Far too often, I read about indie games being done on the cheap and succeeding beyond the developer’s wildest dreams.  Flight Control for the iPhone is a great example.  Fantastic game; apparently made for very little money and then launched to commercial success.  We see these articles in the headlines every so often because, well, they make great headlines.  What we don’t see are the games that took months to develop that end up selling 400 copies.  What we don’t ever see is the true cost of a team of 4 – 6 people working on a project in a budding game development company.

Many indie developers have the one man shop mentality and as long as they build games where one person can do everything that the game needs they'll succeed.  They'll rarely achieve any sort of free standing business simply because their business relies on them being there to do the work but with a bit of luck they'll get a good career out of it and they'll be able to fund their own personal expenses from their efforts.  That's not the kind of game development company I was thinking would get excited about what the guys at Indie Fund are up to.  I immediately thought of the small 4 - 6 man team working six months on a game. Personally, I was secretly hoping they would be a full blown VC for the games industry.  How nice it would be to have a VC for AAA game development that understood the risks and rewards of the industry without having to be educated on what a video game is and why all video games aren't Facebook games but I digress.

I wanted to take a look at the financial model for a fictional company to shed light on just how expensive it is to execute the startup of a game development studio.  Let me start with a couple of assumptions:

    1. The game != the company.  The game is merely the first revenue generator for a fledgling development studio.  The plan is to not only create a profitable game in the first go but to create a company that can sustain the development of future games.  I’m building a company, not a game.
    2. I take the responsibility of hiring employees seriously.  I can only be one person on the team of six and that means that at least five other people are depending upon me to provide them a means to make a living. 
    3.  I'm building a company, not a game.  If you don't get that see points 1 and 2.

Now for the specifics.  Let’s black box the game concept entirely.  Assume it is a fantastic idea.  Assume there's a market large enough to support it.  We'll even back into the sales projections once we figure out expenses.  I'm assuming an aggressive schedule of 9 months to revenue.  That's six months development and three months to the first revenue check.  If that check doesn't arrive in 9 months, then there's a serious chance that you'll be disbanding the team and shutting down the company without some other form of revenue.  Call it our drop dead point.

For our fictional company, we need 2 programmers, 2 artists (sharing 2D/3D/Animation duties), 1 level designer/game designer and 1 producer/manager.  As the CEO of the company I've got to fill one role so naturally, the management of the company falls to me leaving five more positions to fill.  So far so good.  Using Gamasutra.com Salary Survey averages (April 2009) we can calculate the requirements to pay for this staff.  You're specific salaries will depend upon a whole host of factors including location, local taxes, company options in lieu of salary, etc., etc. (round everything to nearest $5K for easier math later on.)

Producer: $85K pre year.
Programmers: 2x $85K per year.
Artists: 2x $70K per year.
Level Designer/Game Designer $70K per year.

Add all that up, divide by 12 multiply by 9 and you need: $350K just to pay payroll salaries for the 9 months that you plan to stay alive.  Wait a sec; we're not done. Federal Unemployment Taxes are 6.2% of the first $7K earned for every employee.  In the first two months you'll pay out $2600 in FUTA taxes above and beyond salaries.  Then the company has to pay 6.2% to Federal Social Security taxes and 1.45% to Medicare taxes for all wages so let's include that number: ~ $27K in company paid payroll taxes.  Rounding up the two values and adding to the original gives us a grand total of $380K to fund our company for 9 months. Additional months beyond the first 9 will eat $42K per month just to keep the team together.

We're still under a half million dollars so we're doing pretty good.  Not so fast.  In the next update we'll add in the cost of a small office, computers, development software, utilities and supplies.  Keep in mind that our human resources plan covers the basic necessities.  There's no dental coverage, no optical, no life insurance and no health insurance.  The current political climate aside, each of these adds to the cost of keeping the company running and in the case of health insurance, the amount can either be a significant cost to the company or a significant reduction in the employee's salary.  The rest of your personnel plan will affect your entire hiring strategy when you're looking for employees to fill these positions.

It's expensive already and we're not even close to done.  More is explained in the next installment.