Why do publisher always ask for flat fee ?

[yanuart]

Hi, I know that flat fee is actually what we're looking for but the thing is : these retail publishers usually ask for exclusivity or won't disclose (being quite vague about numbers and method) how they're going to distribute our game.
This leaves me always stay up all night thinking about what I'm going to ask out of retail deals. Obviously I won't give my game so easy nor do I want to ask something ridiculous to let the publishers think I'm somekinda golddigger.

How do you come up with your numbers and calculation when you were asked about the flat fee ? What are your considerations, etc ?

ps: since the release of my game I've been negotiating with >5 publishers in which the result is : nothing :)

[Andy]

How do you come up with your numbers and calculation when you were asked about the flat fee ?

Be a golddigger. Everybody does.


ps: since the release of my game I've been negotiating with >5 publishers in which the result is : nothing :)

These are pretty regular numbers. Think they all are fury and warm to your needs? - No. Most of them just like to fool you. (They call this "a business" )

[MrQ]

Normally in the retail industry your up front fee from a publisher should include your development costs + what you expect to make in profit from sales.
You should also try and negotiate some sortof marketing budget for your game as well.

[James Gwertzman]

My suggestion is to reject any sort of flat fee. The simplest kind of deal is to simply ask for a royalty as a percentage of gross wholesale revenue, where the wholesale revenue is how much the publisher makes from the retailer. Generally it's around 65% of the retail price.

Asking for a simply royalty as % of gross is nice because it's very easy to audit (if it comes down to it) and it's very easy to calculate. Also there is no possible confusion as to which costs should or should not be subtracted before calculating your royalty.

On the flipside, prepare to accept a lower royalty share than you might otherwise expect because the publisher must recoup all of its costs out of the money that's left over after paying you.

here's how a retail breakdown might work:

MSRP = 19.95
margins to retailer = 35% = 6.98

wholesale = 12.97 <==== this is what your royalty is based on
wholesale is also how much the publisher is making from the sale.

marketing = 6% = 0.78 (this is a good allocation for marketing, often used as MDF funds where the publisher pays the retailer to help market the product)

COG (manufacturing cost) depends on the format. A jewelcase is around $1.50, a fancier box around $2.00. Assume Jewelcase = $1.50

Distribution costs (shipping, freight, etc) = 10% (this might be generous) = 1.30

rebate/refunds = 3%. this is how much the publisher sets aside in the case of returns or often as rebates to the retailer. = 0.39

total left over from the $12.97 after all these costs: $9.00
This is the net profit on the sale. You and the publisher are getting paid out of this $9.00

What percentage of this $9.00 is fair? i know it's tempting to say 50/50, but I don't really think that's fair. Why? Because the publisher has the risk of inventory and you don't. the publisher needs to pay to manufacture all the boxes, and if the product doesn't sell that represents a liability.

Personally I think a good royalty rate is 30% of gross, or $3.89 per unit sold. That leaves the publisher $5.11, or a 43%/57% split of net.

You should then ask for a minimum guarantee of $3.50 or even $3.00, giving the publisher some negotiating room to do discounts with the retailers if necessary. You can also simply ask for $3.50 but put in a term whereby the publisher can pay you less by written agreement -- this gives them the opportunity to offer discounts to move inventory, but you have to approve first.

Publishers will probably want rights to hold back a chunk of the money they would otherwise owe you in case they have to cover significant returns from the retailers. This is pretty standard, but not great because it might give the publisher some incentive to sell-in more units into the channel than the channel can really support, since you're helping support the cost of accepting returns of all those units.

A better idea is to not accept any holdbacks, but take an even lower royalty percentage since now the publisher has to cover all costs on their own.

Ultimately, anything above 20% of gross I would consider a very good deal for a developer, especially a small developer. If you're really small and this is your first game, then even 15% of gross is probably a good start. If your game sells well then you can always look to do better on your next game.

Exclusivity in retail is very standard and makes sense -- you really don't want multiple publishers knocking on the same retailer door offering them the same game. It only encourages the retailer to make them compete against each other on price which hurts you.

On the other hand, don't give away worldwide rights automatically. dont give a publisher rights to a territory that they don't have the ability to sell into. If your game is successful, you can easily find another publisher who specializes in that territory later.

