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214. Bull, Bear & Beyond – Devolver Digital: executive interview
16 Plays17 days ago
In this interview, Devolver’s executive team discusses the company’s developer-first model and its focus on publishing distinctive indie games, while increasingly benefiting from owned IP and in-house development. CEO Harry Miller explains how Devolver differs from traditional games publishers by backing new IP, supporting small creative teams and helping titles find their audience. COO Graeme Struthers highlights the importance of allowing developers to retain IP ownership while improving portfolio management, release cadence and regional execution, particularly in China, Japan and Korea. The team also discusses how data, technology and AI are being used to understand player behaviour, extend game lifecycles and support back-catalogue monetisation. CFO Dan Widdicombe outlines the financial profile, including a growing contribution from historic titles, platform partnerships, margin expansion from first-party games and a pipeline of more than 30 titles over the next three years.
Devolver Digital Inc. is an indie games publisher of third party and in-house video games and merchandise.
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Transcript
Introduction and Welcome
00:00:07
Speaker
Hello and welcome to Edison TV. Today I'm speaking to the executive team at Devolver, a leading publisher and developer of indie video games.
00:00:19
Speaker
Harry, many thanks for joining me today. Well, thank you. Thank you.
Devolver's Focus and Role
00:00:23
Speaker
and Can you start off by um really introducing Devolver, explaining your business model and and perhaps just talking about how you are different from other games developers that people might think of?
00:00:35
Speaker
Sure. Well, simply put, we're primarily a publisher of small indie games. We do have in-house development now, but our major core business is publishing.
00:00:47
Speaker
um The teams we work with are quite small. They can range from one person up to 15, 20 people, sometimes maybe a little bit bigger than that. And really our role in this whole process is not only do we provide provide funding to help them through the development cycle, but we also provide a host of services really depending on their needs as a team.
00:01:09
Speaker
Thanks.
Differentiation and Success Factors
00:01:10
Speaker
And so what really differentiates Devolver from traditional video games publishers? Well, we really focus on new IP, whereas the traditional publisher focuses on existing franchises and the sequels that come through that.
00:01:24
Speaker
right Our specialty is working with new and distinctive games and helping them find their audience. At the same time, we can offer the same services that a AAA publisher does to their portfolio and and to the games they work on.
00:01:40
Speaker
But and through this, we can provide a well-crafted, unique game. And one thing that gives us great pride is that many of our games are not only nominated for, but win awards every year.
00:01:55
Speaker
And this isn't just a bragging exercise, it also has real financial consequences and meaningful benefit. That's very helpful, thank you.
Innovation in Indie Gaming
00:02:03
Speaker
and And turning more towards indie games in general, where do they fit into the overall gaming industry in this current environment we've got where you know we've seen AAA game games budgets balloon, a real focus on sequels rather than original content.
00:02:20
Speaker
yeah Where do indie games fit in in all of this? Well, indie games are really the lifeblood of innovation in our industry. And a lot of that is based off what you just described in that AAA are so huge and phenomenal budgets, they really can't take risk with new IP, new game mechanics, you it's just too much at stake, right? So with indie games, they come to market quickly, they can adjust quickly, and you know,
00:02:52
Speaker
I wouldn't say following trends in the market, but can adjust to trends right where appropriate. And it's it's a more exciting output for someone who really believes in it's their hobby to enjoy games.
00:03:07
Speaker
So what makes a successful indie publisher? Well really, you need to demonstrate miserable value, right? Also it's important that the publisher understands the importance of the relationship with the developer themselves. And also it's key to understand that they, just like us, want to see value in their own company grow, and you have to respect that.
00:03:29
Speaker
And then beyond that, it's really anticipating and proactively reacting to change in the market, because it's always coming.
The Importance of Scale
00:03:36
Speaker
And what about scale? How important is scale to the business? think one of the clearest forms of scale that we provide is our sales team, right? And how they manage the storefronts throughout the life cycle of ah of ah um of a game, and which is quite long now. So through the active participation of our sales team, we can add 20 to 60% to the annual revenue of a game every year. So you multiply that by 5, 6, 10 years, that's quite meaningful. We also have costs that that that we negotiate with people like our PR firms and other software providers and things like that, that we can demand a better price. And the developer benefits that from that as well.
