Four Examples

[ LiB ]

Four Examples

Licensing an Engine

It should be noted that while a lot of energy has gone into promoting proprietary technology for third-party licenses, only a few developers are actually making any money through licensing. It is still advisable for a company to work to develop its own technology, both because it can dramatically reduce development time if several projects can use the same core technology, and because proprietary technology can provide a persuasive competitive advantage if it is the best within a category. For example: if you build an outstanding RPG AI, publishers will think of your company first when they need to develop an RPG project.

Cast of Characters

• Licensor . Engine owner.

• Licensee. The developer creating a game using the engine.

• Publisher. The publisher may be a party to the engine license to preserve its rights to use the engine in the game if another developer ends up working on the game.

Mis en Sc ne

Developer has been approached by Publisher to develop Game A, a licensed property that it needs to release six quarters from now. Developer does not have an in-house engine appropriate to the game. Furthermore, it has worked with Publisher before and knows that the deal alone will take at least two months, meaning Developer won't receive any funds for at least that long. Developer decides to license to the Shake engine, which has a good reputation, and factors this into the proposed budget and schedule.

Contract Highlights

Definition of "Licensed Technology"

Most software can adequately be described by a name , for example, the Shake engine, and the term "Licensed Technology" should be defined to include all modifications, patches, improvements and updates not marketed as separate products, to be given to the licensee at the same time as all other licensees . Clarify which version and platform of the engine is intended, for example, the Shake II engine for PlayStation2.

Permitted Use

Licensor will want to limit licensee's use of the engine to certain applications. The licensor will need to confer many of the copyright rights discussed above, namely the rights to: create a derivative work, including the right to modify the original work; the right to duplicate and distribute the derivative work; and the right to sublicense the duplication and distribution to the required third parties (such as a publisher or OEM manufacturer). Typical terms of use include:

• Game. The licensee may generally use the engine only to develop Game A and any localizations . Are sequels, ports, and expansion packs (stand-alone and/or dependent?) included in the license? If not, what are the terms and fees for these additional products?

• Distribution in Object Code Only. In addition to confidentiality provisions, an engine licensor will want to protect its product by only allowing the licensee to distribute the engine in object code as embedded in Game A.

• Restrictions. Licensees must usually agree to other protective restrictions on their use of the technology, such as prohibitions against reverse-engineering or decompiling the technology, disclosing the source code to any third parties, and so on, as well as agreeing to make proper use of the licensor's trademarks ("proper" being defined in the license agreement).

Fees

Engine fees are usually broken down by title and platform. If there is a possibility that the game will be ported, and the licensor supports those platforms, negotiate the port fees in the original license.

License fees for third-party engines are almost always non-recoupable and non-refundableeven if the game is terminated mid-development. It is always a good idea for the publisher to pay the licensor directly and recoup the cost as part of development expenses.

Territory

A licensor will want the license to be valid in all territories in which it plans to distribute its product; worldwide is most appropriate.

Term

When the license is limited to use on a single title, the licensor can allow a perpetual term because the game has a limited shelf life, even with catalog sales (sales of the game after it has been in the market for at least one year) factored in.

IP Ownership

Ownership issues surrounding products that become enmeshed with other products can become messy. Engine licenses generally deal with this issue by allowing the licensee ownership of all elements of the game except the engine. It is important for the licensor to make it clear that the licensee acquires no rights to the engine even if it makes modifications or enhancements to the engine. However, the licensor may allow the licensee to retain ownership of any modifications or enhancements to the engine that are separate and independent from the engine.

Support

Support is a critical component of licensing a technology. A licensee needs to be sure its employees will have sufficient support to make effective and efficient use of the engine. Many licensors provide a training session at the developer's office soon after executing the agreement as part of the license fee. Licensees will want to be able to ask questions and receive timely answers by phone, fax, and e-mail. Licensors will want some kind of limit on the amount of support available to prevent extreme resource drain, for example, by extremely inexperienced developers.

Expected Features

Have your team work out its feature requirements and be sure the licensor can guarantee that those features will be in the product (and in the license agreement). For example, what does your particular game need in terms of polygons per frame, sound, streaming, VU0/VU1 acceleration, and other technical enhancement? Ask the art department if they have any theme-specific needs, such as realistic image distortion for an underwater level.

