A Dirty Little Secret Of The Game Industry: Royalties
Many game studios develop games for publishers through an early stage development agreement: the studio pitches a publisher on a game that it wants to make and if the publisher greenlights the deal, the publisher funds the game’s development by paying advances to the studio in addition to paying royalties from sales of the game. Now, when negotiating the terms of such an agreement, a studio might be tempted to think, ““We’ll cover all our costs with the advance and then wait for profits when the royalties come rolling in.” Well, here’s a dirty little secret of the game industry: most developers never receive a dime in royalties.
Consider a AAA console game that players buy at a retail store for $60. Let’s say that the studio negotiated a 20% royalty. That royalty is computed after a number of expenses are deducted from that sale.
- Around $12 going to retail store (GameStop, Walmart, Best Buy, etc.)
- Around $12 going to the console manufacturer (Sony, Microsoft, etc.)
- If the publishers used another distributor for selling the game, a cut for that distributor.
- 5% or whatever was the cost of goods were for manufacturing the box, manual, disk, etc.
- Freight and insurance for shipping the product to stores.
So, when all is said and done, the studio is not receiving 20% royalties on $60, but maybe on $30 or less. So, in this example, the studio is receiving only about $6 on that $60 game.
But wait! Usually the publisher paid the studio advances against royalties to fund that game’s development, often millions of dollars in advances. So, the studio doesn’t receive royalties until the publisher recoups the advances from the royalties.
So let’s say a game cost $10 million to develop. The the game must sell enough for the game to earn $10,000,001 in royalties (not sales) before the developer receives their first $1 in royalties.
The reality is that most games never sell enough for a studio to see any royalties. They earn money through the advances to cover their development costs, but rarely do they generate any profits for the studio that made it.
So, what’s studio to do? One thing is to try to negotiate sufficient advances so that the studio can survive long enough to gain another development contract just to stay in business. Or it can try to negotiate an escalating royalty based on sales so that the better a game sells, the higher the royalty the studio receives.
Another approach is to try to develop as much of the project as it can on its own dime; the more complete a game is when a studio approaches a publisher, the better the terms it can negotiate. Of course, the ideal situation is for the studio to publish the game itself.