Our grand children probably wont be drooling over the prospect of playing Grand Theft Auto 46: Salem, South Dakota (controversial content: the top-less co-eds cow-tipping easter egg and the unfortunate “Kill the Norwegians! Kill the Mennonites!” line), so, what games will they be fawning over? Heck, what games will we be fawning over a couple of years down the road? And, not insignificantly, who will finance the development of the next wave of video games?

That last question is one that Mercury News journalist Dean Takahashi asks in his speech I Don’t Get It: Why Is It So *&@#$% Hard To Finance Video Games?” at the Video Game Investor Conference, a “cutting edge event [that] will bring together a visionary group of industry leaders from the video game and investment communities to share perspectives on growing investment opportunities, current strategic trends and up-to-the-minute challenges facing the multiplayer internet-based video game and the wireless/mobile game industry today.”

As suggested by the title of his speech, Takahashi wonders “[w]hy is there such a mismatch between the capital needs of the video game industry and the investment that is going into it?”

Takahashi outlines the economic fundamentals of the gaming industry (volume, profitability etc) and its steady march towards consolidation and bigger development budgets. Nothing wrong with either one, but Takahashi notes how skewed investments are in the industry:

Video games are an attractive market. But there seems to be a lot of fear about investing in them. Venture capitalists have shied away from them, in part because investments in early stage development companies carry huge risks. It’s a hit or miss business, and venture capitalists have no particular skill at picking those hits…

According to Takahashi, there are two areas where VCs are willing to invest: Online gaming and cell phone games. Neither is a bad market, but both combined are just a small niche of the over all video game market.

It doesn’t take much money to get started in this business so companies such as PlayFirst and LimeLife are taking small $5 million rounds. If the games cost only $100,000 to develop, then that money can go a long way. A lot of developers who are refugees from the console wars are taking lessons from this and moving from console games to cell phone games. The economic model is friendlier.

But if you look at the numbers here, something is wrong. There’s an $18 billion market for console software, but nobody wants to invest in it, unless they’re buying EA stock at some very high multiples. EA is so big at around $18 billion market valuation that a lot of the Hollywood studios can’t afford to buy it. There’s a $1 billion cell phone market, and a $2 billion online games market, and the investors are climbing over each other to invest in those markets.

I don’t get it. So why is this the case?

It gets even more interesting from there.

Read it all

In lieu of financing, some developers have to self-finance, as noted in this Wired story from March this year:

In getting Alien Hominid released for the PlayStation 2 and GameCube, The Behemoth did something virtually unheard of in the industry: It fully developed its game before bringing it to publishers.

Originally, the team had developed the game for web downloading, and won over millions of enthusiastic players. But the developers wanted their game to be available for console play. This was no cheap task.

“We self-funded through mortgaging our houses,” said producer John Baez, while another team member sold his house to raise money.

Along the way, The Behemoth spent what its team members call a typical PS2 game-development budget — they wouldn’t be specific — all the while knowing they might end up getting nowhere.

“We were going to take it to the end,” said Baez. “We took a pretty much finished game in to publishers, and said this is the game we want to do.”

But in the end, it worked. The group struck deals with publisher O-3, which distributed Alien Hominid in the United States, and with another publisher for European distribution.

A less interesting and quite windy examination in The Economist of the social role and impact of video games.