Business Strategy in Game Engine Licensing

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Business Strategy in Game Engine Licensing

The Case of Lucid Platform Technology

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Business Strategy in Game Engine Licensing The Case of Lucid Platform Technology

Final Thesis for the title of ‘Doctorandus in de Technische Bedrijfwetenschappen’ July 25, 2007

By Christian Hut

Supervised by

dr.ir. John L. Simons - University of Groningen dr. ir. W. Klingenberg - University of Groningen dr. Gino Yu - The Hong Kong Polytechnic University

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Preface

This thesis presents the findings of research performed at The Hong Kong Polytechnic University Multimedia Entrepreneurial Research Education and Creativity Laboratory from May 2006 until December 2006, with final adjustments made in the summer of 2007 (following the completion of my second thesis). This thesis was written for the fulfilment of the requirements of the title of University of Groningen program in Technology Management, leading to the conferment of the title of ‘doctorandus’ (equivalent to the title Master of Science).

I would like to thank, first and foremost, my academic supervisors, dr. ir. John Simons, dr. ir. Klingenberg (University of Groningen), and dr. Gino Yu (The Hong Kong Polytechnic University). I would also like to thank the rest of the staff at MERECL, all of whom have been very helpful in providing advice, not to mention making my tenure at MERECL a most pleasant one. Mr. Cedrick Chan, mr. Milo Yip, ms. Peri Wong and mr. Loic Wong all deserve to be singled out. Industry expert Dave Sharpe is also thanked for his valuable insights. Last, but by no means least, I would like to thank my family and friends in both Hong Kong and The Netherlands, for being exceptionally supportive.

Overall, I had a wonderful time working on this thesis, in that it was a unique opportunity to experience first-hand the game industry, an industry that has interested me for a long time. Secondly, the research has allowed me to focus on the China region, a region I will most likely continue to focus on in the future.

Christian Hut July 25, 2007 Hong Kong

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1 Chapter Guide

This thesis presents research into the subject matter of business strategy for game development software, specifically applied to the case of Lucid Platform technology, developed at The Hong Kong Polytechnic University. It delves into both the technology and business of gaming to provide strategic recommendations regarding the further development and commercialization of this technology. The structure of the report is as follows.

Chapter 2 starts with an introduction of game development and game development software. This chapter provides the reader with a basic understanding of the products of the game industry, videogames, the structure of the industry itself and of what is and what is not considered game development software. Specific types of game development software, specifically game middleware, game engines and game production tools, are discussed.

Chapters 3, 4 and 5 are aimed at presenting Lucid Platform technology and its background, analyzing the issues associated with the technology and deriving the thesis research problem statement respectively. Chapter 3 contains high-level descriptions of Lucid Platform technology, addresses its pedigree and the commercialization that have been undertaken to date. Chapter 4 first lists issues by functional domain, before analyzing their interdependence. Chapter 5 presents the research’ problem statement, including research constraints.

A review of relevant (academic) literature on both game middleware and game engines and the game industries in China and South East Asia is provided in chapter 6, while chapter 7 details the methodology of the thesis research.

Chapters 8 through 11 present the core of the thesis and relate to strategy directly. Chapters 8 and 9 contains the findings from the study of external and internal factors influencing the future of Lucid Platform technology. Using models from strategic management, both the macro- and meso-levels of the external environment are described in chapter 8. Chapter 9 analyzes the internal capability of the organization, including the technological competitiveness of Lucid Platform technology. Chapter 10 consolidates the findings from the external and internal analyses by means of a SWOT-analysis, while Chapter 11 presents and evaluates strategic options.

Chapter 12 concludes this thesis with recommendations of a strategic nature, while also briefly reflection on the methodology used.

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2 Introduction to Game Development

An introduction to game development is given in this chapter. The introduction includes a discussion of the principal products of the game industry, videogames and the key roles that various businesses play in the game industry. The information provided here is nowhere near exhaustive, but it provides the reader with knowledge that is both necessary and sufficient to comprehend the remainder of this thesis. In section 2.2, game development software is discussed. Being able to differentiate between different types of game development software is essential for comprehending the remainder of this thesis, and the reader is advised not to skip this section.

2.1 Vi deogames and the Game I ndustr y

This section provides the reader with a brief introduction into videogame development and the game industry.

2.1.1 Products of the Game Industry: Videogames

The principle source of revenue for the game industry is the delivery of videogames to end-users (consumers). A video game may be defined as an electronic or computerized game played by manipulating images on a video display or a television screen. The earliest videogames were produced in the 1950s, while an industry became firmly established in the 1970s, with the advent of the first generation of a type of device, known as a (videogame) console, that allowed videogames to be played at home (by connecting it to a TV). Since the 1970, the game industry has grown and matured and its products have reached a high level of technological and artistic sophistication. While today’s videogames are differentiated through a host of characteristics, some of the most salient differentiators are (1) the genre to which the videogame belongs, (2) the hardware platform on which they are played and (3) the medium of distribution. These differentiators are discussed below.

2.1.1.1 Videogame Genres

Perhaps the most obvious differentiator between different videogames is the genre to which they belong - although, increasingly, games transcend the boundaries of single genres to incorporate elements of multiple genres. Videogames are classified into genres on the basis of gameplay style. There is no commonly accepted typology classifying games into genres, though, with retailers, industry publications and academic references alike classifying games in sometimes seemingly arbitrary ways.

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Popular genres are role-playing games, action games, adventure games, platform games, sports games, simulation games and strategy games. Popular and well-defined subgenres are, for example, first-person shooters (action games in which the player’s perspective is the same of the character he or she is playing in the game), racing games (sports games in which players race one or multiple types of vehicles) and real-time strategy games (games that are set in real-time environments where users gather resources, build bases, develop technologies, produce units and control groups of units - normally in battle).

It is debatable whether massively multiplayer online games represent a genre of games, or if the number of concurrent players is another dimension that can be used to differentiate videogames. Nevertheless, massively multiplayer online games deserve special mention here. In massively multiplayer online games, players congregate in online environments (virtual worlds) and interact as part of the core gameplay.

