Analysis: Inside Brazil's Video Game Ecosystem

[Brazil's game development market is underdeveloped, but Divide By Zero CEO James Portnow believes it has "infinite possibility." In this detailed regional analysis, he explains why.] Recently, an unusual opportunity came across my desk. It required that I do some business in Brazil. I knew nothing of the Brazilian games industry, so I began to ask around. To my surprise, no one else seemed to know much about either, so I just took the leap and headed south. Beyond my business dealings, I tried to do as much general fact finding as possible while there. Here’s what I learned. Overview Brazil is a place of infinite possibility. It has the drive, the wealth, and a large enough highly educated populace to become the next Korea. It has a large, well established "gamer" demographic and a remarkable desire to grow its own national industry. It is also unfettered by the traditions and mindset that many of the more established markets have developed. I believe there are great opportunities for members of the US game industry in Brazil, but there are also great obstacles. Piracy is rampant, the industry is inexperienced, funding is almost nonexistent, distribution is next to impossible, and the government is either apathetic or hostile. It’s a risky place. My money says there will either be a boom in the next decade or the industry in Brazil will never start. I’ll try to go over in depth what I see as the challenges facing the industry in Brazil, the possibilities on the horizon, and what we, the international development community, can do to help the Brazilian industry overcome the hurdles they face -- and how we benefit by doing so. Hurdles First, the elephant in the room... Piracy in Brazil I’ve long heard other people in the industry say Brazil simply isn't a viable market for games because of the piracy rate. This isn't true. It’s not a viable market for games because of the tax rate. Games which are six months old in the US are being sold through legitimate vendors at 250 reais, or around $140 US dollars. This is an exorbitant price. It’s prohibitive. If you’re reading this article, you're probably pretty into games and know many people who are. Think about yourself and your friends. How many games would you purchase per year at $140? One, maybe two? Would you buy a console in the first place if you knew that every game you were going to buy was $140? All the consoles I saw in Brazil were sold at roughly one and a half to two times their price in the United States as well. What if I then told you that you couldn't get on Xbox Live in Brazil? Would you buy an Xbox 360? Even the very wealthy Brazilians with whom I spoke bought the majority of their legitimate games through Steam or other digital distribution services. For console games, Play Asia is by far the most popular choice (Amazon won’t even ship most games to Brazil), followed by Submarino.com (which still has exorbitant prices but occasionally has good sales), with the local retail outlets being a distant third. The sad fact about all this is that the retail outlets seem almost exclusively to cater to parents who don't know where else to go. That's anecdotal evidence, but after spending several hours loitering in major retail game stores in several different states, it seemed universally to be the case. All this isn’t to say piracy isn't an issue. Pirate stores sell games at 5-15 reais ($2.80-$8.50) and have better service. For the most part, pirate game dealerships are small local operations that know their clientele and are willing to go further for their customers than the large retail chains. Interestingly enough, I heard people say that their pirate dealers would let them buy a game and, if they didn't like it, come back a few days later and switch it for something else. That's the sort of service I wish we had in the US. Regardless of the extra service, people seemed interested in legitimate versions of games so long as they came at a reasonable price. In general people told me they’d be willing pay $20 to $30 more for a legitimate game over the pirated version. That number went up to approximately $40 if the game had internet play and required a legitimate version of the game to play online. If anyone has sales figures of PlayStation 3 games in Brazil, I’d like to know. PS3 games are currently un-piratable due to the Blue Ray discs. Academia in Brazil In the field of research, Brazilian academics far outstrip current US efforts, at least with respect to the cultural and artistic merits of games. There is a disproportional number of government grants and university-sponsored research positions available to those who wish to explore the sociological and historical aspects of our medium. Unfortunately, in terms of educating future developers to be prepared for the rigors of a career in the industry, Brazilian schools are woefully behind US standards (with the possible exception of a program being set up by Ubisoft in southern Brazil). Universities across Brazil are currently making a concerted effort to offer game development as part of the potential coursework for students. Unfortunately these nascent programs have met with little success. Given the level of passion and determination I saw in the teachers and the students, I believe these programs will grow and perhaps become the backbone of the Brazilian games industry. But right now, they face challenges unthinkable in the United States. Brazilian professors have an incredible opportunity -- their game development programs have the chance to grow alongside the private sector aspect of the industry and thus be considered a