the new media lifeline

Montreal: Increasingly, new media companies are finding their dance cards are full.

These operations have become the latest targets of vertical integration strategies in the entertainment and communications industries, the communications hardware sector, and in the field of software production tools.

In a local expression of what is very much a worldwide phenomenon, last month two Montreal-based entertainment operations, Astral Communications and Malofilm Communications, joined the parade by purchasing multimedia and games development companies.

Astral paid Ottawa-based Artech Digital Entertainment partners and founders Paul Butler and Rick Banks $3.1 million ($1 million in cash and the balance in non-voting Astral shares over three years) for a 35% interest in the 13-year-old operation. The deal includes an option to purchase an additional 16% of Artech, giving Astral majority control.

Meanwhile, Malofilm acquired all the shares of Quebec City-based Megatoon Entertainment Group. The acquisition price for the three-year-old company, headed by founders David Weiser and Guy Boucher, was not disclosed.

From day one of the acquisitions, the new media or development companies are discovering their agendas are virtually complete. And they are also reporting the deals go a long way in the management of two of the thorniest issues facing multimedia companies – the lack of financing for products and the young market’s shrill demand for high-profile licences.

Artech’s Butler says the trend to acquisition peaked over the past two years, leaving only a handful of Canadian software developers, of any size, without strategic alliances.

But that is not to say the unsold have no future, he says.

‘Qualified independent software developers aren’t likely to become idle,’ says Butler. ‘There’s work out there, even if it’s piecemeal and not part of some bigger agenda.’

Megatoon’s Weiser, who calls his shop a creative development company, says mergers with richer entertainment companies are a necessary lifeline in his business.

‘Companies (not acquired) will feel left out, except for those few who come up with the killer game or application, and they’ll get picked up the year after anyway,’ he says.

According to Weiser, there are very few financial resources available to software development companies. ‘In this industry, he says, ‘there’s no way in hell you can do a five-year business plan.’

Megatoon struck its first deals with big publishing companies by hustling at major trade shows like comdec and Mac World.

‘They (the set-top publishers) are very sticky or severe about who they do business with, whether it’s Sony, Sega or Nintendo,’ says Weiser. ‘You have to submit your productÉand they don’t finance it. You have to finance it yourself. Sometimes you can cut a distribution deal. If they think your product is going to be a big hitÉthey’ll advance royalty or development fees. In desktop, our product has been prefinanced.’

Public funding is just starting in the software development industry, and while Sega of Canada has recently launched a $1 million a year support fund for games development, Weiser says most companies rely on private investment, trading shares for cash or private fund operators who offer loans on joint ventures or capital for part of the profit.

In Megatoon’s case, the company has received no public funding, except a small, $18,000 grant under a Quebec young business program.

On their own

‘It’s almost impossible raising money for multimedia products,’ says Butler, ‘and there’s virtually no help from the banks who don’t understand our business (except when it’s time to apply for r&d tax credits).’

He says software development companies which are not part of a strategic alliance, either work for hire or on a royalty basis. Unless a company publishes its own titles, there’s no risk, he says, adding there’s no payoff at the distribution end, either.

However, in Artech’s case, a huge volume of production and many awards helped create a high profile in the u.s.

Butler says clients began to bankroll the operation with projects and orders well into the future. Still, Artech has been self-financed during its first 13 years, with no public funds available for either development or production.

The terrible reign of licences

While financing product is driving merger activity, an even greater factor appears to be the growing reign of licenced properties.

If this trend deepens, developers with no access to licences may be in for a rough ride.

To illustrate, the top-selling game in December in the u.s. was Disney Software’s first real success, The Lion King, which sold 144,000 units. The number two title was Aladdin.

But even when huge sums are spent on acquiring licence rights, there is no guarantee the shipped product will be of the highest technical standard. Recently, several mass-market Hollywood-backed game titles were shipped with major faults. ‘Licensed-driven quality can be questionable,’ says Butler.

Adds Weiser: ‘Creative effort and the quality of a product are the things which will allow one to stay in the business. Once things settle, people won’t buy basically crap anymore.’

Strategic alliances

Convergence becomes an apt metaphor for more than the merging of film and computer technology, it also characterizes a now pronounced pattern of international industrial alliances.

Butler says there are three areas of strategic alliances reshaping multimedia companies.

Communications and broadcast companies like Turner Broadcasting, Fox and Viacom have been acquiring software companies with a view to exploiting future cable and licence deals.

In the area of hardware, manufacturers such as Sega and Sony have also been buying out developers as they work towards new hardware product launches.

As for companies which create software tools, including Alias Research in Toronto and Softimage in Montreal, the acquisition battle lines run deep.

Alias has tied its fate to sgi, the big workstation manufacturer in California. sgi has an alliance with electronic games producer Nintendo, which is locked in fierce battle with Sega. As for Sega, it has ties to Microsoft, which, from a Canadian animation software developer perspective, completed the circle with its $130 million acquisition of Alias’ main competition, Softimage.

Prize acquisitions

Malofilm president and coo Steven Harris says the Megatoon deal serves the company’s diversification strategy, and gives it immediate access to long shelf-life animation, new revenue streams, ‘and a complementary synergy with our distribution and production activities.’

