Psychochild's Blog

A developer's musings on game development and writing.

7 October, 2010

Indie games as a business
Filed under: — Psychochild @ 3:55 PM

As Psychoavatar is winding up, I’m back into “business” mode. I have a good amount of experience in running Near Death Studios, so I know to avoid pitfalls like taking on too much overhead too early. I’ve also started considering business opportunities and haven’t put marketing ideas off until the last minute.

In my daily reading, I’ve been seeing more articles about independent game development, particularly about business. I figured I might discuss a few of those since I’m in a business-minded mood.

First up is an interesting article in Develop magazine by Sophie Houlden entitled You Can Do It (pages 18-19). (Tip of the hat to the Rampant Coyote for the link.) In the article, she argues that you can get started making indie games with low cost. She wrote a companion blog entry where she definitely sold herself short, however. I think there is a lot of knowledge required, and I don’t game development is something where you can sit down with a list of things to learn and then crank out a game afterwards. Perhaps I’m a holdout romantic, but I still believe there’s a bit of art (and not just the visual kind) to game development. But, this quibble shouldn’t distract from the fact that you can get into game development for very low cost if you really want.

Another article requires a bit more delving but also provides insight into the next step: making a living from your game. Arcen Games, makers of the critically-acclaimed game AI War has had some financial troubles lately, as is all too common with indie developers. The online version of PCGamer has an article with an email from the company founder Chris Park detailing some of the financial realities behind the company. Hard data is always hard to come by since people tend to keep financial info secret, so this is fascinating for that reason. But, I think it also demonstrates some of the troubles you can have as an indie developer when considering the business side of things.

From a the very simplest point of view, your business is defined by two values: your income you receive and the expenses you pay. In this simplest version, you win the game if income is greater than expenses. In order to make a (bigger) profit, you either need to increase revenue or reduce expenses. For an indie game developer, income can be a bit hard to predict so your best bet is to make sure your expenses are as low as possible; this includes the strategy of keeping overhead expenses as low as possible, as I mentioned above.

Things get murkier when you try to expand from this. In his email Chris Park starts discussing the cost of the time he put into developing the game. In reality, that doesn’t matter and has little impact on the state of the business as it is now. In accounting terms, that’s a “sunk cost”: whatever higher-paid alternative he could have engaged in would likely not have produced greater value for the company directly. Since the company didn’t pay him, it doesn’t count as an expense, and it has no impact on the day-to-day running of the business.

The other issue to note is the Child’s Play donation. The cold, hard fact is that while a donation to that charity is very noble, from a business point of view it is an expense. In the interest of continuing your business, you have to look at how making such a donation helps your company. Usually, the goal is to get increased sales from such a promise that results in greater income for the company as well as a generous donation to the charity. But, a lot of people see this type of thinking as distasteful, but ignoring it can lead to having severe financial difficulties as demonstrated in this case.

Finally, it’s important to look at income as well. Every expense should be seen as a way to maintain (or increase) the revenue for the company in order to keep it running and allow the business to accomplish its goals. Note that not every business has to grow as big as EA, but I think most people want to keep a roof over their head and food on the table and keep the lights on so that they can at least maintain their games. So, it’s time to take a hard look at what generates income for the company. The obvious answers are launching new games and providing expansions. If I were in that position, I would look at ways to generate income in the short term for the company. In the longer term, figure out how to pace development to keep money coming in. Look at how much income an expansion to AI War can bring in and how long that income lasts. If it’s feasible to release expansions that frequently, focus on doing so. But, also plan to develop other games for when people tire of AI War. It’s a lot of work, but it’s what you have to do if you want to run your own company.

Not to pick on Mr. Park or his company, this is just an easily available example. I wish him and his company every success, and hopefully the company can use this opportunity to evaluate how the company will survive in the longer term. I certainly do appreciate the courage it takes to expose your financials to a high profile website like that.

What insights do you get from that article? How can indies run their businesses better? Or, are they doomed to always struggle, even with a rather successful game like AI War has been?

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  1. As I’m still strictly a part-time indie, I really don’t feel qualified to answer. What I can say is that I’m seeing a lot of reasons why even indies are moving more and more to the online model, with pay-for-content or other monetizing schemes rather than depending upon the next game selling as well as the last. Steady revenue generally trumps the feast-or-famine model, especially for small studios who can only have one game at a time in the pipeline.

    I don’t like that option, personally – I guess I’m a bit of a traditionalist – but I can see the temptation.

    Having read “The E-Myth Revisited” not too long ago, I can also see a massive case for predictable budgets, schedules, and revenues. With small studios, a project going over budget and over schedule is probably the #1 killer. You need a process in place for consistency, and hopefully not too much of a turnover in team composition.

    That probably takes more than a single data point (game release). And you probably need a rapid enough turn-around on release schedules to be able to detect trends before they become a problem. If sales are falling between releases, you want to know why and do what you can to correct or adjust to it BEFORE you’ve spent 18 months on the Next Big Thing.

    Comment by Rampant Coyote — 7 October, 2010 @ 4:22 PM

  2. It seems to me that Armor Games is more of a consortium of developers than a single studio. They also sponsor other developer’s games. If that’s the case, they have a multi-pronged approach to generate steady revenue.

