Updated: Q&A: An interview with game developer Foundation 9 Entertainment

Jon Goldman is chairman and CEO of Foundation 9 Entertainment, the Irvine, Calif.-based video game development company that followed a different path by sticking with the cool stuff of making games and leaving the business of publishing games to others. (Update: Goldman announced March 16 that he will become chairman of Foundation 9 and James North-Hearn will be its new CEO.)

While most developers grow up to be game publishers – who market, distribute, and publish games – Foundation 9 is a rare company that has amassed a lot of firepower but remained a developer. I caught up with him at the Dice Summit in LasVegas last month, just before he was about to take off for the gym. I saw him again at the Game Developers Conference, where he was constantly greeted by other developers. He is casual and approachable, but very serious when it comes to the gaming business.

Goldman says that focusing on development quality is a good business in its own right. Foundation 9, funded by Francisco Partners, is now the largest independent game development company in North America, with 10 studios across eight different locations. The company handles game development for a wide range of publishers and developed more than 60 titles in 2007. At any given time, it has more than 35 projects in the works.

Q: In the earlier days of gaming, everyone assumed that the only business
model that worked was being a publisher. Game developers would grow up
but eventually have to expand into publishing in order to be viable.
When did you first think about the idea of succeeding as a company
focused only on game development?

A: Long time ago. I remember talking about this formally with others at GDC in Long Beach and had thought about it previous to that. In every other media industry, there is great value to making content – the market values top authors and singers, for example. Meanwhile, we don’t want to destroy our client base by competing against publishers, so I
saw a great opportunity as a pure play developer.

Q: Has that idea gotten better over time?
A: Well, the idea is simple and hasn’t changed as a concept, but we are seeing plenty of benefits that we hadn’t foreseen, just the ability to do more things than we could as smaller developers.

Q: What’s new with Foundation 9?
A: A lot is new. We now have a studio in England and a studio in India. I just got back from India and saw our new employees. It’s so vibrant over there. Not only the economy but the media business there, too. People tend to joke about Bollywood. But the movies I saw on the plane were entertaining. They could be a real potential market for what we are doing over there.

Q: How many people do you have?
A: We have more than 850 people and a lot of open jobs, too. We want to grow that studio over there and our studios in the U.S. and Canada. We won’t be U.S. centric.

Q: Are you speeding up growth?
A: We’re happy with the size we’re at. There’s no mandate to grow for growth’s sake. The mandate before this was to get to enough of a critical mass for overhead and infrastructure and have a real management team that could measure products, do financial accounting, have better human resources, better business development and legal. That’s all the stuff you need as a real company, but you can’t do it with 60 guys. You can do it with 850.

Q: You raised a lot of money from Francisco Partners. How difficult was it to do that?
A: It took us over a year and a half, not all of that with Francisco – but plenty of planning and prep work. Raising money is a big distraction, just like everyone says.

Q: In hindsight, how has that helped your company?

A: We more than doubled in size last year, we’ve increased critical functions like internal testing and quality initiatives, we’ve invested in products and human resources programs. Pretty much every aspect of our business has benefited from better financial resources.

Q: Where are you in the cycle of development now? Are you commissioning more mass-market games because the new buyers of consoles and handhelds are mass-market consumers and not just hard-core players?
A: We are making mass-market games because that’s what we believe in. We want to sell games that a lot of people are going to play, not just our employees and the employees of other video game companies. We have at least one game for a mature audience. Our basic strategy is mass market.

Q: Are you supporting all of the platforms?
A: We now have more next-generation SKUs. We’ve got three or four huge projects going on. We’ve got a ton of Nintendo DS work. We’ve got mainstream PS 2 games. We had 25 percent of the top Xbox Live Arcade games last year. We are just killing on that platform. We have a great balance in every respect from publishers in Japan, U.S., and Europe. We have kid’s stuff, mature stuff, and all the platforms. That feels good. It’s a real validation of what we set out to do.

