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When you are creating a game based on an intellectual property provided by the publisher and the game will not use your proprietary technology, the development is
Always be aware of time. What is the effective date of the agreement? Are the milestone dates subject to change if the agreement takes longer than anticipated? Watch the start date for all time periods. Be sure that every decision has a time limit on itsequels,
Do you know the correct, complete
If you are working on a day and date release (where the game release is scheduled to coincide with the release of a product like a film or DVD), find out what kind of access to production assets (story lines, art, backgrounds) the publisher is negotiating with the produc er. Smooth transfer of assets will often speed game development and create synchronicity between the two releases.
If the contract is a work for hire, this section is where the publisher describes the content intellectual property with which you will be working (such as "Spiderman"). It is important to
Frequently, the licensor will include language
The term defines the duration of the parties' different rights. Terms are usually broken out into Initial Terms and Renewal Terms . The initial term covers development and commercial release of the game, and the renewal term kicks in if the relationship meets certain conditions, for example, if the game is successful and the parties develop a sequel together. Term considerations are discussed more fully in the section below on Developer-owned IP Publishing Contracts.
Territory determines the area for which a publisher is purchasing rights. In a work for hire, the publisher will most likely take a worldwide exclusive license, in other words, the right to manufacture and distribute the game worldwide. However, if you are extremely enterprising and want to
A standard compensation arrangement will be broken out into two or more tiers, depending on whether it is your IP being licensed or you are doing a work-for-hire. The first tier is the development fee/advance against royalties, paid out over the duration of development; the second
The first tier is the development fee/advance against royalties. This is what you will receive over the period of development to cover costs. You will want to be sure that the development advance is non-refundable. The typical structure is 20 percent at signature, 10 percent at gold master, and the remaining 70 percent spread out over ten or so milestones. No milestone = no milestone payment, so schedule yourself
To protect yourself, assume that the pub lisher will not pay milestones in a time ly manner and build a cash cushion suffi cient to weather sig nificant delays.
Be extremely careful when budgeting and pricing
your development contract. Many developers add
a margin to their
Royalties are a percentage of the publisher's sales payable to you. The balls to keep your eye on when discussing royalties are
Recouping/Earn-out process. How much money the publisher must earn before it begins sharing royalties with you.
Cross-collateralization. Whether the publisher can apply
Royalty rates for each category. The percentage you will receive for different platforms, products, and
Definitions of "Gross" and "Net." How big (or small) is the pie you'll be getting a slice of.
It is wise to have the pub lisher include a sample roy alty statement as an appen dix to the contract, and be sure it includes the number of units manufactured, the number sold, and the whole sale price. A sample royalty statement is included at the end of this chapter.
The publishing company will want to "recoup" some or all of the development fee from royalties payable on the game (or other productssee the discussion of cross-collateralization in this section) before it begins making royalty payments to you. Earn-out the point at which the publisher begins paying royalties.
The three main schemes for recouping the development fee are
Recouping the fee from net sales at developer's royalty rate (most favorable to the publisher)
Recouping the fee from total net sales (most favorable to you)
Recouping the fee from net sales at developer's royalty rate minus X percent and paying developer X percent from unit one (a valid compromise, but a very uncommon arrangement)
Here's an amusingly lowball example: Assume the royalty rate is 10 percent of net sales, the publisher makes $10 in net sales per unit, and the development fee was $100,000. $1 (10 percent of $10) of every unit sold goes toward repaying the development fee; you will begin receiving royalties after sales of 100,000 units (barring other income from ancillary products). You won't like this setup since the publisher would break even and be long into the black before sharing any money with you.
You will want the publisher to begin paying royalties after
When negotiating, you should expect a trade-off between the advance and
the royalty rate. If your advance is higher, your royalty rate will be lower, and
vice versa.There is a risk balance between you and the publisher: up-front
money is high risk for the publisher, low risk for the developer; back-end com
pensation is the reverse. Some developers with a cash cushion and confidence
in their product prefer the higher royalty rate,
Another approach may be available in situations of lower risk to the publisher (such as where you have self-funded or partially-
Cross-collateralization means that the publisher can recoup development advances from more than one
(retail term meaning "stock-keeping unit;" each platform is considered a separate SKU) or category. Some publishers will want to cross-collateralize every revenue stream from you against every contract it has with you. So, for instance, royalties from a game done with a publisher now can be withheld to repay any unrecouped advances from a contract ten
Platform by platform, so that a profitable Xbox SKU will not be used to subsidize an unprofitable Gamecube SKU, and the U.S. release will not be cross-collateralized with the Chinese localization.
Simultaneous releases, for example sequels, will not be cross-collateralized against the original.
