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It may have been "competing" with Diablo but IWD wasn't expected to be a huge multimillion seller. It didn't even match BG in sales but it still had a very high return on investment because it only took them a year to make it.
IWD was "simplified" cause
http://o.rpgvaultarchive.ign.com/features/interviews/icewind_a.shtml
IWD was "simplified" cause
http://o.rpgvaultarchive.ign.com/features/interviews/icewind_a.shtml
Black Isle had just finished up Baldur's Gate and Fallout 2, and many were working on Torment at the time, and all of these games were heavily dialogue oriented. We said, why don't we make something that is a little more accessible, something that you can play whenever you want, know what you need to do next, but give it a strong story. We bounced around how this would work and came up with the Dungeon Crawl idea. I know that sounds dumb, but essentially we were thinking of making a game like The Bard's Tale, or Wizardry, but add in the story elements that couldn't be done back then.