Negotiating Royalties in Video Game Publishing Agreements: an Indie Developer Guide
Most video game developers make games because they love it. Unfortunately, love alone does not pay the bills. Any publishing or distribution agreement will have many key parts to it, but in the end if there isn't money to be made, none of the other stuff matters. Knowing how to position oneself, how to negotiate royalties, what to take into consideration, what to emphasize, are all imperative key components to any negotiation with publishers, but it's by no means obvious for someone who might be going into their first negotiation.
This article aims to explain how royalty splits typically work in video game publishing contracts, and to highlight some key considerations to take into account as a developer. No article could cover it all and this article is intended to be surface level, not a deep-dive into cross-collateralizations, deduction definitions, escalator structures, auditing, bundling concepts, or other more technical (and very important) aspects of royalty negotiations.
Ultimately in any negotiation there is always a certain gut feeling where you'll simply have to trust your instincts, but after reading this article your gut will hopefully have a lot more to go on.
Different revenue models
This discussion has to begin with explaining how revenue share structures typically work in publishing contracts. There are a few different models which most publishing deals fall within: work for hire, recoupment-based revenue shares, and pure royalty splits (these are not "official" names, simply useful monikers).
Work for hire, a primarily (but not exclusively) American concept, essentially meaning that the publisher funds development and owns all IP upon creation. Usually, there is no royalty on game sales for the developer. Good for cash and brand-building, but has little long-term upside.
Recoupment-based revenue shares, the most common structure, means that the publisher pays certain amounts in advance to the developer (usually tied to milestone deliveries during development), which is then (together with certain other publisher expenses) paid off through sales of the game. Typically, a percentage of the sales will be dedicated to recoupment of the advances: sometimes this will be 100 % of generated income, other times the developer will have a certain percentage of revenue from the start. After full recoupment is made, revenue splits between the parties will adjust to be a more balanced split. Important to note is that advances are not loans in the traditional meaning, since the developer is not obligated to pay those amounts back other than through sales of the game.
A pure royalty split is less common but is typically used in cases where the publisher or distributor does not contribute any advances and "only" helps with distribution and marketing, in which case there are no advances to be recouped, resulting in a mere %-split between the two parties. This is often used when the game development has been funded by the developer itself and is close to being completed.
Essential considerations – what are you offering each other?
The most basic question in any negotiation is commonly abbreviated "BATNA": Best Alternative To Negotiated Agreement. For any agreement, you must consider what your alternative is to signing the agreement being presented, i.e. what benefits the other party is offering you. The next step beyond that is to ask yourself what you are offering the other party, and how that can be used as leverage in the negotiation.
If you are a developer building your first game, with no development completed, no funding, no consumer interest, then what you can expect in terms of compensation is of course wildly different than if you have a game out on early access and 100,000 wishlists on Steam. What you ask from a publisher or distributor has to take what you are putting on the table into account.
This logic goes the other way as well: For it to be worth it for you to use a publisher as opposed to self-publishing (assuming you're able to finance the development yourself), they have to be able to increase either numbers of copies sold or price per game to more than make up for the percentage, deductions, etc. they will be getting on sales. It's worth noting that this can be done through more ways than simply marketing – QA, creative input during development, localization, etc. are also ways through which a publisher can materially help you improve sales.
For a lot of developers, there really isn't an alternative to using a publisher since they can't afford to fund development themselves. In those cases, where "not signing " is not an actual alternative, other considerations have to come into play instead, as discussed below.
Revenue splits and what goes into them
The publisher is usually the one suggesting the initial revenue split, and it will be constructed around a few considerations, some concrete, some intangible. If there are clear, tangible indicators as to the future success of the game such as wishlistings, prior developer success, demonstrated consumer loyalty, then that will certainly be used by a publisher, but often that is either not available or offers limited insight. In those other cases, the publisher has to rely on how far into development the game is, how much they trust the individual people working for the developer, market fit, longevity, commercial performance of similar games, market saturation, and a whole load of other aspects which often tend to ultimately boil down to gut feeling and whether or not the final decision maker personally likes the game.
Once the publisher has considered the above criteria, there are broadly speaking two ways in which you as a developer can affect the revenue split, which can be divided into 1) money; and 2) rights.
