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business of gaming

Screen shot from the game Pandemica by XMG Studio

Ray Sharma was a research analyst in the tech industry, a founding partner of a venture capital firm, and a successful entrepreneur, before he and a Bay Street colleague left it all behind to follow their passion and start a mobile-video-games studio.

"It was kind of altruistic and for fun in the early days," Mr. Sharma says. "It started out as more of a startup of the heart. We all had an innate love of games."

After Mr. Sharma's company, Toronto-based XMG Studio Inc., won an award for augmented reality game of the year with its first creation, Pandemica, the company started to pick up steam. "It kind of set us off to the races. We're three years in the making, we've released over 15 titles, and at least half of our titles have one-million-plus installs."

What started out as a hobby soon blossomed into Mr. Sharma's full-time career. Today, his 35-person studio has built games that have won awards, attracted millions of users, and reached the No. 1 app download position in China. "Having a top grossing game or app can generate hundreds of thousands of dollars a day in sales," he says.

While Canada's video-game industry has historically relied on the development of major blockbuster titles for console (PlayStation, Xbox and the like) and PC platforms, declining hardware sales and a drive toward free-to-play software has allowed a new generation of small, independent mobile-game developers to emerge as key players.

"They are finding the opportunities to develop games for consoles that didn't really exist five years ago with the advent of tablets and smartphones," says Julien Lavoie, director of public relations for the Entertainment Software Association of Canada. According to the ESAC, Canada is the third-largest producer of video games in the world, and the first on a per-capita basis.

In spite of their growing success, however, mobile-video-game startups often have trouble attracting investors.

"Investment in the games industry is very specific," says Nathan Vella, founder of Capybara Games, an independent mobile-game studio based in Toronto. "If you're doing mobile free-to-play games and you've got experience, you've worked on a bunch of titles, you've started another company that got bought, okay, then maybe there's a chance you'll get investment. All the rest of us, never going to happen, especially in Canada."

Frank Erschen, an angel investor with Golden Triangle Angelnet, agrees that investors generally look for experience, no matter what the industry.

"We look at (video-game startups) the same as we look at any business," he says. "We always want the teams to be rounded out, so you've got someone who's got the passion, someone who's got the experience in the industry, but you need to have a team of people to bring together the right skills to deliver, and sometimes they have to lean on somebody who's got real business experience from the past."

In an attempt to bring more development and marketing funding to the industry, Tom Frisina, former head of EA Partners, recently unveiled a new company called Tilting Point, which announced last week that it will invest $40 million (U.S.) in phone and tablet games over the next three years.

Mr. Vella, however, believes mobile developers that can't secure investment can still thrive. "You can make a great mobile game with two people, and because the cost of development is so low, investment almost becomes unnecessary," says Mr. Vella, who founded Capybara Games in 2003 in his spare time before opening a studio in 2005. "Mobile provides a really unique opportunity for game developers, and it's the ability to bootstrap a game, a full project, without risking the roof over your head … There are a lot of examples of people making a game in their spare time or in between jobs."

Mr. Vella says developers in Canada can take advantage of government grants and crowdfunding websites such as Kickstarter and Indiegogo.

Independent studios also find themselves in a unique position where they can experiment with riskier titles and gaming concepts. "I think there's a ton of opportunity for independent developers because they can very cheaply push the boundaries and provide gamers with experiences that major developers can't, (because) they just can't take that risk," Mr. Vella adds.

The rise of independent studios in Canada coincides with an industry-wide shift from console-based gaming to more casual tablet and smartphone gaming. According to a study co-authored by International Data Corp. and App Annie, a company that tracks mobile application metrics, in the last quarter of 2012, purchases made through the iTunes app store and Google Play store were higher than those for dedicated portable hardware titles on devices such as the Nintendo 3DS and PlayStation Vita.

"It's certainly evidence of a larger trend, which is that smartphones and tablets are absolutely becoming a critical platform for game development, distribution and monetization," says Lewis Ward, IDC's gaming research manager, and co-author of the study.

Mr. Ward says the results of the study are especially surprising when you consider the cost difference of producing a dedicated handheld title versus a smartphone or tablet game. "The average cost of producing a game sold on the 3DS or the Vita or the (Sony) PSP or the (Nintendo) DSi is much more expensive than it is for an iOS or an Android game," he explains. "The budgets are all over the place, but it can certainly be millions to produce a dedicated handheld game."

Dedicated handheld titles retail for upwards of $40, while most smartphone and tablet games cost less than $5, if anything. Mobile games started off using a pre-paid model for digital downloads before switching increasingly to a free-to-play or "freemium" model.

"Over the past three years especially, we've seen a huge shift toward the micro-transaction business model, the freemium business model," Mr. Ward says. "So the games are free, you download them, and if you're really enjoying it the developer or publisher will get you to buy power-ups or virtual items."

Observers frequently cite the rise of casual gamers for the spike in mobile gaming. "There's some extremely innovative games that are created on these new emerging platforms, and quite a number of more casual titles that would appeal to people who are not necessarily willing to pick up a console to play some games but are perfectly happy playing a very basic, simple game when they're standing in line somewhere," Mr. Lavoie says.

According to Yannis Mallat, CEO of Ubisoft Montreal, an arm of the world's third-largest game development company, the major studios aren't trying to convert casual gamers into console gamers so much as they are trying to incorporate them. "I see it the other way around," he says. "The experience is enlarging and it is also including those (casual gamers), because then it is up to us to make games that talk to any kind of gamer."

Even big console game developers such Ubisoft, which have typically depended on hardware sales from major blockbuster titles, are looking at new ways to monetize their games.

"We're talking about free to play, we're talking about micro-transactions, we're talking about pick-up-and-play, there's a lot of things that are happening right now," Mr. Mallat says. "Anything that is considered valuable from a gamer's perspective can lead to new business opportunities, and we are looking into that right now."

While Ubisoft is based in France, its largest development studio is located in Montreal. "Canada is a big player when it comes to the video-game industry, and truthfully, the capital of Canada's video-game industry is Montreal," Mr. Sharma says. "But when it comes to mobile games studios, there's actually been a tremendous amount of startup activity in Toronto."

Mr. Vella agrees, adding there are also still plenty of video-game development communities outside of Toronto and Montreal, the two main hubs. "Vancouver got hit pretty darn hard with a lot of triple-A studio closings, but there's still a pretty strong scene there," he says. "There are great developers in Winnipeg, Calgary, and Edmonton. It's kind of nice. Canada ranks super highly in terms of both the overall games industry but also specifically on the independent side of it."