2.1.1.2 Videogame Hardware Platforms

Today, videogames are played on a variety of hardware platforms. The category of platforms that leads in terms of the cumulative revenue earned is the console category. Consoles are hardware devices whose principle function it is to play videogames. They are normally connected to television screen for graphics display purposes. Every few years, dominant console manufacturers introduce new hardware; In 2005-2007, Sony, Nintendo and Microsoft are releasing their ‘next-generation consoles’1_{, the PlayStation 3, Wii and XBOX 360. These consoles} are intended to replace the previous generation of the PlayStation 2, the GameCube and the XBOX (of which the PlayStation 2 had been dominant). While older consoles could be used for gaming purposes only, next-generation consoles provide a wide array of secondary functionality, included DVD playback, Internet browsing and online content download. In addition to in-home consoles, Nintendo and Sony produce so-called handheld consoles, the GameBoy Advance (which Nintendo is phasing out), the DS (for Dual Screen) and the PlayStation Portable (or PSP). Handheld consoles are generally much less powerful than their in-home counterparts and are intended for on-the-road gaming. Games produced for handhelds are much less sophisticated in terms of graphics and other underlying technology.

Desktop computers and, increasingly, notebooks equipped with Windows XP (or Windows Vista) are popular gaming platforms as well. Desktop computers and notebooks differ

1_{The PlayStation 3 and the Wii were released while the author was performing the research described in}

this thesis. Even by the completion date of the thesis, the XBOX 360 (released in 2005), PlayStation 3 and Wii were still referred to as next-generation consoles, although, by that time, they were decidedly ‘current-generation’. Throughout this thesis, the term next-generation consoles is used to refer to the XBOX 360, PlayStation 3 and Wii consoles.

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greatly from consoles as gaming platforms because their diversity is much greater and because they are composed of components with much shorter life cycles than those of consoles. Further complicating desktop computers and notebooks as gaming platform is the fact that there are multiple operating systems, of which Windows XP (increasingly, Vista) is the operating system most frequently supported by game developers and publishers (due to its market share). Notebooks have only recently gained in popularity as a gaming platform, as high-end graphics hardware (necessary for most videogames) used to be exclusive to desktop computers.

Mobile phones are increasingly attractive as platforms for game development, as mobile phone technology improves and as standards increase in prevalence. Other mobile devices, principally smart phones and PDAs, but also other devices with video displays, such as Apple iPods, are being used as gaming platforms.

2.1.1.3 Videogame Distribution Media

The media on which videogames are distributed are often tied to the hardware platform. Console manufacturers dictate, by design, what media their consoles will be capable of playing, for instance. In the case of next-generation consoles, the PlayStation 3 has caused quite a stir by incorporating (as a core feature) Blu-ray playback technology. Blu-ray is one of the two major high density optical disc storage technologies (the other one being HD-DVD) intended to replace DVD. PlayStation 3 games are released on Blu-ray discs, while the console is also backwards compatible with PlayStation 2’s (regular) DVD media. XBOX 360 and Wii continue to rely on DVD media. The DS uses a proprietary game cartridge format, while the PSP uses the Universal Media Disc (UMD) media format, which is proprietary as well.

Desktop and notebook games are typically distributed on DVD. There is a strong trend, however, towards digital distrubution - distribution of videogames through Internet downloads. Next-generation consoles also support digital download services, although the download service is controlled by the console manufacturers, and digital distribution is generaly limited to smaller-sized games only (the principle reasons for this being limited console harddrive space for storing downloaded content).

Mobile phone games are easily distributed digitally, because they are normally very small in size (to fit into mabile phones typically limited memory). Often, they are distributed over-the-air, through wireless operators.

2.1.2 Game Industry Players

In this section the game industry is introduced by outlining the functions of the main players in game industry value chain. It is re-iterated that this section is for introductory purposes

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only and that, in accordance therewith, a number of players that is less relevant for the reader’s fundamental understanding of the industry is not discussed. Also, the focus here is on console (both in-home and handheld) and desktop and notebook gaming. Games for these platforms accounted for 85% of the revenue of the game industry in 2006.

2.1.2.1 Hardware Manufacturers

The term ‘hardware manufacturers’ refers to the (designers and) manufacturers of the videogame hardware platforms mentioned in the previous section. In the console space, the three dominant players are Sony, Microsoft and Nintendo, whom source components from such manufacturers as IBM, ATI and NVidia. The desktop and notebook space is decidedly more fragmented, with many system assemblers (e.g. Apple, Dell, HP, Toshiba, AlienWare) sourcing from a host of component manufacturers, including leading CPU manufacturers Intel and AMD and leading graphics hardware manufacturers ATI and NVidia. Hardware manufacturers are responsible for the advancement in hardware technology, which has driven the development of increasingly complex videogames.

2.1.2.2 Operating System Developers

Operating systems are sets of computer programs that manage the hardware and software resources of a computer system. In the console space, hardware manufacturers are themselves responsible for operating system development. The PlayStation 3, XBOX 360, PSP and DS use proprietary operating systems, while the Wii uses Linux, with a proprietary user interface built on top of it. In the desktop and notebook space, Windows XP (and Vista) is the most popular operating system.

2.1.2.3 Digital Content Creation Tools and Game Development Software Developers

Developers of digital content creation tools and game development software aim to enhance the effectiveness and efficiency of game development production processes through software products. Digital content creation tools may include such functionality as 3D modeling, texture mapping and animation and is differentiated from game development software in that it generic applicability (digital content creation tools can also be used for creating computer-generated animation or visual effects, while game development software is generally not very effective for such purposes). The leading developers of digital content creation tools are Autodesk and Softimage, and their products targeted at the digital entertainment industries are Maya, 3D Studio Max (both Autodesk products) and XSI. In section 2.2 substantial attention will be devoted to game development software, as this thesis focuses on a game development software business.

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2.1.2.4 Game Developers

The parties responsible for actually producing games are termed game developers. Developers generally handle the design of games and the implementation of such designs through (game) programming and art asset production. Depending on the nature of the game developers’ operations, developers may or may not be responsible for designing the creative IP (e.g. stories, characters) of the game.