Mature Game into Film

Cast of Characters

• Licensor. In this instance, Developer and Publisher jointly.

• Producer/production company. The company that makes (or sublicenses the making of) the film.

• Financier(s). Any third parties contributing to the production budget.

• Distributor. The party who gets the film from the can to the screen (or VHS, if it's a direct to video). Usually, this is one of the big studios .

Mis en Sc ne

Developer is working on a game, to be released by Publisher, based on its Developer's original IP. Developer held onto the ability to pursue entertainment licensing opportunities, on the condition that Publisher approve any deals and share half of all revenue for three years following the release of the last game put out by Publisher.

Developer thinks that the property, which is very character-driven, would translate well to film and puts together a modified bible to pitch the project. They think about hiring an agent, who would have better film industry contacts. Furthermore, they worry that the time and effort required to shop the project around would take focus away from getting the game done. To try to save the 10 percent agent's commission (which could apply to all revenue stemming from the film, including sequels and film- related merchandise), Developer decides to spend one month trying to sell the project without an agent.

Two parties express interest in optioning the property: Producer A is a small independent production company willing to pay $5K for a one-year feature film option with the direct to video and television film (not series) rights, with a $50K purchase price plus 3 percent of the production budget if they exercise the option. Producer B is a production company tied in to a large entertainment conglomerate. This company is willing to pay $5K for a one-year option, with a $50K purchase price and one percent of the production budget on exercise; however, it wants not only all film rights but the merchandise rights associated with the film and an exclusive option to make other entertainment.

Developer consults with Publisher on the two offers. They agree that Producer A is more likely to make the property a priority, and the deal would allow them to hold onto what could become valuable entertainment and merchandise rights. However, even though Producer B wants to tie up more rights for less money, Developer and Publisher agree that their best chance of getting those rights turned into entertainment lies with the power of a conglomerate to finance and coordinate a licensing program across its divisions.

Developer consults with its attorney, who counsels that Producer B sounds like a fine choice provided that any rights not exploited within a certain time frame revert. Producer B and Developer (with Publisher's approval) negotiate a contract with the following highlights.

Contract Highlights

Highlights of licensing a property for film production may include:

Property Definition

Where the original public version of the property will be a game, the definition of the licensed property would make reference to the game by name and would incorporate all copyrights and trademarks including all characters, artwork, plots, music, story lines, costumes, vehicles, props, weapons, concepts, sets, and ideas.

NOTE

TIP

While the developer may not have the leverage to resist a conglomerate's desire to license all entertainment and merchan dise rights, the developer can try to negoti ate to have some rights revert if the film's production budget is less than a certain amount or to only grant those rights if the budget exceeds a certain amount (see Chapter 6 for a discussion of the relation ship between options and reversions).

Rights Granted

For this kind of broad agreement, the licensee is acquiring the right to most forms of entertainment and merchandise. If the licensor already has certain licenses in place, such as a graphic novel or series of figurines based on the game, these should be noted in the contract as excluded categories of rights.

Compensation

A licensor will often receive three forms of compensation: rights fees, profit participations, and service fees.

• Rights Fees. Rights fees are "front-end" compensation for the right to use the licensed property in the product. These may be complemented by "back-end" compensation, a share of profits from the film, and/or merchandise.

• Option Price. The option price does not actually buy the license to make the film; it buys the producer a license to do pre-production worklike writing a screenplayand a period of time to make a decision about whether to purchase the license to make the film. However, the option agreement usually lays out most, if not all, terms of the full licensea licensor does not want to lock up rights without knowing what kind of compensation it will receive should the deal go through. There is usually an initial option fee for a certain amount of time, renewable for another fee for another period.

• Exercise Price. If the producer decides to proceed with making the film, it exercises the option by paying the exercise price or guarantee . The exercise price/guarantee is the minimum rights fee that the licensor will receive. The full rights fee is usually a percentage of the production budget, less any option fees paid, with the exercise price acting as a set minimum (if for example, the production budget is very low). This protects the licensor by setting expectations for the production budget (read: quality); in other words, the guarantee named in the option agreement should be around one percent of the producer's envisioned budget.

