At 7 o’clock on a Wednesday night, the basement of a trendy Gastown pub has been taken over by young men speaking in a strange foreign tongue. As they talk in the acronym-filled dialect, referring excitedly to SaaSs, APIs and MAUs, you could be forgiven for thinking you’d walked into another country called Open Source whose inhabitants worship a mysterious deity called “the cloud.”
In reality it’s just startup night at the Alibi Room, a meet and greet put together by some unofficial leaders of the digital media circuit, including Vancouver’s Bootup Labs, a sponsor of young digital media companies that’s part venture capitalist firm, part mother hen. In exchange for giving Bootup five per cent of a company’s equity, the founders get office space and mentors for an eight-month term as well as access to a $100,000 line of credit, which, when spent, gives Bootup another 10 per cent stake.
On this night, representatives from about 40 companies are scattered through the bar. They quiz each other about business models, revenue streams, microtransactions and subscriptions, and debate whether today’s big release, the Apple iPad, will take off. From the din of conversation pops the inevitable question, from one young techie to another: “Yeah, OK, but how do you make money?”
It is, indeed, the question facing entrepreneurs at the forefront of B.C.’s digital media industry, a nebulous conglomeration that spans web development, video gaming, digital animation and effects, e-learning and mobile and wireless content and applications. According to industry association DigiBC, the cluster (centred in the Greater Vancouver area) accounted for 1,300 companies, 22,000 employees and $3 billion in revenue in 2009 when it fell under the catch-all phrase “new media” – but don’t use that term here. It stops the conversation flat, like nails on a chalkboard.
“The term new media has been around since we were doing CD-ROMs and it never got updated,” says Boris Mann (above), managing director of Bootup Labs. A wry, sandy-haired 35-year-old, Mann proudly sports a T-shirt decked with his own company’s logo. “New” media generally describes familiar content producers such as filmmakers and video game studios, he says, not this new crop of companies selling their own products electronically. Here, everything is online, heavily geared toward a growing mobile market where smartphones are expected to eclipse PC sales by 2011. And that market is favouring small companies.
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“The days of the big employers are like the dinosaurs: they’re gone.” That’s the verdict from Paul Kedrosky when I reach him by phone in Kansas City, where he’s a senior fellow at the Ewing Marion Kauffman Foundation specializing in innovation, entrepreneurship and the future of risk capital. Kedrosky used to teach information technology at UBC’s Sauder School of Business and mentors some of the startups at Bootup Labs, so he knows the scene here pretty well. Vancouver’s digital media sector is in for a big disruption, he says, similar to what has happened in centres such as New York and San Francisco where large media companies have collapsed.
“The New York media industry is being blown up because of broken economics and bloated cost structures,” says Kedrosky. In Vancouver the industry heavyweight has long been video game publisher Electronic Arts Inc. (EA), which at its 2008 height employed 1,800 people locally. Despite its former place at the helm of “new” media, EA’s model of economics is, Kedrosky says, “as orthodox as NBC.” Too much money is being spent on too many employees making a product that not enough consumers want to buy. These days, he adds, the small screen rules and small companies are better suited to navigate that space.
Edward Williams, a New York-based senior research analyst with BMO Capital Markets Corp., agrees: “Changes in the competitive landscape mean that smaller companies are equally as able, if not better equipped, to reach that market.”
As Williams explains it, a publishing studio such as EA needs tens of millions of dollars, hundreds of employees and about a year to publish one game. It sells for at least $60 at a retail store and can only be played at home on a big black box that plugs into the wall. If the game flops, it’s back to the drawing board to start the process over. A mobile company, on the other hand, can produce a browser-based game with a handful of employees in a couple of months and distribute it through Facebook, Apple’s App Store or other mobile markets for a few dollars a download – and it can do it for a few thousand dollars in development and labour costs. The games are smaller, shorter, less complex and are accessible from any device with an Internet connection. If the game sells well, great. If not, it can be changed or updated based on consumer feedback. And consumers, Williams says, are coming to expect that.
The shifting market has big publishers scrambling to retool as they try to emulate the dexterity and cost structures of their smaller competitors. In the past year, EA has downsized considerably, cutting 16 per cent of its worldwide head count. Another Vancouver studio, Radical Entertainment Inc. slashed 90 jobs in February of this year after halving its workforce in 2008 and Korean-based Nexon Corp. shuttered its Vancouver studio entirely in January 2009, laying off 90.
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Back at the Alibi Room, Boris Mann isn’t worried. The carnage only means there’s a glut of talent for the startup scene he’s working to nurture.
Vancouver has a lot going for it that’s attractive to digital entrepreneurs, says Mann: proximity to Silicon Valley, multiple post-secondary institutions – “plus it’s green while the rest of the country is white.” When your product is entirely virtual, physical location counts for a lot.
