Completion bonds come to video game world: policies include monitoring of daily production at companies.

Completion bonds, long a staple in film financing, are now moving into the video game publishing industry.

Film Finances, a Los Angeles-based completion bond company, recently hired a 30-year video game industry veteran Tom Petit out of retirement to head its interactive entertainment group.

"I remember when game budgets used to be $50,000. Now they range from $15 million to $20 million," said Petit, who co-founded Sega Enterprises U.S.A. Inc. in 1985. "As budgets grow exponentially, the level of risk grows as well. The very nature of that risk compels people to start seeking security."

Companies like Film Finances issue bonds that guarantee funding required to complete a project in the event of a financial shortfall or unexpected costs. The firm reviews the project budget and assigns an executive to monitor its day-to-day production.

These guarantees have not only become common given bigger budgets, but also because of the dynamics of the $30 billion industry. The video game business can be roughly broken down into two segments--hardware and software. About two thirds of the software costs are self-funded by game giants like THQ Inc. or Electronic Arts Inc., Petit estimates.

But the rest develop, publish and distribute games with third-party financing, for which some level of protection and guarantee is typically required before a project is funded. "Project slates have ramped up significantly over the past year," Petit said.

Film Finances has taken on 25 video game projects so far and about half are contracts from the past year. A handful of them are in Los Angeles, though Petit declined to identify the clients.

Packaging bonds

Risks in videogame production resemble those in filmmaking, as console games become increasingly more narrative and elaborate. Still, since there are no actors or location shoots involved, the costs and risks of producing video games are typically less than they are for films.

The basics are similar, however. Copyright protection for characters in video games, for example, or what's called a "key-person" insurance that covers the absence of an indispensable player in production, is comparable to the type of entertainment insurance long offered in the motion picture industry.

This means that completion bond companies will require producers to get insurance for these separate risks--usually offered at about 2 percent of total production costs--before completion bonds are issued. Completion bonds cost anywhere between 2 to 5 percent of the total production expenditure.

This month, the Universal City-based entertainment arm of the Firemen's Fund Insurance Co. began offering both completion bonds and insurance packages for videogame makers. The company has most recently insured the films "Spiderman 3" and "The Lord of the Rings" trilogy.

But at Film Finances, a far smaller company, the insurance is outsourced to Lloyd's of London, where its syndicates historically have insured a wide assortment of risks.

Joe Finnegan, a vice president at Firemen's Fund, said it makes sense that the insurance industry has set its sights on the videogame sector as a new source of revenue.

"If you look at box office sales, video game sales have already surpassed them," Finnegan said. "And yet most videogames are improperly insured as software businesses, and not treated as the entertainment products they are."

Firemen's Fund's completion bonds for video games, which are offered through its International Film Guarantors business, are structured in the same way as film bonds. The staff monitors the project daily to make sure they are delivered on time, on budget.

Finnegan said video game-specific completion bonds and insurance products will become even more marketable as more videogame developers partner with filmmakers to create games, as THQ did with "Bratz: The Movie" and Brash Entertainment did with the film "Saw."

"Studios are well aware of what's going on with the video game industry," Finnegan said. "They're going to begin requiring proper insurance before partnering with them. It's still a new product, but the industry will catch up, just like every film production company now knows that you've got to have the right insurance and bond before you begin any project."

BY BOOYEON LEE

Staff Reporter