  NOTE

  NOTE

  If the license is for a product that has not yet been released, the licensor may negotiate for bonus fees if the product is very successful (which increases brand exposure and enhances the value of the license).

• Other Rights Fees. The option will usually set rights fees for sequels to the film at half of the rights fees for the original and at one-third for remakes . Other fees to consider: television spin-offs based on the film.

• Profit Participation. Profits may come from the actual production or from other sources like merchandising .

• Production Profits. The licensor should receive some share of the producer's profits. As always, beware the path from gross to net: it is a good idea to include a "most favored nations" clause in the definition, which states that the definition of net profits for licensor will be no worse than that for any other parties sharing in the producer's net profits. As with packaged goods, the manufacturer (in this case, the producer), sells its product through a distributor (the studio) that takes a percentage of the revenue as a

  CALCULATING RIGHTS FEES FOR MOTION PICTURES

  Rights fees for motion pictures are usually calculated by a formula and paid in two or three stages: the option fee, the guarantee (paid on exercise of the option), and any additional rights fees due on the start of principal photography. Typically, payments from one stage are deducted from payments at another stage, as you will see in this example. Keep in mind that an option generally won't be exercised until the producer starts productionno sense paying the guarantee if the project falls through.

  Assume:

  Initial Option Fee: $5K

  Renewal Option Fee: $5K

  Guarantee: $50K

  Rights fee: 1% of production budget on first day of principal photography

  Additional rights fees:Another $50K for game sales in excess of 300,000; an additional $100K for game sales in excess of 600,000. Sales to be determined on the first day of principal photography.

  Illustration One: Producer uses the initial and renewal options ($10K total). Licensor is paid $40K (exercise price less option fees paid) on the day the option is exercised.The game sells nicely , but is not a blockbuster (200,000 units).The production budget turns out to be $5M, for a direct to video. Licensor does not receive any additional money ($50K, less $10K option fees already paid = $40K).

  Illustration Two: Producer uses only the initial option. Licensor is paid $45K when the option is exercised.The game does extremely well, selling 550,000 units by the first day of principal photography. On the strength of these sales, the producer secures a $20M budget for a feature film. Licensor is entitled to an additional $205K ($200K plus an additional rights fee of $50K, less the $45 already received).

  
  

  distribution fee. After recouping production costs, the producer is left with what we'll call "adjusted gross" (though other times this number may be considered "net profits"). From the adjusted gross it must pay shares of profits to any investors as well as to any powerful creative contributors (like a big-name director). Whatever is left after these fees may be called "net profits." A licensor will want to negotiate whether its royalty base is off of the adjusted gross or net profits.

  Adjusted Gross vs. Net Profits

  Example:

  Assume:

  Production Cost: $5M

  Distributor's sales: $20M

  Distributor fees: 25%

  Investor share: 50% of adjusted gross

  Director's share: 3% of adjusted gross

  Licensor's share: 5% of net profits

  The distributor would remit $15M to the producer ($20M less a 25% fee), who would be left with a $10M adjusted gross after recouping the $5M production expense.The investor would receive $5M and the director $300K, leaving net profits of $4.7M.The licensor's share of net profits would come out to $235K.

  Had the licensor's share been from adjusted gross, its share would have been $500K.

  
  

• Merchandise Profits. The licensor should share in revenue from all merchandise from the film or any other entertainment produced under the license (such as a television spin-off). Merchandise should include soundtracks and theme park rides in addition to apparel, books, and all of the other customary merchandise.

  NOTE

  TIP

  Consider capping the distribution fees, particularly if there is any possi bility of sweetheart deals across branches of a conglomerate.

• Service Fees. At least one party from the developer should be engaged as a "creative consultant" on any projects and should receive industry-standard compensation and screen credits. Where possible, gaining production credits is advisable because they can carry union- mandated fees.

Figure 7.11. Licensing an old stand by like Tetris and Frogger can provide a reasonably inexpensive license to a publisher.

