Contract deal points

Well, another week where I was too busy to write a good blog entry. So, I'm gonna take the cheap way out and dump one of my handy text files here, one that I use to keep track of contractual deal points for future agreements. This is real behind-the-scenes stuff.

I started this doc about 7-8 years ago, and every now and then I'll add a little more too it, especially if I've talked to another developer who tells me of a technique they use, or a publisher trap they try to avoid. Whenever I enter into a new agreement, I make sure that all of these points are considered and covered, if possible. It works as a reminder list.

The hope is that others will benefit from it. So, here it is, warts and all, a full, unedited dump:

o We have full approval rights on the product.

o We have full approval rights on all marketing of the product.

o We must have audit rights. There must be a interest penalty for late payment.

o We must have credit/logo on packaging, at least equal to the publisher's logo size and placement

o COGs must be precisely defined and capped -- never leave this open-ended.

o Make sure there's a clause that prevents the game from being assigned to another company under any condition, including the sale of the company.

o If there's ever a port or remake (or otherwise) opportunity, and the publisher doesn't want to pursue it, then rights revert to us.

o Credits: Original developer's credits are always listed first, even in ports (even if ported by a third party).

o Marketing costs should not come out of COGs -- this is a publisher expense.

o We need to see the top 12 countries' quarterly sales reports, broken out individually so that we can see how the game is selling in each of those countries.

o We get all awards, plaques and trophies for the game. (The publisher may pay for duplicates for themselves.)

o Reserves for returns should be capped at 15% of royalty.

o Reserves must be paid the following quarter.

o Penalties for leaks during development (e.g. penalty of 25k per leaked screenshot or demo, penalty 250k for leaked build).

o Currency risk to publisher i.e. payments locked into our currency (USD).

o Updates (patch obligation) limited to one year after release.

o Penalty for late advance or royalty payments -- and if late beyond a certain cure period (say 60 days), then the term of the agreement and all rights are negated.

o Three late payment notices, by Fedex or other tracked service, is considered material breach of contract and can be cause to severe all agreements, including those for games still under development. Quite simply, make payments on time. Being paid is the entire point of the relationship!

o No console rentals for the first five months of each individual's console release. Rentals destroy retail sales.

o If the publisher makes royalties or bonuses from rentals (i.e. console rentals), then we get 50%.

o Limit the number of games that can be used for promotional purposes, or for sales incentives, to 1000 games. Otherwise, the publisher can shrewdly use your game as part of a sales package, and move 1000's of them without your benefit.

o Make sure indemnity works both ways.

o Kill Fee. The rationale behind asking for a kill fee is that the publisher can cancel the project at any time, in which case the developer may be in dire straits. Often times the developer has added staff and increased expenses to accommodate a project. A kill fee should buy you enough time to land another deal, and also make the publisher think twice about canceling the project. At the very least the kill fee should cover the current and next milestone payments.

o IP. Most developers in the console world work on games who's IP is owned by another party or by the publisher. Regardless of who owns the game IP, it is crucial to maintain ownership and control of your code. A proprietary engine for example is something that console developers will use on multiple projects with multiple publishers. You can't do this if you give the rights away to one publisher. It is unreasonable for a publisher to expect that just because they pay for the game, that they get rights to your code also. Especially if the code existed prior to this publishing deal. Don't agree to ship code to the publisher by request. You should be able to argue that the code will be held in escrow. This will prevent the publisher from accidentally borrowing code.

o Passive royalties. It is fair to expect a passive royalty on ports based off of this game that are not done by you. A passive royalty of 5% is pretty standard. If the publisher decides to do a sequel with another developer, but wants to use assets that you've created for the franchise, it is fair to expect a 5% passive each time it's used. Royalties from one game should never be cross collateralized with royalties from sequels.

o Ports & Sequel rights. You should be able to get sequel and port rights to this game if the publisher decides to do them. It's a good idea to spell out the terms of the sequels and ports in this contract too. You should include royalty rate, recoup rate, and game budget.

o Budget. When asking for a bid on a project, several console developers will also ask for an expense break down for things like salaries, overhead, etc. *NEVER* *NEVER* *NEVER* give a publisher information about how much you pay your people. It is none of their business. The most you should tell them is that the bid you are providing includes salaries, overhead and a small margin to cover unexpected costs. If you give out specific numbers, you will only be whittled down. Also, advances should under any circumstance, ever be refundable.

