CONTRACT KILLER 2: Bad Payment Terms (Back End)
Making sure you get paid
The primary reason for most developers wanting publisher support is the access to funding. That is cash during development to help you finish and launch your game (Front End Payments), and then revenue payments generated by game sales (Back End Payments).
Front End Payments made during development usually come in the form of development fees (also called development advances, minimum guarantees, etc.) – which we looked at in more detail in Part 1.
Back End Payments are usually in the form of revenue share (also called royalties or profit share) that being a percentage share of the revenues that the publisher has received from selling your game, but it should also include money that the publisher has received from other methods of exploiting your game – such as money from exclusivity deals, merchandise sales, licensing of film or TV rights, in-game purchases or in-games advertising (the latter two depending on whether your game has these).
How much does your publisher cost?
Publishers are not doing business with you for free. Like most businesses they want to make a profit, and a publishing agreement gives you an indication as to how they want to make a profit from you and your game.
To guarantee a return on their investment in you most publishers will aim to recover their sunk costs incurred in publishing your game before paying any back-end payments. The amount and timing of back-end payments is likely to depend on the value (or purported value) of the publisher’s costs. As such you need to know what costs the publisher is going to be charging to you.
Check definitions of Permitted Deductions or Net Receipts/Revenues to determine publisher costs
Publishing contracts will deal with the publisher’s costs in different ways, but a common example is to list a range of "permitted deductions” that the publisher can recoup from gross sales revenue. An alternative approach is for the contract to have a definition of "Net Revenues" or "Net Receipts"; that being the amount of revenue left over once the publisher has deducted its costs.
In either case it is not unreasonable for a developer to ascertain exactly what those publishing costs are, and what they include. If a publisher is providing you with any front-end payments then they normally ask to recoup those. Ditto with other publishing costs such as marketing, localisation or QA (depending on what the publisher is offering).
However, where a publisher is looking to recoup any internal costs, particularly costs relating to marketing, then you should query the value of those. Internal publisher costs can easily be inflated, and might not represent good value to the developer. For example, it is reasonable for a developer to ask for a publisher's recoverable marketing costs to be limited to third party costs only (i.e. those costs incurred where the publisher engages external marketing or PR support leading up to game launch).
A publisher should be able to provide evidence of incurring its publishing costs. Ask to see evidence of invoices from third party suppliers so that you can verify this against the costs deducted by the publisher from gross sales revenue.
Where does the publisher deduct its costs?
The most common approach taken by publishers is for them to recover their sunk costs from gross revenues generated by your game’s sales at 100%. However, not all publishing contracts are created equal so check these payment terms in every contract.
In some (worst) cases the publisher may look to recover their costs from your share of royalties only. This is grossly unfair for several reasons because:
- It ignores all of the investment that you have put into your game before signing with the publisher
- The publisher makes profit from day 1
- It takes you much longer to receive any back-end payments as the publisher is recovering their costs from a smaller pool of revenues
- This can lead to cashflow issues post-launch if you are relying on back-end payments to keep your business afloat
While turning down money is hard you should seriously consider the deal if publisher is recovering its costs from your share of revenues only.
Best Case Scenario
The best case scenario for a developer is where a publisher pays a small royalty on day 1 sales and recoups its permitted deductions from the rest. The % of back-end payments paid to developer should then increase over time as publisher recoups 50%/75%/100% etc of publishing costs.
However, this is not offered by most publishers. The most common approach is for the publisher to recoup its publishing costs from game revenues first at 100% with royalties only being paid to the developer after this time.
- Check your contract to see what costs the publisher is looking to recoup from selling your game. These may be in the definitions of Permitted Deductions or Net Revenues/Receipts.
- Does the contract require the publisher to provide evidence of incurring cost? If not, add an obligation in.
- Does the publisher recover their costs from your share of revenues only? If yes, change it! If the publisher insists on this payment term then be prepared to walk away.
- You might not end up with the best case scenario, but any deal needs to work for you.
Thanks for reading. Part 3 of Contract Killers will be out next week.
Missed Part 1? Find it here.