Miguel Oliveira, Michael Mei, Lukas John,, David Solari

Delivered at Casual Connect Seattle, June 2006

Transcript from : Negotiation and what to look for in a contract

Moderator: Miguel Oliveira, General Manager, Blue Fish
Panelists:
Michael Mei, Business Development, Reflexive Entertainment
Lukas John, Managing Director / Co-Founder Snowstep Development
David Solari, VP Online Gaming, Codemasters

This panel identified things that a game developer should look for in negotiating a distribution or publishing deal. The panel was comprised of representatives of the developer, publisher and distributor communities.

Distribution Deals
Worldwide there are roughly 50-70 significant game portals (e.g., RealArcade) through which a developer would hope to have his games distributed. Nearly all distribution deals are on non-exclusive basis and no one makes any money until your game gets sold. For this reason, securing distribution for a game is relatively easy. The larger question is what kind of a deal you will get. If a distributor is looking to fill a need in a particularly category and you’ve got an appropriate title, that gives you more leverage. And if you’re flexible in doing the type of deal the portal wants, you’re more likely to get an agreement.

What is the single most important item in a contract that needs to be discussed?
The definition of compensation. For instance, the definition of ‘Net Revenues’ can vary widely. Some agreements allow the distributor to subtract their Cost of Goods Sold (e.g., bandwidth) to derive the revenues upon which your royalty will be calculated. And various formulas could allow the distributor to subtract affiliate costs, which if not properly defined might allow a distributor in theory to create affiliate deals in which affiliates receive 90%-95% of the revenue, leaving only a fraction of the revenues generated available upon which to base the developer or publisher royalties.

The length (term) of the agreement.

The scope of the license to your IP (intellectual property) and the length of time over which you are extending these rights. Does your IP license extend only to that which has already been created or successive IP development as well?

What gives a developer better leverage in negotiating the best distribution deal?

Existing successful IP (e.g., track record by developer in creating popular games or an existing game that is already selling well on its own).
The distributor has a specific category need that you can fulfill.

What is the one item that you weren’t expecting in your negotiations that then came up as an issue?
Legal venue. The location (state and country) of the legal venue that is defined in your agreement. For instance, if you have a deal with RealNetworks, it is likely that the venue for legal jurisdiction will be in Seattle, Washington. And if things resulted in a lawsuit between you and RealNetworks you would have to bare the costs of bringing your team to Seattle and your attorney may not be familiar with the laws of that jurisdiction (e.g., each state in the USA has its own laws that apply to matters of commercial disputes).

Exclusivity. One panelist stated that if a distributor wants exclusivity he would walk away from the deal. Another panelist said there would have to be some consideration given in exchange for exclusivity, such as cash.

What is your one big recommendation?
Create options for yourself. Negotiate multiple distribution relationships at the same time. You will become smarter by being able to compare the terms that are being offered to you. And everybody is open for negotiations.

You don’t have to sign every deal. Be sure this is a win-win situation. They earn money and you should too.

Hire a good commercial lawyer who is experienced in intellectual property law.

Negotiate the shortest term possible (i.e., 12 months or less). The market changes quickly and a shorter term gives you more options to make adjustments.

Publishing Deals
Negotiating distribution deals may be outside of the interest, knowledge and available resources of a small game developer. For this and other reasons it was suggested that many developers would benefit from working with a publisher. Potential benefits include:

Achieving distribution for your game(s) with the 50-70 game portals that really matter. It can easily cost a developer $2,000 to $5,000 to negotiate each contract as well as other opportunity costs. A good publisher should be an expert on the market and be able to represent your interests well when negotiating on your behalf and have existing relationships that it can leverage.
Faster time to market. A publisher can provide such things as QA, marketing, support, market insights, and perhaps upfront cash to finance development.
Risk reduction. Not every game is a hit and a publisher may be willing to provide you an advance to fund your development. This protects a developer’s downside and could enable a developer to be more productive.