A developer can resist platform by platform cross-collateralization by arguing that if a third party developed the port or localization, the publisher would not be able to wait to pay roy alties until it had recouped develop ment fees for the original game.
A developer can argue that if a third party developed the sequel, the publisher would not be able to wait to pay royalties to that third party until the publisher recouped development fees for the original game.
This is crucial when you own the content intellectual property. You can resist cross-collateralization from entertainment based on your IP by arguing that if the publisher had purchased, for example, film rights from a third party, it would not be able to withhold royalties from that licensor until the publisher had recouped development fees.
If, for instance, a publisher purchases the rights to make games and
other entertainment based on a popular card RPG and then
the right to make a film to a third party, the publisher will most likely
have to share revenue with the card RPG licensor from the first dollar
that the publisher receives from the film producer. The publisher would
be able to recoup its game development costs before pay
ing the card RPG licensor for film-related revenue. Therefore, when the
developer is also the licensor, the publisher will be no
The royalty rate paid to a developer varies significantly based on reputation, platform, whether it is developing its own content, and the size and leverage of the publisher. Some publishers like to grant a flat amount per unit sold, which can put your heart at ease over accounting chicanery (see net sales discussion, below), but the percentage of net sales is more common. Wherever the
Given the hit-driven nature of the game business, be prepared for your publisher to actually try to reduce the royalty rate as sales go up, with the reasoning that 1) the developer is incurring no additional cost and is mak ing a fair return even at a lower royalty rate, and 2) hits are what keep publishers in business so they need to capture as much revenue as possi ble from the hits in order to finance the games that fail.Your response to this should be 1) that a developer's business model relies on extra revenue from hits to cover the games that never earn-out, and 2) the publisher's share of net sales is already significant enough to cover its risk.royalty rate begins, you will want to share in any success of the title, and most publishers are happy to grant royalty escalations based on units sold. The points of negotiation will be the thresholds for escalated royalties and the amount of the escalation. Rates will also vary by medium and category.
12-24% 750/1mm - 1mm/1.5mm
14-26% 1.5mm and up
Some developers argue that they should receive a higher royalty for PC games because the publisher does not have to pay any license fees to the console manufacturer.
PDA and Wireless
This area is still developing, but the developer should receive a share of any revenue generated by PDA or wireless game distribution.
Online Multiplayer, Digital Distribution, and Subscriptions
This area is still developing, but developers should receive a share of revenue generated by subscription services using their content. Developers are arguing that they should receive higher royalties for digital distribution of games given the reduced cost of distribution.
25-50% of Net Sales or Net Receipts (see sections in this chapter)
25-60% of Net Receipts (see section in this chapter)
The publisher will want to reduce royalty rates in the following situations:
The wholesale price
For follow-on games developed by a third party.
You will, in effect, receive a lower royalty
rate for games sublicensed for publication
by third parties (
It's Not Really a Small World, After All
Selling games around the world is a complex process. Even the giant publishers lack an
Your international concerns will be fourfold:
If the publisher sublicenses the game in a given territory, it must compensate the regional publisher with a
Keep the cost of sublicensing in mind when selecting a publisher and negotiating the territory of a contract. It may not make sense to grant worldwide rights to a pub lisher with distribution in North America only.
The publisher will want to deduct certain expenses from revenue received in connection with the game (or licensing products and entertainment). Just as the publisher recoups its cash outlays for development of the game, it will want to recoup certain cash outlays for selling the game. Which of these outlays are fair to recoup and which are not is the subject of negotiation between parties. Getting from "gross" to "net" refers to the set of expenses deducted to
This is one of the most important sections of the contract. If you get a great royalty rate, but neglect to pay attention to the deduc tions allowed, you will make significantly less money than had you received a lower rate on a higher base.
For games you will want the gross to include all games sold and not returned. For entertainment/merchandise you will want the gross to include all licensing fees and revenues received by the publisher, its subsidiaries,
The publisher will want to deduct as much as possible from gross sales to get to net, because this minimizes payable royalties. Of course, you want to limit the deductions to non-overhead cash expenditures actually paid to unaffiliated third parties. The
Where the publisher will be sublicens ing game production to another pub lisher (in another territory, for instance), most of the deductions listed here will already be taken out of the royalty received by the publisher and should not be deducted again from the publisher's receipts. (See Sidebar: It's Not Such a Small World, After All .)
Credits. Refunds issued by the publisher to the distributor.