In addition, Megatoon, which has 32 employees and has sold 75,000 units of cd-rom game titles in the u.s., permits Malofilm to delve into set-top production and explore online services and interactive television.

With Artech in the Astral Multimedia fold, headed by former ibm developer Bud Gillan, Astral becomes a fully integrated player in new media, with games and interactive development capacity, animation studios, a joint distribution network through Beamscope, and a major cd-rom replication plant in Boca Raton, Florida.

Artech

Established in 1982 with 40 employees, recent releases at Artech include a new, expanded Windows 95 version of Nickelodeon Director’s Lab created for Viacom New Media; Super Moto-Cross, a 32X cartridge game developed for Sega; and the animated interactive cartoon series Wild Card, one of a series of projects for Ottawa-based Corel.

Another Artech product, Crystal Pony Tail, which operates on Sega’s Genesis platform, won a prestigious Parents’ Choice Award for ‘its positive social values, non-violent content and excellent graphics.’

‘Artech does everything,’ says Butler. ‘We’re developing flight simulator games, arcade games and learning products.’

The Artech studios feature a full multimedia video and sound production facility, a staff of 13 animators, on-site cd-rom capability, and the ability to produce for all platforms including mpc, Sega cd and cdtv, Sony’s Play Station, 3DO, Atari Jaguar and the new Saturn systems.

In addition to its entertainment products, Artech produces software and 3D simulation products for training, and is providing much of the programming for the nabu network, the first interactive games cable network, as well as supplying real-time software for sports broadcasts and special events in Canada and the u.s.

The company has won Billboard Magazine’s Best Game and Computer Entertainer Games of the Year awards twice.

Megatoon

According to Weiser, the Megatoon/Malofilm marriage was instigated by Malo. ‘The Malo people approached us and there was a good synergy, basically, the same sort of vision of how you take content and (exploit it) in a growing number of windows of opportunity.

‘Our business is not distribution, it’s content creation,’ he says.

This year, Megatoon expects gross revenues of $2 million.

Little more than a year ago, full-time staff numbered only four, then the company went into production and ‘things went a little crazy. We had two titles in five languages on two platforms in less than 12 months,’ says Weiser.

The financing came from WordPerfect, which had world rights except Japan, where the rights were sold to Gaga Communications.

‘But that’s something else we don’t want to do again,’ says Weiser. ‘Some distributors can’t do justice to the product in a particular territory.’

Megatoon creative director Guy Boucher created the animated characters for Goferwinkel’s Adventures, dubbed ‘the world’s first interactive comic book.’ Five adventures of the cd-rom game have been published to date, distributed internationally by WordPerfect, and in Japan by Gaga.

Megatoon has also signed a deal with u.s. multimedia publisher Millennium Media Group to produce Hacked!, a new cd-rom Internet-based action game.

First created as a desktop (computer) action game, Hacked! is played out in a 3D cybercity environment where players attempt to wipe out or collect units of information. The game can be played against opponents or the computer.

According to Weiser, there are two basic elements in game development – storytelling and game playing.

Megatoon, he says, ‘is moving away from storytelling to focus on game playing for the time being because there is no virtual reality yet.’

Emphasis on set-top

Weiser says Megatoon will focus on developing games for set-top platforms as opposed to desktop applications which are played out on computer.

‘We’ve always concentrated on content development. We did platform development, but our priority is creating or acquiring, and then adapting it to the machine.’

In the past, all Megatoon products were desktop, either for Macintosh and/or Windows. The pcs which have most of the market are problematic, he says, because they require additional cards for sound, and standards are constantly changing.

‘The most important thing to us is that we know who our market is when we do set-top products,’ says Weiser. ‘The developer at least knows the purchaser is out to play games and willing to invest between $200 and $600 to acquire a platform (from Nintendo, Sega, 3DO or Sony Play Station) and another $60 to $100 for the game itself.

Early warning signs

‘There’s so much hype in the multimedia business,’ says Weiser. ‘The performance standards of some platforms and interfaces leave a lot to be desired.’

Another catch, he says, is that consumers can’t easily test out what they are buying.

According to Weiser, entertainment companies are investing in multimedia and software development ‘because of their interest in new media in general, not just cd-rom, which is the current interest. Maybe in three years it will all be online. That’s why we’ve positioned ourselves as a content creator, because if cd-rom disappears tomorrow, it won’t really affect our business.’

Weiser and team, average age 24, also have plans to create and market linear tv series and classic cartoon characters.

‘One thing we want to get off the ground is a licensing division. We have properties. There’s no real reason not to have toys, t-shirts, toothbrushes and all the spin-offs. We’re in the entertainment business,’ he says.

Actorless movies

Because it’s still early in the convergence game, and where exactly everything is headed is still not clear, Butler suggests we may all have a better idea of what the landscape might look like midway between film and computers when Hollywood produces it first actorless movie.

The obvious potential for ‘natural’ spin-offs to products like interactive games is clear, and cutting loose some of those inflated multimillion-dollar talent fees might go a long way to reducing the alienation quotient whenever the word convergence is heard.