Canadian developers of interactive games are emerging as a thriving high-tech sector.

Whether the platform is a console, computer, mobile phone or interactive TV, Canadian firms are playing a significant role in the increasingly popular entertainment medium.

North American revenues in this industry surpass US$7 billion annually, rivaling movie box-office receipts.

"Canadians have always been fascinated with being in the entertainment industry," says Rob DePetris, vice-president of Silicon Knights, a privately owned, independent console-games developer in St. Catharines, Ont.

Bayne Stanley, Business Edge
Radical Entertainment CEO Kelly Zmak has a big winner with the video game Scarface.

"The difference is that, unlike the film industry, they don't have to go to Hollywood to make a video game."

Dozens of best-selling video-game titles have been made by the Canadian affiliates of California-based Electronic Arts in Vancouver and France's Ubisoft in Montreal.

Japan's Koei in Toronto is set to launch its first Canadian-made game, Fatal Inertia, this year for next-generation consoles that include Microsoft's Xbox 360, Sony's PlayStation3 and Nintendo's Wii.

The foreign-owned developers set up in Canada when the low-valued loonie provided a competitive edge and their presence created the demand for a growing Canadian talent pool.

A look at the membership of the International Game Developers Association, a global group, shows there is one Canadian for every four U.S. members.

These college-educated programmers and artists have become the backbone of a flourishing home-grown industry.

"The players in Canada are successful all over the world," says Ian Kelso, president of Interactive Ontario, a trade association of 100 Ontario interactive digital media companies. "They fare very well on the global scene, but nobody really knows them as Canadian companies, like you would a film company."

Rob Barrett is a typical Canadian interactive entrepreneur. He spent 10 years at the Disney Interactive studio in Victoria, B.C., before deciding to set up Blue Castle Games (BCG) in Burnaby, B.C., in 2005 with two colleagues.

"After that many years in the industry, you want to see if you can do things better," he says.

BCG will release its first game this summer, The BIGS. The Major League Baseball game features larger-than-life player models and ballparks, as well as pitching, batting and fielding animations.

The BIGS will be available for the next-gen consoles, but those who buy the console game will also be able to go online and compete against up to four players.

BCG is already at work on another multi-platform next-gen title, but awaits the final development fee for The BIGS from its publisher, New York-based Take-Two Interactive Software, in order to turn a profit.

"Publishers always try to hold back some money until the end to keep you hungry and focused," says Barrett, "and that's where your profit lies."

Meanwhile, another Vancouver startup, Big Bucks Games Interactive (BBGI), is bringing on Big Bucks Footy, an online soccer game where enthusiasts manage teams and compete for cash.

The beta version has been up since January and the revenue model will be online April 1. Four years in development, the game is being marketed to the U.K., Europe and Canada.

Players subscribe for a minimum of three months, spending from £6 to £35 per month. (The game is denominated in pounds, but players can pay in pounds, euros or loonies.)

By its third year, the company expects to have 48,000 players, who could generate $40 million in revenue. BBGI is already planning further online games, including pay-per-play soccer for Asian markets and NHL hockey.

Co-founders Stephen O'Neill and Tim Lloyd favour the Internet space partly because their background was in building online applications. But they also prefer the online business model.

Says Lloyd: "We're breaking away from the traditional games model of distribution - finding a distributor, packaging the game and distributing it to the store shelves. We cut all those costs out. And we get to keep our IP (intellectual property). It makes more profitable sense that way than partnering with someone."

Independents that succeed, however, find that multinational developers want to acquire them.

For independent console-game developers, development budgets have ballooned to $8-$12 million a title, "and the risks have gone through the roof," says Kelso of Interactive Ontario.

"It's starting to enter the sphere of a special effects-driven feature film."

Increasing development costs and the desire to "cross over" from the console market into others have sparked a consolidation trend: Homegrown independents are being acquired by big foreign players.

Radical Entertainment of Vancouver, originally an independent, has benefited from the bigger development budgets and marketing skills provided by multinational Vivendi Games, which acquired it in 2005.

With 230 employees in its 70,000-sq.-ft. studio, Radical has 10 to 15 per cent more staff now than it did when it was acquired, says president Kelly Zmak.

He expects the number will rise to 270 employees by the end of the year, as the studio has four projects in development.

Radical continues to conceive and design games under its own brand, but Vivendi provides financial muscle.

"They are responsible for the publishing process and for the marketing," says Zmak.

"Those are skillsets that have never existed within Radical, which has always been a pure developer.

"Part of the beauty of the marriage with Vivendi has been the complementary skillsets."

Radical has scored hits with video games based on The Simpsons,The Incredible Hulk and last year's Scarface, based on the Al Pacino film about a ruthless Cuban mobster that Zmak calls a "phenomenal success."

It was marketed to computers as well as Playstation 2 and Xbox consoles.

