"Famous Last Words"

Nothing but Net Profits (December 2002)

Dear Jim,

We’re a small PC games company with an offer on the table for our first game. We funded development ourselves, working in our spare time.

If we make this deal, it will be a budget line game on a small label distributed through one of the majors.

The offer on the table is that we’ll receive 50% of the net profits!

50% of the profits on our first game seems like a great deal! How does it look to you?

First Timers.

Dear First Timers:

“Net profits” deals can be attractive, but here’s a couple of issues to weigh:

1. These offers may not provide for any royalty advance or guarantee. You’ve invested in the game and have no assurance of receiving any money. In effect, the publisher is using you as its bank.
2. You only get 50% of net profits if there are any profits. Always check the definition of “net profits” and beware. If this were the movie business, even “Titanic” and “Gone with the Wind” may not have returned "net profits".
3. Your question said you were being distributed “on a small label … through one of the majors.” If you are receiving 50% of net profits, consider whose “net profits” are we talking about? The small label’s? The major’s? Your return is probably dependent on the deal the small label made with the major. If it is getting 25% of net, you may actually only see, at the very best, 12.5%. With no advance or guarantee, that may not be a very good deal.
4. Are there iron-clad marketing guarantees in your contract? Remember, you probably have no advance or guarantee. With no marketing requirements, your game might be lost in the major’s line. The major, and even your label, will make its own decisions, and have its own priorities, regarding which games to feature based on many factors, all of which are beyond your control or even influence. If they are paying you 50% of net profits, they may decide to put resources elsewhere into games they feel can be more profitable to them. Or they may have made aggressive guarantee promises or other financial commitments to competitive games that force them to be more aggressive in bringing them to market. Either way, there may be little incentive to aggressively market your game. With the enormous and competitive demand for shelf space at retail, in four weeks, your game could be history.

You might decide that this “net profits” deal is the way to go. That is your business decision. But be sure you understand the lay of the land before you sign the paperwork.

My own recommendation is always that developers remain developers, and not become banks for publishers. In keeping with that philosophy, I would choose not to make a deal for my game unless there were an advance or guarantee that covered my costs plus profit and gave me the chance for an upside. But I’m always cautious about publishing deals that on their face do not cover my clients’ costs plus profit.