Mobile Entertainment Distribution boss Lewis MacDonald talks Telcogames
With numerous publishers and developers owed money by the aggregator/distributor, there has been genuine anger on their part, which was seemingly exacerbated by the news that several Telcogames executives had formed a new company, Mobile Entertainment Distribution Limited (MED), which proceeded to buy the business and assets of Telcogames.
Developers and publishers have numerous questions, which have been expressed directly to PocketGamer.biz, and also on industry sites like Mobile Games Blog, which has run several posts on the affair.
For that reason, we've spent the weeks since the announcement canvassing industry views, and drawing up a list of questions. Then we put them to Lewis MacDonald, the former COO of Telcogames, who's now heading up MED.
We started with the most obvious.
What went wrong?
Rewind to 2006, when Telcogames diversified from its established aggregation and distribution business, into publishing high-end native games. It bought studios Magic Productions and Fathammer, and won critical acclaim and even awards for games like SIL.
However, MacDonald says the strategy sowed the seeds for Telcogames' downfall. "We along with others were expecting high-end native gaming to take off. But for a number of reasons, it did not," he says.
"The returns we got on the publishing were absolutely not in line with the investments we had made. Our vision and strategy were right, but the timing was wrong. We were too early for a company that, as an aggregator and distributor, didn't have the financial depth of an EA or a Gameloft."
This isn't a controversial assertion, but the real issue for Telcogames' publisher and developer creditors is this: why didn't the company ring-fence the royalties that were due to them, rather than seemingly using them to fund Telcogames' own expansion into the publishing arena?
"I understand the frustration they might feel, and it is regrettable what happened," says MacDonald.
"Ultimately, we didn't ring-fence the royalties, because we expected to secure follow-through investment. We didn't foresee that the native market wouldn't grow in line with analyst expectations. We didn't foresee that investment in the mobile gaming arena would completely dry up. And we didn't foresee the effect of the credit crunch in Q4 last year."
Investment and Restructuring
That reference to follow-through investment is worth exploring. MacDonald says that by the summer of 2007, Telcogames found itself in an awkward financial position, thanks to its expansion.
He says that the company had a "solid" aggregation and distribution business, although as several developers have pointed out after reading the official Administrator's report (which PG.biz has also seen), Telcogames had made a trading loss of £315,265 in the financial year ending March 31st 2005, and a trading loss of £238,435 in the year ending March 31st 2006.
For whatever reasons, the company needed more investment. "We were following a plan of fund-raising in the summer of 2007, which we hoped to complete in the June to August time period, but for a number of reasons, that didn't happen," says MacDonald.
"So we went back to our existing shareholders looking for additional investment from them. However, this was at a time Q4 2007 when the financial markets were difficult, so we didn't raise the full amount that we required."
In parallel to this, MacDonald says that from March 2007 onwards, he was restructuring Telcogames, which included closing Magic, Fathammer, a studio in Korea and Telcogames' Liverpool-based publishing team. As a result, Telcogames' headcount shrank from 72 people down to "somewhere in the region of 18-22".
"By the early part of 2008, we were a business that was heading towards profitability," says MacDonald. "That's the key thing about the administrator's report: it shows we went into administration as a going concern, as a direct result of those changes we had made in 2007. We would have achieved the turnaround if we had got the ongoing support of some of our creditors."
It's no secret who at least one of those creditors was. The Administrator's report reveals that on April 10th this year, Namco Bandai Networks Europe filed a winding-up petition for £91,496.98 against Telcogames (the publisher declined to comment for this article due to ongoing legal issues). MacDonald says that Taito was also on the verge of serving a petition, spurring Telcogames' bank, the Royal Bank of Scotland, to appoint Menzies as the official administrator.
Much of the anger amongst Telcogames' creditors concerns the setting up of MED, which then bought the business and assets of Telcogames after being chosen by the administrator from a field of four potential buyers.
"We paid the cash amount higher than any of the other offers on the table, and we have committed to pay seven per cent of our gross margin back to the administrator," says MacDonald. This is confirmed by the Administrators' report, which states that MED will make this payment every month for a period of 12 months after the sale.
