Negotiating Game & App Development Agreements February 13, 2013

1. Negotiating Game & App Development AgreementsFebruary 13, 2013 Patrick Sweeney Reed Smith

2. Traditional Way Games Are Played… Microsoft Sony Nintendo

3. Console Statistics…

4. “Traditional” Relationships Independent Developer (Airtight, Gas Powered, CD Projekt) Content Licensor (if applicable) Publisher (Capcom, EA, Activision, Ubisoft, etc.) Console Manufacturer (Ex. Sony, Microsoft, Nintendo) Retailers (Wal-Mart, Best Buy, etc Consumer

5. Bargaining. HOW FAR CAN YOU PUSH?

6. How Far to Push? • Depends on evaluation of your client’s leverage. • Assessment of level of desperation, comparable deals, opposing party, etc. • A small & unproven developer is unlikely to get deal outside of “normal” parameters. • Common pitfall is sinking development team into a project prior to finalizing deal. “Why buy the cow…”

7. “Traditional” Publisher/Developer Deals • Leverage (and resulting deal terms) HEAVILY favor Publishers • Developers often have few options beyond OTHER Publishers offering similar structure • Generally, Developers can’t self-publish (due to financial and console restrictions)

8. They Like Me…They Really, Really Like Me!! NOW WHAT? GETTING PAID

9. Getting Started • The agreement is what gets you paid. • Things to agree on beforehand: • Budget • Scope • Timeline for development • Developers often over-promise just to get the work. • If you make promises you can’t keep, you’re only setting yourself up for problems down the road. • Be certain that you won’t “breach” your agreement PUBLISHERS HAVE A GOOD IDEA ABOUT WHAT EVERYTHING IS GOING TO COST! IT’S WHAT THEY DO!

10. So I have my first “partial” payment. What about rest of them? THE MILESTONE & APPROVAL PROCESS

11. Milestones and Approvals • A milestone is a partial payment. • Publisher doesn’t just write you a blank check for the full budget. • Expects monthly installments (“Milestones”) reflecting progress to be submitted and approved by them prior to payment. • Payments are in the form of “Advances.” • Milestones are paid upon approval. • Approval standard is variable, but generally heavy-handed in Publisher’s favor. • Amount of $$ attributable to each Milestone expected to parallel overall actual cost for that milestone (approximately). • “Front-loaded” and “back-loaded” deals exist, but are rare.

12. ROYALTIES

13. “How’s My Back-end?” • Royalties are usually given as a function of “Net Sales” • This is the total revenue AFTER returns, allowances, discounts, etc. • Usually advances are “recouped” against developer’s royalty (not off of first dollar). • This means developers don’t start earning royalties until the advance has been recovered from a PERCENTAGE of Net. • Example: Assume $10m advances, 10% Net Sales Royalty. • So developer doesn’t earn royalty until Net Sales > $100m. • Under this traditional model, royalties are rarely earned.

14. Net Calculation Example Common Definition: Net Sales is commonly defined as: Gross revenues - Taxes/Freight Manufacturing costs (COGS) Returns/Price Protections MDF/COOP funds (Sometimes other “kitchen sink” items) -------------------- Net Sales

15. OWNERSHIP OF IP

16. Ownership of IP • General Rule: • Usually the Publisher will own all IP that it pays for. • What if Developer brought the game to the Publisher? • On RARE occasions,the Developer may retain IP for original games that it brings to the table. • Underlying tools and tech: • Developer commonly retains ownership to these, even when story IP is not retained. • Most deals are “Work-for-Hire”

17. Ah, crap. TERMINATION

18. Termination Termination for Breach • Works in mutual fashion. • If either side doesn’t live up to their obligations, then the other side can terminate (if the problem is not remedied). • Cure period. • Some publishers don’t allow developer a termination right under any circumstances! Termination for “Convenience” • Publisher has unilateral right to kill the deal if they don’t like the direction it’s going (even if developer is performing). • Often combined with “kill fee” paid to Developer. • The “kill fee” is often equal to the next milestone amount. • Does NOT work in mutual fashion.

19. OTHER IMPORTANT CONSIDERATIONS

20. Other Important Considerations Ancillary revenues Sequel Rights “Key Man” clause Audit Rights Cross-collateralization Non-Compete Windows

21. Brave New World New “open” platforms & new disruptive business models are changing the way deals are structured and negotiated.

22. Dramatic Shift in Way Games Are Played Worldwide Game Revenue (in Billions) $81.0 $76.9 $66.5 Source: DFC Intelligence & Gamasutra

23. “New” Platform Relationships Independent Developer Digital Publisher (optional) Digital Platform (i.e., Apple, Facebook) What does THIS Publisher/Developer agreement look like? Consumer

24. New Publisher/Developer Dynamics Developer can publish without a Publisher: • Less $$ required (and more readily available) • “Open” platforms • Uncertain value of Publisher in a marketing role • Leverage is much more on Developer’s side (or at least more level)

25. New Publisher/Developer Dynamics Deal points that were settled in “traditional” deals, are open for negotiation (if a publisher is to be used at all) • Examples: • IP ownership • Deal Economics: Royalty rates and recoup structure • Publisher Commitments & Milestones • Approval standards • Software as a Service ~ Ongoing content • Other: (Reporting, reserves, etc.)

26. Beyond the Publisher/Developer Dynamic Other considerations for the independent developer: • Funding • Crowdsourcing/Kickstarter, etc. • Government Tax Incentives • Venture/Angel • Privacy/Data Use • More of an issue here than in “Traditional” model • Business model of the social/mobile game is to monetize the user via ads and other offerings.

27. Beyond the Publisher/Developer Dynamic Other considerations/independent developer (cont’d): • IP/Open Source • Indy Developers may not be as used to protecting IP as Publishers are • Production safeguards re: Open Source likely not as prevalent with Indy Developers • False Advertising • Issue always present in Retail games (recently, Mass Effect) • But with non-traditional and untried marketing for mobile/social games, it may have greater significance

28. Beyond the Publisher/Developer Dynamic Other considerations/independent developer (cont’d): • Potential New Litigation Risks • Lack of familiarity with new roles and responsibility may lead to business disconnects • Ability to indemnify very speculative with smaller, independent companies (often start-ups)

29. THANK YOU Questions Comments