What development could be a remedy for skyrocketing production costs in next-generation video games, and yet, some warn, could cripple the game development industry in the U.S.?

The answer is "offshoring," the practice of offloading pieces of game creation to foreign developers in order to hold budgets in line. And it's a fast-growing trend -- or concern -- depending on whom you ask.

Industry observers liken the situation to the U.S. TV animation industry. In the early '80s, programs started to use companies in Japan and Ireland as animation outsourcing vendors: "Thundercats" was sent to Japan, "Teenage Mutant Ninja Turtles" to Ireland. It made sense; the labor-intensive process of drawing the thousands of frames in each cartoon could be done much more cheaply abroad. Today, many prime-time cartoon shows are designed and scripted in the U.S. and then sent to Taiwan, mainland China, Hong Kong or South Korea to be animated.

"That is the same sort of danger that the video games industry faces here in the U.S.," says Dustin Clingman, president of Orlando, Fla.-based developer Zeitgeist Games and also a professor of game design and development at the Full Sail school in Winter Park, FL, and a member of the Quality Of Life Committee of the International Game Developers Association.

"What I'm most concerned about is what I call the 'ambition gap,'" says Clingman. "In the short term, our industry might save a lot of money, and we might even improve the quality of life for domestic game developers who may no longer have to be pummeled into completing huge workloads on crunch-time schedules. In the long term, however, the people who we outsource to -- in India and China and such -- they're not going to stop at just doing menial tasks. As we ship them more and more to do, they're training themselves to take over the more important game development jobs. We're just laying the groundwork for our competition."

Clingman recalls an episode a few years ago when a U.S. publisher hired him to oversee a group of 15 Russian programmers and artists to build a mobile game.

"They had all the right skills. All they needed was someone in the U.S. to make sure that the project was going in the right direction," says Clingman who at the time was doing prototyping work on cell phones games. "Why did the publisher choose to go offshore? As I recall, it was able to staff that entire team for $1,500 a month -- basically $100 a person."

He estimates that, including his fee, the six-month project cost the publisher approximately $25,000. "If it were done in the States, well, first of all, you wouldn't need 15 people. A mobile game might require four people working for six months at an average annual salary of $60,000 each -- or a total of $120,000 for the half year. By going to Russia, on salary alone, they saved $95,000."

Clingman admits these figures may not be typical, but they aren't too far off base, he says.

"People will argue that a competitive U.S. developer might be able to do the job for $90,000 in three months," he says, "but, heck, nobody in this country could get it done for $25,000 unless they were really, really hungry for work."

While Clingman fears that this sort of availability of cheap labor will surely impact the ability of domestic game developers to get work, others see a brighter side.

Giving games their props

Jason Robar is a Seattle-based consultant who describes his job as helping game developers do their job "more efficiently, more quickly, and more cost-effectively."

Offshoring, he says, started with audio and music production, and then, as the Internet developed and assets could be sent more quickly and easily to anywhere on the globe, it spread to artwork and testing.

"Today, just like in Hollywood where there are companies that specialize in building the props for a movie, in the video games industry there are companies that will create the 'props' for a game, perhaps hundreds of trees for a forest or buildings for a city," Robar explains. "The top level of artwork, which is, say, the main characters, is harder to outsource. But as the companies who do the lower-level artwork get better at what they do, they move up the chain to more important work, and that is rapidly accelerating. In Russia, in Vietnam, in South Korea, even in South America, you see companies doing more and more of the game development work. Every publisher I know is doing some offshoring."

Data is hard to come by, but Robar estimates that roughly 10% to 12% of today's game development budgets in the U.S. is spent on offshoring, a number that he says is growing fast. That's because the cost of producing a next-generation PlayStation 3 game can be trimmed by 25% -- from, say, $10 million to $8 million -- through the use of offshoring, Robar says.

But the desire to save money isn't always the main catalyst.

The number one motivation, says Robar, is what he calls "scalability."

"Just like in movie production, the instant a project is greenlit, the next day you need a bunch of resources," Robar explains. "You don't want to pay your staff to sit around until you're ready to begin work so, instead, you improve your timing and flexibility by having your offshore company ready to go. That's the real driver ... a small, independent game developer's ability to get the resources it needs when it needs them."

Back in the U.S.S.R.

Chapel Hill, N.C.-based Octagon Entertainment is a company that facilitates offshoring through its production management model -- it signs with a publisher to complete a game, and then uses offshore studios to do everything from artwork to coding. According to co-founder Lloyd Melnick, he typically sees savings of 60% to 70% by offshoring to companies in Eastern Europe -- such as Russia, the Ukraine, Poland, Romania and Bulgaria -- for PC, online, and mobile games and to Western Europe -- the U.K. and France -- for console games.