vital part of the industry as a whole, as opposed to in the United States, where university efforts aren’t well integrated into the larger machinery of the industry. Unfortunately, this opportunity brings with it a monumental challenge: building development classes without a strong local development community. Schools in Brazil do not have the existing industry from which to draw resources. They do not receive technology from game companies, they don't have internships available to their students, and, perhaps most importantly, they don’t have the opportunity to draw on the experience and talent of the industry to provide teachers and lecturers. Additionally, interdepartmental cooperation in Brazil seems to be an even bigger hurdle in Brazil than in the United States. In many of the schools I visited, the game development courses were the purview of specific departments. (The split is fairly even between schools that had game development courses run by an art department and those run by the computer science division. Humorously enough, I ran into several programs that were essentially part of the fashion design track.) This means students rarely get to work in interdisciplinary groups, and we all know game development simply can't be taught in a useful manner without exposing students to the diverse specialties that go into game creation. On top of these underlying challenges, many of these programs lack the resources and infrastructure vital to a successful game development degree. They lack commercial software, modern hardware and even, at times, proper lab and classroom space. If anyone reading this is interested in donating software or hardware to some of these Brazilian programs, feel free to contact me. Oi Futuro Nave There was one particular school I came across during my trip, a high school called Oi Futuro Nave. In it I saw the future. Oi Futuro Nave may be the boldest educational experiment I've ever encountered. It is the child of a partnership between one of Brazil's largest cell phone carriers, Oi, and the government of Rio de Janeiro. The goal of their experiment is nothing short of preparing students for the technological culture of the future. Every classroom in Oi Futuro Nave is equipped with the latest technology, from digital white boards to modern computers. Even the building is a reminder of and a monument to technology, for Oi Futuro Nave occupies part of one of Oi’s central switching stations. Students can see the massive banks of cables that keep their neighborhood connected through the windows in the cafeteria's walls. The students specialize in animation, script writing, or game programming. They work in multidisciplinary teams to create projects that incorporate each of these specialties. They spend long days, usually from 8am to 5pm (most Brazilian public high schools have a truncated school day of only four to five hours), working both on these projects and learning all traditional subjects. It's a young school, having been around only three years, so it has yet to see a class graduate. When the first class enters college, the metrics they return in higher education will say a great deal about the success of the experiment, but so far what I saw there seemed like a testament to the power of technology and education. Oi Futuro Nave is a public school. This means none of the students pay to go there and they all come from the public school system, which is otherwise notoriously awful. The engagement I saw from students who would may otherwise have simply checked out proves to me its success. Its value comes from the fact that, while the setup costs for the school exceeded other schools of its size, the year to year operating costs (as I understood it) are competitive with other schools of its size -- schools which offer a much worse education. Oi Futuro Nave takes the mystery out modern technology for these kids, but it leaves the magic. This is the future of pedagogy. Publishers How do you finance a project in Brazil? This question may present us with the biggest hurdle facing the Brazilian games industry. There are no major Brazilian publishers and none of the major Eastern or Western publishers have a large presence in Brazil, with the possible exception of Ubisoft. Venture capital for game development is even more difficult to acquire in Brazil than in the United States (I did not meet a single venture-backed developer, and all agreed that since the dot-com bubble, finding venture has been nearly impossible). Bank loans are equally difficult to get for Brazilian developers. All of the companies I encountered were either self-funded or backed by small private angels. There is limited governmental support in the form of grants for edutainment games and simulations, which has lead to some growth in the serious games industry in Brazil, but there is little in the way of subsidies or matching funds available to traditional game developers. Without financial support, many companies are reduced to relying on work for hire to stay in business. This means that their own projects drag on and rarely reach completion, which in turn hamstrings the growth of the Brazilian games industry. Development With the exception of Southlogic (the makers of Deer Hunter, recently acquired by Ubisoft) and perhaps Tendi Software (creators of TriLinea for Xbox Live Arcade Indie Games), most of the viable Brazilian industry is focused on smaller non-console titles. They have some incredibly strong mobile developers, including Gameloft and Glu Mobile, but -- much as in the United States -- the mobile game market is practically a separate industry to those creating experiences on