o Key Employee List. It is fair for a publisher to ask for a key employee list for the project, but that list should be limited to lead artist, lead designer, and lead programmer. Also, the terms of the Key Employee List should not state that these people will work only on this title, but that these people will give priority to this title. Console developers with multiple teams will often share resources for efficiency, i.e.. an engine team, a tools team, art director, creative director, technical director. These people should never be contractually bound to one title.

o Dependencies. In the console world, where working on a licensed IP is common, the developer is dependent on timely delivery of certain things by the publisher in order to get the job done. It is important for the contract to state that any delay in getting material or approvals needed to develop the game, will cause a delay to the schedule. Any such delay will result in cost overages which are to be paid by the publisher, and not held recoupable versus royalties. Dependencies should include things that are the publishers responsibility, for example, providing audio, materials & approvals for the IP, etc.

And to wrap up, if you liked this stuff and want a little more, you can jump over to the IGDA where you'll find an article I wrote in 1998 (as one of the owner/founders of Gathering of Developers), The Ten Developer Commandments. If you have any similar contractual deal points, please do share...

Comments

[Jeffool]

First and formost, I must point out that I'm not even in the industry. I'm in college hoping I will be one day. And even then this type of info is something I wouldn't have to worry about for a while, if at all. That said;

Do rentals really cut into sales that much? I guess I never thought about it much, as I assumed that rentals cut into sales some, but also supplemented sales to some degree. And do developers not get much from the rental?

[Scott Macmillan]

This is great stuff, thanks Scott. I don't know anything about how rentals and console games are usually done - is it customary for it to be on the shelves at Blockbuster, etc., immediately?

[Joost Schuur]

This is great reading material for someone who expects to go into business with 3DRealms, but how realistic are these terms for a development house if they aren't Epic/id/Valve and a few other select powerhouse independent companies who can take their product to any publisher they chose?

In today's climate, if you have a great product, but no established reputation, is it realistic to get most or all of those points agreed upon by publishers?

[Joe McGinn]

Joost, I'm sure many points are unrealistic for developers ... but they are still valuable points to consider during contracting, because you should be able to get *some* of them.

And as, hopefully, your company improves in stature, you add as many as possible.

[Ryan Hagan]

I was an agent in the game industry in my former life. I represented smaller developers that wouldn't normally have gotten publishing deals by themselves, mostly because their games weren't that great. I specialized in the "casual" market. Many people also refer to my games as budget titles.

I certainly loved my job when I was doing this, but I'll NEVER forget when Scott published "The Ten Developer Commandments". This article made my life a living hell! All the sudden, my clients (who were mostly writing puzzle games) were demanding every single point in that article be matched on their contract. This was a HUGE fire to put out.

Thanks Scott!

[Ben]

Would be useful (and fun) to see excerpts from a highly biased contract with translation comments like "What this really means is that the publisher owns you, your company, your IP and your house - including the kitchen sink..." or "This says that if the publisher kills the project, you owe THEM money."

I've heard some of the old GT contracts were a bit like that; I wonder just how common contracts like that are today?

[Nexis]

"Do rentals really cut into sales that much? I guess I never thought about it much, as I assumed that rentals cut into sales some, but also supplemented sales to some degree. And do developers not get much from the rental?"

I don't know about you but I rarely buy games that are shorter than 15-20 hours and have little or no replay value. There's just no point to it really, even if the game is really good. The only exceptions to this are games that I'm really looking forward to and can't wait for them to come in at the rental place. That said, the only games I don't ever see available for rent are online titles (like phantasy star online) and lesser known games (disgae, ikaragu, etc). I can see a benefit to renting out games that take a long time to beat but not the shorter ones. This is why it kind of surprises me that you recommend delaying rentals and so few companies do this. I had kind of assumed that the rental places couldn't be prevented from carrying them or some other strange logic since it makes so little sense for them to allow it.

[Jeffool]

This is why I pointed out that I'm a student. I don't know the business, I just know what I like.

