Massively Multinational Player
By spreading the work among nine countries, Yves Guillemot made Ubisoft's game studios the cheapest--and most creative--in the industry.
By Geoff Keighley

(Business 2.0) – Behind the brick walls of an old textile factory in Montreal, more than 1,000 employees work in a 175,000-square-foot room without a single partition or cubicle. Here, on wood floors beneath tangled wires, the Gen Y coders of Ubisoft are turning out games like Myst, Prince of Persia, and Tom Clancy's Splinter Cell--among the most critically acclaimed titles on the market.

It's just one more reason for Ubisoft CEO Yves Guillemot to smile these days. While bigger American videogame companies like Electronic Arts have spent millions building ritzy studios in Southern California, Guillemot and his four brothers, who jointly formed Ubisoft in 1986, have opened 13 low-cost game studios in nine countries, including Canada, China, Morocco, and Romania. The result? According to Ubisoft CFO Alain Martinez, the average operating cost per employee is $66,000 per year--about a third less than the industry average.

Ubisoft's cost savings may soon turn into a serious competitive advantage. Budgets for next-generation games for the PlayStation 3 and Xbox 360 are expected to double to $20 million because of the required technical wizardry. While American firms put their profit margins at risk with soaring labor costs, Ubisoft, based in Paris and currently the No. 5 seller of videogames in the United States, is sticking with a business model that has already begun to pay off. Since 2003, Ubisoft's profit has climbed more than 10 percent to $50 million on $648 million in sales, propelled by hit games like Clancy's Rainbow Six and the World War II action game Brothers in Arms: Road to Hill 30. The company's King Kong game comes out in November, a few weeks before the release of Peter Jackson's highly anticipated film. "For me it has never been about making cheap games," says the soft-spoken Guillemot, 44. "What I wanted to do was find a way to make the highest-quality games at the most competitive cost."

Humble Roots

Ubisoft's knack for finding cheap talent came by necessity. Before turning to games, the Guillemot family ran a small business on the coast in Brittany, selling fertilizer and other supplies to farmers. After Yves's parents retired, the idea of importing videogames to France dawned on Yves's brother Michael during a vacation in London, where he noticed that games cost about half what they did in France. The family asked Yves, the second-youngest brother, to run the new company. Called Ubisoft (for "ubiquity" and "software"), it was little more than a skeletal support staff redistributing games in France. But Guillemot knew that U.S. and European publishers would eventually sell direct and put the company out of business. So in 1993 he decided that Ubisoft should make its own games.

Out of a rented castle in Brittany, the company ran a shop for a few dozen programmers, and Guillemot began prospecting for more space in low-cost locales like Bucharest and Shanghai. The selection criteria were straightforward: Since gamemaking requires ever-more-sizzling code, Guillemot looked for a strong pipeline of computer science students to fill the jobs. (Locating in cities with no competition has also brought Ubisoft some badly needed cash: In 1997 the Quebec government offered the company tax credits worth half the cost of salaries in Montreal for 10 years.) Opening so many studios was risky, but Guillemot had a hunch--based on the success of Japanese game studios and Electronic Arts's internal-studio model--that the most efficient way to make high-quality games was to control his own studios rather than rely on third-party developers. Ubisoft today has the second-biggest studio operation in the industry.

How Guillemot manages all that young talent is just as crucial to the business. Each studio, regardless of locale, operates according to the same creative credo. It starts with a collaborative environment where a team of 80 or 90 employees, including managers, work together in a single "war room" to create a game's core technology. The collaboration extends between studios too. For Prince of Persia: The Sands of Time, a game produced in Montreal, the core software came from a studio in the French Alps, while the top programmer in Canada was on loan from Ubisoft Shanghai. The result: GameZone's "PS2 game of the year" for 2003.

Not that the system always works flawlessly. Guillemot once assigned a racing game to the Shanghai studio, for instance, only to realize that no one there knew how to drive. But the lack of training sometimes works to Ubisoft's advantage. Employees who don't know the limits of game development are more willing to try risky new ideas, like the Splinter Cell series of spy thrillers or Beyond Good and Evil, an adventure game starring a female photojournalist that became a personal favorite of director Jackson's. And whereas market research drives much of the product innovation at EA, Ubisoft's lower production costs allow Guillemot to experiment more than his bigger rivals. The goal for the company is to generate three new brands every two years. That keeps annual sales growth healthy--an average of 33 percent since 1996--and the developers happy, since they wouldn't enjoy the same creative license at a big studio. (EA's best-selling Madden NFL franchise, for instance, is in its 16th season.) "We have a freedom to propose ideas at our company," Guillemot says. "EA just keeps making the same game."

Small Struggles

There's a downside to guillemot's approach, of course: As edgy as Ubisoft's games are, without the marketing muscle of a larger company, they end up as art-house hits, not blockbusters. Ubisoft didn't have a top-10-selling game in the United States last year; despite its reduced labor costs, the low volume results in skimpy operating margins--8 percent last year, compared with 21 percent for EA.

More worrisome for Guillemot, perhaps, is that his low-cost model may not remain low-cost for long. EA recently opened a studio of its own in Montreal. As a result, says Martin Tremblay, president of Ubisoft Canada, the company has been forced to hike wages there by about 25 percent. (According to EA, more than 250 of Ubisoft's Montreal employees have sent over their resumes.) Then, last December, EA bought nearly 20 percent of Ubisoft's stock in what Guillemot deemed a hostile transaction (although EA has no say in day-to-day operations). EA officials say they want to help Guillemot take his company to the next level--"He's better with us than without us," says David Gardner, EA's senior vice president for international publishing--but for now Guillemot isn't interested in collaborating. "We have capacity to do better than them down the road," he insists. If necessary, he adds, he'll pick up and move his studios to cheaper locales. His short list? Let's just say that coders with a taste for borscht and vodka should start updating their resumes.