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Negotiating Contracts That Protect Your Title and Team

In the game business, as in life, you don't get what you deserve -- you get what you negotiate. Jay Powell offers guidelines that will help you negotiate a deal that will get the publisher committed to your game and protect your team in the event that something goes seriously wrong.

In the game business, as in life, you don't get what you deserve, you get what you negotiate. The purpose of this article is to offer guidelines that will help you negotiate a deal with the publisher of your game. By following these guidelines you will get the publisher committed to your game, and protect your team in the event that something goes seriously wrong.

Careful planning and negotiation will ensure you maximize your revenue and provide you with protection in the event the project is canceled. It is very important to have an attorney at your disposal for the entire negotiation process. Even if you do not wish them to handle the negotiations themselves, you should not enter any agreement without having the contract reviewed by a lawyer, preferably one experienced in the interactive industry.

Let's Make A Deal!

Prior to submitting your game to potential publishing partners, you must understand what type of deal you want and/or need. The type of deal you are looking for will often determine the underlying deal terms that you can negotiate.

For most developers, publishing deals fall into four categories:

  1. Work for Hire Development Deals -- Publisher brings the developer a concept, property or franchise and the developer creates the game based on the publishers guidelines.
  2. Early Stage Development Deal - Developer pitches a publisher on a game that they want to make and gets funding from the publisher to create the game
  3. Completion Funding - Developer creates a game on its own dime and then at some stage in the development process brings the concept to a publisher that finances the rest of the game
  4. Pick Up Deal - Developer completes the game with its own money and then sells the essentially complete game to a publisher

Work For Hire Development Deals
These deals will yield the least amount of negotiating power from the four examples listed. In these scenarios publishers are seeking development talent to create games based on the publisher's licenses or franchises. It is very difficult to get a strong royalty in these deals. They are a reliable form of revenue and generally require a smaller staff. This allows the developer to take more than one contract at a time and balance their risk out. These deals are an excellent way to make a name for yourself in the industry and have a steady revenue flow while planning your original game and creating the initial demo.

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Careful planning and negotiation will ensure you maximize your revenue.

Early Stage Deals
Offering more negotiating position than Work For Hire deals, these deals are generally reserved for teams with a solid track record. Requirements for this type of deal include a solid design document along with a technology demo running on the desired platform. When pitching Early Stage deals, you will find the sale to be much easier if you are pitching a game in a genre where your team has proven itself previously. The number or prospective publishers is limited due to the budget requirements of these sorts of deals. Publishers will potentially be paying millions of dollars for these games to be completed so they will require a certain amount of control in order to protect their investment. Since early stage deals are quite risky for publishers, they will generally require more demanding terms that limit the developers upside.

Completion Funding
These deals offer a good balance of creative freedom and negotiating power. A great demo that shows full playability and demonstrates the unique selling points of the game is a must for this deal. Publishers realize that their risk is less here due to the fact that the developer has funded a percentage of the game from their own money. This will give you a better negotiating position when it comes down to the royalty rates and ancillary rights of the game. The more a publisher can see in the initial pitch, the better chance a developer will have in securing a contract. Many of the Early Stage pitches do not see contracts until they reach this stage.

Pick Up Deal
These deals offer developers the strongest negotiating position of all the deals. Under these circumstances, a developer has funded the majority of the title and a Gold Master date is near. Publishers have very little risk as they are able to evaluate the final version of the game they will be buying. With this model you will also have the ability to choose between a country-by-country or worldwide model. The differences in these two approaches can give you the negotiating power necessary to land a truly lucrative deal.


Royalty Rates

Once you have decided on the type of deal for which you are looking, you need concentrate on the basics of the contract you are negotiating. Royalty rates are one of the key determinants of the financial success of your game. However, you may negotiate a nice royalty, but if the publisher never re-coups their money it will be irrelevant.

We Need How Many Logos On The Box?
Obviously, a high royalty rate is better than a low one. However, it is important to understand how the royalty rate is determined and how your publisher will get your game into the hands of buyers all over the world.