"This isn't so uncommon," says Melnick. "I can think of at least several U.S. developers that have turned into nothing more than facades, that will become the developer of record for a project and then outsource all the work to, say, an East European team."

The benefit is not only cost but speed.

"The East Europeans are very efficient coders compared to some developers in the West," Melnick explains. "A good studio there can typically put together a game in 10 months (where) it might take 18 months here, and the quality is just as good. And because they are cheaper, they can put 20 programmers on a project for the same amount of money that, in the U.S., there would be just eight."

Melnick cites a game that his company completed for Global Star, a publishing label of Take Two Interactive, called "JetFighter 2015," that was released at the end of August. Using City Interactive, a Polish development studio, Octagon had it built for "half to a third of what Take Two spent on previous 'JetFighter' line projects," he says. "Because this was a value line product, meaning that it sold for only $19.99, it was important to restrict the production costs."

"JetFighter 2015" is a good example of a game that wouldn't have been made at all if it weren't for the savings that offshoring affords, Melnick maintains.

"Every publisher is very bottom-line conscious these days," he says. "Which means that offshoring is enabling the U.S. games industry to make a lot more games, which keeps the employment level higher -- not lower. And it will certainly help the publishers maintain the $50 MSRPs that gamers are used to. With next-gen consoles almost here, I think U.S. publishers need to find ways to keep costs down so that they don't price their games out of the market."

Melnick predicts that offshoring will become the dominant trend in the games industry and he has expanded his own staff in preparation for that.

"I see our industry looking a lot more like the animation industry in a few years," he notes, "meaning that most of the work will be done in lower-cost markets with just the high-level project management done here. I believe that will be good for the industry overall and, frankly, the only way it can continue to grow."

At the International Game Developers Association, executive director Jason Della Rocca speaks of the "protectionist sentiment" in the U.S. game development community regarding offshoring and what it could mean to job opportunities. But, he adds, it's not an issue for the IGDA, which is an international organization.

"We're all over the world," he says. "So if someone is making games in the U.S. -- or in India -- we're happy. If others aren't happy, there's not much we can do about it other than to try and quantify the issue, to find out how many people are actually doing offshoring, and to determine whether jobs are being lost because of it. There aren't a lot of good numbers around. And, frankly, I don't believe offshoring eliminates jobs. More often, it's the result of too much work at a developer. As the manager, I might send out the easy stuff to do because I need my people to worry about the more important things."

Della Rocca agrees that offshoring may be the solution to some current developer staffing challenges.

"Every studio in the U.S. -- especially those that intend to build next-gen games -- has openings for programmers and artists and producers and designers. And there just aren't enough talented people to fill them," he maintains. "Next-gen may require triple the manpower, but that doesn't mean developers are getting triple the budget, and so they need to do a better job of managing that budget. Does that mean the industry may be forced to offshore? Maybe."

Over there, over here?

In a unique potential twist to the practice of offshoring, if Roger Green's plans come to fruition, there will be a "Code Boat" just off the coast of Los Angeles, where offshoring can take place -- just a lot closer to home. Green is the COO of SeaCode, a San Diego-based venture that plans to employ software developers for 24-hour, two-shift workdays. The benefits to clients, says Green, are the low cost of distant-shore offshoring, and the ease and reliability of a nearby American company. Plus, he adds, the protection of U.S. intellectual property laws.

"The stories of theft of code in India and other third-world countries abound, so this is no small thing," says Green.

His plan is to hire developers outside the U.S. -- especially in India, China and Russia -- who would be paid considerably less than their counterparts on the U.S. mainland. Cook believes he will be able to skirt US H-1B visa regulations (which cover skilled immigrant workers such as programmers) by categorizing the hires as "seamen."

He notes that he's gotten "definite interest" from videogame companies that are already outsourcing to foreign countries and want to bring the work back closer to home.

"That's because they've begun to discover that the savings of distant shore outsourcing are often erased by the 'gotchas' of trying to manage complex, rapidly changing projects across huge distances, dealing with foreign languages and cultures, the risks of travel, and communication problems," he says. "Game companies are particularly rattled by the spectre of unplanned delays and late delivery of product to a market that demands on-time product availability."

Green is performing due diligence on the ship he wants to purchase and, if everything is shipshape, he hopes to have a team of developers all aboard and setting sail by the first quarter of 2006.

Paul "The Game Master" Hyman was the editor-in-chief of CMP Media's GamePower. He's covered the games industry for over a dozen years. His columns for The Reporter run exclusively on the Web site.