If a game is short and has no replay value, it probably was a bit of a chore to sit through the first time. I'm sure there are some short games that are good only once through, but I usually look at games like a good book or movie. If I enjoyed it the first time, it's highly likely I'll enjoy it again.

I could very well be in the minority. I'm not trying to troll, in fact, this could be the thing I get to argue with people about. ;) There's no way in hell I'm buying a game I haven't either played through entirely, or at least played extensively. Just as I wouldn't buy a movie I hadn't seen.

Though I'll concede to buying books I haven't read. If I hear really great things from a pal I'll give it a chance. Being a big comic geek this bites into me at $20 chunks, but being a student, well, that's on hold.

[Scott Miller]

Guys (no gals here, right?), the rental issue is GIGANTIC. I'll have a full entry on this before the year is out, but the bottom-line is that games should not be available for rent at the same time they appear in retail. This is KILLING retail sales, especially for shorter games like Max Payne.

What if the movie industry released DVDs/videos for rent at Blockbuster on the same day the movies hit theaters? Box offices sales would plummet. But the movie industry uses its collective gray matter, and they smartly delay the release of rentals. The game industry needs to figure this out, otherwise were giving far too many sales away to the rental market, and that money doesn't come back to developers. The result is that more developers will fold, and less will be able to take risks with innovative titles.

[Derek Smart]

Against my better judgement....

Those are some excellent points that Scott makes and I adopt, I'd say 90% of them in all my contracts since my run-in with Take Two back in 1996.

But Joost makes a very good point. Unless you are one of the big boys, have a track record or don't need publisher funding, you probably won't get away with 50% of the points in Scott's document.

If anyone has heard about the farce* with Dreamcatcher, the publishers of my last game (released in March 2003) and my upcoming game (being released this month), I can safely say that no less than six of Scott's points were instrumental in my preventing them from shipping 30K duds into the retail channel this past December. Naturally, they're not very pleased about it. My thoughts? Screw 'em. I'd rather piss off a publisher who I DON'T need, than 30K gamers who I DO need.

HOWEVER, point #10 was not something I had thought about. If I had, I would not - right this minute - fighting with them over unreported sales, royalties and sub-licensing deals they did in Europe without (a) telling me about it (b) reporting it in ANY of the royalty reports. And how did I find out about these shenanigans? From the very gamers who buy my games. Once BCM Gold popped on Akella (Russia) and other licensee sites, then checking the Q1/03 and Q2/03 figures for the game, I knew something was up. So I started digging. The rest is history and I can't talk more about it without leaving myself open to a lawsuit for breach of an NDA (or similar nonsense). Unfortunately, I cannot terminate the contract due to a cure clause in it. Otherwise, coupled with the Universal Combat farce, I certainly would have, because I have no problems finding a publisher to distribute a 100% finished game based on a popular franchise.

But I got even in a recent contract amendment. Lets put it this way, you won't be seeing the sequel (which goes into development next month) to UC, nor the XBox title (been in development since June last year) out on the Dreamcatcher label. Ever.

Unscrupulous publishers just keep finding every frigging loophole in a contract in a concerted attempt to either (a) keep devs out of money and relying on them or (b) reducing their income stream for their hard work.

Yes Virginia, the biz side of the industry still sucks and its only getting worse. But once you find a good, honest publisher - one that is not run by the mob or wankers in monkey suits - you'll do OK. There is a damn good reason why indie devs move around so much, mass exodus of entire dev teams at publishers is rampant and just on the rise. Publishers are - FOR THE MOST PART - run by DISHONEST people whose sole intent is to cheat developers and piss on gamers, while making a buck the whole time.

* http://www.3000ad.com/ubb/ultimatebb.php?ubb=get_topic;f=26;t=000012

[Gestalt]

Scott - "What if the movie industry released DVDs/videos for rent at Blockbuster on the same day the movies hit theaters? Box offices sales would plummet. But the movie industry uses its collective gray matter, and they smartly delay the release of rentals."

But they do (these days) usually release DVDs / videos for sale simultaneously with the rental release, which is probably more relevant to the gaming industry. In fact, in the bad old days DVDs / videos were only available to purchase after an exclusive rental window! A movie's theatrical release is (if anything) more equivalent to an arcade release for a game.

