Xbox fathers start game development company

**DouXXX** · 05-09-2002

http://forbes.com/home/newswire/2002...rtr598447.html

By Ben Berkowitz

LOS ANGELES (Reuters) - Two of the creators of Microsoft's Xbox have joined a pair of video-game industry veterans to launch a venture with a familiar Hollywood feel: find raw talent, create edgy entertainment, and then sign with a major publisher to sell it to the world.

But the product for Capital Entertainment Group is not movies, but video games, and the startup is in the process of raising $50 million in venture backing for just that purpose.

The executive team includes former Xbox chief technology officer Seamus Blackley and Kevin Bachus, who handled relations with game developers for Microsoft, the company said.

Former Sierra Online senior vice president J. Mark Hood and Dotted Line Entertainment founder Eugene Mauro are also behind the start-up, which plans to find video game developers with ideas that established publishers would normally shun.

CEG will back the development with money and production resources and find game publishers to market and distribute the resulting games, very much like an independent movie studio.

The game startup plans to make its money by taking a cut of net game sales. The company believes its investors can break-even on a game after sales of 250,000 copies. Developers will get a royalty, assuming a "breakpoint" is achieved within the first 12 months of sales, equal to anywhere between 5 percent and 15 percent of net sales.

The new venture comes at a time when the video game industry is in the first year what most expect to be a cycle of unprecedented growth. The top three U.S. game publishers recorded sales of $714.3 million in the first quarter of this year, up 45 percent from a year earlier.

Investors, analysts and even major media companies have started to pay closer attention to big-name game publishers, as they produce stock gains and quarterly returns far better than those coming from other technology or media companies.

TRYING TO INCREASE INNOVATION

"I've found over the last year that it was becoming increasingly difficult to get innovative, original titles funded," Mauro told Reuters. "I put together a model that was a little bit VC (venture capital), a lot of bit of production."

Mauro serves as chief executive of the new venture and will work from his home base in Connecticut. Blackley, vice president of development, Bachus, vice president of publishing, and Hood, vice president of production, will work from Seattle. A third office will eventually be opened in Los Angeles.

Bachus left Microsoft months ago, but Blackley did not resign from the software giant until April 22, only days after it cut its Xbox sales forecast for fiscal 2002 by as much as 40 percent after poor international sales.

Blackley denied a correlation between the two events and said he was leaving simply because he wanted to get back to developing games.

While the company does not plan to have any titles available at retail until the 2003 holiday season, it already has a deal in place with Sega Corp. for its first two games, with what Mauro described as "extraordinary latitude" in what the games will be and for which platform they will be developed.

WILL DEVELOP FOR MOST PLATFORMS

Bachus told Reuters that while the CEG team has a natural affinity for Microsoft Corp.'s Xbox, it will also back the development of games for the PC, Sony Corp.'s PlayStation 2 and Nintendo Co. Ltd.'s GameCube.

For reasons of logistics and time commitment, he said they will largely stay away from working with developers on games for handheld platforms and mobile phones, as well as massively-multiplayer online games.

"For Seamus and me ... it was really borne out of our desire to increase the level of innovation in the industry," he said. "CEG is the industry's first independent production company."

A background sheet on CEG reads much like those for independent Hollywood producers, discussing fine details like negotiable net sales splits and completion bonding for titles in development -- essentially a form of collateral to ensure that game projects are finished.

While the group intends to work with a number of different publishers, Bachus said they agreed to the initial production deal with Sega because "Sega entertaining this opportunity is very flattering."

Copyright 2002, Reuters News Service