Brain Boom
Austin's Techno Geeks and Slackers Cash In
By Kayte VanScoy, Fri., March 20, 1998
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Ten years of writing computer games for The Man had Warren Spector convinced of one thing: He was ready to go it alone. All he had to do was sign the contract with a group of investors to get the venture capital and he was on his way. But Spector is hot property in the gaming world. Too hot, it turned out, to even fantasize about going solo for much more than the blink of an entrepreneurial eye. Poised to sign the contract, literally before Spector could set pen to paper, the phone rang and another multimedia superstar - John Romero of id Software out of Dallas - was begging for his hand. "He wanted to hire me, but I said I won't leave Austin. Then," Spector practically whispers, "he offered me an insane amount of money."
Romero, Spector adds, is "unbelievably powerful in the business," having developed two of the most popular computer games on the market, Doom and Quake. As Spector tells it, Romero "drove down from Dallas the next day in his Hummer" to make the pitch in person. "I said `Look, I refuse to move to Dallas because Austin is it.'" So Spector and Romero hammered out an agreement which would be the envy of small-business people anywhere: Romero gets a top game developer to don Ion Storm's mantle and Spector gets to hatch his own ideas with Romero footing the bill for everything from accountants to hardware.
But perhaps Spector shouldn't count his 3-D, real-time chickens before they hatch. Other multimedia insiders point out that Spector's firm has, in its brief 16 months of existence, already become known for spending extravagant sums of money without having yet delivered any product to the stores. The problem, they say, is his model - a common one in the software businesses which have popped up all over Austin in the past three years: The developer's money flows like wine from a much larger and richer publisher as the developer whittles away his backend profits on royalties and merchandising in exchange for up-front development cash.
Not that the speculation angle is raining on Spector's parade much. "I'm loving it," Spector says like a man with an embarrassment of riches. "If it goes away for whatever reason, I can always start my company then," he shrugs.
Spector is not alone in this world of the seemingly too-good-to-be-true. Austinites from all walks of life are pinching themselves to wake up from this dream of a local economy. But this is no dream. In fact, Austin is now surpassing the excellent national statistics for unemployment, job creation, and new business start-ups. And while old-monied Austinites are certainly enjoying the harvest of their traditionally Texan investments in real estate and banking, a new breed of money is pouring into town to pan for Austin's gold as well. The Dellionaires, some call them, though they certainly don't all work for the ever-expanding Dell Corporation. These newcomers are the lifeblood of Austin's new economy - a silicon and software soup which tastes delicious to everyone from twentysomething go-getters to middle-aged investors.
These days in Austin, everyone seems to be cashing in on the brain boom - musicians, filmmakers, real estate barons, and software developers alike are angling for their share of what has become the seventh-fastest growing economy in the country. But, even given the obvious stability of the hardware giants, why should this boom be happening in Austin, as opposed to Des Moines, Cincinnati, or anyplace else? The answer seems to be an advantageous combination of outdoor and business climates, new blood and old money, stable corporate anchors, and a city full of vibrant start-ups.
"Austin was always a poor relation to Dallas and Houston," says Austin-based investor and real estate mogul Roy Butler. "People used to say `You really can't make any money there.' Now it's done a 180-degree turn."
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The Bad Old Days
Austin's recent economic ascendancy is all the more sweet for the city, rising as it is from the ashes of the late-Eighties downward spiral known to all as The Bust. Way back then, Austin's economy was still moored to its government-and-university buoy, and the only get-rich-quick option was to invest in Austin's God-given resource - land. Trouble was, when Austin started growing in the early Eighties, everyone tried to get rich all at once and real estate prices inflated through the ceiling, out the chimney, and into the stratosphere. When the real estate market crashed, Austin was left with a crippled economy, fleeing investors, and little else.
The business leaders who did stay knew they had to learn a new way to make money if Austin was ever to be an economically viable city. IBM, Tracor Inc., Motorola, and Advanced Micro Devices (AMD) had all been here for years, but were hardly providing the kind of dynamic growth Austin would need in order to employ its still-burgeoning population. The silicon giants were, however, relatively clean industries, stable, and all indications seemed to be that a left-brain-leveraged economy could be the wave of Austin's future. Several years of active recruiting netted the city dozens more hardware industry anchors, including the homegrown giant Dell, and a solid base of high-tech research and development firms like MCC and 3M.