Return reserve allowance of 10 to 20 percent (liquidated after two periods or 180 days, whichever is shorter). When a publisher sells product to a distributor, some of the product usually comes back if it doesn't sell through in retail. However, a publisher does not know what portion will come back until some time later, usually a few months. To protect against paying a royalty to you for items that are later returned, the publisher will maintain a
return reserve allowance
Returns. If, on the other hand, the number of returns exceeds the allowance, the publisher will want to deduct those units from any royalties it may owe.
A commercially reasonable number of promotional units/rebates. Publishers will send out a certain number of free copies of the gameto the press, to retailers and
Lost and damaged goods and write-offs.
A publisher may want to add on other deductions for
Cooperative advertising and MDF funds. Cooperative advertising is funded by several groups in an industry to advertise together. MDF is short for market development funds, which is money paid to retailers to secure shelf space,
(the high-visibility displays at the ends of
Cost of goods sold. All costs that the publisher puts into the finished product, from manufacturing to packaging and license fees.
Manufacturer's platform royalties. The publisher must pay a royalty to the owner of proprietary platforms (like Sony for the PS2 or Nintendo for the GameBoy) for every game sold. This is how console manufacturers earn their profitsthey generally lose money on the R&D and manufacture of the consoles, but make money through the royalties publishers pay to create games for the platform.
Sales taxes and VAT. VAT is
, a tax imposed by many countries on all finished goods. Some people think it's how Canada
Shipping charges. If these are included, a developer will at least want to limit the
Imputed fees for publisher assets and services. If a publisher wants to use its own assets to further the game, whether in-house
A developer's strongest argument
against most of these expenses is that
they are the publisher's overhead and
that all overhead is covered by the
(100 percent-developer's royalty) per
centage the publisher receives. Shared
deductions are intended to protect the
publisher against its actual risks and
costs associated with your game.You
may want to try and limit the amount
of these expenditures by requiring the
publisher to provide you with
Sequels are closely related to any discussion of the term because they act as extensions. Sequel rights can prolong a relationship, so it is wise to build in assurances that the extension will benefit both parties. In a work for hire, the sequel rights at issue are usually for the right to be the development house on any sequels. This is usually included as a right of first negotia tion or a right of last refusal . If the original developer does not want to work on the sequel, the publisher may want some kind of follow-up support for any third-party developers.
Create a cap, whether in hours or otherwise, on the amount and kind of support provided.
Right of First Negotiation and Right of Last Refusal
These rights are essentially what they sound like: the right to be the first party negotiated with and the right to be presented with and have the opportunity to match the final offer from all other parties.
It doesn't make much sense to negotiate the terms of a sequel development deal before the initial game is even complete,
The right of last refusal states that any agreement the publisher comes to with a third party must be offered back to you for X number of days before the publisher proceeds with that third party.
While these rights seem
The right of last refusal is a bit more airtight that the right of first negotia tion, because definitions of "sweeter" vary; example: if the second develop er's contract gives it a higher develop ment fee but a lower royalty and no sequel rights, is that a sweeter deal?
Notice is very important for follow-on developments.Timing cash flow
and resource commitment is everything to a developer, so you will want
to do everything you can to avoid a situation where you need work to
begin as soon as possible on a sequel when you have just committed a
team to another project.The best way to work this out is to agree on a
notice "deadline," perhaps 90 days following the initial commercial
release of the game, during which the publisher can interpret the sales
data and decide if it wants to do a sequel. Another option is for the pub
lisher to give you a heads-up period (90 days, for example) that would
enable you to organize resources for the project. Do beware: many pub
lishers are nervous about the reliability and functionality of
The contract should specify not just what you will be delivering (milestones), but how you will be delivering it, how it will be accepted, what changes to the milestones are acceptable, and what happens when milestones are late. Will the publisher be delivering any development kits? At whose expense (usually the publisher's) and when? (Tardy development kits can lead to missed milestones.) The first milestone should be signing the short form contract, and the last is usually delivery of the gold master. As for pricing the contract, you will want to factor in as wide a margin of error as possible and to isolate as many unpredictable costs (cost of third-party licenses, name actors or vocal talent required by the publisher or over which the publisher has approval, and any other costs over which you have no control) by stating that the milestone advance amounts will be $Xplus the cost of those items to be jointly approved, or that the publisher will cover those costs for all publisher-
While the nature of game development means that milestone definitions must be somewhat elastic, many developers and publishers cite lack of clarity in milestone definitions (and the resulting mismatched expectations) as a common cause of friction.
To improve the quality of mile stone definitions and project plan ning, many contracts make the first milestone the setting of the milestones for the entire project.
Example: "Level two characters in" means to you that the art assets will be complete and rendered, but not fully functioning, while the publisher is expecting to see the
It is also useful to include definitions of core terms like Bug, Alpha, Beta, and Gold.
