Fundamental issues a game developer should pay attention to when negotiating a contract for publication of a video game | In Principle

Contracts for publication of video games are concluded between game developers and companies specialising in publishing games (sometimes referred to “dev-publisher agreements”).

Just a few years ago, the word in the video game industry was that the role of publishers in the process of commercialising new games was on the way out, and the future of the industry was in self-publishing of games by developers. But publishers have not gone away, and still represent a hugely important element of the operation of the entire industry. For game developers, contracts with publishers are one of their key business relationships. The publisher typically provides not only services and knowhow in marketing and distribution of games, but also serves as a fundamental source for financing game development.

So as a developer, it is vital to consider the nature of cooperation with a publisher, and first and foremost what to pay attention to when negotiating the contract with the publisher.

First question: What do we need a publisher for?

Any developer, but particularly one negotiating a contract with a publisher for the first time, should ask themselves at the beginning what they expect from their publisher, and then consider what the publisher will expect of them.

In simple terms, the publisher’s role boils down to three aspects:

• Financing production of the game
• Providing marketing of the game
• Organising distribution of the game and managing relations with distributors.

In practice, not all of these elements will necessarily be involved. Contracts are often concluded where the publisher does not finance development of the game, but handles solely distribution. There are contracts where the developer assumes the responsibility for marketing and does not expect any support in this respect from the publisher. But a classic or full-service publishing contract will cover all three of these elements.

The publisher in turn expects the developer to be in a position to create a work within a short timeframe in the form of a game suitable for commercialisation and offering prospects for good profits. Indirectly, the publisher also expects the developer to possess a qualified team of people allowing the developer to meet this goal. In exchange for its services—particularly when it also finances production of the game—the publisher also expects a fee, typically taking the form of a defined percentage of the revenue from sale of the game.

These mutual expectations point to the fundamental areas typically addressed in the publishing contract, namely:

• Copyright to the game under development and other intellectual property rights
• The publisher’s rights and obligations with respect to distribution of the game
• Rules for financing production of the game and subsequent division of the profits from sale of the game
• The scope and nature of marketing services provided by the publisher.

In this article we focus on two of the most fundamental issues, namely intellectual property rights and financial aspects.

Intellectual property: As the developer, can we retain the copyright to our game?

In the case of many developers cooperating with a publisher for the first time, their first question is how concluding a contract with a publisher will affect their copyright to the game they have created.

In the past, publishers most often expected the developers to transfer their economic copyright to the game to the publisher to the fullest possible extent—particularly in instances where the publisher agreed to finance production of the game. The practice today is different, but as a developer it is still worth closely examining the provisions of the contract governing the issue of intellectual property rights.

Now it is much more common in publication agreements to regulate the publisher’s rights to use the video game (or rather to exploit the bundle of various intellectual property rights involving the game) through the grant of a licence. Thus this is generally a form that is more limited. Nonetheless, publishers often expect the scope of the licence to the IP rights granted them in the contract to be broad, a solution in practice sometimes bordering on a transfer of copyright. It should be examined from the developer’s perspective whether the scope of the licence demanded is truly justified.

Scope of licence granted to the publisher

In terms of the scope of the licence, the following basic issues should be borne in mind:

• Territorial scope (i.e. in what countries the publisher obtains the right to exploit and benefit from the game)
• The platforms on which the publisher will have a right to commercialise the game (whether the publisher will be able to market the game exclusively in box form, e.g. at brick-and-mortar stores, or via certain digital distribution channels like Steam or the Epic Games Store)
• Whether the publisher will have a right to “port” the game to other platforms, and if so which (e.g. in the case of a game developed exclusively for PC, will the publisher also have a right to exploit and benefit from a new version of the game for consoles like PlayStation or Nintendo Switch)
• The right to localisation of the game, i.e. to adapt the language and narrative to make it relevant for users speaking other languages or coming from other cultures.

It should also be considered whether the contract covers derivative works, such as sequels/prequels and merchandise inspired by the game (shirts, toys etc). Sometimes these items can generate significant revenue.

The licence may be exclusive or non-exclusive. The first solution can be disadvantageous for the developer if the developer is considering potential cooperation with other publishers as well, who in certain aspects (e.g. in certain countries) have greater experience in marketing or distribution or can offer better financial terms.

The period for which the licence is granted must also be considered. Various solutions may be applied in this respect, but publishers from the US or the UK often propose clauses defining the licence as “perpetual.” Such clauses should be consulted with a lawyer specialising in the law of the jurisdiction governing the contract, as copyright law does not always allow the grant of a “perpetual” or “irrevocable” licence (more about perpetual licences here).

