Introduction

Starbreeze is a Swedish game development company, founded in 2000 through the merger of O3 games and Starbreeze studios. The company is based in Uppsala, where it also has all of its employees. During the summer of 2007 the company has been given much attention, thanks to the release of a new game, The Darkness, which gained rave reviews. The game has an average score of 82% on Gamerankings.com, making it the 29th highest ranked game on Xbox 360 and the 12th highest ranked game on Playstation 3 at the time of writing (out of several hundred games). The company has a strong reputation for making good games, thanks partly to The Darkness, and partly to an earlier game, Chronicles of Riddick, which released in 2004.

The game engine (the software which is used to build the game) that Starbreeze uses has been developed in-house, and is the company’s primary immaterial property. Starbreeze develops games on contract for other companies, and as such the games it develops aren’t actually owned by Starbreeze itself. The primary reason for this is that Starbreeze doesn’t itself have the capital to make its own games, and the secondary reason is that it doesn’t own any valuable Intellectual Property (IP) on which to base those games. The Darkness is based on a comic book and the IP is owned by Top Cow, while Chronicles of Riddick is based on a movie and is owned by Vivendi.

There is also a certain risk involved in making your own games, since if it flops, then you will take the entire hit yourself. With the current arrangement, the risk for Starbreeze is more limited, since it gets the money it needs to make a game from the contracting company during the actual development process, and if the game doesn’t sell well, then it is the contracting company that stands to lose money.

The main risk factor to Starbreeze is that it is completely dependent on finding partners in order to get continuous cash flow. If the company were to complete a game project and then had to endure several months without finding a partner to provide funding for a new project, then Starbreeze would likely go bankrupt. The profit margins are also low with the current business model. If a game sells well, the returns to Starbreeze are small, since the contracting company takes the lion’s share of any profits. And of the sum paid to Starbreeze during the development of a game, most if not all is required to use for actual game development, so very little can be squirreled away.

Another risk factor for the company is the employees. Starbreeze is at its heart a design company, and the quality of the end product is completely determined by the quality of the employees. Competition for the best and most experienced game developers is fierce, which means that they have a strong bargaining position and can demand a relatively high salary. For a game development company the single highest cost is the employees – compared to them computers and other equipment is cheap. In order to keep good employees, additional incentives such as bonuses must be used, which further decreases the return to investors. A problem for Starbreeze is that it is located in the relatively minor town of Uppsala, which makes it difficult to attract foreign developers, and means that location can’t be used as an incentive. Another Swedish entertainment company, Paradox Entertainment, moved its head office from Stockholm to Los Angeles, after it became obvious how expensive and difficult it is to run a business from Sweden when all the potential customers are in the United States.

Starbreeze thus faces a number of relatively large problems. The most recent game, The Darkness, received very positive reviews, and is reportedly selling quite well, but the profit to Starbreeze is likely to be tiny. It is still uncertain whether the game will sell enough copies for Starbreeze to receive any royalties whatsoever. In some ways the company is stuck in a kind of economic hamster wheel – the company is moving, but not really moving forward. It gets money to make a game, it spends the money making the game, and at the end of the two year development period, it’s right back where it was at the beginning.

This picture is only half true though. For every new game Starbreeze makes that is a success, it strengthens its reputation, which gives it a stronger bargaining position and thereby better contracts. At the present moment, the company has a strong capital base, so it’s not going to go bankrupt any time soon, but the risks for game development companies aren’t small. Another company which was founded at roughly the same time Starbreeze was, called Troika, went bankrupt in 2005, only a few months after having released a game (Vampire: Bloodlines), despite positive reviews, because it couldn’t find a new publisher in time.

The aim of this report is to analyse the company’s present situation and business model, and discuss ways in which the company can move forward and strengthen its position on the market.

Analysis