internet.” Even if they are wrong, there will be no shortage of companies willing to pursue some other dream of digital riches.

READY, AIM, SELL:

Value of computer-games software shipped to North American retailers, in millions:

  • 1991: $357
  • 1992: $459
  • 1993: $540
  • 1994 $614
  • 1995 $877

Source: Software Publishers Association

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