Can Vancouvers billiondollar video game sector survive the tectonic shifts reshaping the industry?

It looks like pure fun and games at the sprawling half-million-square-foot Burnaby campus of video game giant Electronic Arts Inc. (EA). Its noon and the cafeteria clatters with the sound of software engineers digging into bento boxes while fellow employees bash at arcade games in the Executive Lounge. Outside, a soccer game real, not virtual is in full swing on the all-weather turf, while other workers make use of nearby amenities including a weight room, yoga studio and basketball court. Meanwhile, a gang of awestruck visitors stock up on games and EA-emblazoned souvenirs at a store near reception laughing and snapping tourist pics of each other to capture memories of the place where their favourite titles are made. Theres an energy in the air that seems part university campus and part amusement park. Despite appearances, however, this is serious business. Even as industry sales seemingly defy the recession with 2008s US$11 billion in worldwide video game sales surpassing 2007s figures by 26 per cent trouble can be seen in these halls and in those of other B.C. game
. .

By Dee Hon

pHotograpH By Clinton Hussey

48 BCBusiness June 2009

June 2009 BCBusiness 49

developers. Desks in Burnaby are being cleared to make room for workers from EAs shuttered downtown Vancouver studio, Black Box, as the company consolidates facilities in an effort to cut costs. EA is bleeding cash quarter after quarter, losing US$641 million in 2008s fourth quarter alone. The California-based firm announced in December 2008 that it was slashing its worldwide workforce by 10 per cent, or about 1,100 workers; about 300 of those jobs are coming out of B.C., leaving the local offices with 1,600 employees. EA is the bedrock of Vancouvers video game cluster, which, according to UBC economic geographer Trevor Barnes, includes some 140 companies employing about 3,500 people. Many of the other studios in town none of which employs more than 200 are startups founded and staffed by people who first cut their teeth at EA, outfits that werent even in business five years ago. And many of them are not faring particularly well either, including Radical Entertainment Inc., once the second-biggest video game employer in town, which sacked about half of its 230 workers last August. Other studios are cutting staff too. We have an industry where 800 people were put out of work in the last six months, says Jared Shaw, who runs Vancouver-based video game recruitment firm 31337 Recruiters. When software developers stop getting snapped up, you know things are really bad. Changing consumer demands, the global economic meltdown and competition among international video game makers is re-sorting the industrys winners and losers. The cost of developing games is soaring and companies are losing their stomach for risk cutting back on the number of projects theyre developing, which means less work all around. In addition, there are a growing number of jurisdictions around the world pushing to compete with Vancouvers video game cluster, offering various incentives to lure both companies and prospective employees. For the local industry, estimated to contribute almost two per cent annually to B.C.s GDP, the challenges are mounting.

In recent years, local studios Relic Entertainment, Action Pants Inc. and Radical Entertainment have been bought out by publishers (THQ Inc., Ubisoft and Activision respectively), making them much more dependent on the fortunes and whims of their partner or parent. Publisher-owned studios gain access to their parents deeper pockets but lose a degree of control; the 120 jobs lost at Radical last year came after Activision shelved two out of the four projects it was working on. Independents, on the other hand, can make games for more than one publisher as a hedge against collapse. Vancouver-based Blue Castle, for example, recently more than doubled its staff, from 70 to 165, thanks to its deal to make Dead Rising 2 for Japanese publisher Capcom Entertainment Inc., even as the studio makes a sequel to The Bigs for 2K Sports.

