Features

Negotiating Contracts That Protect Your Title and Team

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?

join | contact us | advertise | write | my profile
news | features | companies | jobs | resumes | education | product guide | projects | store



Copyright © 2003 CMP Media LLC

privacy policy | terms of service