www.ttlg.com Open in urlscan Pro
74.208.228.60  Public Scan

Form analysis
0 forms found in the DOM

Text Content

TTLG Forums / Sshock2.com / Thief-TheCircle.com / DeusEx-Machina.com /
StygianAbyss.com / Morrowind.ttlg.com




Reasons for the Fall: A Post-Mortem On Looking Glass Studios ~ James Sterrett

We’ve all been shocked and saddened by the sudden demise of Looking Glass. It
seemed that Looking Glass was riding high, with System Shock 2 and the Thief
series finally getting it the public acclaim and sales Looking Glass has always
deserved. Suddenly, Looking Glass turned out to be dead. Why did this occur? The
more I have learnt about this, the more complex the answer has become.

However, the quick answer is this:

> Looking Glass died because a series of problems compounded each other into a
> financially lethal situation. No single factor is to blame. No single person
> or entity killed Looking Glass. No one problem was enough, on its own, to kill
> the company. Nonetheless, the problems were deadly when combined.

A hard fact of the world is that software development companies are rarely in a
very good financial situation. The company enters a contract with a publisher to
produce a specific game with a given set of features. The contract usually
specifies that the publisher will provide the producer with money when the
producer achieves agreed-upon milestones in the construction of the game. If the
producer fails to achieve a milestone before the previous dollop of cash runs
out, the producer has to find more money, or go out of business. Getting more
money now almost inevitably means borrowing it in some manner, which leaves the
producer with a debt to pay off in the future, reducing the net profit from
royalties - payments the producer gets as a percentage of the publisher’s profit
from sales of the game - the producer gets once the game is finished. Those
royalties are only a small fraction of the actual revenue gained by sales of the
game, and, furthermore, the payments the producer got during development are
considered as advances against the royalties.

As a result, the producers are in a bind: they have to make a very complex
product, on a tight schedule. If the schedule slips - and, because of the
complexity of the product, the schedules nearly always do – the producer begins
to get into trouble.

One of the ways that a producer can reduce their exposure to this risk is to
have several projects running at once on an offset release schedule. If all goes
very well, each product’s royalties then provide the operating expenses to get
later products through their troubles. If one product fails to make money, the
revenue stream from the others cushions the company from the blow. A producer
needs to have a minimum of three or four active projects for this to work.

Inevitably, there are some catches in this plan. The biggest catch is that
nothing guarantees the income cushion: no game is guaranteed to do well. If
several games fail to do well at once, the scale of trouble is proportionately
worse. It takes a large company to conduct multiple projects at once. Thus, when
the company does have to search for extra funding, it needs a much larger
infusion of cash than a smaller, single-project company. The risk involved is
reduced, but the consequences are worse when things turn sour.

All in all, producing games is not for the risk-averse. Lots of things can go
wrong. Many game projects never get to the point of being sold. Many of those
that are sold do not make enough money to repay the cost of their production.
Since the games cost several millions of dollars to produce, and more millions
to publish, a lot of copies have to be sold just to break even. Consider that
Thief II cost $2.5 million to develop, and probably, at the very least, another
million to publish (and probably more). At a price of $40 per box, it needs to
sell a minimum of 87,500 copies just to break even. And at 100,000 copies sold
the profit margin is still only half a million dollars, which isn’t enough to
fund the next game.

Keep in mind that this doesn’t all mean that the publishers are the evil
villains of the game industry for failing to support obviously good companies
and ditching the bad ones, and for failing to split the profits equitably with
the producers. Publishers are, in fact, in the same binds as the producers,
except on a much larger monetary scale. Bigger publishers are better able to
offset losses with a few hits, which is why there are so few publishers around:
most of them have died or been bought up.

The third link in the chain of getting a game into your hands, the game
retailers, is also under immense financial pressures. Yes, retailers do some
pretty amazing contortions that introduce big problems for the publishers. But
when was the last time you saw an independent game retailer? All of their
strange tricks (see The Retail Game) are designed to try to insure that the
store won’t fold when it bets wrong on which products to stock. Game retailers
have wound up in large chains because the greater mass of money allows a single
store to survive mistakes better; the parent corporation may bail it out if it
founders, while an independent retailer would simply fold.

The entire computer games industry is high-risk. Vast amounts of money are spent
in the hopes that a few games will sell well enough to make up for the losses
incurred on all the others. (If you want to know more about the perils of
computer game development and publishing, there are several good articles about
this on the web. I suggest beginning with these three: Staying in the Black; The
Retail Game; and Why Being a Computer Game Developer Sucks .)

