Video game distributors prepare for digital future

The digital wave is growing by the day and companies that don't want to get shipwrecked need to be prepared. Leading video game retailers are feeling the impact already; following E3 both GAME and GameStop saw their respective stocks plummet because investors are realizing that consumers are buying fewer games, and downloading them more when they do (digital accounts for 74% of the US market). New York-based video game distributor Alliance Media Holdings sees the writing on the wall and is taking a bold step in the digital direction.

Alliance, which has direct buying relationships with most of the major game companies, has rebranded its Alliance Digital Media division to reflect the digital revolution. The division will now offer indies funding in the range of $50,000 to $500,000 per title, along with Alliance's core suite of publishing services.

This should not come as a major surprise. In Alliance's most recent quarter ended March 31, the company announced that it lost almost three-quarters of a million dollars as revenues fell 41% and CEO Jay Gelman acknowledged, "We are convinced that the industry as a whole is moving towards digital and streaming alternatives, and that this change will impact our financial performance sooner rather than later... Ultimately, the future of our company will depend on the success of our digital and content initiative, and our ability to fund its growth and further development."

"Our latest plans to seek out games within the indie space is a culmination of our efforts to remain a relevant part of the business we have grown up in"

In an interview with GamesIndustry.biz, Gelman stressed that retail distribution remains important for Alliance, especially since digital still has some hurdles to clear. He cited the lack of reliable high-speed internet connectivity throughout the market, along with the consoles' limited digital storage space and ISP bandwidth restrictions. That said, the impact of DLC especially has been undeniable. "DLC continues to grow at a rate that has outperformed all expectations... It does not have the same obstacles facing a fully downloadable game version, and the consumer, by all measures, prefers accessing this content digitally," he noted.

While retail remains viable for now, Gelman is making sure his company is ready for the inevitable. "We believe that, eventually, consumers will access all video game software digitally, and we've been planning for this eventuality for over nine years," he said. "Over that period, we transitioned our business from exclusively distributing games to also publishing our own titles for SCEA, Microsoft and Nintendo. We further evolved to develop our own software for publication, initially for the mobile space, but more recently with our acquisition of Zachtronics, adding digital and platform development to our publishing offerings.

"Our latest plans to seek out games within the indie space is a culmination of our efforts to remain a relevant part of the business we have grown up in. I think our shareholders have come to appreciate the industry's challenges, past and present, and understand we have continually worked to position ourselves to them accordingly."

Perhaps an apt comparison to what Alliance is doing would be Koch Media, which in Europe handles all the boxed releases for Sega and Square Enix but has significantly invested in digital through the Deep Silver label. Similar to Koch, Alliance believes that its long-standing preexisting relationships across the industry will give it an edge in the digital publishing space while facilitating the occasional retail release for devs who still want a physical presence.

"We've been in the video game space since the old Atari days," Gelman said. "We've experienced all the ups and downs of the business from every vantage point. And I think that allows us to provide expert advice to our potential dev partners with regard to what to avoid and what to leverage in their work to get their creations to market.

"From there, we can open all the possible doors that are out there to drive revenue, leveraging our present business in distribution and all of the relationships we have cultivated over 30 years in the industry. With our connections to retail, we can, when appropriate, seamlessly take a digital offering and put it on shelves at major retailers as a box product. We did this with Zachtronics' Infinifactory, taking what had been a strictly digital offering and making it available as a physical PS4 offering at retail."

"There's no question it's harder for indies in this space, especially as they compete not just against bigger titles, but against each other, as well"

Gelman said that Alliance will begin by digitally publishing 7 to 12 games per year, "but we're targeting the digital initiative to eventually merge completely with our wholesale business and become our biggest revenue generator over time."

While $500,000 was announced as the maximum allocated per title, Gelman said it's not necessarily set in stone. Alliance can be flexible on budgets and business deals formed with devs. "We established the funding range based on the overall feedback from the dev community on the financial requirements necessary to complete their work. We are open to discussing larger potential budgets if the opportunity presents itself," he noted. "I wouldn't say we have specific criteria for who can and should apply, but what excites us most is innovation and creativity. Granted, our team has to agree it has the potential to be a good game - but we offer an open mind to any project we feel has the right idea and talent.

"The games that excite us most are created by developers who have a clear vision, but lack the financing and support they need to get their projects finished and delivered," he continued. "With that in mind, we always prioritize creative control for the developers we work with. We then step in to provide financing, QA, marketing, promotion, timeline management, etc. with the aim of helping them complete their games and bring them to market. There's no single way things like revenue share or IP are determined - a lot of it is up to each individual situation. We're very interested in establishing a relationship that functions as a true partnership."

One of the big trends in gaming since 2016 has been virtual reality, and while VR has yet to fully mature as a market and offer substantial profits, Alliance is open to funding VR/AR projects in the long-term and not just traditional titles. "We believe both VR and AR offer major potential to the game space. We have experience selling the current offerings of VR through our distribution business. I think we have to keep an active, long-term view as it relates to VR, but in the short-term, our concentration will be on more lucrative platforms," Gelman explained.

One of the biggest challenges for any indie releasing a game onto digital storefronts is discoverability, and no one has completely solved that complex issue yet. That said, Alliance believes that it's industry experience and relationships once again can help it to tackle the discoverability challenge head-on.

"E3 was extremely exciting... The main thing I came away with, based on the public's participation at the show this year, is that great games still put video games at the forefront of the entertainment industry"

"There's no question it's harder for indies in this space, especially as they compete not just against bigger titles, but against each other, as well," Gelman remarked. "Our experience as developers, publishers and distributors is unusual compared to our competition. We have our own in-house marketing team with vast consumer promotion experience, and we're one of the few partners of our kind with the knowledge and reach to make an impact in the ad market to get the word out on a game outside of social media. We have an expansive view on marketing, which we craft depending on the game, considering spot TV, key market newspaper exposure and retail store promotion as part of our unique menu for marketing a game."

He added, "We have longstanding relationships with the first-party owners of gaming's most relevant platforms, which gives us a lead when it comes to getting the games we publish noticed."

As Alliance looks to increase its digital output, the company has wisely expanded into other areas, such as e-tailer fulfillment. "We have been an important distribution partner for every major studio in the video game space, and we've evolved our business with them to stay impactful as the retail landscape changed. For example, we recently launched a fulfillment operation to ship product directly to consumers on behalf of retailers like Walmart, JET, Target and Toys "R" Us," Gelman said.

Coming off E3 2017 - a show that historically has been critical for retail - video game retailers may have felt dismayed by shareholders' reactions, but Gelman remains enthusiastic about being part of the games business, even if retail is in decline. "E3 was extremely exciting," he said. "I loved the electricity of the Switch in Nintendo's booth; Microsoft and SCEA also showed the world gamers are still engaged with compelling new system discussions. Many of the larger publishers, such as Warner, Take-Two, Ubisoft, Capcom, Atlus/Sega, and EA, all showed great future IP.

"The main thing I came away with, based on the public's participation at the show this year, is that great games still put video games at the forefront of the entertainment industry."

Developers interested in learning more about Alliance Digital Media and how to pitch a game for financing/publishing should visit this page.