In 2000, the gamesbiz team advised on the UK's first completion bonding exercise - an exciting alternative method of financing game development borrowed from the film industry. In 2001 we hosted a working group (consisting of a small number of invited individuals from the games and finance industries) to discuss how completion bonding will affect the games industry.

The group discussed the following issues:

Is completion bonding a great new way to finance game development or is it a white elephant?

How long does a typical completion bonding exercise take to set up and, typically, how much does it cost?

What can be done to simplify and standardise the process?

Here’s a quick overview of what completion bonding is all about.

As we all know, in the beginning, the development of computer games was a low budget affair with the development work being carried out by an individual or a small team.

Since then, the industry has matured. There has been a lot of consolidation; processing power of modern consoles and PCs is increasing all the time and games and gamers have become more sophisticated; the industry has become global and seems to have largely shaken off its "anorak" image.

Nowadays, a game is developed by a team ranging from 5 to 30 people, over two years. To a large extent, funding is provided by publishers. This funding is usually broken down into "milestones", with the developer being obliged to meet certain standards by each milestone for the funding to continue.

However, a new model of financing is just starting to take off in the UK computer games industry.

Completion bonding is a finance model which is often used in the film industry. In a nutshell, completion bonding works like this:

A developer and publisher will enter into an agreement for the development of a game. This will usually entail setting up a separate company and transferring the intellectual property rights into the ownership of that company;

A bank will provide a loan for the development of the game. This will be secured against the intellectual property rights in the game owned by the separate company;

To ensure that the game is actually finished and released so that the bank can get its money back, a completion bonder will guarantee to the bank that the game will be developed in accordance with the specification, within budget and on time;

Furthermore, the bank and the bonder will require that the publisher will actually publish the game or pay off the money if it terminates the game.

What are the advantages for a publisher?

This is an exciting new form of financing for the games industry, as it offers a break from the traditional funding model where the publisher writes all the cheques. It offers the following advantages to a publisher:

In general, the bank loan will only become payable once the game has been correctly delivered;

This means that, if handled correctly, the publisher can shift the development cost off its balance sheet until delivery of the game, thus improving its accounting position;

This model offers the advantage that there is a shorter time period between the publisher paying for development costs and then receiving revenues by selling the game in the market.

Are there any advantages for a developer?

Clearly, the bank and the bonder will want to have an exit strategy: i.e. a guarantee that their costs will be covered. This means that it is unlikely that a developer will be able to enter into a completion bonding arrangement by itself, as the bank and bonder will want a guarantee that the game will be sold in the market. This is done by a publisher. However, a developer who is part of a completion guarantee arrangement has an extra layer of certainty that, provided that it correctly delivers each milestone, it will receive funds. The bank is unlikely to get involved in the politics surrounding the development of a game, and will pay upon each correctly delivered milestone. And banks are often better at making timely payments than publishers.

Furthermore, even if the publisher retains a right to terminate the development project early, the publisher will still be liable for paying off the bank loan for sums paid by the bank to the developer. This means that the developer will again have the security that it will be paid for work actually done (provided that work was in accordance with the specification).

Investment fingers got burned in the dotcom crash and the games industry is having a problem distancing itself from this. Additionally, as this is a new area of funding for the games industry, not every bank or bonder wants to get involved. So, the ones that do can afford to be choosy about the projects that they get involved in. Oh, and it’s not free: the publisher has to pay fees to the completion bonder and the bank. In total this can be between 2-10% of the overall budget.

As far as a developer is concerned, it will still be reliant upon having a contract with a publisher, so completion bonding does not provide the magical answer to a developer’s quest to get its game published.