There are three major types of game developer: (1) In-house studios, (2) third-party developers, and (3) independent developers. In-house studios are (often wholly) owned by game publishers and work on game development on their behalf (game publishers are discussed in the next section). Third-party developers are largely independent from game publishers in terms of ownership (although game publishers may have minority stakes), but they do work closely with publishers to developing their games, with the intent of producing products that the publisher can sell at a profit. Third-party developers’ budgets are typically funded by publishers. Independent developers remain independent in terms of ownership, financing and the actual development process. Independent developers are often small, may self-publish their products online and retain near-complete creative control over their games.

2.1.2.5 Game Publishers

The principal function of game publishers is in bringing completed game products to the market, by liaising with retailers and other sales channels, and managing the marketing of videogames. In practice, the role of game publishers is much deeper and broader than just bringing games to the market. Publishers generally get involved in game development prior to the development is commenced, often providing funding and, sometimes, substantial creative direction to the game’s developer. There is also a substantial amount of vertical integration in the videogame value chain, due to game publishers’ acquisitions of game developers, and because hardware manufacturers’ are the leading game publishers for their proprietary platforms (the two may also go hand-in-hand; some of the most successful console games are published by console manufacturers and developed by wholly owned game developers). The world’s largest publisher is Electronic Arts, which develops for all major platforms. Other large publishers are console manufacturers Sony, Nintendo and Microsoft, and Activision, Take-Two Interactive, THQ, Ubisoft, Konami and Sega.

2.1.2.6 Retailers

While digital distribution (where the consumer buys games directly from the publisher) is increasing in importance, a great deal of videogames continues to be sold through bricks-and-mortar stores. The most important are large chains of stores in the U.S., Japan and key markets

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in Europe, where packaged software products are the primary source of revenue for the game industry. In Asian countries other than Japan other models prevail, including the Internet café model (see next section).

2.1.2.7 Internet Cafés

While retailers remain the primary sales channel in the U.S., Japan and Europe, Internet cafés are of greater importance in markets such as South-Korea, China and South-East Asia. In such Internet cafés, players generally pay on an hourly basis for using computer facilities. Often, the Internet café owner retains control over what games are installed on the café’s computers.

2.2 Game Devel opment Software

Game development software is an umbrella term that is used to describe (1) game middleware, (2) game production tools, and (3) game engines (this categorization is the one applied by game development software website gamemiddleware.org). The common characteristics of all game development software are (1) that it aids a game developer in optimizing the development pipeline, and (2) that it addresses the needs of the game developer specifically (as opposed to generic software engineering tools). In practice, many persons, including many in the game industry, use the terms interchangeably, and no official definitions exist. The following sections, however, explain the difference between these types of software, and propose definitions to enhance the reader’s understanding of game development software. 2.2.1 Game Middleware

Game middleware is defined as domain-specific game development software, at least a part of which is integrated into game products (i.e. at least some of the software code becomes part of the game). The website www.gamemiddleware.org maintains an index of available middleware, game engines and game production tools. Game middleware is categorized by application domain. Table 1 lists the different application domains of game middleware, as well as example middleware.

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Rendering: Software designed to support the process of converting mathematical representations of graphical elements that computers use to

(normally two-dimensional) images that can be shown on a display. Examples: Geomerics Real-time global illumination software (www.geomerics.com) Physics Software designed to support the simulation of physical behaviours

in the virtual environment.

Examples: Havok (www.havok.com), PhysX (www.ageia.com)

Artificial intelligence Software designed to support the simulation of the behaviour of seemingly autonomous entities in the virtual environment, principally non-playable characters.

Examples: Kynogon (www.kynogon.com), AiImplant (www.engenuitytech.com)

Animation Software designed to support the process of determining how things (objects and their properties) change between frames.

Examples: FaceFX (www.oc3ent.com), EmotionFX (www.emotionfx.com), Morpheme (www.naturalmotion.com)

Modeling Software designed to support the process of creating three-dimensional computer models.

Examples: SpeedTree (www.idvinc.com)

Texturing and effects Texturing: Software designed to support the process of creating image files that can be applied to three-dimensional models to add color, specularity, bumpiness and other characteristics. Effects: Software designed to support the process of creating particle effects. Examples: Allegorithmic (www.profxengine.com), Fork Particle (www.forkparticle.com) Network Support designed to support the connection of multiple computers

over a network.

Examples: Quazal (www.quazal.com)

Interface Software designed to support the development of game menus. Examples: Gameface (www.anark.com), Scaleform (www.scaleform.com)

Audio Software designed to produce or play audio, either in menus or in-game.

Examples FMOD (www.fmod.org), Miles (www.radgametools.com)

Video Software designed to play video, either in menus or in-game. Examples: Bink (www.radgametools.com)

Security Software designed to enhance the security of gaming, principally of playing online.

Examples: SecurePlay (www.secureplay.com)

Core Software designed to optimize games’ use of hardware computing power.

Examples: Chattering Pixels (www.chatteringpixels.com) Table 1. Application domains and game middleware and examples

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2.2.2 Game Engines

A game engine is defined as the core software component of a digital game or of another interactive, possibly networked, application with real-time2_{graphics. By this definition, a} game engine must include, at the very least, a rendering engine, which is responsible for converting mathematical representations of graphical elements that computers use to (normally two-dimensional) images that can be shown on a display. A rendering engine alone does not constitute a game engine, though, as a game engine is more comprehensive in its coverage of middleware domains. Where a piece of software (that includes a rendering engine) stops being middleware and starts being a game engine is hard to define. It is important to keep in mind that middleware is usually purchased (licensed) to address the developer’s needs in a very specific domain, while an engine is usually (purchased) to address the developer’s needs in a number of domains.

Gamemiddleware.org lists three categories of game engines (see Table 2). While this categorization is helpful, it is at an extremely high level of aggregation, differentiating between only the massively multiplayer online game (MMOG) and non-MMOG genres, and differentiating between only mobile and non-mobile platforms. From a practical perspective, there is an important difference between game engines that are genre-agnostic or engines that are tailored to the requirements of one particular genre (most commonly, the first-person shooter genre). Engines are also differentiated by platform support: Cross-platform engines that support console platforms are different from single-platform engines 3 _{. Gamemiddleware.org’s} categorization lumps all such engines together (as they all support non-mobile platforms). All-purpose Unreal engine (www.unrealtechnology.com), GameBryo

(www.emergent.net) Massively Multiplayer

Online Games Big World Technology Suite (www.bigworldtech.com), HeroEngine (www.heroengine.com) Mobile Games KA (www.pixelgene.com), Terraplay Systems (www.terraplay.com) Table 2. Categories of game engines and examples

2_{In order to qualify as a real-time application, the frame-rate must be sufficiently high and the latency}

sufficiently low for humans to perceive the images as continuous. Generally, this implies a frame-rate of 24 frames-per-second or more, and a latency of no more than 2 frames (at the aforementioned frame-rate).