When we look at things in this light, Looking Glass was actually a remarkably
successful and long-lived independent developer. It survived all of these
pressures for eleven years and produced at least 12 titles: Ultima Underworld I
& II; System Shock I & II; Terra Nova; British Open Championship Golf; Flight
Unlimited I, II, & III plus a Windows ’95 version of Flight Unlimited I; Thief I
& II, Thief Gold, and, if the bankers permit it, Jane’s Attack Squadron. In
addition, Looking Glass did conversions of various PC games to console systems,
and at least one original console game: John Madden ’93 for the Sega Genesis,
which sold over one million copies and was their greatest single hit.

Of all these, most were successes. Terra Nova was a disaster, not least because
Looking Glass decided to publish on its own. Exactly why Terra Nova failed on
the market is not clear. Possibly the gaming public saw it as a Mechwarrior
clone and thus ignored it. If Terra Nova had been a success, this would have
allowed Looking Glass to reap far greater profits, as they had done with the
self-published Flight Unlimited 1. When Terra Nova was a commercial disaster
(despite selling over 100,000 copies), Looking Glass was left holding all the
publication debt. Looking Glass might have folded at this juncture, but was
bailed out by Averstar, Inc.

Terra Nova would have killed most companies. Looking Glass, probably because of
its previous string of successful titles, was able to find creditors and stayed
afloat, but in debt. Over the next several years, the company appears to have
led a troubled existence. Nonetheless, Looking Glass nearly died again in 1997.
British Open Championship Golf experienced a difficult birth, and then bombed
when released, as a third self-published game, in the spring of 1997. The
company saved itself, in part by closing a studio in Austin set up by Warren
Spector. While it reduced overhead, this closure was a serious loss. Not only
did it cost Looking Glass staff who were important to ongoing projects, such as
Thief, but the team involved comprised no small net talent: many of that team
formed the group now completing Deus Ex. Moreover, the stress of not knowing if
the office would be open from day to day caused many of the Looking Glass staff
to leave, slowing projects while replacements were found and trained. In and
around all these troubles, a project for a Star Trek: Voyager game foundered and
eventually died. All told, Looking Glass incurred a significant quantity of
long-term debt in this period, though it improved its financial situation at the
end of the summer through a merger with Infometrics, a subsidiary of Averstar.

Yet Looking Glass survived. Flight Unlimited II appeared late in 1997 and
eventually broke even. Nonetheless, the debt incurred in this period - from
Terra Nova through Flight Unlimited II – comprises the precondition for Looking
Glass’ eventual demise. If all went well, Looking Glass could control the debt,
pay it off, and survive. If trouble occurred, it was not as well-placed
financially to deal with it.

Thief appeared in late 1998 and was a major hit, eventually making millions of
dollars for Looking Glass. Had Thief not been a big hit, Looking Glass would
almost certainly have folded. Instead, Thief appeared to revitalize the company.
Thief Gold sold well, and System Shock II sales were passable. Thief II is
currently on the way to being an even bigger hit than Thief I. However, Flight
Unlimited III (released in 1999) sold quite poorly and ate the gains from System
Shock II due to an agreement with Electronic Arts to pay off advances for both
projects with the royalties from both projects.

Furthermore, there is extensive circumstantial evidence that Thief’s success,
great though it was, may have done little more than plug the holes that debt had
left in Looking Glass’ budget. Thief ensured that, if all went well, Looking
Glass could survive 1999 and 2000.

Unfortunately, a series of problems came together, and ensured that a lot of
things went very badly wrong.

The fourth game in the Flight Unlimited series, Flight Combat, ran well over
schedule. Worse, Flight Combat (Janes’ Attack Squadron) was knowingly undersold
to Electronic Arts: Looking Glass apparently gambled that it could get the game
out the door faster than the budget actually called for. The gamble failed:
Flight Combat was instead slower than the planned budget, in part because of a
major redesign insisted on by Electronic Arts. This redesign appears not to have
been accompanied by a sufficient change in the budget and schedule for Flight
Combat.

The multiple project system depends on each product coming out essentially on
schedule. Since Flight Combat went over time, Looking Glass was not only losing
money on the project, but also failing to get the income from it that was
supposed to support its other projects.

In theory, multiple offset projects allows the developer to survive a failure.
Thief was profit that plugged holes in short-term debt. System Shock II more or
less offset the failure of Flight Unlimited III. Flight Combat was thus a
financial problem that strained the multiple project system and put Looking
Glass in danger again, and cash in hand began to run critically low in early
autumn of 1999, despite the royalties coming in from Thief (in addition to,
presumably, milestone payments for Thief: Gold.)

