Effective Contracts


Now that we have covered the basic business relationship and different elements that go into a development contract, let's get down to what a developer can do to ensure the success of their development agreement. Of course, the quality of the deal that the developer is able to negotiate is directly proportional to the publisher's desire to obtain the game and the publisher's relative comfort level in the economic success of the game on release. Therefore, if you are id Software or Lionhead Studios, you will probably be able to negotiate extremely favorable terms, retain all IP rights, and get a huge royalty percentage. Similarly, if the development team has a desirable product and a highly qualified team, favorable terms can be reached. On the other hand, if you are trying to negotiate a development contract for a game that the publisher perceives as being high risk, your ability to obtain favorable terms is not good. Let's look at some specific goals to strive for in your developer contract.

Setting the Net

Ultimately, it all comes down to royalties, and royalties come down to royalty rates. Royalties rates can range from below 15% to above 40%, depending on the development team, the publisher, and the game product. However, other issues come into play besides percentages.

Royalties are defined as a share of the "net" profit to the publisher. The contract should set out in detail exactly how this "net" is calculated. These provisions are often complicated, and a close examination is important to make sure that the publisher is not deducting expenses that it should be absorbing into its own cost of doing business. In the end, the definition of the net profit can be even more important that the percentage.

Indeed, the "net" should be the net profit derived from sales of your game after the publisher has deducted costs related to the development of the game. Therefore, deducting costs such as software development kits, licenses, manufacturing costs, discounts, freebies, returns, and distribution expenses is appropriate. However, these deductions should be limited to variable costs directly related to your game. The publisher's costs for advertising and promotion, marketing, inventory storage, internal operations, or what is being spent to promote the publisher itself should not be included.

Royalty Run Up

Escalating royalties are an excellent method to capitalize if your game really hits it big. The nicest thing about escalating royalties is that they only apply once the game's sales have reached a point where the revenue stream is pure profit for everyone. Once the publisher has recovered all of his costs, including those that are not included in the deductions that establish the net, the game becomes extremely profitable for the publisher. And increasing the developer's share of the additional profit is both reasonable and appropriate.

Here is what it looks like. Let's say that the initial royalty rate is 20%. After the initial 150,000 units are sold, that rate increases to 25%. Then, if the sales go up another 150,000 units, the percentage goes to 30%, and so on up to a maximum rate of 50% for sales over 1,050,000—a total that is both phenomenally high and very unlikely. Rarely, some contracts even call for this higher royalty rate to be applied to all sales retroactively, and not just to those above the threshold.

The main point of escalating royalties is that these higher sale numbers signify an exceptional product and a much higher return for the publisher. Therefore, publishers are more likely to share a larger proportion of the sales at that point.

Avoid the Slide

Even the greatest games end up in the discount bin eventually. Publishers sometimes seek to have the developer's royalty percentage decrease as the price of the game goes down.

Avoid this at all costs. Keep in mind that your game has already been paid for and that most if not all of the marketing has already occurred. Consequently, there is no rational basis for the publisher not to share the net profits here at the same percentage as they did at the beginning of the project. After all, they are "net" profits. In fact, there are some good arguments to be made for increasing the developer's royalty percentage on the discounted games, since by then the publisher's costs associated with the game might have already been fully recovered.

Lunch Box Bonus

Ancillary products and product placements can create substantial profits for everyone—and at no additional cost. A savvy developer should demand a higher royalty for these secondary revenues, hopefully at least twice the base royalty rate set for the game itself.

If possible, you should also include a time limit on the exploitation of ancillary products derived from your game. This way, if the publisher does not pursue these ancillary revenue sources within the set period of time, you will be able to do so yourself.

When Things Go South

The termination provisions are, not surprisingly, contract terms that should be examined very carefully. As with all of the important provisions of the contract, make sure that they are mutual, within the boundaries of reason. While your company might be much smaller than the publisher, there is no reason to assume that they are less likely to run into problems. Publishers go bankrupt or sell off their assets all the time.

