16/04/2014

BLOG: Business Models Selling Time vs Selling Products

Despite the common perception that there is an infinite number of options when starting a business, there are only really two choices in the creative industries.

The question that any budding entrepreneur needs to ask themselves is: did I want to fulfil client briefs (work-for-hire) or build my own products (intellectual property)? Essentially, the argument between creating your own intellectual property (IP) and work-for-hire is one of risk versus reward.

Work for hire is low risk, but low reward. You know that you will get paid if you deliver on a pre-agreed contract, but your profit margins will always be limited. If you’re lucky, then over time you can end up with 20-30 per cent net profit, but it’s unusual to get beyond that; and some companies make no profit depending on what their costs are. While a company which only undertakes work-for-hire has no real value outside the business, it can be a robust venture which earns good money for the owners. Still, there is unlikely to be an exit strategy because few people would want to invest in a work-for-hire business.

However, creating your own products is high risk as there’s a chance that you’ll invest time as well money and the project will fail. Companies who create products are tied to their offering and if that fails, the company fails. That said, if it succeeds the profit you can make is essentially unlimited and not at all proportional to the amount of money put in. Successful IP also gives you great options for exit strategies such as being acquired or merging.
Every company that I’ve known has made a slightly different decision on which model, or split of models, to follow and there is no right or wrong way. As a business owner you must decide what sort of company you want, what risk you are willing to take and where you want to end up.

When we started Remode, we realised that we wanted to build a robust business, but we also wanted to create our own games and build a company that one day might give us a good chance of exit. Essentially, we love making games, but we also love the business and take pride in its growth and want to make profits. Not all creative businesses feel like this. Some prioritise the making of their games over the business, and some are all about the business. We felt we were somewhere in the middle.

On that basis, we decided that the best route was to build a sustainable, profitable business through work-for-hire, and then once we had reached a position where our team was big enough to splinter, we would start creating our own games and taking part in revenue share partnerships. That way, we would ensure that the business could sustain IP and that the business wouldn’t fail if we didn’t succeed in making revenue from them.
This is probably quite a common model in the creative industry, where some of the more mundane work-for-hire can fuel passionate, expensive IP work. It’s not all one way, however, and we have found that, once a company produces a successful piece of IP, client work will come knocking.

It took nearly five years to get our studio in a position stable enough to begin creating our own games. After this we had to think carefully about which model, or combination of models would work for us. The most important aspect we had to look at was stakeholder consensus, because changing models later on means fundamentally changing the business and that is not an easy thing to do. If you put off choosing, the likelihood is that your business won’t succeed because you won’t know what your goals are, and you won’t understand what decisions to make or what you need to do to achieve them. You can be cautious but you can’t hold off making a firm decision forever.



REMODE

In the five years since launching, Remode has straddled work-for-hire and IP to launch over 30 games; including the innovative, heart-powered shooter Sky Cycle.

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