Radical intends to use Vivendi's channels for further crossovers from the console space into the online and handheld markets.

"We believe that there's convergence," says Zmak. "The online component in the console space is allowing us to broaden out of a typical box retail-sale product that's a single-player experience, to that product being extended in its value through downloadable content and multi-player experiences (online)."

Content available online for $3 to $10 can add five to 20 hours of game play to a product, and allow the purchaser to compete against other real players instead of artificial intelligence.

BioWare Corp. of Edmonton is also thriving following acquisition. A California-based private equity firm, Elevation Partners, scooped up BioWare in 2005 and merged it with Pandemic Studios to form a well-funded independent game developer.

Since then, BioWare has established a new studio in Austin, Tex., to develop its first massively multi-player online (MMO) game.

BioWare has a total of 340 staff at both its Edmonton and Austin studios. Last year, it formed a division to develop games for handheld platforms, beginning with the Nintendo DS.

Silicon Knights, for its part, is resisting the consolidation and crossover trends.

It continues to make action games for consoles, but it's taking on more, and bigger, projects for other publishers.

It broke away from exclusivity with Nintendo and is now working with Microsoft on the Too Human trilogy and with Sega on an unannounced project.

Silicon has doubled its team of game developers to 140 from 70 just three years ago.

It used to produce one console game at a time - earning $5-$7 million in advance royalties from publishers - but now makes two at a time with a revenue stream of $10 million per project, reflecting the souped-up graphics and other advances of the seventh generation of console games.

Silicon's DePetris recalls that the company made its first video game for only $25,000.

He acknowledges the takeover trend in the games industry, yet he's not convinced that independents are destined to be bought by either a bigger developer or by one of the 10 or so major publishers.

"We've stayed independent for 15 years and that's a huge time in the games industry," he says. "I think we can survive. The reason why we're so successful is creativity. We're very content driven. We're making games we ourselves want to play."

At Splashworks, an independent in Toronto, the accent remains on advertiser-supported online games ("adver-games.") The company has developed more than 300 titles in the past eight years, becoming Canada's leading producer in this space.

Splashworks has a client base of some 55 consumer-goods companies and ad agencies. It also has a library of more than 100 titles that clients can license and brand to suit a particular ad campaign.

Although Splashworks makes almost all of its money from adver-games, it has begun producing downloadable games that target individual gamers rather than corporate clients. Two will be released this year.

Online game developers such as Splashworks operate in a less-complex value chain than those producing for console or handheld platforms, said Jennifer Crisanti, the company's co-founder and vice-president of new business development. "It's a lot easier for us to develop and release," she adds.

Over the Christmas holidays, for example, Splashworks speedily designed Rosie vs. Trump for one of its newest clients, the cable-TV Game Show Network.

Gamers were able to go to the GSN.com website and join in the celebrity slugfest as it heated up early in January.

The space includes just the developers and a small number of online distributors who are relatively easy to reach, says Crisanti.

"They're always looking for new content, so once you get to a certain level of development, they will continue to look to you," she says.

"You just have to get enough games out there, and one of them is going to be a hit."

Big Blue Bubble (BBB) in London, Ont., which originally developed games for consoles, became a leading developer of handheld interactive games, with distribution in 80 countries.

Now, it's also targeting the PC market.

Last July, BBB released its first computer game, Pop-A-Tronic, and will follow this year with Geeks Unleashed, which pits a player "against some of the smartest, yet geekiest players on the planet."

Founder and CEO Damir Slogar says moving into the PC space was a natural progression, since "it's pretty close to mobile games in terms of development time and the way in which the games are developed."

He expects the PC division will generate 10 per cent of BBB's revenue in 2007 (versus 30 per cent from mobile, 30 per cent from console and 30 per cent from other projects).

The company began developing games for the cellphone market only in 2004.

Last year, it released GoodFellas, Pat Sajak's Blackjack Bowling and 24, based on Fox TV's counter-terrorism thriller.

24 has been a critical success, winning a number of awards, but Slogar says it is too soon to know if it will be a financial success. (Jewel Quest, a puzzle game, has been its biggest hit so far, selling two million copies.)

The company has produced several titles for the handheld console market, and has two in development for release next Christmas on the handheld Nintendo DS. Meanwhile, it is developing Hobby Shop for the Wii next-gen console.

Hobby Shop has already achieved one distinction - it is among the 10 finalists in Telefilm Canada's Great Canadian Video Game Competition.

In December, 69 independent video-game developers submitted applications to vie for up to $2 million in financing and valuable industry mentorship.

Telefilm, a Crown corporation, initiated the contest as a way to give an extra boost to the home-grown games industry.

Says Slogar: "We're going to create brands that stay in Canada."

(Sheldon Gordon can be reached at gordon@businessedge.ca)