Try to include provisions in the development agreement that call for the reversion of all of the game's assets and obligations to the developer if the publisher goes into bankruptcy or receivership. Even in contracts where the agreement calls for a conveyance of all your intellectual property rights in the game to the publisher, postpone the transfer of ownership of the game's assets until the final payment. This will help avoid your game being pulled into the publisher's bankruptcy estate, which would make the ultimate completion and distribution of the game beyond your control.

Get It Back

Also make sure that if the publisher drops your game or decides not to market it within a reasonable period of time, all rights revert back to you so you can try publishing your game with another company.

Space It Out

Contract provisions regarding material breaches often allow for a period to cure such breaches. Make sure that this period is as long as possible; if the publisher offers 10 days, ask for 30 or even 60. That way, if you receive notice of a breach, you might have that extra week, or month, you need to save your project.

Stay Loose

Flexibility in milestones is also something that can help when a project starts to get away from you. An overly rigid definition of milestones creates a contract that might not remain viable throughout the project. We often hear publishers complaining about slippage in milestone dates. While slippage in milestone dates hurts the publisher, it hurts the developer even more. As delivery dates slip, the period of time it takes to develop a game lengthens. As a result, fixed costs such as payroll, rent, and so forth continue to accumulate for the developer. Therefore, the extended time between milestone payments can make payroll, rent, and other financial responsibilities of the developer difficult if not impossible to meet.

One good way to insert flexibility in a contract is to have the development schedule and milestone definitions subject to revision at the delivery of each milestone. This can really help when new technologies, market changes, and other unexpected issues come up. Keep in mind that it is in everyone's best interest to have the game delivered in a timely manner and in acceptable form. Therefore, this sort of flexibility is good for both the developer and the publisher.

Keep It Simple

Multi-platform deals are becoming increasingly common. However, as far as contracts go, the more components in the contract, the likelier it is that something will go wrong.

For example, a PC/Xbox deal might look very appealing. However, if 75 to 80% of the work is related to the PC game development, but over 50% of the revenue is tied to the Xbox version, a simple thing like Microsoft either lagging or denying approval of the game could spell disaster for the developer in mid-production.

Make sure that only the appropriate share of the development advances is tied to each platform's SKU. Remember that the purpose of the advance is to fund the creation of the game; the work needed to develop each component should be the basis for the apportionment of advances, not the potential return. Especially in a situation where a third party has the ability to substantially delay or even kill the project and there is nothing the developer or the publisher can do about it.

One at a Time, Please

Publishers also like to tie one game contract to another by cross collateralization when acquiring two or more games from the same developer. What that means is that the set-off costs being accrued on one game for the publisher are applied to the royalties on the other game. This is great for the publisher because they then spread the risk of both games across both games' revenue streams. However, if one game is a bust and the other a hit, the royalty stream from the hit will go to the publisher to defray the costs of the bomb—instead of going to the developer. Of course, if this is taken into account by setting higher royalty percentages for the developer in both games, then fine. However, that rarely (if ever) happens, so avoid these cross collateralization deals, if possible.

Exercise Your Audit Rights

The developer's audit rights need to be considered both in the contract negotiations and after the game is released. Every developer contract should provide the developer with audit rights over the publisher's financial records regarding the total game sales and a detail of what expenses are used to determine the "net" income that forms the basis for royalty payments.

Although audits are usually limited to one time per year, push to have the audits more often—like every six months. Moreover, be wary of clauses that make audit rights "use them or lose them" propositions, where if the developer does not audit within 30 or 60 days of the end of the accounting period, the rights expire. Use your audit rights and do not allow them to expire




Secrets of the Game Business
Secrets of the Game Business (Game Development Series)
ISBN: 1584502827
EAN: 2147483647
Year: 2005
Pages: 275

flylib.com © 2008-2017.
If you may any questions please contact us: flylib@qtcs.net