any other platforms. PC and console development in Brazil is in its nascent stages and the Brazilian games industry suffers from many of the problems that afflict the amateur and independent game development community in the United States. Primarily, they have no sense of scope (this is a gross generalization; there are plenty of exceptions, but not many that I encountered). Unlike in the US, where the industry had the luxury of growing up in the Atari era, when a game could be brought to completion by a single individual, game makers in Brazil expect to jump in and start making AAA experience like those they play. Given the funding and trained talent available in the Brazilian industry today, this is an impossibility. The Brazilian industry is also plagued with too many people who want to be designers. The industry there hasn't coalesced enough yet to establish designer as a separate job. In many of the teams I encountered, most of the team members took part in the design (with perhaps a designated designer as the lead) and, while I believe everyone should have some input, this design by committee approach leads to massive amounts of scope creep and lack of a clear and unified vision. This is something the industry will mature beyond, but until it does, it will prevent the community from ever successfully developing larger products. There is also something of a brain drain. The most talented and successful Brazilian developers tend to end up working in the US, which means that there aren't enough experienced leads available for beginning businesses. Many times I saw Brazilian developers reach outside the industry for their leads, looking to commercial software engineers and members of the advertisement industry, which uses a great deal of pre-rendered CG, for artists and developers. On the positive side, wages are lower than in the US. Junior staff tended to receive roughly 20 percent of US wages, with more senior people (especially foreign employees) getting closer to parity with their US counterparts. Unfortunately for anyone hoping to set up a company there, it’s important to remember that you have to estimate wages to roughly double in total cost because of taxes and mandatory benefits. Another difficulty facing the nascent Brazilian games market is the way the international community deals with Brazil. The few major multinational companies that have game development studios in Brazil seem to be focused on producing products for the international market rather than attempting to grow the national market. This is clearly the safer choice at this point, and may be the correct business decision, but it does curtail the growth of Brazil as a viable marketplace for games. Several startup companies working on handheld projects mentioned to me they had difficulty getting dev kits and had to switch over to developing for the PC instead. I don’t know how prevalent this is, but without development kits, Brazilian talent will never learn to build for the consoles and will remain of little use to the triple-A console industry. Distribution The Brazilian games market also faces the lack of a dominant national retail chain devoted exclusively to games. Say what you will about GameStop, but they do us one service: They provide us with a single entity to work with. During my stay in Brazil I visited 31 different game stores. Each of these stores had different ownership, different stock, different displays, and different billing systems. Ensuring your product got into all of the small legitimate stores in Brazil would be a nightmare. Trying to ensure they all paid you on time -- well, that might be an impossibility. Brazil lacks its own digital distribution structure as well. The majority of the Brazilian gamers I spoke with knew (and sometimes used) Steam. Some had heard of Impulse and Greenhouse. None could tell me of a Brazilian company that provided the same sort of service. This problem is compounded for the Brazilian developers. Most of the studios I talked to didn’t know how to, and didn't believe they even could, get distributed through US services. Without distribution the internal market in Brazil is stillborn. Possibilities Despite all this, there are many ways for Brazil to bloom into an incredible market and a powerful development industry. Online The first and most obvious area of opportunity is the online space. I don't think Brazilian developers have the knowhow at this point to make a major Western-style MMO or even compete with second-tier MMOs coming out of Korea or China, but they do have the ability to create very powerful social network- or browser-based MMOs. The market for traditional MMOs in Brazil is deceptively small. There are about 1.5 million players playing traditional MMOs on legitimate servers in Brazil, but there are a great number of people in Brazil who play MMOs on pirate servers. For many MMOs, Brazil is second only to Russia in its number of pirate servers. While this may seem like a negative, it proves two things: one, that there is interest in MMOs, and two, that there is a lot of rudimentary knowledge of how the back end for MMOs works. After all, if you can figure out how to set up a pirate server from the packets sent to your client, you’ve got to know something. Brazil also has a highly wired culture, with a great deal of wi-fi-based internet access in the urban centers and 2,000 to 3,000 major internet cafes plus an additional 20,000 smaller unlicensed internet cafes. The problem with the internet in Brazil is that it's not always reliable. All these facts, as well as the limitations of the hardware available at the internet cafes, suggest to me