Tom: Foreign Language Translations - The games were to be delivered in English and also in eight foreign languages, with Activision supplying the translated voice and text and the developer incorporating them into the games for the localized versions (9.1). Additional localizations would be paid for by Activision at a negotiated price not to exceed $10,000 each (9.2).
Chris & Dave: Developing eight language localizations in double-byte enabled code is expensive. Spark is required to provide these localizations at no extra cost, so presumably Spark factored in this expense when it was negotiating the advances.
Tom: Advance Payments - Activision was to pay a total non refundable, fully recoupable advance of $8.5M US for the initial game, as set out in Exhibit A., the Milestone Schedule, and then negotiate in good faith the advances for the second and third games. But the advances for each of the second and third games would not exceed the advance paid on the initial game (10.1).
Chris & Dave: Section 10.1 sets a maximum on the advances, but no minimum. If the parties have a good relationship, then this is not a problem. But if the relationship is rocky, negotiating a large advance for the next game could be more difficult.
Tom: Additional advances could be added to the recoupable advances to be deducted from the Developer’s royalties if Activision had to pay another developer to provide work on the Games (10.2). The negotiation for the advances for the second and third Games will commence eight weeks prior to the completion date for the game then in development.
If the negotiations can not be completed in time, Activision agreed to make “bridge funding” payments, deemed Additional Advances on the future games, to allow Spark to retain its key personnel and maintain operations through the negotiation period (10.3). All Advances were fully recoupable from developer’s royalties and cross-collateralized across all platforms for each Game. But Advances can only be recouped from the royalties from the Game for which they are advanced (10.4).
Chris & Dave: The definition of “Advance” includes licensing fees paid by Activision to license third-party software and all of Activision’s costs to complete development. Part of Spark’s complaint is that these costs were substantial, and in Sprark’s view, excessive.
Tom: Royalty Rates - There are escalating royalties for each sold, or licensed, Game units from 20% up to 35% with 5% increase at 1,000,000 units and each 1,000,000 unit level thereafter up to 3,000,000+ (11.1). The “Adjusted Gross Invoice” amount is defined as the gross amount from sales and licenses, less the usual taxes, customer reimbursements, promotional amounts for discounts, rebates ad promotional allowances known at DFI (Deductions from Invoices) and coop (Cooperating Advertising Expenditures), cost of goods, first and third party royalties and license fees, returns, price protection and the return reserve.
Chris & Dave: These broad carve-outs from the definition of net sales significantly reduce Spark’s chances of ever seeing any royalties. Many developers try to avoid or limit co-op advertising and other marketing expenses because they can be significant and virtually anything can be classified as marketing (if it’s not classified as part of the Cost of Goods).
Tom: “Cost of Goods” is defined as the cost of materials, manufacturing, packaging, replication, and delivery, including freight and fulfillment charges (11.2).
Chris & Dave: This definition is typical, but some developers negotiate a fixed or maximum deduction for the Cost of Goods.