Games Industry Venture Capital Plummets 22
Thanks to ElectricNews.net for a synopsis discussing the difficulty of raising venture capital for the games industry. They reference a Wall Street Journal article mentioning that only USD37 million was invested in games-related firms in the US in 2002, down from USD66.9 million the year before and a peak of USD295.3 million in 1999. According to the article, apart from the wider downturn in VC activity since the late 1990s: "'Historically, in the games business, a lot of companies really succeeded by hitting it big with one blockbuster,' says Jon Callaghan, managing director at Globespan Capital Partners. 'As a VC, it's very hard to invest in that.'"
Profits - sometimes. Stable companies - rarely. (Score:3, Informative)
In response to things a couple of other people have said... It's been fairly well known that people still spend on entertainment during economic downturns since the Great Depression of the 1930s, when the movie industry flourished. A lot of people were poor, but if they could scrape up a nickel or a dime for a saturday of escapism (including serials, cartoons, and newsreels in addition to one or more main features), they often would.
As far as "one hit wonders" - venture capitalists are smart. They know that if some company is going to turn out just one hit game, it's a better investment to be funding that one game through a deal with the developer than it would be to invest in the whole company and have the earnings diluted by the expense of several money-losing titles... But more to the point, the most desired "exit strategy" for the venture capitalist, taking the company public and cashing in the stock, does NOT work well with a "one hit wonder" publisher. The way to maximize the amount of investor dollars that a game company can raise at IPO, you want at least 3-5 hits, preferably all of them "franchises" where you keep turning out sequels and/or add-ons that can be expected to keep generating a healthy revenue stream for years. A one hit wonder publisher might attract some foolish investors, a strong publisher with several good product lines will attract foolish investors AND savvy investors too. Which means more money, which means more profits for the venture capitalists. I've talked to VCs, believe me - they are interested in building stable (or at least stable-seeming) long term businesses, not something that investors could see is a "flash in the pan". They want to get OUT of the business quickly, sure, but they want to be able to sell it to other people who'll be willing to believe the business will stay around and keep making profits for years to come.
Anyway I'm not surprised investment would die down in the computer game industry - I'm just surprised it took so LONG. At one point, there were about 3000 new PC games coming out a year, with only a tiny fraction of them breaking even or turning a profit. I think that's dropped down to more like 2000 or less. Which is probably a good thing. The fact that there was so much "stupid money" being pumped into the game industry is why the retailers shifted more towards breaking even on sales to consumers, and making their profits from Market Development Fees (thinly disguised bribes) from the game publishers. If there's less stupid money input into the system, maybe it'll eventually go back to the slightly saner way it used to work.