    I heard someone say once that you can’t call your business successful unless you would be okay even if your two largest revenue streams were to disappear tomorrow. So maybe one key is to have lots and lots of revenue streams… ;)

    Comment by Rampant Coyote — 7 October, 2010 @ 7:15 PM

  3. I think it’s important to be aware of sunk costs. You may get off to a flying start releasing a game you’ve been idly pondering for over a decade, but then when you gave up the day job and have to produce a follow-up before the rent comes due find that creativity harder to find.

    So your first game might have thousands of hours of unpaid work but your second game might require all work to be paid (at least in the sense of keeping food on the table and the lights on if you gave up the day job).

    One option that works is to keep other revenue streams active. Brian, you could probably get consultancy work in addition to running your business.

    Another thing is to try to plan your finances long term. Pay off your debts, your credit cards. If you’re renting can you get a mortgage for the same monthly rate? If you’re paying mortgage can you pay off a lump sum to get the rate lower? All things to think about before you take the plunge and give up the salaried job.

    I’ve advised quite a few people in business start-ups (none in games as far as I can recall) and if there’s one common theme that applies to most businesses that fail it’s that they price themselves too cheap.

    I’m not saying that you can get away with being expensive, particularly in the realm of online downloadable games (which are very cheap).

    Let’s consider Minecraft. He’s selling it at $10 and will go to $20 when it hits Beta (but will honour the subs of all who bought it at $10). That’s pretty clever marketing because it appeals to two types of hard to reach customer – the Early Adopter and the Bargain Hunter.

    If he had launched at $20 maybe it would never have gone viral.

    But if you’re expecting your game to get a small fraction of his sales it’s quite possible that $10 simply wouldn’t cover your operational costs. And very few games, even good games, will go viral. You have to price it so that if it sells a reasonable amount, in line with standard industry expectations, it pays your bills with a little over.

    Comment by Stabs — 7 October, 2010 @ 9:21 PM

  4. Rampant Coyote wrote:
    It seems to me that Armor Games is more of a consortium of developers than a single studio.

    From what I understand, Armor Games is a portal that occasionally publishes its own work. They sponsor Flash games and host them on their site from third-party developers, too. They make money off the ads on the site, the developer gets paid and more exposure, so everyone wins. Flash games also tend to be really fluid, so there are few exclusive agreements. Usually you only get temporary exclusivity on a site from what I understand. Ultimately, a developer wants their game to go far and wide to get more attention for selling sponsorship for the next game.

    Stabs wrote:
    I think it’s important to be aware of sunk costs.

    Oh, I agree. But, the sunk costs aren’t an ongoing part of Arcen’s potential bankruptcy issues. It is valuable to keep the data of how much time was spent handy in case you need to do that again. But, it sounds like they’re trying to re-use their core tech, so the developers shouldn’t have to sink as much time into developing a future game. It sounds like their game Tidalis didn’t require nearly as much time.

    Brian, you could probably get consultancy work in addition to running your business.

    Feel free to recommend me to your friends! :) Sadly, most of the projects I’ve been part of have either been strangled in the cradle, or things didn’t work out and I’ve left the company before launch.

    But, yeah, running a business is tricky. One reason I have a lot of confidence in Psychoavatar is because we’ve done two projects already in a short amount of time. One step ahead of the game.

    Comment by Psychochild — 8 October, 2010 @ 1:45 AM

  5. To pick back on what Rampant Coyote is saying about having lots of revenue streams I think it’s an important thing to try to build.

    Some years ago the company I’m still working for had just a few big clients and the company almost disappeared after losing some of them. A decision was made to not try to compete for big contracts and at the same time we raised our hour rate. Sure a lot of work had to be made to find all those smaller clients but the situation is much more stable now than it has ever been.

    Being stuck on a big project for a long time you prevent people from being more versatile because they remain in the same set of knowledge they’re good with. That makes it much more difficult to adapt if something bad is to happen.

    I went through something similar with Golemizer. The project was huge for just one person and that kept me from expanding the possibilities offered to me. It would have been just fine if the success would have been like Minecraft but considering it didn’t happened I found myself with little ahead of me and it took you to get me to learn Flash and work on a couple of various projects of a smaller scale. Now seeing that in little time we have been able to work on 2 projects I see that I should have gone that way before. It’s easier to stay motivated, you limit risks of investing a lot (in this case time) and not seeing results.

    Of course finishing projects is not easy so pushing ourselves to finish many of them requires discipline but in the long run that’s a wiser way to face what might be or not coming ahead of us.

    One thing that seems a bit odd for me about AI War is how the value of the work done is evaluated. 1000 hours of work worth $50,000 that would mean $50 per hour with no overhead? I find it a bit dangerous to evaluate your time this way. If I’d do the same thing for the first 2 years of Golemizer that would mean it’s about $200,000 of work (gross estimation). I’m really not sure I would have given myself a salary of $50 per hour just to make sure I wasn’t endangering the whole thing. I guess he didn’t either though it’s not clear as we only have here total expenses and revenue to compare with his estimation of how much he thinks his work is worth.