NOTE

NOTE

The developer will want to reserve rights to make games based on the filmed entertainment; the parties can negotiate a participation for the producer.

Term

This kind of contract has three relevant terms: the option term, the production term, and the distribution term. The option term is the period during which the producer has the exclusive right to purchase the production license (called exercise of the option) and may prepare certain pre-production materials like a script. This term may have renewal periods, and those renewals may be contingent on the producer showing some form of progress, like a treatment (a story synopsis). If this term expires

NOTE

NOTE

The distribution term for enter tainment actually produced is usu ally perpetual.This means that a producer will always have the right to sell entertainment that it creat ed, even if it has lost the right to make sequels or merchandise.

without a purchase of the production rights, the relationship goes no further and all rights usually revert to the licensor.

The production period is the time after exercising the option when the producer creates the licensed entertainment. The production period is limited to prevent parties from locking up rights and never actually producing any material. If the production period ends, the rights will usually revert to licensor. There may be some kind of turnaround provision (see the "Turnaround/Reversion" section that follows ).

Credits

Developer should receive a prominent credit in any entertainment and advertising. The credit should read something like "Based on the video game by Developer" and should be of the same size and emphasis as the screenwriter credit.

Intellectual Property

The ownership of the film's copyright and any other new trademarks or copyrights created (new characters, for example) may be the subject of intense negotiation. Licensor will want to own all additions to the property, as will licensee. The producer will likely insist on ownership of the actual licensed product and will probably want control over the registration and enforcement of the intellectual property rights.

Turnaround/Reversion

As mentioned earlier in this chapter, rights that are not in use for an extended period of time should revert to the licensor. If the producer has spent money to create a script that the licensor would like to use, the licensor may purchase the script for a turnaround fee . Some producers negotiate for a licensor to pay a turnaround fee, regardless of whether the licensor uses any of the producer's materials, if the licensor takes the property elsewhere.

Creative Approvals

Developer should try to receive some form of consultation or approval right over the major creative aspects of the production, such as treatment, script, and visual elements. The licensor's need to maintain the integrity and value of the property must compete with the producer's viable argument that, since it is making a massive investment in the production, it needs to operate according to its own logic.

Game into Children's TV Show

Children's television is the brass ring of licensing because it generally creates the most merchandise and toy revenue, in addition to spawning related entertainment (like direct to video). One fact of children's television licensing that surprises many people is that the television shows don't make much money by themselves ; most of the parties involved in the production and distribution of the television show (and other entertainment) are compensated with shares of the toy and merchandise revenue.

Children's television licensing can become very math- intensive , involving a lot of fractions-of-fractions. For example, the producer may receive a fraction of the licensor's toy royalties, which are a fraction of the toy licensee's revenue.

Cast of Characters

This entertainment license often incorporates many other parties.

• Licensor. This can be anyone from the property's actual owner to another partylike a toy company or publisherto whom the owner has licensed the television/filmed entertainment and merchandise rights.

• Licensee. The licensee may be either the network or the production company.

• Distributor. The distributor is the company that sells the production to broadcasters (networks). There is often a domestic distributor and an international distributor. Like a packaged-goods distributor, these parties charge distribution fees to the producers, usually as a percentage of the rights fees paid by the broadcaster to the producer for the right to air the show. Distribution expenses, the cost of marketing and advertising the show to broadcasters, may be charged separately or included as part of a higher distribution fee percentage.

• Broadcaster. The broadcaster is the retailer of children's television: it brings the manufacturer's (producer's) product into the end- user 's home. As with packaged-goods retailers, broadcasters expect to be compensated for shelf space (air time), though the money also flows in the other direction: broadcasters pay a rights fee to the producer for the right to air the show, just as retailers pay manufacturers for products they sell. The loving cup from which all television producers hope to drink is syndication , when a broadcaster airs the show five days a week and pays a fee for every broadcast (known as a strip fee ). This is more likely with adult shows; the demographic windows are so short in children's television (example: 8-11 as opposed to 18-35), the shows don't usually have enough shelf life to support syndication. In other words, adult shows can retain the same viewer for seventeen years, while children's shows must constantly woo new viewers to replace the ones who've outgrown the show.