3_{It is worth pointing out that engines can be differentiated further by specifying exactly which platforms}

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Gamemiddleware.org’s coverage is extensive (it covers a total of 44 products), but by no means complete. Another game development website, Devmaster.net, lists no less than 249 game engines. While many of these would be considered middleware under the aforementioned definitions, and while the list does contain a significant number of discontinued engines, it has far more extensive coverage of budget engines (and middleware).

2.2.3 Game Production Tools

The final category of game development software is game production tools (see Table 3). Game production tools comprise all software that is used to optimize the development pipeline, but which is not integrated into a game itself. The fact that game production tools’ code is not included in game software is the key difference between both game middleware and game engines and game production tools.

Rendering GPU-tech (www.gputech.com) Animation MotionBuilder (www.autodesk.com)

Modeling Turtle 3D (www.illuminatelabs.com), GenHead (www.genemation.com)

Texturing and effects Allegorithmic (www.allegorithmic.com) Audio CuBase Studios (www.steinberg.de) In-Game Advertising DoubleFusion (www.doublefusion.com)

Development CodeWarrior (www.freescale.com), XNA (Microsoft) Management Perforce (www.perforce.com)

Distribution and

Marketing StreamFlow (www.endeavors.com), Cascada Mobile (www.cascadamobile.com) Table 3. Application domains of game production tools and examples

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3 Lucid Platform Technology and Its Context

In this chapter, an introduction to Lucid Platform technology, the organization(s) in which it was developed and its transfer to the industry are given. As Lucid Platform technology and the business surrounding it are the primary subjects of this thesis, it is important that the reader has a solid understanding of these topics. In this chapter, technical details are abstracted from: Chapter 9 provides a detailed comparative analysis of Lucid Platform technology.

3.1 Luci d Platfor m Game Engi nes

Lucid Platform technology is a series of game engines developed at or under development at the Hong Kong Polytechnic University’s Multimedia Innovation Centre and MERECL respectively. The technology is appropriately identified as a series of game engines, and not game middleware or game production tools, if the definitions given in the previous chapter are adhered to.

3.1.1 Lucid Platform 1.0

Lucid Platform 1.0 is a PC platform game engine that was developed at the Hong Kong Polytechnic University’s Multimedia Innovation Centre from September 2003 until March 2005. The game engine comprises two high-level components: Lucid3D and LucidNet.

Lucid3D is a fully featured graphics rendering solution for game development that includes physics, animation, path-finding (artificial intelligence), a particle system, audio support, an input engine, and a terrain and level editing tool called Lucid Scene Builder. Lucid3D also implements a 3D Studio Max exporter allowing models and animation developed in digital content creation tool 3D Studio Max to be imported into Lucid Scene Builder. Lucid3D was unofficially ported to the XBOX console hardware platform.

LucidNet is unique networking middleware that supports the development of ‘Mini-scale massively multiplayer online games’. The single-server networking software is specifically optimized to support up to 500 concurrent players. Traditional single-server architectures support up to 64 concurrent players. The architecture, however, does not scale to multiple servers for the development of the contiguous worlds found in most massively multiplayer online games.

The development of Lucid Platform 1.0 was completely funded by the Small and Medium Enterprise Development Fund. The objective was to deliver a networking engine that

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would allow local (Hong Kong) game developers to develop games that are specifically tailored to Internet cafe gaming. The total budget for development was 2,000,000 HKD. Originally, the development of a 3D engine was not included in the proposal and a third-party solution was to be used (during development the Jupiter engine from Touchdown Entertainment was used). The team, however, ended up having time to implement the 3D engine as well, resulting in a complete solution for game development.

3.1.2 Lucid Platform 1.1.2

Lucid Platform 1.1.2 is the revised version of Lucid Platform 1.0 technology that is currently being licensed to developers. While it is essentially the same technology as Lucid Platform 1.0, it includes a number of additional features (such as a Graphical User Interface editor) and a number of bug fixes. The continued development of Lucid Platfom technology was funded by the Hong Kong Polytechnic University’s School of Design (the total funding provided being 1,000,000 HKD).

3.1.3 Lucid Platform 2.0

Lucid Platform 2.0 is a next-generation game engine. While some high-level feature code is being ported from Lucid Platform 1.1.2, the core of the engine has been rewritten completely. Lucid Platform 2.0 is planned to be a significant improvement over Lucid Platform 1.1.2. One of the key objectives for the development of Lucid Platform 2.0 is to support multiple platforms. The priorities for cross-platform support are listed in Table 44_.

Lucid3D is being upgraded to support next-generation graphics and physics, complex artificial intelligence and advanced sound support. The 3D Studio Max exporter is being replaced by COLLADA pipeline support, allowing assets from a variety of digital content creation tools to be imported (including, but not limited to 3D Studio Max, Maya and Blender models and animation).

LucidNet is being upgraded to support the development of massively multiplayer online games through a scalable, multi-server architecture capable of supporting hundreds of thousands of users in a single contiguous world. A key innovation is the planned heterogeneuous communication environment, which allows different client devices (e.g. PCs, consoles, mobile devices) to connect to the same network.

4_{It may come as a surprise to the reader that a next-generation engine’s requirements specification}

prioritizes the original XBOX so strongly. The author finds this peculiar as well. It is, however,

understandable if the history of the project is taken into account (the reader will learn more about this in this chapter).