00:04:24
Speaker
We also build internal technology because we can through ah through other games and we can offer that to these developers as well. So that's also something that they wouldn't be able to to enjoy on their own or be able to invest in on ah on their own.
Hybrid Model and IP Evolution
00:04:39
Speaker
so So your business model has evolved over time. So having started off as as a pure indie publisher, you've now brought on some of your own IP. So you've got more a hybrid model. How has that influenced the business? Well, it's interesting because our business is always changing. something that I really enjoy about it.
00:04:56
Speaker
Bringing on new teams within the company has not been as disruptive as you may think it would be. What has changed is our ability to further invest within these teams. And a strong benefit that we're seeing right now is we've invested technology to help not only that game, but then we can bring that technology to other games within our our portfolio, including the third party.
00:05:21
Speaker
So it's been a boom for all it all across the board. Harry, many thanks for joining me today. It's been a pleasure, thank you. Graham, many thanks for joining me today. Pleasure.
Championing Developer Rights
00:05:30
Speaker
um So Devolver describes itself as a developer-first publisher. yeah Can you explain what that means in practice?
00:05:39
Speaker
ah Well, in the good old days or the bad old days, what would happen when you went to find a publisher and you would need funding, that was always the kind of relationship you'd be asking for funding, is that publishers would typically take the IP ah off of the developer as part of the deal. Or if they didn't do that, they would take sequel rights, which was effectively capture and kill.
00:06:05
Speaker
Myself and Harry, we had previously been on that side of the fence. And we always felt that the creator should actually own the intellectual property. They should be the owners of it.
00:06:17
Speaker
And so the business model of Devolver when we started the company was that's baked in. So the developer always retains their ownership of IP, but also we don't take SQL rights.
00:06:29
Speaker
the so So the developer is absolutely free. at the end of our relationship of publishing that game they can move on to some work with someone else. So yeah, that's the bedrock of our terms, if you will.
00:06:42
Speaker
um And then if it sort unfolds from there, we think we're here to enable the developer And that might mean help them produce their game on other platforms. It might help mean quite simply build the IP in terms of our marketing and PR.
00:06:58
Speaker
um And when we did promote games, we promote the developer rather than Devolver. So yeah, those are the kind of principles that we started with and they're still the principles we operate with today.
Release Cadence and Growth
00:07:11
Speaker
Thank you. And um you've talked about how you're improving your operating model, um particularly as with with respect to portfolio management and the cadence of title releases.
00:07:22
Speaker
Can you discuss that? Yeah, the cadence is that is is tricky because we we have a number of releases in any given year and we feel that the number, if it's too many, then we lose relevance. We'll be going to the same place, trying to elicit a response from the same audience to buy another game. um Obviously, at the same time, we're also trying to grow our audience. So you could argue that, you know, that's also part of the task. But we do think that there's a balance as to how many games we can be pushing into the market at any given time.
00:07:59
Speaker
and So that's something we always think about. It's quite complicated because the games we sign rarely come out when we thought they would. So they tend to move around. We're trying to get better there as well. and That's another thing that all publishers will always talk about. Getting games to come out within that window that you hope is the biggest challenge, right?
00:08:21
Speaker
So that's part of it. Improving our performance is something where we look at how can we take any of the games we work on and achieve a better outcome. So an easy example would be our team in China. So we have a small team in mainland China and their job is to literally find ways to reach the consumers there.
00:08:40
Speaker
And so growing the business. and We now have our own a dedicated resource for Japan and Korea. And again, it's how do we get better at finding those consumers?
00:08:51
Speaker
there. So we're a very inquisitive group of people and we like to look at the world from the point of view. We know that a sitting here in the UK does not allow us to easily sell games in Japan so we have to go there, have to investigate the market, spend time and and get better at understanding the sort of promotional cycles there because they again are different from than they are here. So yeah.
Tech and AI in Gaming
00:09:16
Speaker
So you talked in the results about how you're using technology, data and AI to to improve your processes. Can you talk about that? Yeah, so the technology i piece would be that we acquired a company a few years ago called System Era.