Brown announced in February this year. But for EA, shifting operations may not be enough. The company, once the worlds dominant publisher, is now faltering to the point where its key rival, Santa Monica-based Activision, has a market capitalization more than double its own (US$13.4 billion versus US$6.1 billion). Both companies took in about US$1.6 billion in revenue in the fourth quarter of 2008, and while both lost money, EA lost significantly more: US$641 million versus Activisions loss of US$71 million. The chief problem: EA is spending too much money making too many games that too few people are buying. The company makes about 35 to 50 titles a year, spending 27 per cent of its sales on research an development, whereas its rival focuses on just 15 games and spends about 10 per cent of its sales on R&D. EA has responded by cutting back the number of games its developing, consequently trimming its staff. I think EA needed to focus down on its priorities and

Nowhere are the industrys seismic shifts more keenly felt than in the increasingly precarious world of development. Within the business, there are essentially three players: console makers, such as Sony Corp., Microsoft Corp. and Nintendo Co. Ltd.; thirdparty publishers, such as EA, Activision Blizzard Inc. and Ubisoft Inc.; and the usually much smaller developers, such as Radical and Blue Castle Games. Console makers make the machines that run the games, although Nintendo also develops and publishes a fair amount of its own software. Publishers market and distribute the games and typically own the intellectual property behind them, while development studios employing anywhere from 150 to just a couple dozen people and working on one or two games at a time actually make the games, creating all the storylines, artwork and programming.
50 BCBusiness June 2009

gamesmiths: ea vice-president Pauline moller shows off eas half-millionsquare-foot Burnaby studio, one of the biggest video game plants in the world

EA, like other publishers, partners with smaller independent studios to develop some of its games (including the next installment of its blockbuster Need for Speed series being developed by Slightly Mad Studios in London, England), though most of the companys games are made in EA studios in such places as Shanghai, Istanbul, L.A. and Montreal; its Burnaby studio, or EA Canada as its known, is the companys largest operation. Increasingly, the push at EA is to shift development to cheaper facilities. At the end of fiscal year 09, we expect to have 19 per cent of our employees in low-cost locations versus 13 per cent a year ago, EAs CFO Eric
phillip chin

say, We make so many great titles, we are cannibalizing our market ourselves, says EA Canada vice-president and general manager Pauline Moller. As a video game industry, we have so much great product out there; its a fight for the consumers dollars. While Activisions situation isnt as dire, it too has stated a desire to avoid risking its fortunes on untested games, focusing instead on sequels to successful titles. Blame the recession for part of the industrys new-found risk aversion. Consumers are still snapping up games, but with fewer dollars to spend they are more selective about which titles they buy. Buyers cant all shell out for five different games at $60 a pop, says Moller. Maybe they can only afford to buy one great
bcbusinessonline.ca

game. So the most popular titles get all the sales while the also-rans end up in the bargain bin. There is growing separation between the sales of the blockbusters and those of the rest of the heap. But even when the economy rebounds, publishers will likely keep a tight rein on the number of games they make which for Vancouver studios means fewer projects to go around. Thats because the cost of developing new games has risen to the point where publishers cant afford as many gambles. The video game industry moves in five- to six-year cycles, reshuffling every time another generation of console, such as Microsofts Xbox 360 or Sonys Playstation 3, comes out. Each generation of video game console has more computing firepower than its predecessor and, as a result, the visuals of the games are more stunning. The physics of the movements are more realistic. The whole playing experience is simply more immersing. But consequently, developers need to pour more resources into the games to take advantage of the technological advances and the cost differences are striking. In the last cycle of consoles, you could develop a pretty solid Playstation 2 game for $5 million to $7 million, says Colin Sebastian, senior research analyst in San Francisco for Lazard Capital Markets. A pretty solid game for the Xbox 360 or the PS3 is probably $20 million; thats a pretty big difference. You cant develop 20 games and just hope that one or two are hits. You have to probably focus on a fewer number of games and then put more into each one. More money is riding on the fate of fewer products. Any failures will put a company into a much deeper hole. Unfortunately for EA, the key franchises that once brought the company success have stalled, leaving the company scrambling to recover. Its Need for Speed series has delivered hit after hit since 1994, but the most recent iteration, Need for Speed: Undercover, bombed with critics and failed to meet the companys undisclosed sales target. IGN .com, one of the top gaming websites, said, Need for Speed: Undercover is a poor game with a ton of problems, both technically
June 2009 BCBusiness 51

more with less: the simple, yet compelling graphics of On the Rain-Slick Precipice of Darkness (l) and Wii Golf (r) prove that games dont need cuttingedge visuals to be fun