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Platform Priority PC 1 XBOX 2 XBOX 360 3 PlayStation 3 3 PlayStation Portable 3

Nintendo Dual Screen 4

PlayStation 2 4

Apple Mac 5

Mobile devices 5

Table 4. Platforms and their priorities for Lucid Platform 2.0

Lucid Scene Builder is being replaced by Lucid Studio, an integrated development environment for game development, that allows for the editing of physics, animation, artificial intelligence and sound editing, as well as visual programming. Multiple concurrent users working on the same project are supported as well. A key innovation is the optimization of the entire tool chain for cross-platform development. An automated testing framework, also optimized for cross-platform development, is implemented as well.

In January 2005, mr. Yip drafted an ambitious development plan, calling for 20 million HKD in funding for two purposes: (1) Upgrading Lucid Platform 1.1.2 to next-generation standards and supporting XBOX and (2) Game development (using Lucid Platform technology). 10 million HKD was meant to fund Lucid Platform upgrading and the other 10 million was to be invested in game development. The game development track of the proposal was eventually eliminated, and the Innovation and Technology Fund of the Hong Kong and Guangdong governments funded the development of Lucid Platform 2.0 with 3,000,000 HKD. Additional financial support was provided by (1) U.K. based developer and MERECL partner Eutechnyx (400,000 HKD), (2) Hong Kong based game developer Gameone (10,000 HKD), (3) Hong Kong based game developer Treasure Box (10,000 HKD) and (4) China Game Publishers’ Association (10,000 HKD). Throughout the funding process, the requirements specification never changed to match the limitations of funding. Also, the fact that XBOX was most highly prioritized (over next-generation platforms) was never changed. The development of Lucid Platform 2.0 started in March 2006 and is scheduled to be completed by September 2007. The development team is now located at MERECL’s facilities.

Although largely government-funded, Lucid Platform 2.0 intellectual property will remain proprietary to the Hong Kong PolyTechnic University upon completion of the project, as per the (approved) ITF proposal. It is required that the technology be released for the local

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industry’s use, and that the terms for such use must be ‘reasonable’. The agreement, however, does not define the term ‘reasonable’. In addition, the ITF-proposal explicitly states no special arrangements regarding the sponsors’ use of the IP that is developed have been made. Nor do the sponsorship agreements with Eutechnyx, Gameome, Treasure Box and the China Game Publishers’ Association detail any special arrangements. This implies that the sponsors have no exclusive or preferential use rights.

3.2 The Pedi gr ee of Luci d Platfor m Technology

Lucid Platform technology development is handled by a dedicated engineering team. This team started out with developing Lucid Platform 1.0 at the Multimedia Innovation Centre. Six of the original team members are still part of the development team working on Lucid Platform 2.0, at MERECL. The Lucid Platform development team, and both institutes that played a role (or are playing) in developing Lucid Platform technology are introduced here. 3.2.1 The Lucid Platform Development Team

The Lucid Platform development team comprises 9 team members. Project coordination is in the hands of dr. Gino Yu, Associate Professor at the Hong Kong Polytechnic University (not counted as part of the development team). The management of the development of Lucid Platform 2.0 is in the hands of mr. Milo Yip, part-time PhD candidate at the Hong Kong Polytechnic University. There are indiviual team leaders for LucidNet (mr. Elvis Lui) and Lucid3D (mr. Ka Man Cheung). Both the LucidNet and Lucid3D teams employ two software engineers. However, both LucidNet software engineers have been recruited in the past few months and both of them have limited experience in game programming. One of the LucidNet team members is still in training. During this period the team member is working on testing the application development framework, not on LucidNet development. The final two team members are primarily responsible for the development of tools.

3.2.2 Multimedia Innovation Centre

The Multimedia Innovation Centre (MIC) is an institute devoted to academic research and teaching in multimedia technologies. Its staff has researched and developed a number of technologies, such as augmented reality technology, automated (kung fu) motion synthesis technology and game engine technology (i.e. Lucid Platform). Its flagship academic program is a Master of Science in Multimedia and Entertainment Technology. Students and staff have access to a wide variety of technologies at the Centre’s Polytechnic University campus facilities, such as film editing and motion capture.

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3.2.3 Multimedia Entrepreneurial Research Education and Creativity Laboratory Multimedia Entrepreneurial Research Education and Creativity Laboratory is also known under the acronym MERECL. The laboratory was launched on the first of March, 2006, with an aim of providing production and training services in the digital entertainment industry, which is typically defined as comprising the game development, animation and digital visual effects industries. Being a part of the Hong Kong Polytechnic University’s School of Design, MERECL is a not-for-profit institution. Any profit made from the provision of production and training services is spent on sponsoring the pre-incubation services offered by MERECL. A number of companies are currently pre-incubated at MERECL’s Cyberport location, including digital media outsourcing company MediaPods, game engine company LucidCorp, meaningful media company Physikoi Media and Eutechnyx’ Hong Kong division.

MERECL maintains a close relationship with the Multimedia Innovation Centre and is responsible for the transfer of research output to the industry. A number of MERECL staff members are employed parttime by MERECL and parttime by the Multimedia Innovation Centre.

MERECL was launched following the merger of the Multimedia Innovation Centre and the Hong Kong Polytechnic University’s School of Design, which drove the Multimedia Innovation Centre to focus on academic research and education.

3.3 Commer cializ ati on of Luci d Pl atfor m Technol ogy to Date

The third and final section of this chapter focuses on the commercialization of Lucid Platform technology. It addresses the transfer of the technology to the industry so far, as well as the business plan that was written on the future envisioned for Lucid Platform technology. 3.3.1 Lucid Platform 1.0 and 1.1.2 Licensing

In the proposal for the Small and Medium Entreprise Development Fund, the different optional licensing models for Lucid Platform 1.0 were specified. Hong Kong based developers could either license the technology at a 60,000 HKD per-project upfront licensing fee, or at a 4% royalty. A total of nine Hong Kong based developers has licensed the technology (all opted for the royalty model), as well as one U.K. based developer (also adopting the royalty model). None of these licensees are known to have an project in active development for which Lucid Platform is used.

Since Lucid Platform 1.0 was launched, evaluation licenses have been provided to many parties. One of them has chosen to use Lucid Platform 1.1.2 for the development of an online

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casual game: Beijing-based game developer Bele Esports. An adapted royalty-based licensing model has been agreed to between the two parties.

The Lucid Platform development team is currently developing a Lucid Platform-based prototype for a casual game for Hong Kong based game developer Firedog.