A bug is one of the following:
A failure of the game to conform to the design and technical specifications
A detriment to the audiovisual elements or function of the game
The destruction, disruption, or corruption of a data system, storage device, or mechanism
is a version for which the content and code are complete according to the design and technical specifications submitted, including all features, front-end, intro/endgame sequences, screens, sound/music, with some
Beta includes all of the alpha definition plus translations from the localization kit, containing some bugs but no known active level "A" bugs (those that will cause the game to crash or freeze).
Gold is the final version of the product delivered on a CD-ROM (specify the number of copies to be delivered) with the complete asset pack including all source code (organized in labeled files), art/cinematic/music files, and all necessary written documentation required so that a programmer of reasonable skill can modify the game if necessary at a later date.
Once you meet a milestone, the publisher needs a certain amount of time to review it (ten days is sufficient) and either accept or reject it. Set out sufficient grounds for rejection, such as significant deviation from the milestone definition. It is important to establish what creative approval and input the publisher will have: if creative issues are a ground for rejection, set out a baseline so that you don't get a new producer mid-game who "just doesn't like" the previously established creative direction. Any
For administrative facility, you will want the publisher to specify in the contract one employee (subject to change with written notice from the publisher) with the authority to approve all milestones, and have the publisher send that name to you in writing.
By laying out
Submitting a milestone on time and not getting paid for three months because the publisher has no acceptance deadline.
Having a publisher use arbitrary milestone rejection as a way to terminate a project for convenience while receiving the benefits of termination for cause (see the "Termination and Rights After Termination" section later in this chapter).
It is not uncommon to submit a milestone, have it accepted, and still have to wait for the milestone check.This is a vagary of the industry, and a developer's best defense is solid contract language and careful financial planning.
The publisher will want the right to request modifications to the game mid-project. Although a certain amount of give-and-take (also known as "reasonable
It's not always the publisher who is responsible for feature creep; teams
can get very excited about a great feature and insist they'll do the over
time to implement it.The development executives can fall into the logic
that it's okay to
What if you are late? It has been known to happen, althoughas mentioned earlier in this chaptera developer stands a much better chance of success if it earns a reputation for accurate scheduling. There are a few
No matter whose fault the delay is, all parties may suffer from lost opportunities due to missed retail windows.Wherever possible, work with the publisher to compensate for unexpected delays.
It is important to distinguish between lateness caused by you
and lateness caused by third-party situations, such as the publish
er's request for a modification, delay in providing development
kits, or problems with third-party
More and more developers are using third-party engines, which means a bit of planning is necessary in the way of warranties, indemnifications, and compensation schemes. The engine licensors have prepared their contracts to accommodate publishing a game, and are
If you will be licensing any IP from a third party, such as an engine or music or vocal talent, you will need to obtain the right to sublicense that IP and provide proof of any sublicenses to the publisher. You will want to include a provision that any publisher-mandated licenses (for celebrity actors, for instance) will be paid for by the publisher. Although the fees may be recouped in full or in part from your royalties, that is far better than having it come out of your development fees.
Specify all languages that are to be delivered as part of the guarantee/payments, and dates. The publisher will provide a localization kit (almost always at its own expense) and the date for delivery of this kit must be setotherwise you could be in breach of milestones through no fault of your own. Provide terms for add-on
A rule of thumb is that the more expensive the license, the tighter the rein a publisher will want on the creative direction. A work-for-hire will be
You will want some
Because the publisher is buying access to your talent, it will often ask for a list of key personnel and some assurances that those people will
Publishers may ask for annotated source code in an attempt to protect
Talented developers capable of delivering
Where you will be contributing your own intellectual property, either content or technology, the contract must account for all of the terms discussed in the previous heading as well as many more that require long term, low-probability thinking. The main differences are
What happens to the property should the relationship not work out?
How much control will each party have over the creation and exploitation of the property?
How does the revenue get shared if the property is a huge hit and spawns several other licenses?
For an overview of intellectual property, see Chapter 5, "Intellectual Property." For an overview of licensing, see Chapter 7, "Licensing."
For a developer-owned intellectual property, here is where the "four corners" of the property being licensed or sold are defined. The precise definition of the rights is crucial for the same reason that giving the address and plot plan of the home you are selling is important. You don't write a contract selling "my house." What if you have more than one home? Furthermore, does that mean you are selling only the house, or the land surrounding the house? And what about the oil that you don't know is underneath the land
For development using your original content IP, carefully define the copyrights and trademarks available for the game and sequels.
For development using your proprietary technology, a publisher will need certain rights to be able to distribute the game, but beware attempts to gain a
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