Work began in early 1999 on a modern-day stealth-based game called "Deep Cover".
This was a joint project with Irrational, similar to the System Shock 2 project.
Looking Glass was to provide a version of the Dark Engine while Irrational would
provide the bulk of the game design. Unfortunately, finding a publisher for this
project took 9 months.

As a result, Looking Glass’ cash shortage began to catch up with it. Payments to
Irrational were affected, placing Irrational in danger of extinction. As a
result, Irrational informed Looking Glass that it was looking for other work,
and eventually found it in November 1999 in the form of a contract for a
Playstation 2 game. Shortly after Irrational signed onto its new project,
Looking Glass came to an agreement with Microsoft to publish Deep Cover in
conjunction with Irrational - but Irrational felt it had to pull out of the Deep
Cover project to honor its own recently-signed contract elsewhere.

The rights and materials to Deep Cover reverted to Looking Glass, and Looking
Glass was allowed to continue to hire the services of the Deep Cover design team
from Irrational. Microsoft, however, was unhappy that Irrational would not be
involved in the manner originally intended. Despite negotiations, Microsoft
pulled out of the deal in February 2000.

This apparently subtracted at least one million dollars from the cash that
Looking Glass had expected to use to cover its operating expenses. That’s a lot
of money, but keep in mind that one million dollars is almost certainly less
than Looking Glass’ payroll expenses for one year: Looking Glass employed some
60-80 people, and even if all of them were paid a spartan salary of around
twenty thousand per year, its salary costs per year would be around one and a
half million dollars. Even that figure ignores all its other operating expenses
of, probably, at least another million dollars a year. In other words, the
failure of this contract could only be a mortal threat to Looking Glass if its
finances were already in bad shape. Furthermore, had Irrational remained in the
contract, a substantial fraction of the money from Microsoft would have gone to
keeping Irrational afloat, instead of to Looking Glass.

Thus, Flight Combat’s cost overruns, earlier debts, the failure of Flight
Unlimited III, and the failure of the Deep Cover project with Irrational and
Microsoft, all combined to leave Looking Glass in a perilous condition.

Looking Glass sought new sources of funding. In particular, it tried to get
itself bought by a company with enough resources to keep Looking Glass solvent.

A deal was in progress with Sony when Sony hit economic troubles. Sony
reorganized, and the executive who had been in charge of the deal with Looking
Glass was replaced. The replacement canned the deal, terminating this possible
rescue.

Eidos then stepped into the breach and firmly intended to buy Looking Glass,
presumably intending to protect their projected income stream from Thief II
Gold, Thief III and other potential future projects such as Deep Cover. The deal
was agreed upon, and, while the paperwork was processed, Eidos began to keep
Looking Glass afloat. It seemed that Looking Glass had been saved.

However, the economic instability sweeping the entertainment industry slammed
into Eidos, which found itself with insufficient funds to complete the purchase.
Eidos asked its bankers for more money. The bank was itself in a period of
difficulty, and thus the bankers said no.

Left with only enough cash in hand to pay off its employees, Looking Glass was
forced to shut down.

Looking Glass had a long run; it survived eleven years in a business where all
too many companies have a lifespan a mayfly would not envy. It consistently
produced superb games, most of which were commercial successes, in an industry
where many games are second rate and many fail to make a profit. It repeatedly
survived disasters that would have killed most companies. All in all, Looking
Glass was a spectacular success as a games producer.

But the games industry is a high-risk environment of speculative capital.
Looking Glass beat the odds for eleven years. Eventually, the odds caught up
with it.

Several conclusions can be made from this:

First, as mentioned before: No one factor killed Looking Glass. A number of
attempts have been made to blame various single parties. While all of these
accusations have a small grain of truth, all of them fail to appreciate the
wider picture. To debunk some of the more prevalent myths:

Eidos did not kill Looking Glass. True, the final word came from Eidos. However,
Eidos was deeply involved in trying to keep Looking Glass afloat. Blaming Eidos
is like claiming that a drowning victim was killed by the person who attempted
the resuscitation.

Eidos’ bankers did not kill Looking Glass. True, the final blow was dealt by
Eidos’ bankers. But without an enormous chain of events beforehand at Looking
Glass, Eidos’ bankers would never have been involved. If Eidos itself had not
hit financial trouble, the bankers would not have been involved. Had the bank
been in good shape, there is a good chance it would have approved the rescue.