Finally, Lucid Platform has also been licensed to a number of educational institutions in Hong Kong and mainland China. The Hong Kong Institute of Vocational Education and The Chinese University of Hong Kong School of Continuing Education are the only paying licensees among these (together they account for 40,000 HKD in revenue, of which 15,000 HKD is recurring on an annual basis).

3.3.2 The LucidCorp Business Plan

A business plan was written for a company tentatively called LucidCorp. The company would focus of the commercial exploitation of Lucid Platform technology, with a specific focus on its distribution to the Chinese game industry.

The most remarkable component of the business plan are its unique business strategy and business model. Game engines are conventionally licensed to game developers for either an upfront license fee, or an upfront license fee plus royalty payments. Support and maintenance (in the form of updates) are often charged for separately. LucidCorp’s strategy is, however, to provide the technology free of charge to Chinese game developers. Revenue is derived from (1) providing training to such game developers and (2) publishing Chinese developed games in international markets. Revenue stream number indicates the key to the business strategy and business model of LucidCorp: Instead of requiring the resource-constrained game developers of China to pay in money, they are required to pay by transferring the international publishing rights of their Lucid Platform based games. The game developer, hypothetically, would make money in the local market, while LucidCorp makes money from non-local markets. However innovative or suitable, the business model was never applied to a single licensing deal so far (the only mainland China based developer has licensed Lucid Platform 1.1.2 under a more traditional royalty based model).

For international markets for the Lucid Platform technology no business strategy is defined in the business plan, although a more traditional model was planned for these markets. For the Hong Kong market, the commitment made in the original Small and Medium Development Fund proposal, bound MERECL to licensing Lucid Platform 1.0 technology through the aforementioned licensing models.

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4 Issue Analysis

The purpose of this chapter is to identify and analyze the multitudinous issues faced by MERECL, related to the development of Lucid Platform 2.0 and the commercialization of Lucid Platform technologies. The chapter is structured as follows. First, a listing of key issues is provided. These issues are subsequently analyzed to determine their interdependence. Finally, the choice of the set of issues that has been the focus of the research underlying this thesis is presented, as well as a rationale for this choice.

4.1 Issues by Functi onal Domai n

The starting point for identifying issues was the pluriform approach set out in De Leeuw (2001). The pluriformity of the approach refers to the use of multiple perspectives. The perspectives of different stakeholders or perspectives from different organizational functions may be used to implement this pluriformity. The organizational functions-based method was used for the identification of the issues outlined below.

The issues that are listed have been identified through interviews (both formal and structured and informal and unstructured) with the key internal stakeholders of MERECL. These stakeholders are dr. Gino Yu, Project Manager for the Lucid Platform 1.0 and 2.0 projects, mr. Milo Yip, Lead Software Engineer on the same and (former) MERECL General Manager, mr. Loic Wong. An extensive review of the organizational structures, project proposals, development plans, internal memos and miscellaneous other materials was performed as well.

A listing of all issues is provided in Table 5. The listing is organized by the following organizational functions: Strategy, Research and Development/Production, Organization, Finance, Marketing, Human Resources and Legal Affairs5_{. The following sections elaborate on} each issue.

5_{The author chose to deviate from De Leeuw’s structure of organizational functions to enhance}

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Strategy 1 No clear strategic rationale behind product development directions chosen in the Lucid Platform 2.0 development plan

2 Uncertainty regarding the applicability of the strategy devised for Lucid Platform 1.0 after Lucid Platform 2.0 is completed

3 Failure to design and/or implement a successful entry startegy

R&D/Production 4 Lucid Platform 2.0 development delays due to production projects being handled by R&D staff

5 No (target) user involvement in Lucid Platform 2.0 development process

Organization 6 Inability to leverage network of Chinese universities for Lucid Platform 2.0 development

Finance 7 Insufficient funds to implement full requirements specification

Marketing 8 Viral and guerilla marketing efforts ineffective

9 Commercially unproven technology (Lucid Platform 1.0) and the fear of vaporware

Human resources 10 Difficulties in hiring experienced game programmers 11 Non-dedicated non-engineering staff

Legal 12 Complete dependence on Polytechnic Technology and

Consultancy Company and Partnership Development Office 13 Console manufacturer authorization required for console

development

14 Constraint imposed by Innovation and Technology Fund Table 5. Listing of issues

4.1.1 Strategic Issues

The primary problem on a strategic level is the lack of a rationale for the development directions Lucid Platform 2.0 is taking. While the requirements specification makes perfect sense from a technological perspective (all specifications are perfectly possible in a technical sense, and have some application potential and thus some value), the decisions inherent in it do not appear to take into account the strategic position of MERECL or the constraints in which development has to take place. While a detailed analysis of the technology is not provided until section 9.2 it is relevant to indicate here that a great deal of technology has been specified merely for the sake of its technological feasibility.

The second strategic issue is essentially the reverse of the aformentioned issue. No business strategy has been defined for Lucid Platform 2.0 (neither an entry strategy nor a long-term strategy). Some of the development directions (e.g. cross-platform console support) are explicitly referred to in the LucidCorp business plan, leading to the initial assumption on the part of the author that the original strategy was also to be applied for commercializing Lucid Platform

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2.0. Following discussion with dr. Yu, however, it has become clear that this strategy is only an option, the applicability of which needed to be researched further.

Finally, so far MIC/MERECL have failed to enter any market in any significant way. While there are a number of licensees in Hong Kong, none of them are actually developing a game. Only one developer is actively using Lucid Platform 1.1.2 (Bele Esports). The industry adoption of Lucid Platform technology, thus far, is negligable.