the possibility of a vibrant web-based MMO community fueled by microtransactions or even more creative monetization methods. Anything that could leverage the man hours and human labor available in Brazil rather than charge hard currency could be incredibly powerful there. Outside Political Pressure At relatively low cost, I believe international corporations could work with the industry in Brazil to get the protective tariff on games removed, which would allow game retailers to drop the prices of consoles and console games to US standards, which would in turn go a long way to help eliminate piracy. Without such a step, I believe eradicating piracy or reducing it to manageable levels will be impossible. There is already such a bill in front of the Brazilian senate, but it is currently languishing in committee. I also believe the Brazilian government could be convinced to begin incentivizing foreign investment in the games industry. The government is amenable to both cultural programs and to technological investment. Once piracy decreases, the Brazilian development community and the internal Brazilian market can become viable within a few years. As it takes publishers much longer to coalesce than development houses, I see an opportunity for major Western (or even Eastern) publishers to become the dominant force and the exclusive publishers for Brazil. Foreign publishers could then exploit the comparatively lower development costs in Brazil to turn out culturally relevant (that is, locally successful) titles for all of Latin America, Spain, and Portugal. Edutainment The Brazilian government has been active in subsidizing, assisting, and incentivizing the creation of educational games. As a result, the edutainment products coming out of Brazil are, in my opinion, superior to what I've seen come out of the US. While subjects that fall under the liberal arts are harder to translate across international lines, the sciences are universal. I saw products that could easily be integrated into American classrooms or shipped around the world as top-tier educational games. In the world of edutainment, Brazil will undoubtedly be an international player in the years to come. Interactive TV The last and perhaps most interesting prospect for kick-starting the games industry in Brazil is the country's version of digital cable. Its system is designed for interactivity to a much greater degree than ours is in the US. In 2016 they will stop using analog signals entirely, forcing a nationwide switch to digital, and, given television's incredible 90 percent-plus penetration rate, there will be roughly 150 to 170 million digital televisions in Brazilian homes as soon as the switch occurs. This means that in 2016 there will effectively be a new console with an install base of at least 150 million -- higher than the install base of every current-generation console on the market combined right now -- with software that is totally unpiratable, which lends itself to smaller games, and which is free from outside competition. You can see where I'm going with this. The only question is how the content will be monetized. None of the developers that I spoke with could tell me if the government or cable companies would simply pay for content then freely distribute it, or if there would be some sort of App Store-like model. If they go with the latter, I believe it will single-handedly infuse the Brazilian industry with the capital it needs to get off the ground. There might also be incredible opportunities here for foreign developers. I am currently exploring the possibility of getting foreign content onto the system. Conclusion Now is the time to get into Brazil. The margin is right. If I were a betting man, I'd say the odds are about three to one that the Brazilian industry never gets off the ground. But at the same time, I'd say the return on resources invested in Brazil at this point will be at least ten to one if the industry does get past its infancy. I also believe that foreign entities have an opportunity to better those odds of the Brazilian industry becoming successful. But Brazil is not a place for the risk-averse. You can't walk into Brazil assuming things operate there the way they do in the US. It's an easy place to lose your money and wind up with absolutely nothing to show for it. Things there will be the wild west for at least another five years. On the other hand, companies can test the waters right now at little expense, and if things go the right way, a little money now could be a lot of money in the near future. For what it’s worth, I’m going to commit a little down there. Not enough to leave me busted, but enough that if it goes well, I'm in on the ground floor. If you have any further questions or inquiries about the Brazilian video game industry, please contact me. I will respond to the best of my ability, or at least see that they get forwarded to the right people. Acknowledgements This article is based on information gained by visits to: - Center for Technology and Society at the FGV Law School in Rio de Janeiro - Media Lab at Universidade Federal Fluminense - Nucleo Avancado de Educacao (NAVE) - Pontifice Catholic University of Rio de Janeiro - The Oi Futuro Museum - Kranio Studio - Donsoft Etertainment - Overmind Studios - Redalgo - Level Up Games - Mother Gaya - Glu Mobile - Ubisoft Brasil - Roughly 30 legitimate video game retailers - "Uruguaiana Station" or Saara (your source for pirated everything in Rio de Janeiro) Note: This list is incomplete as there were development/investment groups who I can’t mention for business reasons or who asked me to leave their name out of this article.