00:09:31
Speaker
ah Part of the reason we were interested in working with them is that they have what we call Games as a Service as a model, which is Astroneer, which is now in its 10th year of of being out there and so they've got very good middleware for tracking player behaviors what players are enjoying also harvesting the feedback players give to help them understand how to keep the game relevant add more content or improve areas of the game that perhaps players feel need that improvement
00:10:02
Speaker
So we took that middleware piece if and and looked at that and thought, how can we use that across other parts of our portfolio? Because understanding what the player is actually enjoying allows you then to invest more money and time in making that feature stronger or adding more content.
00:10:20
Speaker
And if we see things that players aren't engaging with, that might tell you, well, actually that feature, you don't need to continue developing it. You can focus elsewhere. So that's just one simple piece of this.
00:10:31
Speaker
But then it moves into things like consumer sentiment. What do people like? Why do they like it? Or yes, also what don't they like and why not? It just helps us at a portfolio level have a better view of what we're doing.
00:10:47
Speaker
It can also help us understand in specific instances, this is a game that people would like more content for. So again, that helps you look at expanding that game, adding more content.
00:11:01
Speaker
The goal is always to be relevant to the player. And so anything we can do to enhance that is something that we're very focused on. Very interesting.
Back Catalog and Community Engagement
00:11:10
Speaker
and then And then turning towards your back catalog, your back catalog is accounting for a growing proportion of your revenues. um Can you discuss that? And also, you know what levers are you sort of pulling to extend the monetization cycles of the games you've brought?
00:11:25
Speaker
Yeah, I mean the great thing about Bat Catalog is that it tells you that yeah you you build an audience, they move off into places like Discord or onto Steam forums and they're talking about why they like your game, what what it is about the game that they think other people should, a reason for them to maybe join in. So that's just one piece. But then of course back to this kind of like, you know, lovely circle of like, well, why don't we meet more content?
00:11:52
Speaker
um You can even ask the audience what kind of content would they like? And one of our subsidiaries, Firefly, looked at their original game, which they released back in 2001. And we're looking at doing an enhanced version. And they just went to the community said, okay,
00:12:08
Speaker
What is it you'd like to see as an ad? What are the features you'd like to see more of? And that led them to make an enhanced version of Stronghold, which released in 23, then Crusader, which they released last year.
00:12:20
Speaker
And that kind of engagement is so well rewarded because people say, well, you've listened. So that sort turbocharges your back catalogue. And you'll see a lot of that in different instances with games where we're just saying to the community, what would you like to see more of?
00:12:39
Speaker
So more investment into the back catalogue is a key principle. In terms of levers that you can pull, i mean, you're looking at how you can engage with Sony, with Microsoft, with Nintendo, with Steam, and participate in their promotions because a function back catalogue is discount and getting the discounts visible ah just turbocharges I've used that too many times perhaps but it just literally lifts the performance um and our store teams are doing this on a let's say weekly basis looking for promotional opportunities
00:13:16
Speaker
Fascinating stuff. Graham, many thanks for joining me today. Dan, many thanks coming
Financial Strategies and IP Focus
00:13:21
Speaker
in. Thank turning towards the financial profile of the business, um can you discuss how we should expect that to evolve over time and the balance between you know investment in titles, revenue visibility and margins and and so on?
00:13:36
Speaker
For sure. We've published 150 games over the lifetime of the company already. We bring out 10 to 15 a year of new titles. And so those 150 games have their legacy revenue.
00:13:49
Speaker
They have a lifespan 10, 15 years. It's extending. And that's our back catalogue contribution, which is two-thirds or three-quarters of annual revenue it comes from historic games published in in previous years.
00:14:04
Speaker
And so the front catalogue, the new releases, they'll generate an extra impetus for the back catalogue. And that's the way we build our revenues up from 30 million 10 years ago now to over the 100 million.
00:14:18
Speaker
And we've had a 15% CAGR or annual revenue growth rate over the last 10 years. And we've come out of ah an industry slump in 22, 23, and we're seeing our growth accelerate again, which is exciting for us.
00:14:33
Speaker
In terms of the business model, we have not only the new releases each year, but also partnership deals with the big platforms, the Sony, PlayStation, Microsoft Game Pass, Apple Arcade, so on and so forth.
