"Famous Last Words"

Settle a Bet (October 2003)

Dear Jim,

Can you settle a bet? I know we get milestone payments when we turn in code (every eight weeks or so), but my friend says our company is paying for development of the game ourselves. The company has a development contract. The publisher is writing the checks. Who's right? Lunch for a month at Subway is riding on this.

What's Going On?

Dear What's:

The business model for game development reminds me of a game of three card monte. That's the street card game where you think you know where the Ace of Spades is, but when you turn over the card, it's not there.

Payments from your publisher are called "advances" for a reason. They are advanced payments of royalties your company would earn based on sales of the game.

However, because your company has been paid these amounts along the way, before you actually see any royalties, the publisher will deduct (called, "recoup") all these advances from earned royalties until all these amounts (and maybe more) have been recovered.

This results in the odd situation where the developer has, in effect, paid for development of the entire game (maybe several million dollars) out of its own royalties, but when the dust settles, does not own the game and has very little to show for its effort.

No publisher wants to "overpay." We all know budgets are very tight. By the end of the project, all "advances" received from the publisher have been paid out to cover Developer overhead, staff salaries, equipment, and other budgeted costs associated with the game. Profit margins are paper-thin and generally evaporate when schedules or staffing needs inevitably expand during development.

Ownership of the game created using these "advances" is conveyed to the publisher. And unless the developer is strong in its own contract negotiation, at the end of the day it may not even own the core technology developed to create the game. Many development contracts convey ownership of this asset to the publisher along with the game.

Publishers often say that developers are partners in this process. However, if that were the case, both sides would benefit once a game became profitable. Under a system where developers are required to recoup all development costs before seeing any royalties (an increasingly difficult task given the large development budgets), the game is likely to have produced huge profits for the publisher long before the developer has recouped. It should be obvious that every game has two "break even" points - the publisher's and much later, the developer's.

Publishers will forcefully argue that they are taking all the risk in fronting the money for the game, the industry is extremely competitive, and only a few publishers are consistently profitable. And if a game does not sell, no developer is asked to refund unrecouped advances (if this would ever be required, it would be the less-than-amusing equivalent of guaranteeing the publisher that it would acquire ownership of the game for no cost).

While I do not expect this business model to change any time soon, developers should understand how development deals work, who is paying for what, and where all the rights go at the end of the process.

As for lunch, looks to me like you're buying.