General advice that applies to selecting a publisher and negotiating your relationship with them:

Everything is negotiable. Recognize your own needs, those of the publisher and what they can offer. Questions you might ask:

Will your publisher manage your IP into other areas beyond your current product? What control of your IP is the publisher asking? How long does this control of your IP last?
Are there upsides for which you won’t have to do any other work? For example, Game Lab (a game developer), is entitled to earn royalties from distribution deals for other platforms and channels (e.g., mobile and retail) that its publisher, Play First, secures. Likewise, Play First would be responsible for any development required for this use of Game Lab’s IP.

Start your conversations with potential publishers early in your game development process before you actually need their help. A publisher can provide a lot of value before you have a finished product.
Evaluate the publisher’s track record.
Consider having some control of your IP revert back to you if the publisher is not successful is achieving certain objectives. You might for instance have a carve out that says if distribution on a given portal has not been achieved within six months that you as the developer have the right to secure a deal directly with that distributor.
Hire a good commercial lawyer who is experienced in intellectual property law.

What is a typical royalty rate you might see in working with a publisher?
The panel said that every deal is different and that there are too many variables to offer a specific formula. That being said, one person offered that a royalty rate of 25% is something that you might see. Examples of variables that will affect your royalty rate include:

The current state of your IP (do you have a finished game? Is the product already being sold and how popular is it?)
The amount of cash you require to finance your game development.
Your track record of success.
The term of the agreement and the scope of IP control that you are providing. Does your IP license extend only to that which has already been created or successive IP development as well?

DOWNLOAD

Miguel Oliveira (email)

Michael Mei (email)

Michael Mei has been actively involved in casual game publishing and distribution. Michael focuses on securing new business initiatives for Reflexive, and also seeks to expand the Reflexive Arcade Affiliate Network. Prior to joining Reflexive and the casual game industry, Michael spent his career in the Consumer Products and Telecommunications industry

Lukas John (email)

David Solari (email)