Mann gestures around the room at his colleagues, comparing this emerging industry to an ecosystem where the newer companies build products on the backs of ones that came before: “There’s a lot of standing on the shoulders of giants.”
Over at the bar, Steven Rogers and Jamie Martin talk shop with Ben Hesketh. All three are recent additions to Bootup’s mentorship program. Rogers and Martin are behind Status.ly, an application that can organize a user’s different social networking accounts, while Hesketh and partner McElroy Flavelle have launched Compass Engine, a tool that allows iPhone gamers to know where they are in space and time. Neither of these companies (total head count: four) needs to shell out big bucks for a physical server to store its data because Joyent Inc., started by David Young and Jason Hoffman – one of the biggest outfits here with 15 employees – will happily provide that service for as little as $16 a month. Nitobi Software Inc., Brian LeRoux’s company, will also hook you up with open-source (non-copyrighted) software to build your applications.
And if you’re looking to boost traction for your video game, well, look no further than Bootup Labs protege, OverInteractive Media Inc. “The web is built,” the company’s 36-year-old CEO, Jason Joly, tells me, his assertiveness a little incongruous with his ultra-casual trucker hat and Fu Manchu moustache. “You don’t have to do anything. It’s like this room, it’s like Vancouver: someone’s already laid the electricity and there’s the outlet over there. You know what I’m building? I’m building an electric hair dryer, something that will make your life a little easier or more fun.”
Joly’s “hair dryer” is DimeRocker, a tool that makes it easier for independent video game developers to market and distribute their games through social networking sites. Joly explains that each site acts differently around games and applications. Right now, he says, if you want to put your game up on, say, Facebook, MySpace, Bebo and Orkut, you’d have to visit each site individually, configure the code to fit the platform and then monitor the game and update it as the sites change. There’s also a chance the game could be refused publication, and the wait for approval can be lengthy.
DimeRocker simplifies all that. Game developers sign up for a free account, plug their code into an easy email-like template and DimeRocker delivers it to social networking sites. All told, Joly says, the social web represents a potential reach of more than one billion people, plenty of room to develop a niche market. “But what’s even better,” he adds, ever the salesman, “the solution breaks down the barriers between the social networks, so if you’re in MySpace and I’m in Facebook, we can actually play against each other.”
Extra tools like leader boards are added à la carte, including amicrotransaction tool that allows developers to charge a small fee, usually under $10, for their games. DimeRocker takes around a 30 per cent cut of each transaction, the same revenue-share model used by Apple’s App Store and Google’s Android Market. “Our motto is: You create a great game, and we’ll create great tools to allow you to push out to the social web and basically make money to become self-sustainable,” he says. “Not just self-sustainable but potentially very profitable.”
Just how profitable remains to be seen. When I talk to Joly, OverInteractive’s staff of 10, seven full time and three part time, is working to have their product up and running before DimeRocker debuts at the Game Developers Conference in San Francisco in March. But even in its incomplete form, DimeRocker’s potential has caught the eye of prominent tech blogger Dana Oshiro, of Microsoft-sponsored ReadWriteWeb, and piqued the interest of several independent game developers who hope to benefit from the system.
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One such developer is Ted Nugent of Vancouver’s Genius Factor Games Inc. A former EA staffer, Nugent, 35, left the company in 2007 to work for a smaller studio and went into business for himself a year later. “When the App Store came out, that was the last part of the puzzle for me to know that Genius Factor Games could be successful,” he says. “Because it was like, finally, the market forces have changed, and the technology was at a point where I could see from where I was to where we would have a successful media entertainment company.”
Nugent explains that it takes about four to six months and a budget of $60,000 to $80,000 for Genius Factor to put out a game for the iPhone. His first title, Gravity Well – billed as “an innovative and addictive mix of pinball and mini golf” – has garnered widespread praise and won the prize for Best Hand-Held Phone or PDA Title by news site Village Gamer, but it’s a struggle (especially without a marketing budget) to stand out among the tens of thousands of iPhone games. Still, Nugent says he’s pleased with Gravity Well’s performance so far, pointing out that it continues to sell well after nearly a year on the market. “From our research, because there’s such a huge volume of games out there, your game comes out and you have roughly two to six weeks on average of your sales and they stop. Without more marketing, it drops down to zero and that’s it, you go on.”
How long Genius Factor can go on, however, remains an open question. The company isn’t generating much revenue to date (Gravity Well sells for 99 cents), with Nugent’s six-person operation surviving on $150,000 cobbled together from family, friends and leveraged personal assets. Fear over heavy competition in the content market tends to make potential investors nervous, Nugent says, adding that even getting a line of credit was “next to impossible” because financial institutions don’t understand his business. He has big hopes for his next title, though, which has a significant advantage: it comes with a built-in fan base.