If you select a publisher to handle your title that sublicenses the game to other publishers in the major markets, your "high" royalty rate may end up being quite low. This is because you will receive a percentage of percentage. For example, if you give worldwide rights to a publisher that is headquartered in the United States but does not have a distribution network outside of North America, that publisher will receive a royalty rate as well from their international publishing partners. Your North American publisher may be granting a 45% royalty rate to you, but that rate is a percentage of the rate that they negotiated with each of their distribution partners.

To offset these losses you can state in your contract that you will have one rate for the territories where the publisher has direct distribution, and a separate rate for any territories where the game is sublicensed. Keep in mind that more companies in the mix means less margins. Look at this factor when you are selecting your initial partner in a worldwide deal. Do they have the depth of distribution that you require? Is the US company you are dealing with going to sell the title to a Pan-European company who will in turn sublicense it to country-by-country publishers?

What Am I Receiving A Percentage Of?
Just as important as understanding your publisher's business model is to understand on what your royalty is based. The definition of "Net Receipts" can vary from publisher to publisher. This definition of "Net Receipts" will determine how much you actually make per game sold so be certain you pay careful attention to this section of the contract. You may have a high royalty rate, but if the deductions prior to that rate are aggressive you will end up with less money in the long run. As a general rule, net receipts should only cover the following:

  • Amount billed by Publisher from the sale, lease, or license of each Product
  • Deduction for any credits or returns on refunds

Net receipts should not include items such as:

  • Cost of goods from manufacturing
  • Insurance
  • Shipping
  • Withholding taxes from foreign countries

Having your royalty report include the number of units manufactured, sold, and the wholesale price can make your accounting job much easier.

Going Up?
Escalating royalties are an option as well. These royalty rates start at a lower level but increase as the game sells through. The changes in rates come as defined milestones in the contract. Pay close attention to what these milestones are, they should be goals that you and your team feel are achievable.

You should also limit the number of free copies that a publisher can distribute. Publishers and distributors use these copies for reviews and marketing as well as sales into the retail channel. The publisher will be incurring losses for every free copy that they as well, but it is a good idea to put a max on these. In extreme examples these free copies could lead to piracy. It is recommended that the publisher have a code on these versions of the game that can be traced. This will not prevent the initial piracy, but it will be used to trace the problem to the source.

My Money Went Where?
Most business relationships start in good faith. Few companies enter an agreement knowing full well that the deal is going to blow up in thirty days. Bad things can happen though. Make sure your contract allows you to audit the publisher's books if you have reason to believe that the reports are not accurate. These audits are usually held at the publisher's office for a set amount of days. Be careful in exercising this clause, all business is based on a large amount of trust and storming into the accounting department with a troop of auditors is not a good way to further this cause. You can track the estimated sales of your project by monitoring PC Data and keeping in touch with any sub-licensors that your publisher's uses.

Do I Want A Want A Higher Advance Or Royalty?
This depends on the needs of your team and/or company. Do you need the upfront cash in order to complete the game or can you finish the project with the cash you have on hand? Advances and royalties are directly connected, the more you get of one, the less you will see of the other. There are exceptions to this rule, but they are few and far between. The more risk a publisher has to incur on the advance of the game, the less chance there is of you seeing backend royalties. If a publisher can take less risk on a product, they will be more willing to share the rewards with you.

Payment Schedules
The payment schedule you can negotiate is directly related to the type of deal you are seeking. If you are receiving advance payments from the publisher, review the milestones for these payments before you sign the contract. For a Pick Up deal these milestones are usually very basic. As a general rule they are:

  • Signature of Letter of Intent
  • Signature of Contract
  • Receipt of Gold Master
  • Receipt of Localization Kit
  • Release of Product

If the publisher is financing your game in one of the other three models that we outlined earlier this can be much more complex. Make certain you have at least one payable milestone due per month. This will ensure you have the revenue coming in to pay your overhead. It also keeps the team motivated as they always have a goal in sight. Use a meeting or a conference call with the publisher to establish a timeline of milestones that you each feel is acceptable.

