The allure of video games, especially today, is the fact that they can transport anyone into a world they’d unlikely find themselves in. One day you could be a soldier fighting in a war, the next a pirate sailing the seven seas. But do you ever stop and wonder how developers create such realistic universes? What it takes to create the realism?

Like many other creative outlets, video games require a lot of planning and work, oftentimes complex. The success of a video game no doubt stems from fantastic decisions made toward generating wholly original content, smart content licensing deals, and valuable streaming partnerships with people such as @summit1g and @PaceYourself22 – the former according to Looper.com being directly responsible for generating “8.19 million hours watched and an average concurrent viewership of 36,000 people in January 2019” on popular streaming site Twitch.

What is the Difference between Inbound and Outbound Licensing?

 

Inbound licensing is when you, acting as what’s known as a “licensee,” reach an agreement with a content or intellectual property owner to license in their content/intellectual property (IP). Inbound licensing is most typically used to create or increase the value of your product.

Outbound licensing is when originally created content/IP, such as music, characters, stories, production elements, etc., is licensed out to others for usage. It is most typically used to create new revenue streams. There are many ways to license out, including the following examples:

• Game-to-Game licensing like when Square Enix licensed their Final Fantasy 7 character “Cloud” to Nintendo to be featured in their latest installment of their franchise game Super Smash Bros Ultimate.
• Licensing to a table-top game like Epic Games’ Fortnite to Hasbro to create Fortnite: Monopoly Edition
• Licensing for apparel, such as Bungie using Destiny 2 to license out to ARK/8 to create the EUROPA TECH HOODIE
• Licensing for collectables, an example being Activision & Infinity Ward’s Call of Duty: Modern Warfare character Captain Price licensed to Macfarlane toys for a 7-inch highly detailed re-creation.
• Licensing content to be published in a book like Halo: Infinite creator’s 343 Industries has to Dark Horse Books for their title “The Art of Halo Infinite”
• A film adaptation such as Crystal Dynamics’ Tomb Raider to MGM & Warner Bros

For the purposes of this article, we’ll focus our attention on inbound licensing from the perspective of the game developer and publisher.

 

Content Licensing – Inbound Licensing Decisions

 

You must be wondering in this case, what exactly do content licensing deals look like and how complicated are they really?

With every video game, there is a degree of licensing involved. Writers, producers, actors, composers, directors, and a wide array of developers all create content that gets licensed into a game.  For example, the music playing in the lobby of a game is composed by someone who then must give the publishers permission to use it as part of their product.

But the real advantage publishers create for their games comes from the innovative licensed content, such as character likenesses, voiceovers, logos, and more. This is where the realism effect comes into play.

To better visualize this concept, let’s take into account videogame publisher Rare’s game, Sea of Thieves: A Pirate’s Life. Their pirate-themed game includes a familiar cast of characters. Rare was able to build a unique set of stories, or “Tall Tales,” using the cast of Disney’s “Pirates of the Caribbean.” Licensing in the cast created a content advantage for Rare’s game because of the recognition Jack Sparrow and his motley crew have in today’s pop culture.

 

Hierarchical Rights Model

 

The above-mentioned example is highly interesting from a licensing perspective as it covers several different source intellectual properties and rights types. Breaking it down from the perspective of the licensee, we need to identify:

• The Property
• Rights Type (could be a format, a category, or a usage type)
• Territory
• Channel
• Language

 

Applied to Jack Sparrow in the realm of Sea of Thieves, we also need to pay attention to two other types of intellectual properties: set design and voiceovers. We wouldn’t drop a pirate into a ski resort or want him to sound like Mariah Carey!

Now that we’ve gone over a ‘basic’ example, let’s break down something a bit trickier with the addition of talent and trademarks. In EA Sports’ NHL21, we see that they’ve licensed in the trademark NHL shield, the Stanley Cup, and NHL teams’ various logos and style guides. Let’s also not forget the professional players’ names and likenesses used in-game. Their granular licensing structure also accounts for music published in-game, requiring a master recording license and a synchronization license.

 

Production Elements Licensing

 

Now let’s consider a license that most people outside of the gaming industry tend to overlook: the game engine. For those of you who don’t know, the game engine is the actual production tool necessary to develop a game.

Game developers usually take two paths for production elements: Develop and use their own game engine or license in a pre-existing game engine.

If licensed-in, game engine fees can vary based on company. Games from developer Unknown Worlds Entertainment’s Subnautica: Below Zero use a game engine called Unity. Given the size of the development team at Unknown Worlds Entertainment, it’s likely that they have a license agreement they manage for access to the Unity game engine that falls within their Enterprise level package. This would require them to pay a flat annual license fee based on the number of users, typically with a minimum amount.

On the flip side, games like Gearbox & Embracer Group’s Borderlands 3 utilizes the Unreal engine. Gearbox most likely maintains a license agreement with EPIC Games, who owns the Unreal engine, where they are subject to a royalty percentage calculated by gross revenue from life-to-date rather than just an annual license fee.

 

Why Do I Need a Licensing and Rights Management System?

 

A robust licensing and rights management system with a hierarchical structure such as the one shown above has several advantages for a game publisher. The granular display empowers publishers to:

• Be flexible in content creation
• Provide visibility into licensing terms
• Ensure compliance with usage rights and restrictions
• Model new ways to monetize the IP

 

The Goal of Inbound Licensing

 

Ultimately, the end goal of inbound licensing is to maximize the revenue-generating potential from each piece of licensed content, however when companies are faced with this seemingly overwhelming level of complexity, it’s hard to keep track of all potential opportunities.

Unless they have their license agreements broken down to the most granular detail in a systematic way, providing them an unprecedented level of visibility of what they’ve licensed in and what their associated financial obligations are, there are bound to be inaccurate license/royalty payments and missed opportunities for further monetization.