The big boys of high-tech were able to tide Austin over long enough to get on its feet, but the greatest weakness of Austin's economy had always been its reliance on a single industry at a time (see chart). After the bust, it was clear that economic diversity and a more intentional exploitation of our home court advantages would be key to circumventing the boom and bust cycle.
Talent Talks
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"Austin is the prime location for multimedia companies to be successful, because there is a wealth of art, music, and technology, and those are the three major groups you need to make the types of products we do," explains Tim Little, President of Charybdis, a local game company. Little, like every one of the dozen software developers interviewed for this article - and indeed most of the small operators in Austin - started his career at Origin Systems, a local 300-person game development firm. "A lot of people worked at Origin and then decided there's probably a better way to do it," Little says.
Others contend that the largest campus in the United States, the University of Texas, is the reason technology has exploded in Austin. "UT is now Stanford or MIT," says game developer Digital Anvil's Marten Davies, referring to the universities which fuel Silicon Valley's and Boston's technology economies with new recruits. In building its recruiting relationships with larger firms, however, UT has unwittingly neglected building bridges to the software start-ups. Two weeks ago, several start-ups actually had to take matters into their own hands by throwing themselves a job fair on campus.
And although many tech-heads are drawn here for the techie camaraderie, they stay here for the same reasons that native Austinites always have. "This economy has occurred here because quality of life is something people hold near and dear," says Gary Valdez, president of the Greater Austin Chamber of Commerce. A recent Chamber study concluded that Austin's 365-day-a-year recreational opportunities were among its greatest economic assets. "What's important to stimulating creativity is an environment that feels great," concurs Origin's David Swofford.
Dave Taylor, president of game developer Crack dot Com, believes that Austin's quality of life will go a long way toward assuring Austin's future competitiveness against other high-tech meccas, despite his feeling that all the greatest brains and cash in technology are still in Silicon Valley and Seattle. "We're the third-tier brain trust and we got both those places beat," he says. "The real worry is that all of the sudden you have brain drain, but what I'm seeing is that all the brainy types fall in love with Austin real fast."
And many of the same advantages that draw the left-brainers to Austin, have the right-brainers beating a path here as well. The film industry benefits from the training pool provided by UT and other area universities. And the state has built in an added boost for music, film and multimedia ventures - a sales tax exemption which can mean saving up to 8.25% on everything from camera rentals to hotel rooms. And although native Austinites have been grousing for years about the newly inflated cost of living, to transplants from Hollywood or Silicon Valley, rent and other necessities in Austin seem like a bargain.
Climate and environs seem to be key, also, for the success of Austin's new film industry. "People don't come here to use a sound stage or a back lot. They could stay in L.A. for that. They come here because 10 minutes in every direction is a different location - desert, hills, ranches," says Nancy Schafer, director of the South by Southwest Film Conference and Festival. Austin is now neck-and-neck with Dallas and Houston for film production dollars, and 1997 alone saw $64.2 million spent in the Austin area, including such high-profile projects as Richard Linklater's The Newton Boys, Lynda Obst's Hope Floats, and the MTV sitcom, Austin Stories.
The Multimedia Man
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The diversification of the economy has been helped along by a convenient dovetailing of Austin's top industries through the continuing evolution of multimedia. "Film is integral to multimedia, and music is also. It's like a triumvirate," says Daryl Glasco, a vice president of the Greater Chamber. After years of struggling to make ends meet through traditional channels, the Austin film and music scenes seem finally to be getting pumped with cash from an unlikely source - technology.
In some cases, money is flowing directly from the Dells or the AMDs to smaller software developers - as an exchange of hardware use for software development - and from the software developers to the artists and musicians of Austin - as contract labor on various multimedia projects. But the economic matrix is not usually so linear. More often, multimedia ventures are funded much like film and music - directly from backers outside of Austin.
Supported by fat investments from Microsoft and AMD, firms like Digital Anvil are working on creating the next stage for Austin's economy, and for multimedia. The firm is currently in Luxembourg shooting the movie version of one of the most popular computer games on the market - Wing Commander - which was originally created at Origin. "For the conversion between silicon and celluloid, Austin is a very good place to be right now," says Davies.
