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Spot On: The rise and fall of CEG

Gene Mauro thought his team would change the game development process. Two years later, their experiment is over.

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Just over two years ago, Capital Entertainment Group (CEG) was founded by agent and business entrepreneur Gene Mauro. The company would eventually include on its roster Seamus Blackley, Kevin Bachus, and Mark Hood. Each member of the CEG team had a unique, almost storied, history in the industry. Blackley was part of the Xbox launch and design team, Bachus was a key member of the Direct X and Xbox teams, and Hood was an executive at Sierra Studios.

The company's business model was unique. It would focus the expertise of its founders and partners and work diligently on a game's development process, bringing products that might be as much as 50 percent complete to publishers.

The idea was simple. The company would allocate task sets to those most capable of accomplishing them. Design and production elements would be overseen by experts in those areas--namely, CEG. Meanwhile, publishing components (including marketing, manufacturing, and distribution) would be performed by those most competent at those tasks--namely, publishers.

On paper, it sounded good. In practice, the idea collapsed before it hit critical mass.

GameSpot caught up with CEG's founder Gene Mauro to hear his view of things and to learn what went right and what went wrong.

GameSpot: Is the demise of CEG an indication that the industry seeks to remain in a 'business as usual' mindset? Does it suggest an element of conservatism or even stagnation in the area of funding strategies?

Gene Mauro: To be clear, we received industry-wide support for CEG. Publishers, developers, retailers, and even the venture capitalists (VCs) were very excited about the promise of our model. I think the wind-down of CEG has little to do with the state of the video game market, but, rather, it has to do with the state of the private equity market. In the current environment, VCs are extremely cautious when looking at prerevenue companies, especially those with a relatively new business model and those that are focused on content rather than technology. As our model was new to the industry, and we were all about content, we could not get them over that hurdle.

GS: From the publishers' points of view, what did they say were the biggest impediments to their signing up with CEG to manage projects?

GM: CEG's strategy was to approach publishers with an intellectual property that we would license to them (where we absorbed development and production costs, and publishers absorbed manufacturing, marketing, and sales costs). CEG was not an outsourced production management business, as had been widely reported in the press. To give you a better sense of publisher demand, we did approach one publisher earlier than our model planned for, and the publisher didn't waste time executing a deal with CEG.

GS: Do you feel the CEG model was ahead of its time? Do you see the CEG model ever gaining traction?

GM: I don't think CEG was ahead of its time. I think the support we got from all industry constituents speaks to that point. Our challenge was closing the necessary capital to make original content, which, of course, is what made CEG so valuable to the industry. The absence of clear visibility to the commercial performance of our future portfolio is where the model hit the wall for VCs. I believe the private equity climate will improve over time, and we will most definitely see the same successes in independent video game production as we do today in indie film and music.

GS: For the record, what was the CEG model?

GM: We would pay for and produce original content and then bring it to publishers--at around 50 percent complete--for a marketing and distribution deal. They would then cover 100 percent of these costs, as well as manufacturing. We would then split the gross from retail revenues at a roughly 50/50 formula. We can be compared to almost any indie film company--or more accurately--Pixar.

GS: What is the industry missing out on by not having the CEG model available to it?

GM: Original content. CEG was ultimately a very simple business model, albeit with the substantial challenge of producing hits. As publishers feel the increasing pressures from retail and Wall Street for hits and sustainable growth, the need for compelling, new franchises is only going to intensify. Game publishers will need an alternative source of hit product.

GS: Was it an uphill fight for most of CEG's existence, or were there signs of industry acceptance?

GM: Early on, of course, there were skeptics and doubters. Once developers and publishers more clearly understood what we were setting out to do, I can't think of one group we did not achieve acceptance with.

GS: I take it you were the originator of the idea to shift funding and development to an intermediary enterprise, like CEG. What led you to determine that the idea had potential?

GM: CEG was a collection of accomplished and very bright guys with similar ideas and philosophies on how to bring original content to market. Everyone's perspective was crucial in shaping CEG. I got the company started a few years ago, where, as a game agent, I saw the trend of promising content being passed up for largely derivative and licensed product. Although I understood the (risk management) reasons for publisher behavior, it amazed me that the trend trumped the profits to be gained in taking more frequent risk on original content. I began to write the plan for an alternative source of financing original games and was fortunate to gain the interest, insight, and subsequent contributions made by my partners. It was these guys who brought the essential production skills and experience it would take to "engineer hits."

GS: How do you see the increased cost of game development playing out in terms of encouraging creativity, new blood, and new ideas in the game sector?

GM: Higher costs means greater risk, which will have an impact on creativity, I'm certain. We've recently seen publishers reduce their volume of titles in production in an effort to increase the quality of those that make it to the shelf. This is encouraging but comes with a price. Many of these games (some might say "most") have/need a license or are a sequel, etc., so limitations on creativity start from the green light. One of the great things about our industry is how new blood can get in and thrive pretty quickly, so there's not much of a concern there. If by "new blood" you mean "new developer," well, that's a little more daunting a challenge, given your earlier point regarding increased cost/risk of development. As for new ideas…always got room for those. Somewhere, someone is working on the next The Sims. Unfortunately, it's not likely happening in a garage, but we can hope.

GS: Is an industry captivated by the marketability of licensed properties necessarily a bad thing?

GM: Not necessarily. We used to talk a lot about great gameplay enhanced by great licenses. Spider-Man, Madden, etc., for example. You really have to study these cases closely to appreciate what has made them so successful. In some cases, it even transcends great gameplay or the awareness of a license, as was the case with Tony Hawk. The problem you run into is when a license overshadows the game, and you don't deliver on the promise.

GS: The UK is faltering badly in terms of indie-development studios, with many having gone out of business recently. Do you feel there is a threat of this happening in this market? Could CEG have helped stem the impending tide?

GM: I do think indies are threatened by this trend. I'm not sure this is a geographical issue, but, rather, it's one that is driven by the narrowing chances of getting funded and published. Publishers are working with fewer indies or acquiring those that create valuable intellectual property, so just the opportunity to do something original or otherwise is getting more difficult. CEG was in the market to engineer hits, the source of which can be found in original content that would come from the indie community. I'm not certain that our ongoing presence would have necessarily had the broad impact necessary to slow or change the tide you mention, but it could have helped in redirecting some attention to how we got to be a $30 billion market.

GS: Was it a tough decision to shutter CEG, or is this the sort of thing an entrepreneur accepts as part of the course of a career?

GM: Naturally, this was very difficult for all of us. Our team was world class. We reached global awareness, raised money in an extraordinarily difficult economy, and garnered support and interest from the entire industry. We knew this would be tough, and we knew failure was as likely as success, given the risk involved. At the end of the day, you go forward with something like CEG because you can't even consider not doing so. We're all moving forward and in different directions at this point.

GS: What's next for you?

GM: Personally, I'll be managing the final wind-down process for CEG, including looking after our shareholders' interests in our remaining assets. I have begun to talk to some folks about new opportunities but remain convinced there is a model for alternative game production that can work in the near future. Until my wife throws me out of the house, I'll keep testing my own limitations, and I'll keep pushing those of the industry.

GS: What was CEG's biggest success story, game- or deal-wise?

GM: Biggest success story for CEG? We tried it. We got 90 percent there. Someone will pick it up from here and go on to do great things for game making.

GS: Thanks, Gene.

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