• Master toy licensee. A property hot enough to merit its own television show will probably have a master toy licensee . This is a toy company like Hasbro, Playmates, or Bandai that manufactures and distributes many different kinds of toys and desires control over all toy production, marketing, and distribution. Contrast this to a mature game that may have a market for one kind of toy, like a set of high-end figurines. In a situation of limited toy profits, there is not much incentive for a master toy licensee to invest the money in marketing the property, so it makes sense for the property owner to create a limited license for high-end figurines. A master toy licensee can be a vital part of the production and distribution negotiations because it is often one of the biggest purchasers of the broadcaster's advertising time and may be requested to make a commitment to buy a certain amount of advertising during the series' time slot.

• Merchandise Agent. The merchandise agent, which is almost a requirement for the level of merchandising activity created by a children's television show, handles all of the contracts with different licensees, including oversight and enforcement of the contracts. A licensor may hire a single agent to handle worldwide merchandise (understanding that the agent will hire sub-agents in different areas and that those sub- agents will take their own commission), or it may contract territory-by-territory or country-by-country .

Mis en Sc ne

Developer creates a game that achieves massive popularity with girls age 7 to 11. Because Developer self- funded the game, it held on to most of the intellectual property rights. After toy companies started showing interest in the property, Developer hired a full time licensing executive and created a separate corporation for the licensing business. The executive, who had been a high-ranking employee at Mattel, has lined up a master toy licensee and has been pursuing television series opportunities with different production companies.

Contract Highlights

Highlights of the children's television production license include:

Property Definition

For the level of money that must be invested in an animated children's television show (on the average of more than $250,000 per 22-minute episode, multiplied by 13 or 26 for a season ), the licensee will be sure to acquire the rights to all aspects of the property, including any future additions or creations.

Rights Granted

The rights granted in a television production contract fall into two categories: the right to create licensed entertainment and the right (including the right to sublicense) to distribute, exhibit, and sell it.

Distribution and exhibition rights are rather straightforward: the licensee will need the right to sell and exhibit (and permit others to sell and exhibit) any productions .

Production rights are a bit more involved. As with a film, the licensor and licensee may be contracting before they know that the product will find interested parties to finance or distribute the production. Therefore, the rights may be broken out into categories so that, should the production hit a dead end, the licensor can get its rights back. These categories may include:

• Pre-production. Pre-production rights must be granted for the licensee to have the authority to create derivative products like treatments , scripts, bibles, and artwork to pitch the production.

• Series. This is where the licensor would specify that the licensee may produce animated but not live-action motion pictures for television broadcast.

• Associated Productions. The producer of an animated series almost always acquires either an exclusive option or a right of last refusal (see Chapter 6, "The Publishing Contract") to create animated feature films , television specials, spinoffs, and direct to video productions for as long as the producer is actively creating a threshold number of new series episodes per season (and possibly for a limited time afterwards).

Compensation

The licensor receives two different kinds of compensation, rights fees and service fees. Unlike the previous example of a film option, the licensor does not look to the production for the bulk of profits. Instead, most of the revenue will be from the merchandise and toy sales driven by the show, a portion of which licensor will pay to licensee.

• Rights Fees. The licensor will receive a minimum rights fee from the producer for every episode produced (whether or not distributed) and should receive separate minimum rights fees for other entertainment, such as an animated film, if the producer acquires and uses these rights. In addition to these minimums, the licensor should receive a share of the net profits from each production. A licensor will be most comfortable with a net profits calculus that simply subtracts the production costs from the producer's revenue from distribution (television, DVD, VHS, and everywhere else). It is more likely that the producer will have a dense boilerplate definition that your attorney will need to negotiate back down to earth.

• Service Fees and Screen Credits. Licensors should be involved with the production and should receive industry-standard credits and service fees. If parties from the licensor contribute to the productionas writers or financiers, for examplethey should receive commensurate credits and service fees. Fees are bound up with credits in television production because screen credits carry union-mandated payments. Therefore, a licensor will want to get as many credits as possible in its contract with the producer, though all may be subject to broadcaster approval. Reasonable credits include:

NOTE

NOTE

Where do a producer's profits come from? Most television productions run at a deficit, meaning that the fees paid by broadcasters for the initial run of the show do not cover production expens es. The profit center in television is strip fees (per-broadcast fees) if the series goes into syndication, which is more likely for an adult show, and from shares of the toy and merchandise revenue for children's television.An increasingly big bottom-line contributor is the DVD sale or rental income for a series.