The actual amounts paid by the publisher in advances can be used as a way to lower or raise the revenue split (i.e. developer takes less in advances for a higher royalty). The same goes for how much work the publisher has to put into the game through QA, localization, marketing etc. Anything you can do which lowers costs for the publisher can be used as an argument to raise your percentage of revenues. Finally, the structure of recoupment can also influence revenue split, though to a minor extent: if you're willing to give recoupment 100 % of revenue until full recoupment is made, rather than starting off with e.g. an 80/20 split (80 % to recoupment, 20 % to the developer), then that can be used as an argument for why your revenue should be higher once recoupment has been made.
The other way, usually more realistic for indie developers, is to give up additional rights for better revenue. This can be creative control/input, though that is fairly unpopular among developers. More common is to give up sequel rights, which in its "lightest" form can mean that the publisher has a right to be the first to negotiate for a sequel, and in its "strictest" form can mean that the publisher owns all rights to future installments of the game. Additionally, the developer can give up rights to merchandising, DLC, ancillary products and derivatives, etc. All of these additional rights could (and should) give the developer additional revenue, or at the very least should cause the publisher to give up other, equally important, rights. Many publishing deals are written with the assumption that the publisher will gain e.g. certain sequel rights, and that can be perfectly acceptable, but the developer should take that into consideration when negotiating revenue splits and make sure they're getting something for it.
Essentially, funding development as a publisher is a risk, and the more you as a developer can either mitigate that risk or increase pay-off in case of a hit – be it through less cost, more upside, more control, etc. – the less the publisher will want/need in royalties.
What ends up in your pocket?
As highlighted above, once recoupment (which comes out of total revenues, not as some believe from the publisher's revenue) has been made, the revenue will settle on a certain percentage of income generated between the parties. Some agreements will structure this with escalators, so that developer percentage will go up as income increases, but revenues will in any case from that point onward be predictable.
As such, if a publishing agreement states that revenues will be 50/50 after recoup, most developers might justifiably think that for every copy of a $20 game, they will make $10. Unfortunately, they would be mistaken – percentages are essentially always calculated on net income after deductions. What exactly that means will differ from agreement to agreement, and what is defined as gross or net income can have wide-ranging impact on what the developer ultimately earns. Publisher expenses such as marketing will often be deductible, meaning it will be paid before the negotiated revenue split comes into effect. Additionally, all platform costs, taxes, engine costs, and other required expenses come before the split is made. As an example with hypothetical numbers, a game which sells on Steam will immediately lose 30 % in platform costs; if it uses the Unreal engine (and depending on revenues generated and license type) 5 % of gross income will go to Epic Games; then publisher deducts for expenses; then taxes will usually take 20-30 %, depending on jurisdiction. Even ignoring publisher deductions for expenses (which can be substantial), in the above example a game selling for $20 will, in a 50/50-split, give the developer approximately $5 net. And that's calculated generously.
The important point to remember here is that the revenue split which you see in the agreement is not what will end up in your pocket, and that what is and isn't allowed to be deducted matters significantly for your bottom line. This is something you need to consider when negotiating the revenue split – how much will you actually make, all said and done?
It's worth pointing out that this doesn't take into account a practice not uncommon for indie game developers, namely paying contractors through future royalty shares. Remember: if you're offering your contractors income through royalties on sales of the game, that royalty is coming out of your income, not the total revenue generated – in the above example, that means it's coming out of your $5, not the total $20.
Repayment and termination
Termination clauses in publishing deals can be difficult even for lawyers to navigate, let alone a layman. This is partly because they tie into several other key aspects of the deal, sometimes including IP ownership and repayment obligations. Theoretically, obligations under termination clauses can be used as additional leverage to increase royalty, however that is rarely if ever recommended since it seriously jeopardizes the existence of the company, especially if it's a smaller developer. IP ownership can be used in the context of early termination as a way of securing higher compensation, but how is a bit too nuanced to lay out in an article such as this. Suffice it to say that IP ownership is always highly valuable, and that offering it as a way for the publisher to mitigate risk is a possible strategy, though not one typically recommended.
In essence, be wary of termination clauses which require repayments or which attempts to hijack the IP.
Final thoughts and summary
Most video game developers, especially indies, either need or benefit greatly from having a publisher to help fund development, as well as to handle marketing, distribution, and a slew of other obligations. Developers should, however, not simply accept whatever revenue split a prospective publisher suggests, but rather should always consider: is this worth it to me; is it fair; and what can I offer to increase revenue?
The publishers know that they are the stronger party, developers need their money more than publishers need new video games (to a point). But ultimately, publishers want to generate profit: if you have a game that can give them that, make sure that you get your fair share of it.
Good luck out there! And if you need help negotiating, don't hesitate to get in touch.