and in terms of design. (The game, produced since As I finish my tour of EAs studio and Why has the inception at EAs downtown Vancouver Black Box lunch hour comes to an end, the halls deaden Wii been such studio, will see its next sequel made in the U.K. by into silence. Few industries squeeze as much Slightly Mad Studios. EA denies the move has anypassion and talent out of their workers as EA a hot seller? thing to do with poor performance.) does here. On the floor where developers Because its EA built much of its business around its awardare making the companys upcoming tennis winning sports games. Its industry-leading titles title, dozens of 20-somethings sit unblinkfun: to play such as NHL, NBA Live and FIFA, among others, are ing before twinned LCD screens lit up with it, you swing produced in Burnaby. Sequels are pumped out each the green of a Wimbledon lawn. These guys, your arms year as surely as the seasons. But lately, success has like the gamers who will one day forego not followed. The sports business in games has sleep and nourishment to play the product, and throw actually declined, says Sebastian. So has the racing are in the zone. Every pixel has to be peryour fists like genre. Racing games are not as big as they used to fect. Each stroke of the racket is repeated be. Where EA historically had a lot of strength has again and again. This is the studio, after all, youre a kid on actually been a weakness in this cycle. Activision, that brought in developers from 18 different a playground on the other hand, has scored hits in its massively soccer-mad countries to ensure that its FIFA popular Call of Duty first-person-shooter series and Soccer 09 would be made by people with the rather than in its music game Guitar Hero. beautiful game in their DNA. just twiddling The real game changer in the business, however, Ever the diligent journalist, I pick up an your blistered has been Japanese console maker Nintendo. Most Xbox 360 from London Drugs on my way of the industry had predicted that either the Xbox home from Burnaby and pop in EAs highly thumbs 360 or the Playstation 3 would lead the most recent decorated hockey title NHL 09. Im absorbed generation of consoles. Publishers developed games into a world of stunning realism. Each playfor those machines accordingly and largely ignored ers face is masterfully rendered. Their moveNintendo. But Nintendo shocked everyone. Its Wii a cheaper, ments are the product of hours spent recording real NHL stars less powerful machine with an innovative motion-sensing control- actions in EAs motion-capture studio. True hockey fans would ler has outsold its rival consoles two to one since being intro- recognize the individual players characteristics: the Canucks duced in 2006, leaving publishers scrambling to build games for Sedin twins are slick but soft; Calgary defenceman Dion Phaneuf it. None has been very successful so far. Of the top 10 games sold practically runs opponents through the boards. But only after in the U.S. in 2008, five were published by Nintendo for play on five hours of frustration learning to pass, shoot and check do its own machines. Wii Sports recently became the worlds number I finally manage to score a goal. Another five hours later, with one selling video game of all time, selling more than 40 million dawns light approaching, I start to win a few games. EA and the copies to surpass the lifetime sales of 1985s Super Mario Bros. other big publishers have for years targeted such hardcore gamNeed for Speed: Undercover, by comparison, has sold about four ers: players with the time and dedication to invest countless hours million copies across all three platforms plus the PC, according to mastering the games. Sports titles, with millions of dollars spent vgchartz.com. on improving their ever-growing realism, further demand that the Why has the Wii been such a hot seller? Because its fun: to players have passion and knowledge of the sport at hand. If you play it, you swing your arms and throw your fists like youre a kid dont know your slapshot from a wrist shot, youd never appreciate on a playground rather than just twiddling your blistered thumbs. the intricacies of a 2-1-2 forecheck. It turns out that a massive segment of consumers have a different Nintendo, on the other hand, figured out that there are legions idea of what fun is compared to the games-industry insiders who of people who want to play but arent necessarily sleep-deprived thought the Xboxs horsepower or the PS3s Blu-Ray capabilities gaming addicts. Wii Sports, for example, has geometrically shaped would rule the day. EA and the other big publishers have spent characters lacking even arms to wield their clubs, bats and rackhundreds of millions fighting each other for what is a mere frac- ets. To play tennis, you just swing the Wii remote like a racket to whack the ball. To play golf, you swing the controller like an tion of the game-buying public.
52 BCBusiness June 2009