Q: What do you think of Electronic Arts’ new developer-friendly mantra, that they will not crush the culture of their development studios? They say they will run their studios like nation states that have autonomy.
A: It’s funny. I don’t want to give off any wrong impression. We work with EA and respect it. These things have been self-evident to us for a long time. We’re not a publisher. Game development inside a publishing organization is a cost of goods. Developing inside a pure independent developer is our bread and butter. It’s not a cost to be minimized. It’s what we do for a living. Because we all grew up in that environment, it was obvious that one of our key sales points is we didn’t want to crush anyone’s culture. And we wouldn’t acquire anyone if we didn’t like what they were doing already. If we didn’t like everything, we would say no thank you, even if they were really profitable. It’s great EA is saying that. But we didn’t run back and rewrite our business plans.

Q: How do you acquire game development studios and make them into good businesses?
A: John Riccitiello (CEO of EA) hit it critically when he said it is all about your leaders. He’s the CEO of a massive organization. He can’t do the integration of every company. He has to have good leaders with good people skills. He has identified the right way to do it. We’re a people-driven industry. Having good people skills is very important. An M&A guy comes in and talks about how it’s a good fit, it’s accretive, makes financial sense. That’s what you say if you are an M&A guy. The day after the deal gets done, you have years of integrating and making people feel happy and welcome in the organization.

Q: What do you think of the topic of outsourcing development to low-cost areas?
A: The outsourcing debate is a big issue. My mother asked me if I was sending American jobs overseas. Maybe in other industries, that’s true. But we can’t hire enough people here. We hire everybody we can get our hands on and we still need to grow. We are looking at opportunities in other countries. Hopefully, their markets will grow so they buy the games that we make here. We aren’t really calling it outsourcing. That’s an important distinction. We are making investments in our team in India. They aren’t just galley slaves making little art assets over there. Maybe some are working on that. That work has to get done. We are sending people over there and hiring people there to work on any level of project that they are capable of doing.

Q: At the same time, you don’t worry as much about having studios in high-cost areas?
A: It’s higher cost in Emeryville [California] than India. But cost basis is not your rent. The major cost is human resources. The Bay Area is absolutely expensive. It’s more important to improve production processes, reliability, and remove down time. When you do those things, you can support your cost base. There’s lots of demand for good development. That’s the message for all of our studios. Doing your job well will lead to quality of life and more choice of the projects you want to do. When you do a good job creatively, then people trust you more and look to you for creative leadership.

Q: Do you have some Wii console games in the works?
A: We have a few good things cooking but they’re all under NDA now. Those are what my girls like to play.

Q: Any observations about the high costs of making PlayStation 3 games?
A: It’s still high. We have by no means reached the value stage of the cycle. There is still a lot to learn on the platform and there is still more R&D work. We’re getting there. We are getting to the point where upcoming projects will be more efficient and cost effective. That’s good from a business standpoint.

Q: How big are some of your teams?
A: We still have a lot on the big end where we can do a project with 60 people. We don’t have any 200-person teams. Those would be done internally at a video game publisher. Given our size, that would be too much of a risk. To have a quarter of your people on one game – that would be a nail biter.

Q: Are you supporting all of the platforms equally?
A: Things are evening out across the consoles. Certainly, on the PS 3 and the Xbox 360, there is no reason to choose between them. Once you build art assets, you want to leverage them across those platforms. You can’t ignore the installed base of the Nintendo DS, which is twice that of the PlayStation Portable.

Q: And what about PC games?
A: The place we do PC games is for kids 10 and under.

Q: Do you think we’ll see good things on user interfaces?
A: I don’t have a prediction. I’m hopeful that more accessories like the Wii controller will make for more fun and mix up the types of games you can make. That’s a great trend for the industry. We worked on a lot of plug-and-play products. The thing you run up against is the shelf space in the house. People don’t have infinite room in the house for a joystick, steering wheel. There is only so much accessorization a family can do. But it opens up different kinds of game play for sure.

Q: Do you think there will be more companies that use Foundation 9’s business model?
A: Not sure, to be honest. It’s not easy in our segment, but it certainly would work elsewhere.