The Complexities of Revenue Sharing
Cross-posted from David’s blog, Game Tycoon.
This article was originally published in Game Developer Magazine. It was the fourth in a series of business columns that I am writing for GDM.
Some lessons are harder to learn than others. One of the toughest lessons you may ever learn is that granting someone a generous share of the revenue from your game in exchange for a service (assistance with development; publishing; etc) does not mean that you can assume your incentives are properly aligned.
Say that you give a publisher 50% of the revenue from your game in order to promote the game, to handle customer service, etc. Or perhaps you’ve agreed to develop a game in tandem with a few other individuals and split the future revenue equally. In either case, you’re making an important assumption: that a significant percentage of future profits will ensure that all parties will do their “best” to make the game a success. And sometimes, that’s exactly what happens. But not always, unfortunately.
Revenue shares and publishers
There are many situations in which even a large share of your game’s revenue may not result in the behavior you need or expect from your business partners. A publisher, for example, may view your self-funded game as just one of a great many small gambles in their portfolio; something worth putting a few hours of effort into and/or maybe a few thousand dollars, but certainly no more than that until the game “proves” itself. The fact that you’ve given them (for example) 50% of your revenue and paid for development yourself may mean very little to certain publishers because they view your game as a lottery ticket… and you don’t win a lottery by spending large sums on a single ticket.
But if giving a publisher ~50% of your revenue isn’t enough to get them to really get behind it and help you in significant ways, what else can you do? The answer, in some cases, may simply be “nothing.” If you aren’t effective at pitching your game and your studio, you may discover that the only publishers who are interested in getting a piece of the game are those who want that piece for free. If, however, you have a competent pitch, and if you seem like a developer worth building a long-term relationship, there are certain demands that you can and should make of any publisher.
For example, you may demand a recoupable advance against your future royalties. If the publisher believes strongly in your game, this theoretically costs the publisher very little (just the interest payments they would have received from that money during the time period in which they advanced it.) And it gives the publisher a good reason to get behind the game — they want to recoup that advance at bare minimum! An alternative is to ask for committments: i.e. 300,000 downloads, as a random example. If the publisher can’t get your game downloaded at least that many times, their revenue share should be reduced or in the case of an extreme shortfall, the publishing contract could be terminated.
Revenue shares and development partners
Things get significantly more complicated when sharing revenue with individuals or companies with whom you have partnered to co-develop a game. Such arrangements are a big leap of faith for everyone involved, and you absolutely cannot assume that healthy revenue shares will keep everyone on the same page. Here are just some of the reasons why a co-development partner might disappoint you (or vice versa!) despite the fact that you’re splitting revenue:
- Different financial needs. Someone on the team may not actually care much about money. Maybe they are independently wealthy. Maybe they simply aren’t motivated by money no matter how little or how much they have. In either case, a revenue share is zero guarantee that this person will share your goals.
- Different financial goals. Even if two people on a team have exactly the same level of financial need, one might be satisfied with a $10K payoff while another might be dissatisfied with anything under $1M. There’s a good chance the latter person is going to become frustrated with the former if the project is marginally but not largely successful right off the bat (and of course, most projects aren’t.)
- Different priorities. Even if two parties have the exact same financial needs and goals, there are other priorities to consider. How important is the success of this game to each party involved? If it’s a make-or-break project for one party, but something that could easily fail without consequence for another party, there may be problems down the road. If one party needs income from the project in three months to survive, while another can plug away for years without income, conflicts could easily result — especially if this isn’t discussed before the project is kicked off. If one party owns the IP the game is based on while another does not, once again, there may be a vast difference in motivation to perform.
The aforementioned examples are just a tiny slice of all the possible differences between people (and companies) that can result in serious disputes down the line, especially once real money is involved. And unfortunately, there’s no perfect way to predict and prepare for all possible disputes. To some extent, when you’re splitting ownership of a game and/or its revenue, you’re always making a big gamble. The best way to reduce the risk of all parties involved is to carefully talk through your goals, priorities and commitments before kicking off a partnership, and document in writing the results of those conversations.
Talking it through
Would you be disappointed if your partner didn’t work at least 20 hours per week on the game, on average? Discuss it, and put something in the contract that specifies exactly what happens if someone doesn’t meet their commitments (i.e. their revenue share drops from X% to Y% after a given period of time.) What if someone gets sick and can’t work for a month? Agree to something and put it in the contract, too. What happens if the game launches and is not successful? How long are you all willing to keep working on it? What happens if someone bails on the project before this time period has elapsed? Talk it all through, and put it all in a contract.
Unfortunately, doing this will not guarantee that you avoid disappointment or drama. If you partner with the wrong folks (or even with the “right” folks but under the wrong conditions) no contract is going to help you. But going through this process is vital. Most importantly, it may help you avoid getting into the wrong partnership. Additionally, it will give you a framework to rely on in the event that disagreements arise between you and your partners.
The challenges presented by misaligned goals and incentives have been a topic of intense study in business schools all over the world for decades. Whether you’re looking at a publisher, a development partner, or anyone else you will rely on in a significant way, do not simply assume that “things will work out” because the other party has a good reputation, is a friend, had a big revenue share, etc. That sort of assumption is exactly the kind of thing that leads to disappointing outcomes and hard feelings in the long term.