HOME \| LECTURES & ARTICLES \| STUDIO BUSINESS \| NEGOTIATION slides (104 KB) Delivered at Casual Connect Seattle, June 2006 Transcript from : Negotiation and what to look for in a contract Moderator: Miguel Oliveira, General Manager, Blue Fish Panelists: Michael Mei, Business Development, Reflexive Entertainment Lukas John, Managing Director / Co-Founder Snowstep Development David Solari, VP Online Gaming, Codemasters This panel identified things that a game developer should look for in negotiating a distribution or publishing deal. The panel was comprised of representatives of the developer, publisher and distributor communities. Distribution Deals Worldwide there are roughly 50-70 significant game portals (e.g., RealArcade) through which a developer would hope to have his games distributed. Nearly all distribution deals are on non-exclusive basis and no one makes any money until your game gets sold. For this reason, securing distribution for a game is relatively easy. The larger question is what kind of a deal you will get. If a distributor is looking to fill a need in a particularly category and you’ve got an appropriate title, that gives you more leverage. And if you’re flexible in doing the type of deal the portal wants, you’re more likely to get an agreement. What is the single most important item in a contract that needs to be discussed? The definition of compensation. For instance, the definition of ‘Net Revenues’ can vary widely. Some agreements allow the distributor to subtract their Cost of Goods Sold (e.g., bandwidth) to derive the revenues upon which your royalty will be calculated. And various formulas could allow the distributor to subtract affiliate costs, which if not properly defined might allow a distributor in theory to create affiliate deals in which affiliates receive 90%-95% of the revenue, leaving only a fraction of the revenues generated available upon which to base the developer or publisher royalties. The length (term) of the agreement. The scope of the license to your IP (intellectual property) and the length of time over which you are extending these rights. Does your IP license extend only to that which has already been created or successive IP development as well? What gives a developer better leverage in negotiating the best distribution deal? Existing successful IP (e.g., track record by developer in creating popular games or an existing game that is already selling well on its own). The distributor has a specific category need that you can fulfill. What is the one item that you weren’t expecting in your negotiations that then came up as an issue? Legal venue. The location (state and country) of the legal venue that is defined in your agreement. For instance, if you have a deal with RealNetworks, it is likely that the venue for legal jurisdiction will be in Seattle, Washington. And if things resulted in a lawsuit between you and RealNetworks you would have to bare the costs of bringing your team to Seattle and your attorney may not be familiar with the laws of that jurisdiction (e.g., each state in the USA has its own laws that apply to matters of commercial disputes). Exclusivity. One panelist stated that if a distributor wants exclusivity he would walk away from the deal. Another panelist said there would have to be some consideration given in exchange for exclusivity, such as cash. What is your one big recommendation? Create options for yourself. Negotiate multiple distribution relationships at the same time. You will become smarter by being able to compare the terms that are being offered to you. And everybody is open for negotiations. You don’t have to sign every deal. Be sure this is a win-win situation. They earn money and you should too. Hire a good commercial lawyer who is experienced in intellectual property law. Negotiate the shortest term possible (i.e., 12 months or less). The market changes quickly and a shorter term gives you more options to make adjustments. Publishing Deals Negotiating distribution deals may be outside of the interest, knowledge and available resources of a small game developer. For this and other reasons it was suggested that many developers would benefit from working with a publisher. Potential benefits include: Achieving distribution for your game(s) with the 50-70 game portals that really matter. It can easily cost a developer $2,000 to $5,000 to negotiate each contract as well as other opportunity costs. A good publisher should be an expert on the market and be able to represent your interests well when negotiating on your behalf and have existing relationships that it can leverage. Faster time to market. A publisher can provide such things as QA, marketing, support, market insights, and perhaps upfront cash to finance development. Risk reduction. Not every game is a hit and a publisher may be willing to provide you an advance to fund your development. This protects a developer’s downside and could enable a developer to be more productive. General advice that applies to selecting a publisher and negotiating your relationship with them: Everything is negotiable. Recognize your own needs, those of the publisher and what they can offer. Questions you might ask: Will your publisher manage your IP into other areas beyond your current product? What control of your IP is the publisher asking? How long does this control of your IP last? Are there upsides for which you won’t have to do any other work? For example, Game Lab (a game developer), is entitled to earn royalties from distribution deals for other platforms and channels (e.g., mobile and retail) that its publisher, Play First, secures. Likewise, Play First would be responsible for any development required for this use of Game Lab’s IP. Start your conversations with potential publishers early in your game development process before you actually need their help. A publisher can provide a lot of value before you have a finished product. Evaluate the publisher’s track record. Consider having some control of your IP revert back to you if the publisher is not successful is achieving certain objectives. You might for instance have a carve out that says if distribution on a given portal has not been achieved within six months that you as the developer have the right to secure a deal directly with that distributor. Hire a good commercial lawyer who is experienced in intellectual property law. What is a typical royalty rate you might see in working with a publisher? The panel said that every deal is different and that there are too many variables to offer a specific formula. That being said, one person offered that a royalty rate of 25% is something that you might see. Examples of variables that will affect your royalty rate include: The current state of your IP (do you have a finished game? Is the product already being sold and how popular is it?) The amount of cash you require to finance your game development. Your track record of success. The term of the agreement and the scope of IP control that you are providing. Does your IP license extend only to that which has already been created or successive IP development as well? DOWNLOAD Miguel Oliveira (email) Michael Mei (email) Michael Mei has been actively involved in casual game publishing and distribution. Michael focuses on securing new business initiatives for Reflexive, and also seeks to expand the Reflexive Arcade Affiliate Network. Prior to joining Reflexive and the casual game industry, Michael spent his career in the Consumer Products and Telecommunications industry Lukas John (email) David Solari (email)