• Depending on the licensor's involvement with the negotiation, administration, and financing of the series, an Executive Producer credit for an individual may be appropriate.

  NOTE

  TIP

  Consider capping distribution fees if the production will be distributed through an entity related to the distributor.

• An authorship credit such as "Based on the video game by [Developer]" or "Based on characters created by [Author]."

• A service credit like "Creative Consultant" for the property's creator if she is involved with the production.

  NOTE

  NOTE

  "Executive Producer" does not connote any particular dutiesit often resem bles a negotiated fee for parties involved with the series. Watch the credits on the Sopranos and you'll notice that there are around 50 executive produc ers and co-executive producers.

• The licensor should receive a full screen credit at the end of every episode with its logo (and up to a two-second animation).

• Merchandise and Toy Sharing. As mentioned in the previous paragraph, the parties financing the productionwhich usually includes the producerwill most likely receive a share of the licensor's income from worldwide toy and merchandising royalties. Note that it may be appropriate to give the financiers a lower share of international royalties because that income comes to the licensor drastically reduced already, due to higher commissions and cost of doing business abroad. Two important terms of sharing merchandise and toy royalties are the definition of "net" and the duration of the sharing period:

• Getting from Gross to Net. Just as the licensor wants to clarify deductions taken in getting from gross to net on the producer's income statement, the producer will want to establish what deductions the licensor can take from toy and merchandise royalty before paying the producer its share. It is accepted the non-overhead, product-specific costs such as distribution fees, intellectual property registration and enforcement, agents' commissions and audit costs, and any rights fees paid for the merchandise (example: Sarah Michelle Gellar gets a rights fee if her voice is used in any merchandise like a doll or game)may be deducted before any shares are paid, as well as a reasonable administrative fee (10 percent) for the licensor.

• Sharing Period. What if the producer makes 13 episodes of a series that gets cancelled after 3 episodes are broadcast? Should it receive shares of your merchandise royalty for the next five years? Probably not. Sharing periods are often limited to the production and broadcast period, with an extension period that gets longer depending on how many episodes are produced and broadcast. Example: if a producer makes 13 episodes, it shares merchandise and toy revenue for three months after broadcast of the last episode. If it makes 44 episodes, it shares for one year after broadcast of the last episode.

Term

Different rights granted in the license may have different terms attached, such as:

• Pre-Production. As with film options, the licensor wants to allow the licensee enough time to develop and pitch the product, but with a cutoff date to pick up stakes and move on if the pitch is not selling. The parties should decide on a broadcast season goal for pitching the show (shows get developed and pitched between January and May, and bought in September for debut the following September or January) and agree to terminate the agreement if they don't receive any offers within three to six months of the last pitch. Example: If the licensor and licensee are contracting in September 2003, they should be able to have pitch materials together for the 2004 pitch season. If they have not received any offers by October 15, 2004, the contract terminates.

• Production. Production rights should persist as long as the producer is releasing a threshold number of new episodes per year (between 8 and 13).

• Distribution and Exhibition. The producer should have the right to distribute and exhibit the productions in perpetuity.

Other Terms

• Territory. The territory is almost guaranteed to be worldwide.

• Creative and Business Approvals. The licensor will want to have an approval or consultation right over all major business decisions like choice of broadcaster or international distributor, as well as creative elements such as treatments, scripts, weapons, vehicles, artwork, sets, and backgrounds.

• IP Registration and Enforcement. Unless the licensor is very experienced with international intellectual property registration and enforcement, the producer may want to take responsibility for registering the property in the licensor's name (or co-owned with the licensor, as the case may be) and recouping those costs.

• Ownership of New Material. The licensor is likely to co-own the copyrights to any derivative works created by the producer, though the producer may own all the rights to certain aspects of the production, such as the theme song.