Having said that, any comparison between the gaming and movie industries is generally not tremendously helpful. ;) Games tend to have a life cycle which goes retail / rental, bargain bin, mobile devices, landfill. Whereas movies have theatrical release, pay-to-view, rental, retail and TV. Not to mention the fact that a movie made 50+ years ago can be just as popular as a brand new one and sell for much the same price.

I think the other issue is that games these days are mostly quite expensive, often overly long, and don't get replayed very often. So whereas you might buy a movie you enjoyed after renting it, you're less likely to buy a game you rented if you've managed to complete it. Maybe the answer is shorter, cheaper, higher quality, more replayable games? That way the difference between purchase and rental cost won't be so great, and people will have more incentive to buy after renting if they enjoyed it.

[Shahar]

what about smaller companies which dont have the ability to push around publishers quite as much, would you be able to rate these in an order of importance perhaps for a negotiation? which would you say are mostly a convenience? which are essential?

[Brian Krueger]

Scott, I'm curious about this bullet point:
o Penalties for leaks during development (e.g. penalty of 25k per leaked screenshot or demo, penalty 250k for leaked build).

How on Earth do you proove that the leak came from the publisher? It's quite easy for them to turn around and say "We think the leak came from the developer, and therefore this clause does not apply." How is this avoided/dealt with?

[Jay Woodward]

Well, the vast majority of console and PC games are not arcade ports, and therefore they don't have any analogue to a movie's theatrical release. Almost all games are effectively "direct-to-video". :)

Like Jeffool, I've always assumed that video stores didn't need publisher permission. After all, if they did need permission, it would seem obvious that publishers would wait at least several months before allowing the rental of new games.

So: DO rental stores actually have a legal obligation to obtain the publisher's permission before they offer a game for rent?

[Derek Smart]

Shahar

"How on Earth do you proove that the leak came from the publisher? It's quite easy for them to turn around and say "We think the leak came from the developer, and therefore this clause does not apply." How is this avoided/dealt with?"

Thats easy. The dev can use a copy protection scheme or DRM to protect interim builds. In my case, when I send stuff to my publisher, it has a DRM signature and a specific serial number. If it leaks, I know where it came from. Same thing happens to press builds etc

In fact, this practice was instrumental in preventing my publisher from recently shipping an RC1 build of my game (they had to destroy all 30K copies) into the retail channel. Someone apparently forgot to tell the suits that my interim builds - any build that is not a GM candidate - has an expiring DRM, serial number and whatnot.

Most publishers won't let you do this but thats why you should (a) know who are signing with (b) own your IP so that your vested interest in what happens to it is communicated in a manner that they are fully aware that anything resembling pissing around with said property, is a no-no.

I don't have any penalities and such, and you'd be hard pressed to find a publisher who is going to sign any such deal - unless they *badly* have to have your game. But so far, apart from this recent fiasco, none of my games have ever leaked into the public.

[markh]

I would think that publishers would agree on the whole wait-a-while-before-renting thing. If you think about it, rentals hurt game sales.. so why on earth would a publisher do something like this?

If your a developer that has something thats fresh, new and fun and most importantly hasn't been done before and should sell millions, I'm sure they'd agree to a mojority of the "rules". That is, provided you have some clause in the meeting with them that they're not allowed to copy any of the ideas seen which you show to them *signed*. Too much corporate bull and red tape for my liking.. whatever happened to honesty and simplicity? :)

[Kathy Schoback]

To Ben - it's not as interesting as some of the more egregious contracts of the past, but the IGDA Business Committee has put together a Contract Walkthrough project that explains variations on contract clauses and how they affect the developer. (See the URL.)

And Scott - can't wait to see the blog on rentals. I had seen internal publisher research that showed that the #1 impetus to buy is hands-on trial of the product. If you believe that, then rental is just an extension of the marketing effort.

Unless, of course, a) your game sucks and the word about it gets around before you can sucker enough people into buying it sight-unseen, or b) your game can be polished off in a rental weekend.

Looks like Max Payne suffers from the latter, along with many other games of reasonable scope(ie not 50 hours).

Kathy S.