00:14:47
Speaker
And they often will commit funds to new titles. ah And in total, those platform deals account for about 10 or 15% of revenue each year. So that's a another slice of the visibility of revenue that we can see going forwards.
00:15:03
Speaker
it de-risks games that we're spending money on up front over two or three years. When we release the game we get the recoup of that when we have these platform deals in place.
00:15:14
Speaker
In terms of margin expansion we're benefiting from the introduction of more of our own IP, our own titles from our development studios that we own in four different countries. This year we'll see half of our revenue coming from first party our own titles that's much higher margin for us because we don't pay out royalties if it's third party games we pay out royalties um between 70% 50% will pay out to to the third parties That's after we recoup the cost of the game. So we're funding 30 million, 35 million a year across a pipeline of 30 titles in future, which will come out in the next three years.
00:15:55
Speaker
And after we recoup each of those, we start to pay our royalties if they're third party. So we're expecting our gross margins to continue to expand and from the low 30% into the mid 30s and we're aiming for 40%.
00:16:08
Speaker
And we see a lot of operating leverage kicking in. This year, we we in 2025, the second half, we saw very strong operating leverage kick in. We generated all of our profit in last year in the second half of the year as revenues expanded.
Studio Development and Investment
00:16:28
Speaker
And turning towards a capital allocation, I guess, you you've got a strong balance sheet, um you're profitable, um and you're growing with operational leverage coming in. How how do you balance your priorities in between your own own IP, portfolio development, maybe even M&A? Yeah, what are your priorities there? Yeah, those are the three buckets that we look at. It's our own studio development, ah which we have studios in four countries.
00:16:59
Speaker
And I mentioned that we spend 30 to 35 million a year on game development overall. That includes for third party studios, where we'll fund their game for two or three years, then recoup upon release and then share the royalties afterwards.
00:17:14
Speaker
So those two buckets of of our own is internal studios, third-party investment, have been the bedrock of our investment. um But now as we're becoming more profitable and starting to throw off cash, we are open to and looking for good opportunities to acquire, particularly IP that may be out there that requires a new owner to reinvigorate it, to take it in a different direction, to benefit from all the ah all the positives and all the strengths that Devolver has.
00:17:44
Speaker
So that's something that's of interest to us and and other opportunities as well. So, yeah, where we have been a acquisitive in the past. Systemeer is our biggest acquisition from two years ago that that completed our strategy from IPO of having exposure to more expandable games.
00:18:01
Speaker
And this year and beyond, we're we're very keen to continue looking for those. And turning towards, looking towards the future, and you know what what milestones should
Future Pipeline and Expansion
00:18:12
Speaker
we be looking for? I mean, you discussed some of the key capital allocation pools, but yeah what would you categorise as the key milestones that investors should look for to measure your progress? progress Well, we have a pipeline of over 30 titles for the next three plus years.
00:18:27
Speaker
um Within that, we have six or seven large or larger investments into our own successful franchises. We have 10 franchises that collectively have generated nearly half a billion dollars of revenue since 2010.
00:18:43
Speaker
And some of those franchises have had sequels and continuations. It might be free content, download downloadable content, paid downloadable content, definitive editions or remasters, sequels, or spiritual successes in the universe.
00:18:59
Speaker
um And some of those franchises have generated $100 million. have generated over hundred million dollars So we recognize the value of continuing to invest in those successful areas, those franchises where there's a big gaming community, big tribe of people who love loved the titles. So I mentioned six to seven out of the 30 are of those more substantial, more successful games.
00:19:24
Speaker
And we're looking to see our margins for gross margins go up to the 40% level. We'd like to see our EBITDA margins come into the teens. um And we're really looking forward to expanding our geographical mix as well. We're very geographically spread between Europe, North America north america first, then Europe and Asia-Pac.
00:19:44
Speaker
We see the Asia-Pacific region in particular as an area of of a great potential. China already accounts for 15% of our our revenues and more units. But greater China, Japan and Korea are a big opportunity for us.
00:19:59
Speaker
That's very interesting. So actually a really nice blend of operational sort of growth and margin milestones for investors to look forward. That's right. Yeah. Dan, many thanks for joining me. i Appreciate it. Thank you.