 

Mobile Game Licensing

 

Keeping in mind the goals and challenges of inbound licensing, let’s shift focus to a common model seen within the mobile gaming world: in-game currency.

In July of 2016, Niantic, Inc. released hit mobile game, Pokemon: Go! Within the game, users have access to PokeCoins, a premium currency accompanied by an estimated real-world currency value. PokeCoins can be earned in several ways:

• Naturally in-game, when a player controls a PokeGym for a defined period of time or by completing an adventure. The player then “cashes out” to collect their earnings.
• Pay real-world money for the premium currency, commonly referred to as micro-transaction. Players can then use this premium currency to purchase exclusive items typically not obtainable through normal means in-game. These real-world currency for in-game premium currency transactions are facilitated by the Google Play or Galaxy Store on Android devices or the App Store on iOS devices.

 

How to Calculate Royalty Fees

 

If Niantic has a license agreement with The Pokemon Group, it’s reasonable to speculate that they’re required to pay royalties based on transactions involving PokeCoins. To calculate royalties, it’s important to understand the elements within the associated equation.

• Value – typically in the form of a number
• Operator – the mechanism that facilitates the calculation (add, subtract, multiply, divide, percentage, etc.)
• Rate Basis – what you’re ultimately applying the forefront of the calculation against

Going back to PokeCoin, let’s say we purchase a bundle ($19.99) facilitated by the Google Store and the license agreement between licensor and licensee is 25% of net sales. First, we’d need to calculate the percentage of Google’s cut, then calculate the 25% against the remaining balance. Complicated right?!

 

New Challenge: Subscription-Based Gaming

 

Subscription-based models have been a focus within the gaming industry recently. Some of the following players have already established their own game subscription service:

• Google for both their cloud gaming streaming service – Stadia – as well as their mobile app store – Google Play Pass
• Microsoft’s Xbox Game Pass Ultimate – a 2-in-1 game subscription service as well as cloud & local device streaming
• Electronic Arts EA Play
• Ubisoft+
• PlayStation’s PS Now
• Nintendo Switch Online
• NVIDIA’s GeForce NOW – which users can link their Steam accounts to
• Amazon Luna
• And now recently announced, Netflix

Reasons for Game Subscription Service Distributions

 

The rise in subscription services is no doubt linked to the exposure they generate for games. In a recent interview with Forbes, Corporate VP of Xbox, Sarah Bond, shared some insight into just how important subscriptions are in this new age of gaming:  “Game Pass subscribers spend 20% more time playing games, play 30% more games, play 40% more genres and, crucially, spend about 20% more on gaming overall”.

Exposure is high, but how exactly do you calculate royalties back to original gaming content creators when it comes to subscription license deals?

Each one of these services manages several license agreements with various companies – and within them could very well be a royalty calculation that is based on several key factors.

Royalty Calculations for Subscriptions

 

In an interview between Executive Vice President of Gaming at Microsoft, Phil Spencer, and The Verge last year, Spencer is quoted as saying: “Our deals are, I’ll say, all over the place. That sounds unmanaged, but it’s really based on the developer’s need.” He most notably discusses agreements based on “usage and monetization,” which can potentially be based on in-game purchases or percentage of recurring players.

Each one of these services manages several licensing agreements with various companies, each with potentially a different set of key factors. So although the principle behind the calculations remains the same, each agreement’s payout structure can drastically vary. For this reason, it’s important to have a robust system in place to keep track of all the moving parts.

 

Takeaway

 

When it comes to subscription-model royalty calculations, there are a few key takeaways to remember

• Approaches vary
• License fees potentially based on state of development
• Calculations based on usage, microtransactions, or both
• Revenue share is possible

For an in-depth example, watch licensing specialist JD Feuerstein develop a game.

 

 

Impact of Licensing Management Solutions

 

To successfully create an engaging game, it’s imperative to keep track of everything you’ve licensed in or out, how the content is being used, and what the overall impact of that is. The best way to capture all key data points is to aggregate the data using a well-structured, flexible, and easily configurable rights and royalties management system.

 

Advantages of a robust rights and royalties management system

 

With a robust rights and royalties management system, you’ll be able to discern

• The cost savings between dynamically generated, licensor-specific statement report templates and manually aggregating and formatting reports during each pay cycle
• How much time and investment are spent on manually creating and distributing statements and general communications with licensors, talent, and partners versus automating statement notifications

 

…as well as managing even larger-impact variables for potential revenue growth, such as:

• The overall revenue performance of a singular piece of content, broken out into the unique foundational rights attribute combination we reviewed earlier
• Brand recognition continuity
• Ensuring compliant usage of content during creation, distribution, and usage
• Tracking licensed (and non-licensed) content you want to use in your game
• Properly setting expectations by dialing in your forecast’s royalty expenses
• Estimating the market value of licensed-in content

Without the proper management system in place, you’re leaving your brand and company vulnerable to the dangers of contract infringements, content misuse, and miscommunication with talent and clients. For example, the National Music Publishers’ Association is suing Roblox for $200 million for copyright infringement. In another instance, Gearbox developers resigned and created their own studio after receiving less-than-expected royalty compensations for their work on hit videogame Borderlands 3. Both Roblox and Gearbox face long-term damage from their non-compliance. Roblox will have to pay out a huge sum while Gearbox will be losing exceptional staff and gaining new competition. Negative press will also cause further damage to a brand’s reputation. To avoid unnecessary damage, it’s vital to have a good management system in place.

Licensing IP for video games, with a combination of licensing content in and licensing content out, is a powerful mechanism for a game publisher to create a competitive advantage for their games and build out new revenue streams. However, it is important to have a robust infrastructure for managing the IP licenses and royalties to support and maximize on that innovation.