The scope of the licence is vitally important in terms of the overall contract and not only in the context of intellectual property rights. The provisions governing the scope of the licence usually also define the scope of the publisher’s obligations in the area of distribution of the game, as well as the sources of revenue that will be subject to division between the developer and the publisher as part of the publisher’s fee—more on this topic below.

Finances: Will we receive funding from the publisher to develop the game, and if so, will we have to pay it back?

The second key issue in game publication contracts, from the perspective of both the developer and the publisher, is finances. One of the publisher’s roles is often (but not always) to provide the financing the developer needs to produce the game. This typically takes the form of debt financing, i.e. an interest-free loan subject to repayment out of the revenue from sales of the game.

Apart from the total amount of the financing the publisher is willing to offer (which itself is obviously crucial, as the amount must suffice to cover the production costs of the game), the mechanism for paying out the funding also looms large. Most often funding is provided by the publisher in the form of advances, released gradually upon achievement of certain milestones in the game development process (e.g. drafting of the game design document, completion of a prototype, preparing a vertical slice). Thus the developer should first examine the description of the milestones proposed by the publisher and the deadlines for achieving them. Situations should be avoided where the amount of individual advances is insufficient to cover the costs that will have to be incurred to meet the specific milestones, or where the gap between advances is too long and could disrupt the development process.

It is also worth the effort to precisely define the procedure for acceptance of individual stages. The developer should focus on negotiating solutions such as:

• A set period in which the publisher must accept or reject each phase of development
• An obligation for the publisher to provide a detailed justification as grounds for refusing to accept a phase of the work
• Provisions under which the publisher is deemed to accept the phase of work if it fails to express a position on the work by the stated deadline.

It is also recommended that from the time of approval of each phase, the publisher be required to pay out the next advance of funding within a relatively short time. This precise regulation of acceptance of phases and milestones helps avoid many difficulties during the course of game development.

As the publisher is providing debt financing, the provisions of the publishing contract on repayment of the financing are also crucial. As mentioned, the financing is subject to repayment out of the future revenue from game sales, referred to as the “recoup.” In practice, publishers typically expect repayment of the financing to take total priority over the developer’s benefit from sales. In other words, the publisher expects the monthly sales revenue from the moment of launch of the game to be applied first toward reimbursement of the financing, until the outstanding amount is entirely paid down, and only after that point will revenue begin to be split between the developer and the publisher in the defined proportions (more on this below in the discussions of the publisher’s fee). This approach to repayment of financing is referred to as a 100% recoup, as reimbursement of 100% of the financing takes precedence over the normal division of profits from sales. But sometimes publishers will agree to a lower degree of recoup, even 50%, particularly in the case of developers with a certain reputation on the market. It’s worth trying to negotiate such a solution, as it allows the developer to start drawing profits from its game earlier. A solution involving a rate of recoup below 100% is particularly important considering that most often the greatest revenue from sales of a new game is achieved immediately following its launch. Thus, in absolute terms, even a relatively small percentage of the revenue in the first months can be significant.

Publisher’s fee for services: rules for allocation of profits from the game

Apart from the publisher’s expectation of repayment of financing provided for production of the game, it is also natural for the publisher to expect a fee for the services it provides. The publisher will most often collect this fee in the form of a set percentage of the revenue from sale of the game after the advances for funding the production are recouped. In practice, the division of revenue can differ greatly depending on numerous factors, but it is not unusual to encounter a 20:80 split, where 20% goes to the publisher and 80% to the developer.

In this context, how the revenues subject to division between the developer and the publisher are defined in the contract becomes vital. Often the definitions prove more important than the split as such. How the notions of “gross revenue” and “net revenue” are defined in the contract deserve particular attention.

Gross revenue typically means all sources of revenue counted for division between the publisher and the developer (e.g. revenue from certain digital distribution platforms, revenue from “box” distribution, revenue from “merch” and in-game sales, e.g. extra items used in the game).

The second notion, net revenue, is equally important if not more so. It captures the value of revenue subject to division between the parties in the defined proportions after making certain deductions from the gross revenue of expenses defined in the contract. Publishers often expect that costs, e.g. for conducting marketing campaigns for the game, will ultimately be borne by the developer, which in practice means that they are deducted from the revenue generated from sales of the game prior to the split according to the defined proportions. Net revenue also often reflects other types of deductions, such as the value of returns by customers and other types of expenses which the parties agree will be charged to the developer, e.g. the costs of the quality assurance process preceding launch of the game on certain platforms.

The connections between concepts like recoup, gross revenue and net revenue are depicted in the diagram below: