The Anglo File: Wise Monkey Hopes to Cash In on Video-Game Business

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LONDON -- A recent newspaper article about the games publisher Eidos (EIDSY) under the heading "Lara Croft turns respectable and wins City friends" says much about how the European industry has recovered from the disastrous years of 1994 and 1995. A new company called Wise Monkey hopes now to improve the fraught process of funding and developing the games.

Wise Monkey is the brainchild of Steve Hickman and Tony Bourne, former senior managers at Eidos and Sony Computer Entertainment Europe (a unit of Japan's Sony (SNE), respectively. Backed by U.K. media investment group Durlacher, Wise Monkey hopes to cash in on the $17 billion annual market for video games by offering movie-style funding and project-management services to developers and publishers.

Hickman sees Wise Monkey as part of the natural progression of an industry that has rebounded from the downturn in the games market in 1994 and 1995, when most publishers in Europe were losing money to a situation where most are actually making money.

According to Durlacher, Eidos is trading at an historic price-to-earnings ratio of 37.5, Rage Software at 55.1 and SCi Entertainment Group at 31.7. The shares have been great investments, with all doing considerably well over the past year. Eidos is up 480%, Rage is up 550% and SCi is up 970%.

Alas, while the industry may have regained some of its luster, the risks and earnings volatility inherent in the game business continue to plague even the largest and most successful developers and publishers to this day.

Dodging the Slings and Arrows

For example, last month, Eidos turned in second-quarter financials that were below even the most pessimistic forecasts, and illustrated perfectly the seasonality of the industry and the problems of getting games developed on spec and on time.

Eidos remains heavily dependent on external developers for its games content -- 19 out of 26 games scheduled for release this fiscal year are from such sources. And although Eidos' management endeavors to keep tight control over projects in progress, the delay of the strategy game Cutthroats to the third quarter from the second illustrates the problem of slippage.

In addition, external developers are invariably small in size and they will be further stretched as the cost of developing games rises an estimated 30% over the next three years to between 1 million pounds and 2 million pounds.

It is these problems that Wise Monkey hopes to address.

According to Hickman, Wise Monkey hopes to make money from two areas. First, it plans to arrange financing for developing games by acting as an intermediary between banks and the developers and publishers. This type of financing has been used in the movie industry, where banks finance the filmmaking and hire a third party to sit on the set and act as their eyes and ears.

Hickman declined to release the names of banks that have so far expressed an interest, although he says one is a large U.S. bank with a sizable media department and the other is a major European bank, also with a media division.

Wise Monkey also hopes to make money from acting as a project manager to the games development process, including overseeing the outsourcing of any work and the auditing of the project.

By all accounts, this system has its merits. It has the advantage of getting away from the traditional means of funding where a developer receives an advance of the royalties from a publisher, and the publisher can also move the funding off its balance sheet.

However, as good a system as it may be, it doesn't necessarily translate into a lot of money for Wise Monkey. According to Nick Jones, an analyst at Jupiter Communications, the principal problem for the company will be one of scale.

"It takes a lot of work and about 18 months to take a game to market. If they're looking after two titles during that time, how much money can they make?" Jones asks.

Good question, and one Hickman said is impossible to answer at this stage with any accuracy. However, he did say they initially hoped to work on three to four titles in one calendar year.

Undoubtedly, the complexity and the costs associated with the development of games means the time has arrived for a more mature solution to the process. Yet as the developers and the publishers know all too well, a great idea is one thing, making money from it another altogether.