And though Austin's musicians may not take much encouragement from the trend, there does seem to be a new way for starving artists to bring home the bacon - working for The Multimedia Man. "The Man isn't what the The Man used to be," jokes Roberts, on the mythical artistic aversion to regular paying work. In fact, The Man in this case could refer to The Fat Man (George Sanger) and his Team Fat co-workers, who are the undisputed champs of music in the gaming industry, responsible for 120 multimedia soundtracks, including Wing Commander and the little tune you hear when booting up Windows 95. Some companies like Crack dot Com are even able to hire in-house composers, while Let's Talk About Me developer Girl Games contracts musicians from around Austin. "There is a tremendously powerful economic future connecting the silicon chip to the guy in his garage reformatting music," Roberts says, "and it's not a traditional Chamber kind of connection."
Money Comes and Goes
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With the comparatively minuscule individual software development firms, however, the model is different. In software, as in music and film, a local developer produces his demo product and then goes hunting around for financial backing. In most cases, that backing usually arrives in the form of a massive payoff with the possibility of eventual royalties which materialize after the backer gets a return on his investment. After the software title, album, or film is distributed, the developer starts the hunt for backers all over again for his next project.
But while one-time cash windfalls might be great for the pocketbooks of the stray musician or software developer, they do not do a whole lot for Mr. and Mrs. Greater Austin. The money comes from someplace else (likely California or Massachusetts), circulates around Austin a little in the form of bar tabs and sport utility vehicle sales, and then dissipates as the product makes profits for an out-of-state distributor.
So if Austin is experiencing such an economic renaissance, and a lot of the job growth is being generated out of small software development companies, why doesn't some rich Austinite jump into the game to keep the money local? "Probably because my generation is not familiar with it and we don't feel comfortable with it," admits Austin investor Butler. "Bring me a deal on a shopping center or a building, and I can tell you if it will pass muster. With multimedia I won't be able to analyze it very well."
The Greater Chamber's Glasco points out that part of the problem is also a chasm in communication styles. "Multimedia people don't communicate by coming together in meetings, they communicate in chat rooms. They're working out of their garages, they don't want to know their banker," he says. And although venture capital appears to be fueling a lot of the software startups in Silicon Valley, it is not a major player in Austin. "I can understand [venture capitalists] being gun-shy. You've got a bunch of long-haired guys, up at 3am, drinking Jolt and coding. They're not the kind of people who can easily get venture capital and it's a pity," says Beeman.
Instead, most of the money for Austin's gaming software comes from enormous publishing corporations such as Electronic Arts - which now wholly owns Origin Systems - and CUC, both out of California. "These huge publishers each have hundreds of people on staff to make games, but they've figured out that the best games tend to come from the six guys up the street from me and the five guys in the garage over there," says Spector. "CUC and Electronic Arts literally own everything," jokes Taylor. "They are definitely thought of as the evil empire."
Power to the People
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At only 29, Taylor has created one possible solution for keeping software money in town. After working as a programmer on Doom and Quake for id Software, which "threw a lot of money" at him, Taylor decided to invest his nest egg in himself by starting Crack dot Com. "I'm old-fashioned about money. I don't want to borrow it," he says, referring to the usual development-cash-for-royalties deal which launches most software start-ups. "Normal protocol is to hose down your employees with options and sell your company to a fat, rich, dumb publisher. The goal is to get your company where you can sell it to Electronic Arts. We side-stepped that because I funded it first. I'm in this to sell games, not sell out."
Because Crack did not have to ask for advances to develop its first game, Abuse, the company was able to secure "obscenely high" royalties when Abuse was distributed. "The sale from Abuse paid for the game we're working on now," explains Taylor. "We're definitely in the catbird seat because we don't have a burning need for money and we're not in debt." Crack dot Com was recently forced to cave in and get an infusion of cash by selling off part of their European royalties, but Taylor's not worried. His new game will ship before the end of the year, and then it will be time to start wheeling and dealing all over again.