Once these milestones are defined in the contract, set a time limit for the approval of each milestone. If the publisher does not approve a milestone they should send you a written bug report and give you a set amount of days to correct these problems. All contracts should have a clause that states the publisher cannot unreasonably withhold the acceptance of a milestone. Once the milestone is approved there should be a clearly defined number of days before the payment is due with penalties for late payment.


If You Build It, Will They Come?

Even the best game in the world will not see it's full potential without a well-organized marketing campaign. If possible, you may want to negotiate a set marketing budget into your contract. This number can be part of the advance in the contract or can be an addendum to the contract. Once a set number has been agreed upon you should receive a package outlining the publisher's strategy and the channels they will use in order to market the game effectively to the public. You should have this package submitted to you prior to the completion of the contract. Always verify exactly what the publisher will need from you in order to do their job effectively. They will most likely need art assets, demos, and the unique selling points of your game. Once the marketing campaign has begun, check in with the marketing department to verify they have everything they need and ask for the costs and samples of the material.

Be certain your company's logo is printed on the box as well as included as an .avi at the beginning of the game. This brand building is as important to your company as it is to the publisher. When it comes time to negotiate your next game, you'll be able to point to the store shelves and have people recognize your work. With time some developers build the same brand recognition that publishers have. Id Software and Blizzard are prime examples of this.

What Is The Market, and Is It Covered Properly?
Make sure the market that the publisher will be covering is clearly defined in the contract. If a publisher is not going to support a title in a given market and you can secure a separate deal for that area, be certain that those rights are excluded from the contract. Simplify your job by having qualified publishers handle some additional territories for you. Your Spanish partner can take care of the majority of South America and Mexico while your Portuguese partner can cover Brazil. Also, many of the Australian offices have distribution set up through out Southeast Asia now. Having support like this prevents you from spending too much time searching out deals that could have been easily handled through existing relationships your publisher already has.

If you have signed a worldwide deal with a publisher or a contract that spans multiple territories, make sure that the territory is being supported through marketing and sales. Having a clause in your contract that sets a time limit on the release of products in these secondary territories gives you the option of taking the rights and selling them on your own if the publisher has not located a suitable partner.

Your title should also be properly localized into all appropriate territories. Keep this in mind from the very beginning of the development cycle. By submitting a localization summary to the publishers with your proposal you can help them know if the game will be a viable choice for them. For example, your game should be able to support the double-byte characters used in Asia and other parts of the world. By not supporting this, you will alienate a large market and potentially hurt your chances of getting a deal. As a general rule the publisher should handle the translation and the development team should integrate the translated text and voices.

It is very important that you make certain your title is properly handled in all of the major territories. If your game is not being actively marketing, the rights should revert back to your company.

Cross Collateralization

If you are selling more than one title to a publisher at a time, you need to aware of the implications of cross collateralization. By allowing the publisher to cross collateralize your titles you are allowing them to apply the sales of one game across to the next. In other words, if your break-even point is 400,000 units sold and one sells 300,000 units while the other sells only 50,000, you will not see a royalty check. However, if the break-even point were set at 200,000 units per title, you would already be seeing a royalty check for one of your titles. Make sure that each title you sell to a publisher has it's own contract and terms. This will make sure you do not lose revenue on one title due to poor sales of another.

Intellectual Property Rights

Unless you have been contracted by a publisher to develop a game based on one of their existing licenses, the work you've put into creating the characters and world in your game should be yours. Unless the publisher is willing to pay an additional fee to purchase the rights to this IP you should retain these rights. Important rights to cover in your contract are:

  • The name of the game
  • Characters
  • Story
  • Trademarks
  • Logos
  • Source Code
  • Art
  • Illustrations
  • Music

Many publishers will be adamant about acquiring these rights. If you do grant these to them, make sure that your team will be the ones responsible for developing games based on this IP.

Publishers have more incentive to promote a franchise that they have a long term stake in. Simply state in the contract that your team will be the only ones to do these games or at a bare minimum have the first option to work on them. The same rule applies here as it does with the general sales of your game. If the IP is not being used it should revert back to your company.