Book into Game

This section addresses your licensing someone else's property for your own purposes, such as turning a book into a game or other media.

Cast of Characters

• Licensor. Usually the author, possibly the publisher.

• Licensee. Developer.

Mis en Sc ne

The art lead at Developer is a huge sci-fi fan and thinks that an obscure novella he read would make a great game. He draws up some illustrations of his idea and discusses it with one of the level designers, who brainstorms some gameplay ideas. They present their ideas to the CEO, who agrees to approach the author about a low-cost license to the property.

The CEO contacts the author, who is intrigued by the idea of the game, and agrees to send the CEO's attorney a copy of the author's publishing contract so that he can check for any rights conflicts with the publisher. Everything looks good, so the parties proceed with the negotiation.

Contract Highlights

Because these contracts frequently have a low dollar amount attached, be sure that the detail and cost of negotiation is in proportion to the contract. In other words, it may not always make sense to spend $10K negotiating a contract for a $500 license.

Definition of Property

The developer will want as expansive a definition of the property as possible, including all sequels, prequels, and other books in the series (if it is a series), any art if applicable , and rights to any other manifestations of the property.

Rights Granted

Because the developer may be investing millions of dollars in the development of a little-known property, it will want to obtain the exclusive option to produce, exhibit, and distribute most forms of entertainment and merchandise, including subsequent publications in the series. The production rights can be broken out into three categories:

• Pre-production rights. These are the rights to use the property to create and pitch preproduction materials.

• Game production rights. The rights to produce, copy, and distribute the game and any sequels, ports, conversions, and expansion packs.

• Other production rights. Film, merchandise, hint books, board games, and so forth.

Compensation

The developer should be prepared to pay a nominal option fee for an initial term (say $750), and a lesser fee for each extension ($300).

If the developer goes forward with the game's production, it will pay an exercise price of roughly 5 to 10 times the option fee, less any option fees already paid. The developer may want to pay the author a percentage of the ultimate development cost, or share a percentage of developer's net royalties with the author.

The developer should pay a share of net merchandising revenue to the author. Should the developer produce or sublicense production of any other entertainment, it should pay the author additional rights fees, which may include a percentage of the production budget or the developer's net profits from the production.

At the same time, the developer may request that the author or publisher pay the developer a share of any bump in book sales (any increase in book sales following release of the game).

Term

There are at least four operative terms:

• Game option term. There should be an initial option term, with successive extensions available. The author may request that the extensions only be granted if the developer shows some production progress, such as a design document.

• Game production term. After exercising the option, the developer should have a sufficient period to develop the game. The production rights should continue as long as the developer releases at least one game based on the property every four or five years.

• Entertainment/merchandise option term. The developer will want the exclusive right to make any entertainment or merchandise for a period lasting at least two years after the release of the first game and automatically renewing upon certain conditions. Examples of these conditions would be the developer entering pre-production for an entertainment product, proved by presenting a script or treatment, for example; or paying the author a minimum level of royalties in the first two years.

• Distribution term. Developer will have distribution rights to licensed products it creates in perpetuity.

Other Terms

• Approvals. The author will want consultation and/or approval rights to the creative elements of licensed productions. Some authors will want business-related input; some won't. If the developer grants any kind of approval right, it is vital that the author have a short number of days to approve or disapprove the submission by fax or e-mail, with no reply being considered assent.

• Credits. The author should receive some kind of on-screen credit, and may negotiate for higher profile credits (for example, on the box or in the title).

• IP Ownership, Registration and Enforcement. Depending on the relative leverage of the parties, a developer may try to acquire outright ownership of any products and additions to the property it produces under license. As the party with more money at stake, the developer will probably want to control the registration and enforcement processes and deduct these expenses from gross income before sharing with the author.

Figure 7.12. Eidos' Tomb Raider property is one of the very few to prof itably transition to the screen.A sequel is due in 2003, to add to the heap of licensed and derivative works, including

Figure 7.13. the first movie

Figure 7.14. writing instruments

Figure 7.15. comic books emphasizing her pneumosis

Figure 7.16. an amusement ride and other items for the obsessive fan.

[ LiB ]