    Anyway my point here is that even with amazing revenues I don’t think indie game devs can afford to pay themselves big salaries because success is so volatile. It might be tempting to finally pay yourself for the time put in your work but that might also be a good way to shoot yourself in the foot. I’d say that indie devs should never look at how much time they’re putting in a project as long as working on such project doesn’t endangered their health (body, social and financial).

    Comment by Dave Toulouse — 9 October, 2010 @ 8:58 AM

  6. People keep using the term “sunk cost” to refer to the unpaid work the owner did. I don’t think this is entirely accurate. A sunk cost is typically a cost you can not recover by spending more.

    Say you paid $20,000 to a contractor to develop a Mac version, and then discovered it didn’t work. You could pay another $10,000 to fix it, or you could abandon it. The $20,000 is a sunk cost in this example — you’re never getting it back no matter what your decision is to go ahead or give up.

    The problem with counting his own time as a “cost” is that it isn’t a cost. The owner of a small business gives away their time. Sometimes it’s billable, like when you do contract work. Other times, it’s not, like when you work on your tax filings or interview people for a job. The owner gets paid at the end because they get ALL of the money after expenses. If there is any.

    Comment by milieu — 9 October, 2010 @ 1:45 PM

  7. milieu wrote:
    A sunk cost is typically a cost you can not recover by spending more.

    I think that’s fairly accurate here. Spending more time or money isn’t going to let Mr. Park get his time back. Now, it’s possible that he exchanged his work to the company for an promissory note, but that doesn’t seem to be the case; the email he wrote made it sound like the main income was from royalties. So, that time is gone and trying to assign a value to it doesn’t help his company, even if it does show the dedication put into the company.

    The owner of a small business gives away their time.

    Definitely. You need to do what you must to keep the company going. If you want a steady paycheck, you need to work for someone else.

    Comment by Psychochild — 9 October, 2010 @ 8:15 PM

  8. I would say that the unpaid work anyone puts into a project will most definitely have an effect. A person working for nothing, worrying about paying the mortgage, utility bills, that radiator that needs fixing, the kid’s new school shoes, is not going to be as focused as a person who doesn’t have to worry about the financial situation outside of the job.

    Also, charity donations, at least in the UK, are a tax break. Smart accountants will be able to shuffle the figures so that what looks like a loss of 20K is actually a saving of 5K. This is why it’s a tax break in the UK, it means government doesn’t have to prop up charities as much because commercial businesses are able to cut their own costs by donating large sums to charity. Everyone’s a winner.

    But are indies doom to struggle? I’d love to point to the birth of Rockstar Games as an example of how indies can grow into massive beasts but these days I don’t think that’s possible. You can’t get away with making a game that doesn’t look like a million dollars and hope it goes global. But then, surely there will come a day when indie gaming is as cool and cutting edge as indie cinema – a day when whole swathes of the gaming community lose interest in blockbuster games and want something else. Having said that, I know someone out there is going to come along and rubbish this opinion by making a game in half an hour and coming out a year later with a multi-national development company with friends in all the highest places. Come on, prove me wrong!

    Comment by Dingo — 23 October, 2010 @ 3:14 AM

  9. Dingo wrote:
    A person working for nothing, worrying about paying the mortgage, utility bills, that radiator that needs fixing, the kid’s new school shoes, is not going to be as focused as a person who doesn’t have to worry about the financial situation outside of the job.Also, charity donations, at least in the UK, are a tax break.

    Sure, but is it going to end up being more money for the company than if they had not participated in the charity? Likely not. So, as far as keeping the company going, this is definitely how you have to look at it. Again, I’m not against charities and I think Child’s Play is a superb charity for associating good works with games, but this could be a problem that hurts the company even if it is ultiamtely a good thing.

    I’d love to point to the birth of Rockstar Games as an example of how indies can grow into massive beasts but these days I don’t think that’s possible.

    For every Rockstar or iD you have dozens of companies that didn’t quite hit the mark. I’m much more familiar with iD’s rise to fame, so let me use them as an example. They happened to have John Carmack, recognized as the leading expert on computer graphics for a very long time. They hit the shareware market just as that was warming up and as the internet was making distribution easier. The hit upon the concept of licensing engines as an additional revenue stream at the right time. The ease in “modding” DOOM help spread the game further. All of these different elements helped catapult the game company beyond others of the time. If a few of these elements hadn’t been fully realized, they might have been the typical game company with some success, then one stumble kills the company has happened to so many other companies.

    …surely there will come a day when indie gaming is as cool and cutting edge as indie cinema – a day when whole swathes of the gaming community lose interest in blockbuster games and want something else.

    I’ve been waiting for that to happen for over a decade now. The problem is that people keep paying for games that they think will be popular despite the anticipated quality. I’m hoping the new Star Wars: the Old Republic MMO is good, but that quote in the linked article shows exactly why indie games get overlooked. I think that perception is slowly changing over time, but there’s still a way to go before an indie game isn’t instantly ignored just by virtue of being an indie game.

    My thoughts,

    Comment by Psychochild — 23 October, 2010 @ 1:26 PM

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