Here's where the controversial aspect lies. Several developers have suggested to PG.biz that as MED has bought the Telcogames debtors book, it can collect all invoices issued by Telcogames to operators and portals, but that crucially it won't have to then pay royalties from that money to developers, since they fall under the category of Telcogames' own debts.
We put this directly to MacDonald.
"The people saying this are obviously commenting on something they don't understand. The devil is in the detail. Due to poor collection and reporting in the market, for a lot of clients generating sales in January and February, those sales might not be reported on until May, June or July."
He continues: "We didn't buy the invoices that had already been generated. The Royal Bank of Scotland is collecting on those. What we purchased was the book debts that hadn't yet been invoiced or collected. It's a very important point of difference."
MacDonald's point is that when MED now chases those invoices and is paid, part of that money will find its way back to developers as part of that seven per cent of gross margins payment to the administrators, which will then be distributed to creditors something that might not happen if another firm had bought Telcogames' assets.
With such anger on the part of many developers, it remains to see if they accept this argument, although MacDonald is also keen to point out that in the event of any sale of MED, 25 per cent of the proceeds will go back to Menzies, to be distributed to creditors.
"Administration is a very clearly documented process, even if it's a regrettable and unfortunate process," says MacDonald. "We have adhered to all the guidelines, and MED offered the most cash and presented the most attractive offer for the creditors. It would have been far easier, believe me, to have just walked away."
MED's Future Plans
So, to MED and its future. The company has a team of ten people currently, although former Telcogames CEO Jamie Conyngham is no longer involved with MED something both he and MacDonald have confirmed to PG.biz.
MacDonald says it has retained 80-100 of Telcogames' partners in terms of operators and off-portal retailers. He also says this includes Orange and O2 in the UK, which may be a further bone of contention for those developers who feel anger towards those operators for having been the catalyst for their relationship with Telcogames in the first place.
"We're focused on stabilising the business, and providing a service in 80-100 sales channels," says MacDonald. "We'll have further updates in September and October, but we're focused on doing simple things. Why do we want to do it again? It's very obvious that there is still a need for a good, solid aggregator and distributor in the marketplace, bringing quality content from the independents to the channels."
A big question is how what happened to Telcogames will affect MED's business going forward. With such strong feeling on the part of developers and publishers that PG.biz has talked to, can MED pick up the customer base it needs to survive and prosper?
"We're absolutely focused on no repetition of what happened before," says MacDonald. "I can understand why some people want to work with other aggregators, but we've got a professional dedicated team, who know the sales channels and know the sectors. We've already launched 35 new games in our catalogue in June, and expect to have 60 new games by the end of July."
A recent feature in Mobile Entertainment magazine, following Telcogames' going into administration, suggested that publishers are asking more of potential aggregators before signing distribution deals with them. Presumably that's happening with MED, too?
"Obviously, yes," says MacDonald. "This is a challenging marketplace right now, so companies are absolutely right to be asking some pretty probing financial questions of anyone they're considering doing business with. I'd fully expect more financial probity. Everyone needs to shape up. It's not just MED: everyone in this sector needs to raise their game."
The events around Telcogames' administration have undoubtedly been messy, with strong views (to say the least) on the part of the developers and publishers who are creditors of the company. Indeed, the lasting impacts remain to be seen, with rumblings of some firms quitting the mobile games industry altogether, and others in genuine financial trouble.
By forming a company to buy the assets of Telcogames, MacDonald believes he's providing a better deal for these creditors than they would otherwise have got. The challenge for MED is to win back the trust of enough developers and publishers to build a business that's strong enough to make that a meaningful commitment if MED struggles for business, then that seven per cent gross margin payment won't amount to much.
However, MacDonald is convinced that the future is bright. "The aggregation and distribution business was healthy," he says.
"People have to acknowledge and recognise that Telcogames was a pioneer, particularly in creating the off-portal mobile game category, which is now seen as a vibrant sector with a healthy outlook. So we had a very healthy aggregation and distribution model, but we pursued a publishing agenda in high-end native gaming where the strategy was right, but the timing was wrong. The business couldn't sustain it, but we didn't just sit back and allow it to go into liquidation. I'm confident and optimistic about the future."