by Christopher Natsuume
Creative Director/Co-Founder, Boomzap
There are dozens of tricks that publishers can play when negotiating for a contract. Most all of them are designed to move more risks to the developer and to better protect the publisher. For Filipino developers wanting to make the most of their engagements, here are three particularly common little tricks you should be aware of and prepare for ahead:
1. Back-ended or “Balloon” payments
The costs of development should be paid out at the same rate the developer is incurring them, or as close to what prediction models allow. When publishers refuse to do that and put big balloon payments at the back-end, they are pushing on the risks to the developer, who by then will be forced to accumulate debt and cost through the cycle. If the project does not test well in later stages of development, the publisher can cancel the project and walk away without paying the larger back-end. This leaves the developer on the hook for accumulated costs.
Most Back-ended or “Balloon” payments-based projects are cancelled at the alpha-to-beta stage. At this point, much of the development risks have been removed from the publisher. They can already clearly see if the project will be successful or not. They obviously want to put their financing risks after that point. We don’t want them to do that. This risky part of financing the project should come before that, and that’s how they should earn their percentage.
The Solution: Make sure that a clear vertical slice of the project is fully funded within the early development process. This allows both developers and publishers to see and feel what the final product will be like. This also removes some of the risks from the publisher; and will make them far more willing to create a milestone payment plan that has a fair and equitable distribution of risks.
“Cross-collateralizing prepaid” means that if a developer works on multiple titles, he first has to meet the prepaids for all titles before collecting royalties for any title. Thus, if the developer builds 3 games for $50,000 worth of prepaids each, the developer must first earn $150,000 of royalties across their entire portfolio before they can collect any additional royalty. If one or two of these titles do poorly, or worse, cancelled in mid-development, the publisher is essentially forcing the developer to pay for that failure with the profits of the successful one. Obviously, this wrongly shifts the risk of failure to the developer.
Taking such risk is the publisher’s job. It is for this risk that they earn their percentage. Again, most projects are cancelled around alpha-to-beta stages or when a great deal of the prepaids has been already used. This means that the cost to the developer in a failed title when it’s part of a cross-collateralized bundle is quite large. It can easily eat up most, if not all, of the profits of a marginally successful title of similar size.
The Solution: Simply put, don’t allow publishers to put such a clause in your contract. In fact, it should be specifically clarified that each royalty stream is handled independently.Reputable publishers are willing to do this.
3. Definition of “Net Receipts”
”Net receipts” have no standard legal definition. Thus, these words are meaningless unless they have a clear definition within the contract. A publisher can use “net receipts” to promise a developer its certain percentage and deduct amounts before computing the developer’s royalties. Suddenly, they will start adding marketing, inventory, testing and all other sort of costs that should’ve been the risk responsibilities of the publisher.
The Solution: Every contract needs to have a clear definition of what “Gross” and “Net” precisely mean. Generally, no cost that is under the control of the publisher (such as marketing, testing, etc.) should be allowed into the definition of net, which should be as close as possible to the actual monies received from sale of goods. The publisher should subtract minimal costs from the receipts in computing for the developer’s percentage. Reputable publishers know this and won’t argue with developers who demand such.
About the Author
Christopher Natsuume has been in the industry since 1994, and has worked on games for PC, Xbox, Playstation 2, Wii, and iOS. He is currently the Creative Director and Co-Founder of Boomzap, one of the leading independent game developers in Southeast Asia. With over 20 fulltime staff in the Philippines, Boomzap is one of the largest employers of game developers in the country. He holds a BA from the University of Texas at Austin and an MBA from the University of Washington, Seattle.