Since the turn of the century, the global video game business has grown at a rapid pace and in a manner that many view as nearly recession-proof. According to the International Trade Administration’s Global Media & Entertainment (M&E) Team of the United States, the global video game industry was valued at $159.3 billion in 2020, with 2.7 billion gamers worldwide. With the latest technology and the ever-more exciting consoles and software, we expect the industry to continue to expand.
The Asia-Pacific region is the largest video game market in the world. Here the video game and related service industries provide myriad business opportunities up and down the value chain. In addition to international industry giants with roots in the region such as Sony, Nintendo and NCsoft; independent developers, publishers and platforms abound and continue to enter the market with better, flashier, and more profitable offerings.
In this article, we examine the relationship between two key roles in the video game industry, the developer and the publisher. We have identified five areas of the developer-publisher relationship that are prone to legal disputes and shed light on how best to address these issues in a video game publishing agreement.
1.Development Costs and Revenue Sharing
Arguably the most important stage of a video game’s commercial life is securing funding for its early development. This is particularly true for independent developers. Key questions related to financing include the amount and types of upfront costs each party should bear and how future revenue should be apportioned.
Often, an independent developer and a publisher cooperate in the following manner:
- The publisher (typically the party with greater financial resources) pays an independent developer an “advance” to cover costs during initial game development;
- The publisher may also provide direct technical support to an independent developer; and
- The publisher may assist in localizing the game for launch in different jurisdictions or porting the game to different platforms.
In exchange for a publisher’s upfront support of a game’s development, launch and marketing, the publisher would likely require a greater share of initial sales revenue (e.g., 70%) in recoupment of any cash advance and certain other upfront support expenses (together, the “Recoupable Amounts”). Upon the publisher’s full recoupment of all Recoupable Amounts, the parties would typically split revenue on a more even basis
In most cases, we recommend setting forth the pre- and post-recoupment revenue splits clearly in a separate schedule attached to the main body of any game publishing agreement. It is also critical to set forth the portion of revenue applied to any recoupment. We have seen agreements in which publishers have applied only a portion of their pre-recoupment split toward recoupment. This results in an elongated recoupment repayment schedule, effectively delaying the time at which the developer would realize a more even share of the revenues.
In addition to pre- and post-recoupment splits, revenue may be shared differently as between that generated from physical game sales versus digital sales and the sale of related merchandise.
Game distribution is a publisher’s primary responsibility. In the digital context, distribution often means launching games onto gaming platforms such as Steam or Epic Games.
In distributing a game, a publisher is usually responsible for managing and promoting the sale of the game on an independent developer’s behalf. Management and promotion of a video game on a gaming platform is typically handled through a seller account.
Control over a seller account means greater control of the commercial life cycle of a game. Platforms compile a variety of data regarding the sale, revenue and promotional efforts for games that are published through a seller account. Such data is invaluable to both the publisher and the developer. Because of this increased level of control and access to valuable data, it is crucial to determine at the outset which party will own and control any seller account and how to handle the seller account after the termination of the relationship between the publisher and the independent developer.
Publishers are often responsible for creating and distributing advertising materials for games. To ensure that a publisher produces the highest quality work, a developer may ask for inclusion of a “best efforts” clause and retain consultation or approval rights with respect to advertising materials. Publishers typically request the developer to provide certain game components which were used in developing the game, such as character, original animation or music files, for use in the production of advertisements. To maintain creative autonomy with respect to advertising, publishers sometimes negotiate for the right to use any material at their own discretion and not to use any specific materials.
4. IP rights
A video game publishing agreement should always set forth which party owns which related intellectual property rights.
Most aspects of a game may be entitled to separate, stand-alone copyright protection. As a starting point for negotiations, each party should claim ownership of whatever works it creates. This means a developer should insist on owning the rights to the game itself (including the source code, the main storyline and characters), any downloadable content that it may subsequently create and incorporate into the game, and the right to create derivative works based on the original game (e.g., sequels). A publisher should identify its own original contributions to the final product (e.g., advertising materials and social media content) and lay claim to IP rights in these contributions.
To the extent each party has exclusive ownership of different aspects of a game, the parties should grant licenses to each other such that each party may use the other party’s in-game intellectual property as needed to develop and promote the game.
In addition to porting a game for use on different gaming platforms, global distribution requires a game to be localized for different markets, i.e., translating it into various languages, making it available in various countries and in some cases curating certain exclusive content to cater to local communities’ gaming preferences. At the outset of negotiations, parties should define as clearly as possible the geographic scope of a game’s sale. Having said that, for most major projects it is not uncommon to set the geographic scope as “global”. Where the default position is worldwide distribution, both parties should carefully consider whether either party should have veto power over distributing a game in any particular jurisdiction and/or through any specific channel.
As a video game enters different geographical markets, inevitably different regulations will apply to the content of the game. Rules on what constitutes obscene language or depiction and thus prohibited speech may vary greatly among countries, particularly if the game is marketed in a country without robust free speech protection. Moreover, a game that is rated R18 (i.e., restricted to persons aged eighteen years and over) may receive a relatively more lenient rating (e.g., R17) simply because the age of majority in one country is lower than another.
As a general rule of thumb, developers and publishers should always agree in advance which party should bear what responsibilities in ensuring compliance with any applicable local regulations. When in doubt, we advise seeking local legal counsel on video game content regulations when entering an otherwise unknown local market.
As with any commercial relationship, there are a number of competing interests between a video game developer and publisher to be negotiated before a game is launched. However, the common goal between the parties is ultimately the same: to maximize game sales and minimize risks of dispute. Through good faith negotiations and a thorough discussion of relevant issues and concerns, this common objective can usually be achieved.
If you have any questions or require additional information on the legal issues related to publishing of video games, please contact Greg Buxton at email@example.com or Ling-ying Hsu at firstname.lastname@example.org.Written January 16, 2023 By Gregory A. Buxton, Ling-ying Hsu, Chi-Hsien Nieh.