4.1.2 Research and Development/Production Issues

Normally, R&D and production are two separate organizational functions. At MERECL, however, the technology team and the production team are one and the same6_{. The production} activities executed by the technology team are (1) project management for subcontracted (to Hong Kong based developer M-Inverse) outsource work for Eutechnyx, (2) development of a prototype game based on Lucid Platform 1.1.2 for developer Firedog and (3) the production of a proof-of-concept demo for online collaboration applications. While this does not appear to be much, these projects have consumed approximately 18 manmonths of developer time, which is almost 30% of the total human resources that should have been spent on Lucid Platform 2.0 already. Also, future production projects are coming, such as the development of a motion sensing control minigame library and the development of a virtual museum. Clearly, production jobs are threatening the progress of Lucid Platform 2.0 development and thus its time-to-market. The second issue is the complete absence of user involvement in the development process, which in a way reflects the strategic issue of not having a (strategic) rationale for the development directions Lucid Platform 2.0 has taken. While doing a survey of potential technology adopters is a formal requirement of the ITF (since it was mentioned in the approved project proposal), requirements specification, design and implementation have proceeded bfore such a survey was executed. Not involving users in the process is a frequently cited pitfall for software development [1].

4.1.3 Organizational Issue

The LucidCorp business plan and the Lucid Platform 2.0 developer wiki list a number of collaboration partners for development. These partners are Hong Kong and China based universities: City University of Hong Kong, Zhejiang University, Shanghai University, Shanghai Jiaotong University and South China University of Technology. While these universities are potential sources of inexpensive development resources, organizing collaborations in such a way

6_{It is important to point out that there is no formal system allocating developer time to R&D and}

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that they actually benefit the development of Lucid Platform technology has proven extremely difficult. It has not been entirely unfruitful: A number of exchange students from Shanghai Jiaotong and Zhejiang University did valuable work on improving Lucid Platform in a few ways (e.g. lake water simulation, volumetric clouds). Large-scale collaboration, however, has been more difficult to realize, with legal and management issues leading to the cancellations of a proposed collaborative development project with Shanghai University.

4.1.4 Financial Issue

Lucid Platform 2.0 is being developed on a budget that is less than 35% of the original estimate and to deliver it at a date 6 months earlier than the originally planned date. Mr. Yip’s original estimate for developing a cross-platform (PC, XBOX) cutting edge game engine, with MMOG support, was 10 million HKD approximately. Eventually, the project was funded with 3.5 million HKD, without the requirements specification being re-scoped. Clearly, the funding does not cover the design and implementation of the full requirements specification. In order to complete the implementation of the original specification, a significant additional investment would be needed. The only viable alterntive solution is to reduce the scope of the development project to match the funding.

4.1.5 Marketing Issues

There is no marketing team (or marketing person, for that matter) dedicated to Lucid Platform 2.0. Instead marketing is done through the personal and professional networks of MIC/MERECL personnel. Guerilla marketing at industry events is also a tactic often turned to. An objective in marketing Lucid Platform technology in these ways is to turn the party that Lucid Platform technology is being marketed to into an evangelist of sorts, theoretically leading to the viral propagation of marketing for Lucid Platform. While these approaches frequently lead to interest in the platform, it has a much more limited reach than conventional game engine marketing strategies. The fact that viral and guerilla marketing of Lucid Platform technology is backed-up only by outdated and unimpressive marketing materials (specifically a brochure and a website) is part of this issue as well.

One might argue, however, that marketing materials quality is not that important, as long as there are actual games that prove the utility of the technology. The Unreal games and Gears of War proved Epic Games’ game engines in the same way the Quake games proved ID Software’s. Even engines that are not specifically developed for an in-house game project usually gain traction after commercial proof has been established. The game industry has yet to see a Lucid Platform-based game storm the market. The commercially unproven nature of the

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technology promotes skepticism among developers, making it extremely difficult to market the technology.

4.1.6 Human Resource Issues

The Lucid team currently employs three programmers new to game programming. The reason for this is that there are two major barriers to hiring experienced people. First, the limitations of the funding drive the hiring of less experienced people who are, naturally, less expensive. Secondly, university policy throws up a major constraint to the hiring of experienced programmers. A competitive salary can only be offered to persons holding at least a bachelor’s degree. In the game industry, it is, however, not uncommon for qualified, experienced people to have no academic qualifications whatsoever. This is a characteristic of the game industry worldwide, where experience is (still) emphasized over any formal kind of training. University policy, thus, makes it extremely difficult to hire qualified people (already, one team member has been let go, because the competing offers this team member got could not be matched under the policy).

As mentioned in the previous paragraph, there is no dedicated marketing staff. The same applies to support staff for licensees and other business functions such as strategy, business development and legal support. The primary people fulfilling these functions are dr. Yu (strategy and business development), Hong Kong Polytechnic University legal staff (legal support), and the Lucid developer team itself (licensee support, and occasionally mr. Yip plays a role in business development as well). All these resources are non-dedicated.

4.1.7 Legal Issues

Legal support for Lucid Platform technology and commercialization is provided by two internal Polytechnic University departments: The legal department of Polytechnic University Technology and Consultancy Company (PTeC) and the Partnership Development Office (PDO). While PTeC is generally responsible for all and technology licensing and consultancy projects, PDO has handled the drafting of licensing agreement for Lucid Platform 1.0 in the past (PDO is generally responsible for collaboration between academic institutions, so its incidental involvement in commercial licensing is confusing). It is important to point out that MERECL has no authority whatsoever in drafting agreements. Agreement must always be approved by PTeC or PDO. In the case of Lucid Platform 1.0 and 1.1.2 licensing, this has led to a number of issues in the past. The most important of these is the long throughput time for agreements drafting and for revisions. The original licensing agreement for Lucid Platform 1.0 took no less than twelve months to be drafted and approved. The customized agreement for Bele Esports took no less than four months to get final approval. Overall, the process is inflexible and slow.

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For developing a cross-platform console game engine, it is necessary to obtain console development kits. Development kits can only be legally obtained for developing a game engine, if MERECL would be allowed into the console manufacturers’ middleware and tools programs. Currently, it is not. Development kits can also be obtained in a game development capacity (indeed, obtaining development kits in this way is normally easier than being admitted into the middleware and tools programs), but in this case, they can only be used for game development. Of course, developing a game includes developing an engine, but this does not mean such an engine can be licensed to third parties, as the development kits are provided for the purposes of game development only. As the Lucid Platform development team is currently project managing outsourced engine programming for the XBOX 360 platform for game developer Eutechnyx, the team has access to an XBOX 360 development kit7_{. Presently, MERECL does not have any} Sony or Nintendo development kits, though8_.

