Secret Level: Making The Decision To Be Acquired

Here we take a few minutes to chat with Reeve Thompson, Secret Level's VP of studio operations, and Jeremy Gordon, the company's studio director and CTO, about what the pluses and minuses of becoming part of a larger publishing company.

DAM: Reeve, tell me a bit about your pre-Sega years. What sort of focus did your company have when it was founded back in 1999?

Reeve Thompson: We were founded by three programmers -- Jeremy being one of them and two other guys. The company originally started about the same time as the PlayStation 2 and the guys had been working at a developer; they thought they’d start out by doing more tech consulting for the games industry like engine optimization. For instance, one early project was taking Macromedia flash and bringing it to the PS2 and then to the Xbox and trying to make flash an acceptable user interface tool. And then, as they started working with various companies, publishers inevitably wanted them to start doing some small port projects as well and start working directly on specific games. So Secret Level started to grow, they hired a few artists and designers, and the company slowly ramped-up.

At the time, I was a producer at LucasArts and was working with Secret Level on a few port projects. As I got to know them more, I realized that there was real potential here and I told them that if they were thinking about making the next leap to doing full-on games, I’d be interested in joining them and overseeing an entire studio as opposed to just one project at a time as I was doing at Lucas. I joined them in 2003 and it was my job to build relationships with publishers and put ourselves in a position to do full game projects.

DAM: Give me an example of one of the porting projects.

Thompson: Well, we ported the Unreal engine from the PC and the Xbox to the PS2 and, before that, to the Sega Dreamcast.

DAM: So those were the pre-Sega years. Something must have happened for you folks to consider being bought out by Sega in 2006 after seven years as an indie.

Thompson: We recognized as a company that doing larger, more original games was the direction we wanted to go. We also knew that the hardware lifecycle was about to change and we thought that was the opportune time to make the leap and start developing our own technology. So we spent some time talking to a few publishers -- Activision, Ubisoft, and Sega, for example -- to try and make that happen. The project we ended up doing was “Golden Axe” for Sega. That was even prior to our thinking about being acquired. Then Jeremy and I started strategizing and looking across the industry at various trends. We recognized how hard it was going to be for us to go from publisher to publisher as the next-gen budgets were growing and the amount of risk that publishers were taking on was building. Publishers were regularly turning to inside studios to do the riskier projects because it gave them more control. We saw that and decided that it made a lot of sense for us to team up with a publisher … if we could be acquired, we could focus more on games and technology and leave the business development to someone else. I always think of the Robert Altman movie “The Player” in which two brothers who are movie directors keep saying “All we want is a home.” And I think that was true of us.

DAM: So that’s why you wanted to give up your independence? To have a home?

Jeremy Gordon: Well, one of the things that was really tough was that we were doing our best to invest in ourselves. Whenever we would amass any kind of profits, we would reinvest that back into the business by hiring people and building up the creative side of Secret Level. But we soon realized that the money we were bringing in wasn’t enough, and there was this threat that we could miss the boat with the new next-gen systems because we weren’t able to invest in the people and the technology the way we should.

DAM: So you really needed to be purchased by somebody. Did you approach Sega because you had been working with them on “Golden Axe”? Or did they approach you?

Thompson: It was a little of both. We definitely started to float the idea that we were interested in being acquired and it was just a matter of who made the most sense. Jeremy and I sat down and made up a list of publishers … and what we wanted from whoever acquired us. It was important for us to retain our identity as a studio; we wanted to remain Secret Level. We looked at Activision, for instance, and saw their model was to acquire a studio but have it continue to exist. We liked that. We thought it was a good balance of a developer remaining independent, keeping some of that spirit that’s important to a developer, but, at the same time, getting the benefits we talked about. On the flip side, we saw that Activision had tons of studios and we really weren’t interested in being, say, studio #48.

DAM: So what looked good to you about Sega?