John Romero did not kill Looking Glass. True enough, Eidos’ finances might have
been much healthier if Daikatana had been on schedule and on budget. But
Romero’s flaws would have had no bearing on Looking Glass’ survival, if Looking
Glass had not already been in deep trouble for its own reasons - including games
that went over time and over budget.

Irrational did not kill Looking Glass. True, pulling out of the Deep Cover
contract hurt Looking Glass. But this single failure could not have been mortal
without the severe problems that already existed in Looking Glass’ budget.

Flight Combat did not kill Looking Glass. True, the cost and schedule overruns
were very harmful, and the cost gamble turned sour. Yet without the other
problems that came before and during this project, it would not have been
lethal.

Poor sales of Thief did not kill Looking Glass. This hasn’t even a grain of
truth. Thief sold well and, according to Tim Stellmach (Gamespy interview),
Looking Glass made millions of dollars from it. If Thief had failed to be a hit,
Looking Glass would have died. Instead, Thief kept the company going.

Poor sales of System Shock II and Flight Unlimited III did not kill Looking
Glass. Obviously, better sales would have helped. Flight Unlimited III was not a
success. However, System Shock II did not sell poorly and, according to Tim
Stellmach (Gamespy interview), should break even or better in the long term. In
any event, had other things gone right – Flight Combat, Deep Cover, the Sony
deal, or the Eidos deal – then the multiple project system would have covered
for the failures.

Neither Terra Nova, nor the Austin studio, nor Star Trek: Voyager, nor British
Open Championship Golf, nor even Elvis killed Looking Glass. Looking Glass
survived the worst moments of all of these. True, the damage these caused helped
to drag it down in the end. But the damage itself was insufficient to actually
cause Looking Glass to keel over.

So what can we blame? If you must blame something, blame the system as a whole.
The games industry is extremely volatile. Millions of dollars must be spent to
design, test, and manufacture a product, and as often as not the products fail
to repay that investment. The whims of the buying public are quite difficult to
predict. Companies whose products fail to pay off rarely get a second chance,
because nobody is in the business to lose money.

Looking Glass, in retrospect, did a stunningly good job in this harsh
environment. If we discount the Windows ’95 version of Flight Unlimited 1,
Thief: Gold, and its console conversion, it produced 11 titles in about 11 years
(if we start counting from the late 1989 inception of Underworld 1). Of these,
three were commercial failures (Terra Nova, British Open Championship Golf, and
Flight Unlimited III), and another one might fail to break even (System Shock II
has not yet broken even, but is expected to do so). Two thirds of its titles
were commercial successes. Some of its titles are legendary as creative
achievements; all have received critical acclaim.

That’s no mean feat. Surviving for a decade, through shocks that would have
killed lesser companies, without compromising its design principles, and
producing many of the greatest games ever to grace a computer, is a legacy to be
proud of. While we may be saddened by its death, we should also be grateful that
Looking Glass had the tenacity and agility to survive so long.

Finally, the Looking Glass legacy does not prove that deep, complex gameplay is
a recipe for market failure. If that were the case, Looking Glass would have
died long ago. Ultima Underworld would be cult hit known to few, instead of
consistently being praised as a seminal computer game. Thief and Thief 2 would
not have been hits. If anything, Looking Glass’ long survival proves that deep,
complex, immersive gameplay tends to be commercially successful. Only one of
Looking Glass’ clear-cut money losers, Terra Nova, resides in its "core
competence" of first-person action-adventure titles. The other two major
commercial failures – Flight Unlimited III and British Open Championship Golf –
went head to head with established powerhouse titles (Microsoft Flight Simulator
and Links, respectively) on those title’s home turf. That’s a daunting and risky
course of action, and in both cases it failed to pan out. Arguably, Terra Nova
suffered from the same fate, being seen as a "big robot game" and thus a
competitor to Mechwarrior. By contrast, Ultima Underworld, System Shock, Flight
Unlimited 1, and Thief all broke new ground and were rewarded for it.

In other words, where Looking Glass innovated most, and provided a game
experience that was most different, it did best commercially. This, and Looking
Glass’ longevity, strongly suggests that in the long run, good innovative games
are good profitable business.



James Sterrett ~ 31/5/2000



Go Back



TTLG Forums / Sshock2.com / Thief-TheCircle.com / DeusEx-Machina.com /
StygianAbyss.com / Morrowind.ttlg.com