The Innovation and Technology Fund provides a constraint of its own: Lucid Platform 2.0 must be distributed to the local (ie. Hong Kong and Guangdong) industries on the basis of ‘reasonable’ terms and conditions. As it is not specified what these terms and conditions are, this is expected to be a minor constraint, though.

4.2 Inter dependence of I dentifi ed Issues

De Leeuw [2] recommends differentiating between instrumental and functional issues. Instrumental and functional issues are related as causes and consequences. Functional issues are issues with the performance of an organization’s primary process outcomes. Instrumental issues are the penultimate causes of functional issues.

The primary functional issue is the fact that the revenue generated from Lucid Platform is insufficient to sustain a separate business - or the development team. The development of Lucid Platform 2.0 is a component of a strategy that is intended to remedy this functional issue. This strategy, however, incompletely defined. It is unclear what business strategy is needed to complement the product development directions that were chosen, and how such a business strategy should be implemented.

There is one major risk, that must be addressed in order to formulate complementary strategies: The risk that Lucid Platform 2.0 will not conform to its requirements specification and will be something different entirely. Six issues primarily have a bearing on the quality of the

7_{This development kit cannot legally be used for Lucid Platform 2.0 development, though.}

8_{It is also relevant to note that console development kits have a significant price tag attached to them.}

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Lucid Platform 2.0 product that will eventually be delivered: (1) Delays to development due to production projects, (2) lack of target user involvement, (3) inability to leverage Chinese network of universities, (4) budget limitations, (5) difficulties in hiring experienced programmers and (6) the potential inability for MERECL to obtain console development kits. As costs and time-to-market are completely constrained by the requirements of ITF funding, quality is the primary variable at stake concerning the release of Lucid Platform 2.0.

Furthermore, even under the assumption that the development of Lucid Platform 2.0 is a complete success, there are likely to be many obstables to implementing any business strategy at this point: (1) the commercially unproven nature of the technology, (2) the ineffectiveness of marketing tactics MERECL is forced to employ due to resource constraints, (3) the lack of non-dedicated staff (including legal support), and (potentially) (4) ITF restrictions to commercialization.

4.3 Pri mar y Focus of Research: Str ategy

While management of research and development provides an interesting opportunity for research, this research focuses primarily on strategy. The reasoning underlying this choice is that even the smoothest research and development process serves very little purpose, if the underlying strategy behind the technology and the deployment thereof is flawed. The heart of the issues MERECL is facing regarding its Lucid Platform technology business is strategic in nature: What is the value of Lucid Platform 2.0 in the light of MERECL’s strategic position and how can appropriate business strategy maximize this value? These questions of a strategic nature are addressed in this thesis.

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5 Problem Statement

The research that underlies this thesis focused on the development of a strategy for MERECL’s Lucid Platform-related business. This chapter is intended to provide further details on the nature and scope of the research project.

5.1 Busi ness Obj ective

The business objective is:

To design and evaluate strategic options for MERECL’s Lucid Platform-related business and to provide recommendations on the implementation of the most highly preferred option by developing (a) supporting business model(s) and a supporting marketing strategy.

5.2 Resear ch Questi on

The research question, which must be answered, in order to be able to fulfill the requirements of the business objective, is stated as follows:

What strategic position is MERECL’s Lucid Platform-based business expected to have at the time of the (scheduled) release of Lucid Platform 2.0, and what business strategy strategy, business model(s) and marketing strategy should MERECL implement so as to support the improvement of this expected position?

The research question points to the necessity of investigating the expected strategic position before designing strategic options and evaluating them. The strategic position at the time of Lucid Platform 2.0’s release will depend on the current strategic position and the developments in the external and internal environment that take place between now and the release date.

It is also relevant to point out that, as the research question is specifically tailored to MERECL’s Lucid Platform-related business, the research proposed is primarily positioned as case-based research in the gaming middleware industry. The value of such research in the academic sense, is addressed in the next chapter.

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5.3 Sub Questi ons

The following sub questions have been defined in order to structure the answering of the main research question above. Sub questions 2 through 8 are compatible with the methodology specified in chapter 7 (sub question 1 concerns a literature review and is answered in chapter 6).

1. What are the relevant conclusions and observations from literature that has addressed (1) strategic issues surrounding game engine licensing and (2) the emerging game industries of China and South-East Asia?

2. What are the characteristics of the external environment relevant to MERECL’s Lucid Platform-based business and how are these expected to develop in the future?

3. What are the characteristics of the resources and capabilities relevant to MERECL’s Lucid Platform-based business and how are these expected to develop in the future?

4. What is, thus, the strategic position of MERECL’s Lucid Platform-based business? 5. Which strategic options will enable the strategic position to be improved?

6. Which strategic option is the most highly preferred?

7. What business model(s) may be adopted to implement the preferred strategic option? 8. What marketing strategy may be adopted to implement the preferred strategic option?

5.4 Li mitati ons and Additi onal Pr oj ect Requir ements

1: No strategic options must be suggested that are incompatible with the requirements of ITF-funding. This does not imply the requirements specification for Lucid Platform 2.0 is set in stone: The project proposal for ITF funding does not include the requirements specification. Instead it includes fairly descriptions of deliverables that are at a far higher level of abstraction. These descriptions must be met. The most crucial of these requirements are listed in Table 6.

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Next-generation Graphics and Physics MMOG-support

Cross-platform Content Tool Chain: Scene Editing Tool, Visual Scripting Tool, UI Editing Tool, LOD Management Tool, Deployment Tool

Cross-platform Automatic Testing Framework

Heterogeneous Communication Environment: Adaptive Synchronization Algorithm, Scalable Data Sharing Service, Monitoring Tool

Integration with previous ITF funded technologies: “Motion Editing and Synthesis Toolkit for Video Games and Animation”, “Automatic Music Arrangement System: Games and Interactive Applications”, Astri’s in-game payment system

Table 6. Features required by ITF-proposal

2: The China and South East Asia game industries will be a primary focal point of the external analysis. Global trends will be examined at a higher level of aggregation.

Business Strategy in Game Engine Licensing

Business Strategy in Game Engine Licensing

Preface

Table of Contents

1

Chapter Guide

2

Introduction to Game Development

3

Lucid Platform Technology and Its Context

4

Issue Analysis

5

Problem Statement