[Scott Miller]

-- " I had seen internal publisher research that showed that the #1 impetus to buy is hands-on trial of the product. If you believe that, then rental is just an extension of the marketing effort."

Kathy, word-of-mouth (a.k.a. buzz) and hands-on trials are, unquestionably, the best marketing a game can have. Demos do a much better job than rentals at the hands-on part of this equation (getting into more gamers' hands), and without the risk of losing a sale (unless the game stinks).

Many game styles are only going to get shorter in the future so games that are 10 hours or less will be more common. This is because many game types, like shooters, require much longer to make a single level due to increasing detail, interactivity, and scripting. In Wolfenstein 3-D's day it took about two man-weeks to make a good level. With Doom it took about 4-6 man-weeks. With modern shooters it can take a man-year (usually split between several level designers/specialists). The trend will only grow longer, meaning that games will become shorter, but more content dense.

-- "DO rental stores actually have a legal obligation to obtain the publisher's permission before they offer a game for rent?"

Jay, the music industry has protection from rentals, so it must be possible. Perhaps the game industry needs to lobby for similar protection.

By coincidence, this same topic about rentals is undergoing a thorough thrashing in a popular member-only, dev-only forum, and the landslide opinion among developers is that rentals hurt game sales far more than they help. But, pubs seems to have a different view, which is mind boggling to me and other devs. I don't think they've analyzed this properly, and one day they'll realize their mistake.

You can bet that in future agreements for 3DR, we will fight hard for a delayed rental release. This is a relatively new contract point on my list, and so I've not had to negotiate it, yet.

[Greg Findlay]

Do publishers get the rights to electronic distribution as well as traditional retail channels? I'd imagine that they do but with things like Steam coming out it would be interesting to know if Valve (or others) negotiated to get the rights to electronic distribution. That would be a significant increase in profits per sale of each game. I'm sure Valve has a lot of power in their contract but that would be something I would look for when negotiating. Particularly if you find a publisher without the means or who are unwilling to provide the means for electronic distribution.

By electronic distribution I don't mean sale of a game online but downloading the game after purchase therefore not receiving a box.

This could also potentially be a way for developers to provide a game before it goes to retail shelves (and rental) by providing it online from the gold disc until the publisher has time to burn and distribute the copies to the public. Good luck negotiating that one though ;)

[Daryl Pitts]

These deal points are really excellent. I'll be adding some of these to my already very long list for my lawyer to weave into our development agreements. Since our game is an original concept and we're self-funded, many of the abovementioned points are going to be crucial for us. Thanks for the heads up.

Regarding rentals, there are great arguments for both sides of the equation, so what if we compromise:

- we generate 1-2 hour long demo versions of our games and release them 4-6 weeks before launch
- these demo rentals can be sold retail at Best Buy for $5 or rented from Blockbuster for $2
- retail versions cannot be made available for rental until at least 60-days after retail release

Does this sound fair? Does anyone foresee problems with this system? I've found that has worked great with me, but quite by accident:

A few months ago, I was in Best Buy and I noticed that they had Ubisoft's Prince of Persia and XIII PS2 demo disks for sale on the shelves (XIII was $0.01, and PoP was $4.99 -- don't ask me why, because they both had NOT FOR SALE labels on the back). I was anxiously awaiting both games so I bought both disks. PoP was a captivating 2 hours of fun, so of course I went out and bought the full version 4 weeks later when it finally came out. XIII just didn't do anything for me, so I never even finished the demo, and of course, never purchased the game.

I think consumers would be willing to risk $2-$5 on demos of the game.

(Deserved) sales would not be lost under such a system because the onus for a good quality product falls squarely on the shoulders of the developer.

(BTW, I think the GT4-Prologue demo disk is the best selling game in Japan this week.)

[Mick Solomons]

Regarding rentals - obviously the best thing for the customer is to download the demo off the net, see if its any good, then decide whether to purchase it or not. My guess is that publishers just prefer to make some money by selling units to video rental shops, rather than taking a chance and only selling the game at retail. As for marketing, I don't know many people who rent a game, then buy it. Most people just rent the game for one or two weeks, finish it, then return it. Seriously, how much money are dev's losing because of this?

btw thanks for all of your articles Scott, i have learned so much from them.

