Addressing the Challenges of Royalty Management in the Gaming Industry
The video game industry is experiencing explosive growth with over 2.5 billion gamers spending $150 billion+ on games in 2019 alone. This growth isn’t expected to slow down anytime soon; a recent GlobalData report estimated that the video game market could hit $300 billion by 2025.
Much of this growth can be attributed to the new revenue streams game publishers are implementing to remain profitable and competitive. Gone are the days when video game purchases were limited to outright game sales alone.
With these new revenue-generating strategies, however, comes new licensing models and royalty payment terms that traditional royalty tracking software was not designed to manage. Licensing rights and restrictions also continue to get more and more specific and constrained, contributing to the difficulties in accurately calculating royalties. Simply put, the practice of relying on manual processes to calculate video game royalties is obsolete in the modern world.
Examples of How Game Publishers are Bringing in Revenue
In years past, the way game publishers made money was straightforward: a game would be released, and consumers would purchase it. While standard game purchases are still common, they are far from the only way game publishers generate revenue today.
Here are some of the other ways game publishers are generating revenue:
- Ad Revenue: Many games, and in particular mobile games, rely heavily on ads to generate revenue. In 2019, the mobile in-game ad market was over $3.25 billion. Some games, such as the popular Candy Crush, reward watching ads with in-game currency, free lives, or other incentives. Video game publishers also generate ad-based revenue by offering gamers the option to pay a one-time or recurring fee for an ad-free experience.
- Microtransactions: Microtransactions are in-game purchases that cost less than the game paid in full; in cases where the game is free, purchases under $100 are considered microtransactions. In-game currency, battle passes, and downloadable content (DLC) are common examples of microtransactions. For example, one of the most popular games in the world, Fortnite, is free to play. Even so, it made over $2.4 billion in revenue in 2018–despite no upfront cost–due to wildly popular in-game items and battle passes.
- OEM Activations: Often gaming companies will partner to offer a bundle such as selling game consoles, like Microsoft Xbox or Sony PlayStation, with games already installed onto it. If the consumer who buys the console decides to play a game (or activate it), royalties are then paid to the game developer.
- Subscriptions: Monthly subscriptions to access games are also popular. The online multiplayer roleplaying game, World of Warcraft, offers a $14.99 per month subscription for users who want full access to the game, rather than charging an upfront cost to play. The Xbox Game Pass provides unlimited access to over 100 console games for a $9.99 per month subscription fee. Game developers typically do not get paid based on the subscription platform revenue but rather an agreed-upon percentage when a game is played.
- Merchandising: Game publishers can also bring in revenue through the sales of game-related merchandise. The publishers of Minecraft, which has 126 million monthly players, license out its brand, characters, and other symbols for use across all types of merchandise including foam toys, clothing items, bedspreads, and backpacks.
Factors Adding Complexity to Royalties Calculations
It is easy to see how these creative new models are great for a game publisher’s bottom line but can make royalty calculations and payments rather challenging. To compound that challenge there are additional factors that drive complexity.
Narrow Licensing Terms
When video game publishers license content for the games the license agreements are often very specific about when, where and how the content can be used. For example, in a typical game publishing deal, a game may only be available on specific devices and sales may be limited to certain geographies. Or perhaps in certain geographies there are restrictions, such as the game only being available with modifications to remove a level or character.
For this reason, it is important that royalty management software also includes contract rights management which will check for sales violations and accurately calculate payouts based on video game royalty rates and payment schedules.
Multiple Contributors or Licensors
With nearly every game, there is some degree of licensing. Licensing in intellectual property in the games industry is a two-way street, as content can be licensed in or licensed out. The licensor-licensee relationship is not 1:1; rather, it’s many to many. This is because game publishers usually payout several contributors or licensors they’re licensing content from. Additionally, they may be licensing “out” content at the same time where the royalty collections “in” also get factored into the payouts.
To break it down let’s look at some of the many contributors to the Madden NFL games that would require royalty payouts.
- The NFL Player’s Association (NFLPA) has an agreement with Electronic Arts (EA) to allow the use of real players’ names and likenesses in the game, including top-rated players such as Aaron Donald and Christian McCaffrey
- Cover athletes, like Patrick Mahomes, are likely to have individual license agreements with EA
- Even music celebrities like DJ Khaled and Lil Yachty license their likeness to be represented as players in the games
- EA also licenses in the rights to use team names and logos from the NFLPA
- Madden NFL games have featured the actual voices of real players such as Tom Brady, while others are hired voice actors
- Music licensing is another component of the overall game; Madden NFL 20 featured songs by major artists, such as Snoop Dogg, that were created exclusively for the game
- Madden NFL is licensed to run on The Frostbite Game Engine created by EA DICE, but is also available as part of EA Access subscriptions to run on Microsoft Xbox and Sony Playstation
- Interestingly EA also licenses out its brands to sports software brand IMG for use in its sports camps, gaming lounges, publishing products, performance apparel. During the COVID-19 pandemic, with esports booming, The Madden Summer Challenge is a great partnering example where “Learfield IMG College and Mainline.gg in conjunction with the Big 12 Conference have come together in launching the first esports tournament that will see students from all 10 member schools fight to be named the best Madden NFL 20 player of the tournament.”
Regardless of how complex it becomes to manage intellectual property in the gaming industry, game publishers must be able to accurately manage payouts and royalties for every applicable licensor. This highlights the need for a unified content licensing platform built with a robust infrastructure that effectively manages IP licenses, rights and royalties.
Payment Terms and Schedules
These aren’t the only factors that contribute to the difficulty of calculating video game royalties. There are often unique payment terms and schedules with layers of complexity like advances, guarantees, payments based on hitting sales milestones, or payments based on game usage or activation.
There are also expense line items, like the fees associated with using commerce platforms like Steam, the Epic Games Store, Origin, or Apple Store, and in some countries the value-added taxes (VAT) that publishers need to factor in before calculating royalties.
Perks of Streamlined IP Management in the Gaming Industry
The challenges associated with calculating and managing royalties for video games comes from the factors described above. While accuracy in calculating royalties is an obvious benefit of streamlining the process with royalty management software, there are other compelling reasons for automating the process. Overall game publishers stand to gain:
- The ability to track and determine what is selling well in terms of characters, bundles, and other performance metrics. By knowing what works, video game publishers can negotiate better deals with licensors.
- Being able to roll up expenses, receivables, and payables into the financial reporting
- Speed and accuracy in royalty calculations
- Visibility and transparency to content contributors and other stakeholders
- Investors gain deeper insights into game value
For more information about how FADEL IPM Suite can empower game publishers to manage and validate the inbound and outbound licensing, and calculate the related royalties, request a no-obligation discovery call.