Taylor's do-it-yourself solution won't work for industry newcomers or cash-poor developers, but there is another idea brewing to empower local software developers - banding together. "We've all talked at various times about how cool it would be to get a kind of a campus going," says Spector, citing the advantages of sharing high-end, low-use equipment and other costs. Most software firms don't belong to any sort of professional organization, although a few small groups like the Austin Software Council have begun springing up to fill the need. For the most part, though, constraints on time and the general non-conformist personality of the industry have been deterrents to effective organization. "Ultimately, you've got these four- to six-people companies that really don't want to be four- to six-people companies forever. They're focused on becoming ten- to twenty-people, and it's fairly time-consuming," says Swofford.
The problem is, without any kind of thread to tie together the software industry, the political clout of each individual firm is diluted rather than strengthened. When, as an economic unit, software is measured against the power of the high-tech giants, it is obvious that the real dynamism in Austin's economy is with smaller firms (see chart, page 28). But looked at from the political end - the impact these entrepreneurs have upon the community - software is a bit of a non-entity, which is just how many of the more anti-social types in the industry like it.
Show-Stoppers
Perhaps it's not necessary to their success for Austin's small developers to band together. Unfortunately, although Austin's economy is booming, a recent study released by the Chamber suggests that there are possible "show stoppers" for Austin on the horizon which will require the focused attention of the entire business community.
Tough issues like social equity and environmental protection loom large, and a growth period like Austin is experiencing now is the ideal time to address them. If many of Austin's start-ups happen here because of the quality of life and the abundance of outdoor recreation, it only stands to reason that protection of the environment becomes an economic issue. If Austin's quality of life degrades by, perhaps, an over-building of the Hill Country, or by the pollution of water amenities like Barton Springs, or even by the simple increase in traffic, the brain boom could come to a screeching halt as all the talent retreats to more pleasant surroundings. After all, in the age of the Internet, software can be written anywhere you can plug into a phone jack.
Challenges in social equity could also sink Austin's ship by, among other things, allowing the debasement of certain economic pools left out of the boom times, which then turn to crime or otherwise become a burden on the community. For example, when most of Austin is experiencing a 3% unemployment rate, it is an obvious failure of this technology-based economy that the unemployment rate among African-American males is 7%. Similar to the well-documented low employment of women in technology, the weak employment of ethnic minorities is a limitation not only for high-tech communities like Austin, but also for an industry with untapped market potential. Without women or minorities employed by their firms, software developers can hardly build games and other programs that target those lucrative market niches.
The Greater Chamber, which has historically stayed above the fray of debates over touchy subjects like environmental protection and social equity, now sees the need to shore up some of the fragile points in Austin's economy in order to ensure the economy's continuing momentum. "More people are open to that kind of discussion for the first time, because we have the money to think about those things," admits Chamber president Gary Valdez. The question is, will the introverted technology firms which drive this economy take part in the discussion?
There is anxiety, too, in the software industry over the possibility that its Californian benefactors could one day decide that Austin's 15 minutes are up. "It's something we all live with every day," says Beeman. "Probably a lot of the publishers are not financially sound and we, as the bottom of the food chain, will directly suffer for that."
Others disagree that it would even be possible to deflate Austin's brain boom. "Honest to God, what are they gonna do? Yank out AMD? Yank out Samsung? The infrastructure is in now, the roots are in," Davis postulates. "To tear those roots out would be an enormous thing to do."
Similar anxiety warbles in the hearts of Austin's film community, even in the first blush of its success. "I'm cynical. I think we're going through what Austin went through in the Eighties with music. I think it's going to wane," says SXSW's Nancy Schafer.
Even through the worries, however, about how to keep the economic ball rolling in Austin, there's a great deal of optimism about the strength of the newly diversified economy. "The passion you can see in multimedia and in film is something you can't quantify. But the passion of people is a very strong catalyst. You know intuitively that these people are going to get it done because you know that they're not going to give up," says Glasco.
Spector and many others in multimedia predict that if their industry continues to grow, it could become not only the strongest sector of Austin's economy, but it could eventually propel Austin into the strongest multimedia center in the world. Using a phrase that is floating around the software community these days, Spector says he hopes Austin might become "the Hollywood of multimedia. I think that's what's going to happen. But who the heck knows?"
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