Term Of The Contract

You should be certain that you keep the term of the contract realistic. Too much time can result in confining situations where you have revenue opportunities down the road that you cannot act on. Too little time does not give the publisher a sufficient amount of time to run through the life cycle of a game.

Today's games can stay on store shelves for many years with the proper support from a publisher. Typically life cycles are as follows:

  • Initial release
  • Add-on release
  • Price reduction
  • Bundle with Original and Add-on
  • Special edition with more content or a strategy guide
  • Value release or "Classics" release

There is little need to take the next step in the process until sales from the last version have begun to taper off. For this reason, the time period in these life cycles will vary from title to title. Generally a three to five year term is acceptable.

Engine Rights

If your team has spent the last two years making the next great engine, there is no reason to sign those rights away with the first title based on that technology. Superior technology is one of the greatest keys to securing a publishing contract so publishers will attempt to take an exclusive on a particular engine to prevent competition.

This engine has the potential to create extra revenue for you in the future. Epic, Id, and Monolith all generate revenue from the license of their engines that were initially created for their own projects. In preparation for this, make sure that your engine has the proper documentation that you will need in the event it is ever licensed to other developers.

If the publisher does demand some form of exclusive on the game's engine, make sure the terms are realistic. If you are developing an RPG, don't let the exclusivity cover all games in a certain time span, especially if that engine can be used to create shooters, or RTS style games.

Movies, Toys, Backpacks... Pencil Sharpeners

Ancillary rights are an important part of the industry today. Go in any toy store in your local mall and you will see a nice collection of toys based on the franchises in the industry. The Tomb Raider movie is in development and there is even talk of a Perfect Dark television series. The game industry has been acquiring licenses for years based on books, television shows, and movies, but what happens when the opposite is true?

korea.gif

Starcraft in Korea

Some rights are just not worth the trouble. The margins you will see in the end compared to the time spent licensing out these rights do not work out. As a general rule on a successful franchise you should look to books, toys, television shows, and movies. Concentrate in these areas first. Starcraft licensing in the Korean market and Pokemon around the world are great examples of stellar licenses, but these are only two of the thousands of games released since 1998. You should seek an equal split for the advance and royalties on these rights.

It's Done!! Now What?

It's time to start looking at sequels and add-ons. Building a good relationship with your publisher is the key to a long-term franchise that is beneficial to both parties. Publishers will want the rights to add-ons and sequels. Make sure your company will be developing these products or at least have the first opportunity to do so. Secondary platforms are another case. It is becoming more and more common for one publisher to handle PC rights, while another handles the consoles. A general rule is to offer your primary publisher an exclusive period of time to decide if they would like to do the secondary platform. If they do not want to pursue this you are open to shop the game to others in the industry.

What if your next title has nothing to do with the first? Unfortunately at the time you are signing your contract you will know very little about how it is to work with the publisher. If at all possible, keep titles irrelevant to the contract out of the contract. If you have a great relationship with the publisher the opportunity will be there later for you to pitch this title and pursue a deeper relationship.


Worldwide Versus Country By Country: Which Is Right For Your Team?

If your team has funded the majority of the game and you are in a strong negotiating position you should investigate the two primary business models available to you and choose the one that fits your goals the best. Should you choose one of the major worldwide publishers or take your title country by country and spread your risk? Each model has its own advantages and disadvantages.

Advantages of A Worldwide Model
A worldwide publisher carries strong brand recognition with consumers. Many gamers make purchasing decisions based on the publisher behind the game. The sports franchises of EA and 989 Sports are classic examples of this trend. Many consumers will buy the newest version of these games every year with little or no regard for previews or reviews. Simply the notoriety of some of the big publishers is an advantage in its own.

Another advantage of the large publishers is the amount of money they can invest in marketing and shelf space. Any company will make certain the public is aware of their products, big companies will invest in television advertising and larger booths at trade shows in order to make sure their games are the topic of conversation.