iron or putter. The Wii is the kind of system even Luddite seniors can pick up quickly and have a blast. I know: my retired parents have one. The Wii is drawing all kinds of people into the game-buying market, not just the young male obsessives who call themselves gamers. Nintendo saw it had no chance competing in the arms race of producing ever more expensive and powerful consoles and games, and went down a different, more lucrative path. So where does all this leave Vancouver? The bulk of its industrys fortunes rests on whether EA can turn itself around, particularly the sports titles produced in Burnaby. I think all these problems can be rectified, says Lazards Sebastian. Thats the beauty of having new products every year. You have to have the capital to be able to invest in new products. You have to have a sense of what the market is demanding. You really have to have your finger on the pulse of the business. And you have to have execution, which is the hardest part. EA has high hopes for its new Grand Slam Tennis and fitness program EA Sports Active (both for the Wii) and plans major moves into online gaming. So dont start writing an obituary for EA just yet. Because of its sheer size, the company has the ability to screw things up and recover from it. The smaller studios in town face different challenges. EA can shelve a couple of titles from its catalogue of dozens and keep rolling, but a studio that only produces one or two games would have to shut its doors. And with jurisdictions from around the world fighting tooth and nail for diminishing development dollars, that risk for local studios grows greater. Quebec, as one example, offers a 37.5 per cent labour tax credit something B.C. doesnt have while fast-rising competitors such as Singapore offer well-educated, English-speaking workers and close cultural connections to the critical Asian markets, in addition to low costs and government incentives. Still, recruiter Jared Shaw sees opportunities for the smallest of Vancouvers developers in all the malaise. As much as I dont like layoffs and real major shakeups in the industry, I like them for the innovation that they create, he says as we talk over lunch at White Spot. Some of these unemployed game developers, he believes, are going to get off their couches, start their own companies and build their own games. And as the Wii has proven, there is a largely
bcbusinessonline.ca

untapped market of game buyers out there beyond the hardcore console gamers. The timing is actually good in some respects when you look at casual online games, the emergence of them, and things like the iPhone, he says. One guy can make a casual game thats downloadable. One guy can make an iPhone game. Five or six guys banded together can make some kick-ass casual games and kick-ass iPhone games. Shaw puts down the shrimp sandwich hes eating and pulls his iPhone out of his pocket. He flips through some of the games and shows me one called Slotz Racer. For $2.99 you can download the software and make a little slot car go around a track on the iPhones 3.5-inch screen. Its not the kind of thing you play until 5 a.m., just something to kill time waiting for your bus or plane. Companies are also discovering a market for easy-to-play casual games for the home computer. Vancouvers Hothead Games makes a $15 downloadable title called On the Rain-Slick Precipice of Darkness, rendered in gorgeous (and relatively cheaper) 2-D. It plays more like a chooseyour-own-adventure graphic novel than an adrenalin-fuelled console shooter. The development cost on it is nil compared to a console game, says Shaw of the new technologies. Indeed, anyone with $100 for Apples iPhone development kit, some skills and spare time can start their own game company. To build a console game, youd need half a million dollars for an Xbox development kit and a similar sum for a game engine, he says. What were seeing is all these scrappy little developers starting up all over the place. Maybe just maybe some of these startups will make money. And maybe still, one or more of them will turn into something big. EAs giant studio in Burnaby, after all, began as a little project started by two Vancouver high school students, Don Mattrick and Jeff Sember, back in 1982. They sold their company, Distinctive Software, to EA in 1991 for $11 million, bringing the publisher to Canada and launching the countrys video game industry. This could just be fantasy: thinking that the citys recent turmoil is a seed that will blossom into a reborn industry whose iPhone games, online casual titles and other, yetunforeseen, kinds of interactive software make Vancouver the envy of the world. But when it comes down to it, fantasy is what this business is all about. n
June 2009 BCBusiness 53