Enter Riese. When producers Nicholas Humphries, Galen Fletcher and filmmakers Kaleena Kiff and Ryan Copple had an idea for a sci-fi fantasy series set in Elysia – a fictional kingdom on the edge of ruin ruled by a clandestine organization called the Sect – they knew they were unlikely to find a broadcaster. In late 2008, the media industry was in crisis, with production spending cut to the bone. So the quartet found some office space – coincidentally right next to Genius Factor Games in an anonymous rental building near Vancouver’s Olympic Village – and set about financing and shooting the series themselves, broadcasting online through YouTube and Koldkast.
“Going online basically allowed us to go straight to where sci-fi fantasy fans live and tap into that market without the help of a broadcaster or a huge marketing budget,” says Humphries, 29. To bolster the series’ fan base, the producers added an online game to Riese and enlisted neighbours Genius Factor to produce an iPhone title.
While the series has received critical acclaim (including a glowing review in the New York Times in November 2009) and has steadily gained viewers (almost 1.25 million by January), revenues have proven harder to come by. Riese gets some money from ads on YouTube and sales of T-shirts and other swag, but Humphries is the first to admit that the project isn’t self-sustaining. The partners have been getting by on $550,000 raised from family and friends – $250,000 for the first chapter of five episodes and $300,000 to shoot the second five – with the understanding, says Humphries, that they very likely wouldn’t see a return.
“It’s a gamble, but I think everyone’s gone into it knowing this could be a financial loss, and that’s OK because long-term it’s going to pay back, either as Riese or just giving us all credibility as filmmakers to go and do something else afterward.”
That gamble may soon start paying off. Early in the new year Riese signed a deal with U.K.-based Fireworks International, a digital distribution branch of ContentFilm PLC. There’s been no money exchanged yet, but Fireworks is looking to monetize the 10-minute webisodes by adding paid downloads through broadband sites and iTunes. The company is also looking at releasing DVDs and is in the midst of putting together a pitching package for a transition to traditional network TV. The deal couldn’t have come at a better time, Humphries says, as the four principals had reached their agreed-to limit for self-financing. The prospect of taking Riese into paid territory has also made it easier to swallow Fireworks’ caveat that the episodes be pulled offline while distribution deals are in the works. That move has disappointed some fans, but diehards can still get their fix on the show’s online games and with the Riese iPhone game, set to be released this spring.
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Without knowing it, Riese’s creators may have tapped into the new standard for entertainment media with their multi-faceted production approach: web, games, apps and a possible transition to TV and DVD. That’s according to media consultant Catherine Warren. As founder and president of Vancouver-based FanTrust Entertainment Strategies, Warren spends the bulk of her time helping entertainment companies, including some big-name clients such as broadcaster CBC, build audiences in the digital space (or in some cases, reconnect with audiences that have migrated there). Her primary tools are broadband video, social media, games and mobile apps.
“Let’s say you’re a broadcaster. There’s an increasing expectation that our clients who are producers will show up not just with a TV pitch but with a whole 360-degree pitch: here’s what our show is going to look like on air, online, via mobile; here’s how we’re going to monetize it through e-commerce; here’s the game; here’s how all these things roll out,” says Warren, who has consulted with entertainment companies throughout North America and Europe, is a judge for the Interactive Emmys and sits as a board member of the World Summit Award, a UN partnership project recognizing “new media for a better world.”
Warren often matches her big media charges with small, digitally conversant innovators, the startups, to access the online market. She says that larger companies, while not exactly the dinosaurs identified by Paul Kedrosky, are increasingly reliant on nimble innovators for their survival; EA, she notes, acquired London-based social gaming company Playfish, a 200-person outfit, for about $400 million the same month it laid off 1,500 people. In Warren’s opinion, the shift we’re seeing is not the death of traditional media but a kind of democratization of the industry, where there’s room for both big and small companies to access and profit from the same market. And with the increasing availability of startup financing – including Bootup Labs and VanEdge Capital Inc., a new $100-million venture capital fund administered by former EA executives Paul Lee, Glenn Entis and Jason Chein – that market is well positioned to grow.
As for Bootup, it’s now on its third cohort of startups since launching its program in 2009. The largest class yet, seven companies from as far afield as Oklahoma, Phoenix, Chicago and Romania, beat out 60 applicants for a spot at what looks like a high-school lunch table in the back of Bootup’s West Hastings Street office.
After raising $500,000 for its 2009 “beta fund,” Mann and business partner Danny Robinson are working to double that amount in 2010. And in typical venture capitalist form, Robinson and Mann make their money back when their proteges do, either by getting acquired or going public. By that measure at least, Mann offers a sure sign Vancouver’s startup scene is taking off: “In 2010 we will actually pay ourselves a bit of a salary.”