The acquisition of shelf space is also a major factor with publishers. Most worldwide publishers have large amounts of shelf space reserved for their lines. This prime shelf space in retailers will guarantee that your product is seen by the consumer.

Worldwide publishers also have the financing to support games at much earlier stages. Established teams can approach publishers with a design document and a technology demo and have a good chance the project will be acquired. This provides you with the security of revenue as long as the publisher is happy with the milestones that are presented.

Finally, publishers offer you a simplistic contact base. You have the entire world covered as far as distribution, but you only have to manage one contact. This makes life much simpler for companies as you spend much less time handling royalties and bug reports, marketing and press inquiries and more time doing what developers do best: Making great games.

Disadvantages of a Worldwide Model
One of the prime disadvantages of a worldwide publishing model is the fact that the bigger houses will overlook many territories. Countries like Portugal, Brazil, and South Africa may not seem like much, but added together the advances from these territories can be quite significant. When you grant worldwide publishing rights to a company, be certain they will cover all the territories available to you. We will discuss how to do this a little later.

The evaluation time for a large publisher is another disadvantage. Small publishers can make a decision in a matter of days. Large companies with offices spanning the globe can sometimes take three to six weeks. The titles must be shown to and approved by each territory or a minimum of the primary US and European offices. Within these offices, the game will be shown to and approved by multiple producers, acquisition agents, and project managers. Once approved, the game usually goes to a board that makes the final decision. In the time that it takes some worldwide publishers to "green light" a game, individual contracts can be signed for the majority of the territories of the world with country by country model.

Worldwide publishers handle all of the marketing, PR, shelf space, and manufacturing costs across the globe. By spreading your risk across several smaller companies you can offset some of these costs. Keep in mind that all money spent to promote your title, must be re-couped prior to you receiving a royalty check. In addition to this, any territory that a publisher sub-licenses to will show a significant drop in your royalty rate. Another general rule of thumb is that the higher an advance you ask for, the lower your royalty will be. Keep all of this in mind as you are researching the business model that will best help reach your goals.

There is always a risk of having your title canceled from a worldwide publisher as well. If the publisher releases several titles that do not live up to their expectations, you may find your project canceled as a means of diminishing their own risk. Acquisitions by other publishers are also common and can have the same effects. Your title may not fit the image of the new owners or they may have a competing franchise. If you have a long-term contract with a company, this is something you should be prepared for in the unfortunate event that it happens. In a sense -

Your advances are only as good as your last milestone payment. No matter how secure your contract is, publishers will almost always demand a clause for termination with little or no cause. For this reason it is recommended that the contract states if the project is cancelled for any reason, the publisher must pay the next two milestones. This will give you enough time to locate a new publisher or diminish the chances of cancellation in the first place. Chances are your title is much further in development at this point and securing a new partner will be much less difficult. Many publishers will require that upon signature of a new agreement you must re-pay all of the advances that they have sent you.

You may also see much less mind share from a worldwide publisher than you would from a country-by-country publisher. These companies release many titles in a year and your title may be only one of these. Don't let your project get lost in the shuffle. Make sure you are in constant contact with your producer or the contact at the publisher. This will keep you in the front of their minds at all times.

Simply negotiating a contract with a big publisher will take more time than with a smaller company. Larger publishers have a legal division and a much larger chain of command to work through than country-by-country publishers. Many times these companies will have template contracts with very little room for negotiation at all. It is much easier to start with a publisher's contract when the negotiations begin. Don't waste your own time and money on a contract that will just be discarded by publishers or delay the process as they have their team review each point. Ask for their contract and have your lawyer look it over. This will save you a lot of time and stress in the long run.

Advantages Of A Country By Country Model
Country by country publishers will offer much higher royalty rates than worldwide publishers will. You will be dealing directly with the publishers in these territories, many times the same partners that the large publishers use!!! For these reasons, the margins are higher and you can receive a larger portion of the pie. You do not see your percentages depleted as the checks filter through multiple companies. When the retailers pay these publishers, you receive a check immediately.