[Jeffool]

Actually, I figured that publishers can negotiate rentals. The movie companies do. That's why if you fail to return a movie you're charged just over $100 a copy for VHS. Those copies are 'rental copies', and the price is jacked up accordingly, I assume to help lighten the pain of lost sales. It's not just 'loss of possible income' on the part of the store; it's a replacement fee.

And like Scott said, you can't rent music at all, save DVDs of concerts.

Also, they place different trailers and ads at the beginning of the VHS tapes than they do the retail copies. Different, and often more. Of course with DVDs there's no difference (that I know of) so far as content. And the price I wouldn't be sure about either, but I still assume it's marked way up.

And if I'm not mistaken, most of the time new movies are available for rental before they're available for purchase. I could be mistaken, but I think there's some payment involved by the stores. Or possibly just the insane mark-up on rental copies. I don't know, on those points I'm just guessing.

(This is one of those things you learn from working in fast food (Subway) beside a movie rental place. Ahh, the good ole days, when I made sandwiches and borrowed free tapes from the Sanford and Son collection. ;) )

Personally I think, at the least, not offering rentals after a certain period is crazy. And possibly, like Daryl mentioned, cheap demos. I'd even say a few bucks for a few demos on one disc, much like those that come with magazines these days. Maybe even free, at a joint expense of both the publisher and store, both for the sake of marketing?

Jeffool.

[John Feil]

Demos: Demos are great ideas for marketing, but are very painful for the development team if the management doesn't realize that creating a demo is, essentially, creating a completely separate game. Though much of the demo can be derived from the game itself, there are user interface issues, stability issues, installer issues, etc that require a lot of programmer hours. At the end of a development cycle, the last thing you want to do is suck a couple of your most valuable and experienced programmers off the main game to finish the demo, unless you've been explicitly planning for it the entire time.

Further, remember that you have to do this for all demos, especially your E3 demo. I've seen more projects get kicked off of schedule because the entire project ground to a halt while all the developers focused purely on hacking together and polishing the hell out of the E3 demo. And then, to make matters worse, this hacking creates unstable code that will bite you, for sure, in the final months of development and cause more delays.

Rentals: The secret here is not to make longer games, but games that are replayable to the extent that you want your own copy. Think about the library. They let people borrow books for *free*. Has it killed the book industry yet? No. How about your local Suncoast? Has Blockbuster driven them out of business? No. Why do bookstores and Suncoasts survive? Because people will always buy what they think they will use more than once. They'll gladly go to a library to borrow War and Peace or to a Blockbuster to rent the entire "24" series, which might take them more than the rental period to return, but they'll go and buy a book or movie that they feel they'll use more than once. A good example is the game console itself. You can rent a Playstation 2 at the same time you rent the game, but, because people realize they'll be using the console again and again, they buy it instead of renting it. Party games like DDR and Mario Party, arcade games like Tekken and non-story-based fps' like Unreal 2003 or Quake 3 will be bought because of their innate replayability. Games like XIII or Dark Cloud will only be bought by the hard core or the collector if given the choice between rental or purchase.

[Scot Le May]

Word of mouth has proven time and time again to be the best marketing tool for any game.

Rentals are a killer, GOOD demos are a winner.

While I agree with John in the terms of rentals perhaps making developers create better games, with a longer replay factor. This issue does not work with every style of game. Games that want and push story driven content will do alot worse than mindless button smashing adrenaline fun styled games. Whats worse is most games would have better replayability if it were not for most publishers.

So while to a certain extent one would assume a rental would make for a sale to a happy customer this is not always the case. The style of game has alot to do with it. not so much as if it is a killer title.

[Scot Le May]

Scott sorry for the back to back post:

You reach on a serious point about why games will become more in depth and at the same time smaller in length. Unless a developer has a serious hit title in its arsenal. The amount of money and much, much, more time needed soon to make a top end fps, will be truly on scope and scale with movie budgets. Perhaps even farther because of the nature of game design. I feel this factor, given most game publishers histories, will also drive alot of developers out of the market.

Back on point, I do think the game industry does need to lobby for some form of legislature on protection against early rentals. I also think that the whole publishing side of the industry really needs some congressional oversight =-p (but thats a whole other topic in itself)