Flagship Studios was one of the most ambitious game development studios started in recent years. It launched a critically acclaimed game, Hellgate: London, in November, 2007 that had garnered more than 60 game review magazine covers.
The game sold more than 450,000 copies (at $50 each, that’s $22.5 million at retail) But by August, 2008, it was out of business.
Stephen Goldstein, former director of business development and general counsel of Flagship, said in a talk at the Game Developers Conference that the lessons learned in Flagship’s fall are useful for all entrepreneurs. They’re particularly relevant, even at a time when the game industry is still growing, since there are numerous losers in the game business who have been hit with layoffs and studio closings.
Flagship was founded in 2005 by Bill Roper, a veteran game developer who worked on Blizzard‘s smash hits such as Diablo. He was joined by other former Blizzard team members, many of whom were frustrated with their parent company, which had told them their game Diablo III wasn’t ready to ship. This team was seasoned, with sales of more than 17 million games behind them. They quit and started Flagship in San Francisco to make the high-end sci-fi/fantasy game Hellgate: London, which would break new ground.
The vision was to create a 3-D first-person game with high-quality graphics. It had all sorts of demons to kill and levels that you could explore in a faithful reproduction of London, albeit in a ruined state. You could also go online and play in groups, much like in the mega-hit World of Warcraft. But WoW was one of Flagship’s problems, because it was so successful that it was drowning out other titles (right now, WoW has more than 12 million subscribers worldwide).
Goldstein didn’t go into financial details. But some public information is available. Flagship raised tens of millions of dollars, both through its U.S. publisher Namco and Korean online publisher Hanbitsoft. The reputation of the team was so solid that six publishers lined up to launch the game worldwide. Co-marketers signed up to do merchandise and comic books ahead of the game launch. There were 11 partners whose names went on the box. But then things went wrong.
“We made a series of mistakes that every entrepreneur may make,” said Goldstein.
The ambition was part of the problem. The company was swinging for the fences, trying to hit a home run with both a single-player game and a subscription online multiplayer experience. It was trying to do a lot of things its team members hadn’t done before, such as making a high-end 3-D game, doing an online game, and other things. There were so many partners, and they all wanted something in return, which took up a lot of staff time. If something went wrong, the company didn’t really have a backup plan, Goldstein said. It wasn’t built on a strategy that allowed it to either delay the game or scale it back.
Another problem was how long it took for the team to get money. It received its money from the publishers as an advance. So it had to sell a certain number of copies before any new royalty revenue could come in. Players could play the game for free online. But to get new levels, they would have to pay. The subscription revenues would go into Flagship’s pocket, but the money was coming in really late.
Goldstein said the company should have just skipped the free multiplayer play and done what others, such as WoW, had done: give players 30 days of free multiplayer play and then charge them a subscription fee after that.
Initial sales might have been lower, but subscriptions would have come in faster that way, he said. The company also had complicated tasks that it put off for too long, such as building the online infrastructure and setting up a billing system. It tried to launch worldwide all at once, but that meant doing 17 different versions for 17 languages. The company believed a little too much of its own hype.
Flagship could have raised $20 to $30 million from venture capitalists. In 2006, VCs had funded big online game companies such as Red5, Slipgate Ironworks, Trion World Network and Perpetual Entertainment. Goldstein said that raising money from VCs would have given Flagship the cushion to delay its launch. The game ran off schedule, and the company needed four or five months to complete it. But it had to launch in November, 2007, anyway. As a result, players complained it was buggy.
“This was the company-killing moment,” Goldstein said. “If somebody offers you money, take it.”
That money could have come with some rich advice from outsiders on how to run the company. Flagship didn’t have the benefit of people from outside who could give it a reality check. The game didn’t meet expectations, and so sales just didn’t materialize.
In July, 2008, the company laid off all of its 100-plus employees. Creditors claimed its game rights. And the employees said they’d been “Flagshipped,” or basically screwed over.
“This was one of the most painful times in my career,” Goldstein said. “Unfortunately, I think we’re going to see a lot more of it happen.”