Thompson: At the same, Sega was going through its reinvention. They had dropped hardware with the Dreamcast and were struggling to become just a software publisher. The strategy of developing games in Japan and then bringing them to the Western market wasn’t working well for them. So you have this new initiative to grow development in the west plus we were working with them plus we had shown them this technology that we were developing and they were impressed with it. So the timing was perfect; our needs and theirs seemed to align. We talked with Sega, they agreed to keep Secret Level as Secret Level, and let us be a studio that was relatively independent. And we were also their #1 acquisition in North America, so that fit nicely with our interest in helping shape the relationship as opposed to just being studio #48.

DAM: For those indie developers reading this, tell me what it’s like being purchased. What sort of negotiations did you go through?

Thompson: The acquisition process is definitely an eye-opener. Jeremy and I mentioned numerous times that we felt a bit like we were in business school because we were getting a ton of on-the-job business training. Indie developers are very, very focused on the games they’re building but, during the acquisition process, suddenly you’re forced to look at a lot of parts of the business you’ve never really been passionate about -- financial records, doing your due diligence, working with outside accounting firms to do evaluations, working with different lawyers to draft acquisition agreements. That’s all pretty foreign to game developers. I mean, Jeremy and I had gotten pretty good at understanding what development contracts look like, but an acquisition agreement is a totally different beast -- about 18 times as long. So it’s a very eye-opening, at times painful, definitely very exciting -- and humbling -- process. It took over four months to complete which, I’m told, is actually quite quick.

Gordon: Not only was it interesting, but also fun to see your life over seven years represented in a set of 25 binders or so. If any developer out there is thinking about being acquired, they really should make sure that they are very, very organized on the financial and legal ends. If your files weren’t organized before, they certainly will be after the acquisition.

DAM: After a year, I’d guess you’re a very different company from what you were previously as an indie. Is it working out well?

Thompson: Absolutely. But, you know, we had expected that all of our problems were going to disappear; that’s not exactly true. What really happens is that you trade one kind of stress for another kind. The challenge of making games is still there; that doesn’t go away. But now we’re able to focus more on our long-term strategy instead of constantly worrying about where our next milestone payment is coming from. So that’s a vast improvement.

Gordon: One of the great things for us is that we’re just down the street from Sega. So, yes, we’ve stayed independent but we just happen to be very close to the mothership. And that’s been great because Reeve and I are part of the Sega executive staff which is pretty rare in the situation of acquired developers. That has given us access to knowledge about how the publisher thinks. We’re smack in the middle of all the people who are analyzing the sales data, looking at the industry trends, discussing business plans and inventory levels. That’s all information that we, as indie developers, never had access to. Now that we’ve got it, it enables us to do our jobs that much better.

DAM: And what have you given up now that you are no longer an indie?

Gordon: During the acquisition process, I realized that one of the things we were trading was the freedom to choose what our next project would be. The reality has been that we have far more choice. When we’re sitting at the executive table, someone might ask, “Hey, who is doing this license?” And if it’s something we want to do, we can raise our hand and say, we’d like to do that. It’s so cool to be that far upstream in the process and get to hear what’s going on and work on the roadmap of what our three-year and five-year picture looks like. As an independent, you don’t really get to do that. You kind of have to choose from what’s available. And maybe you try to pitch something you’d like to do, but you never know how the publisher reacts to your pitches. So this is pretty cool. We’ve got a lot more choice, not less.

DAM: It sounds like, if you had the choice to make all over gain, you would make the same decision -- to be acquired?

Gordon: Without a doubt.

DAM: What is your best advice to other indies who might be considering the same move that you made?

Gordon: Come on in! The water’s fine!

Thompson: I would say that a developer really needs to know what it wants from the process, what it wants to accomplish. That’s what gave us a direction through all the turmoil that occurs while you’re being acquired. And I think it’s also the reason why we feel very satisfied now. We knew what we wanted. So I would encourage anyone thinking about it to know what is their motivation, what type of studio do they want to be, what type of publisher do they want to be acquired by, and enter with that knowledge. Because, otherwise, the process can eat you up.