The marketing campaigns of these companies are much more focused as well. They only handle sales in their native country and they know how to reach the gamers in their territory effectively. When dealing with different publishers in each market, you will see the variety of campaigns that they use. Many worldwide publishers will use one blanket strategy and you will not see the benefits of this localized marketing.

You will also have a much larger pool of partners to choose from with a country-by-country model. If you can reach beta stage with your title, you can have as many as five times the available partners to choose from. There are roughly thirty to forty companies in the world that can safely fund a title from concept on a worldwide model. With a country-by-country model you can have as many as twenty partners in a given country to choose from. This increases your chances for a bidding war and also allows you to select the publisher that you are most comfortable with.

Deals happen quicker with country-by-country publishers. This was addressed earlier when it was detailed how much time it takes many worldwide publishers to make a decision on a game. Many country-by-country publishers only need to show the game to their evaluation staff, and then have the heads of the company quickly review it. Offers can arrive within two days of some of these companies receiving packages. The contracts are also much easier to negotiate. If you are using an agency, chances are high that your agent has seen this company's contract before and they can help you speed this process up. Even if you are handling the sales of the game yourself you will find that country-by-country publisher contracts are much more forgiving and sometimes half the size of a worldwide publisher contract.

Country by country publishers will also provide you with much better mind share than most worldwide publishers. They release only a fraction of the games a year that the big companies release, so the title means as much to them as it does to you. You will be able to receive instant feedback on the marketing and work with them to correct any problems or execute new sales strategies. With their interests closely aligned to your own you can be certain that your title is being handled properly.

Disadvantages Of A Country-By-Country Model
The primary downside of selling your title country by country is that you must have your title near completion. These companies incur much more risk per title than the worldwide publishers. As a result they want to be certain of what they are buying. On occasion the game can be sold at demo stage, but the demo must be quite complete and very good.

The advances you see from a country-by-country model are smaller, but the shear number of advances you will receive counters this fact. The risk here for developers is making sure that a significant number of publishers pick the title up. As you are not requesting development funding, the chances of a high seven-figure deal are slim. But they are not unheard of. This situation is not the norm, but it certainly helps when all your costs are covered from one territory and you still have ten or fifteen more to sell into.

There is a smaller chance of landing a publisher with the name recognition you desire in this model as well. The country-by-country publishers may be well known in their own territory, but they may not carry the weight you desire for your next negotiation in the worldwide market. The ability to say "Our last title was carried by X publisher" is a huge benefit when negotiating contracts down the road. The country-by-country model may provide you with a deal with a division of one of the worldwide publishers, but you will most likely end up with a company that few outside of that market recognize.

Using this model also makes it difficult to place titles in the US and the UK. Where other countries around the world have as many as 20 companies how handle single territory deals, the US and the UK have very few. Most of the worldwide publishers are based in these countries and they prefer worldwide rights or nothing. There are still several options in the US and UK, but you will find the search much more difficult here if Europe and Asia are already spoken for by a variety of different publishers.

There is a significantly larger time investment in this model as well. Much more time will be devoted to selling the title country by country. It is possible to send your title to as many as two hundred to three hundred publishers on this model as opposed to the thirty to forty worldwide publishers. Once you add the follow up calls and negotiations into this, there is a large amount of time that could be spent coding or developing art resources. Your company may not have the resources to handle this time investment. Moreover, you may not have these contacts in the first place. This is a significant factor to consider.

Once the deals are signed in each of your target countries, you will have to manage that many more PR requests, localization kits, royalty reports, and payments. With a worldwide publisher you will have one liaison to work with in this capacity, with a country-by-country model you will have one from each company. Either a full time employee in the office or an agency can alleviate this concern as well as time investment mentioned above.

Summary

Creating a great game and negotiating a contract that ensures you make money are two keys to success in game development. Know the kind of deal you are looking for and in which areas you should negotiate most aggressively. If you use the information in this paper to create a plan for your negotiations, you will have an excellent head start in structuring a contract that will maximize your revenue and protect your company and it's property.


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