Publishers would love to pay you as late as possible after the close of each period, since it can often take them a while to collect their own money. that's a good negotiating tactic -- you can offer lenient payment terms (e.g., 60 days after close of each month or each quarter or even 90 days) in return for a higher royalty rate since the publisher is paying you out of actual money they receive from their retailers (who probably have net 30 or net 45 days) instead of having to front you the money before they get paid themselves.

finally, make sure your agreement has a reasonable termination date like 2 or 3 years, and ideally ask for the opportunity to terminate at convenience which means you can terminate at any time. If your publisher is doing a bad job, you need the right to get out of the deal. You will need to give your publisher inventory sell-off rights in this case, meaning the publisher will have the right to sell off whatever inventory they might have already manufactured over a period of time such as 6 months.

I would take termination for convenience rights over an upfront royalty payment any day.

If you have been offered terms that you think are sketchy or you dont like, feel free to post a summary (or whatever you can considering whatever NDa you might be under) and we can help provide feedback.

[James Gwertzman]

one more thing. it's reasonable to ask the publisher to provide you with a term sheet detailing their revenue model for each SKU. It should look something like what I just described. If they can't or won't, then there might be something fishy. There shouldn't be anything to hide in describing the costs as I just laid them out. If the publisher doesn't or can't describe them accurately, they may not be familiar with it themselves and again i'd walk away.

[Jack Norton]

I might not be experienced as james, but I always accepted flat fee (advance payment) + royalties. I've experience only about retail though.
I wrote a few suggestions and most used tricks by dishonest publishers (unfortunately there are still a lot around) in my blog (http://www.winterwolves.net/blog/2006/10/06/dealing-with-publishers-mini-guide/).

Good luck!

[cliffski]

Asking for a simply royalty as % of gross is nice because it's very easy to audit (if it comes down to it) and it's very easy to calculate. Also there is no possible confusion as to which costs should or should not be subtracted before calculating your royalty.


Most valuble quote ever. If I'd kept this in mind many years ago, I'd have paid for my house by now. It's THAT big a deal.

[yanuart]

thank you James for the explanation :) I just couldn't get enough of it. There are two things that I'm quite concern when it comes to this :
1. The publisher intention to use "subsidiary" channels. This include B2B, e-commerce, email, etc. I'm okay with people buying a retail version of the game through e-commerce but not in a shareware fashion cause that'll damage my online channels. How can I prevent this ?
2. The word "sub-license", is this something that I should be worried about ? It's explained as a way to bundle the game in other product. I'm quite okay with it but since there's no way I'm gonna know where/how much my game will end up in other product will this mean I'm just giving away my game for.. err.. free ?

I won't talk about numbers since it won't be a professional thing to do but roughly I couldn't help to shake this feeling : "If I can earn that kinda money in just 2-3 months of direct sales why should I give my game away for 2-3 years?"

[Pyabo]

I won't talk about numbers since it won't be a professional thing to do


Says who?

I keep wondering when someone is going to have the balls to hold out for a contract with Real that allows them to disclose any sort of sales numbers they feel like.

Thanks for the tips, James. Exactly the kind of veteran advice we read this board for!

[val]

2. The word "sub-license", is this something that I should be worried about ? It's explained as a way to bundle the game in other product. I'm quite okay with it but since there's no way I'm gonna know where/how much my game will end up in other product will this mean I'm just giving away my game for.. err.. free ?

Sub-license is necessary for small publishers to sell your game contract to the bigger publisher. If you set up minimum royalty per CD sold, it's Ok to sublicense. If you get flat fee, think about territorries and terms of Agreement (2 yrs is OK).

If you need to localize your game, or provide separate localized demo, think about your expences and add it to negotiable price. Sometimes it's reasonable to deal with small sums if you speak about small territorries like countries that you never heard of. You do not lose any many if you sell game for flat fee to Poland/Slovenia/Czechia/Thailand. But when you negotiate about German-speaking market, bear in mind that it is the biggest in Europe.

Good luck.

[James Gwertzman]

If you are concerned about a retail publisher conflicting with your online channels, then don't do the deal. Basically you want the deal to be as restrictive as possible. ie, limit the deal to retail packaged product only, in a fixed number of territories, and only allow bundling by mutual written agreement.

If you are already happy with your online strategy, then there's no reason to give online rights to a retail publisher.

[yanuart]

Sub-license is necessary for small publishers to sell your game contract to the bigger publisher. If you set up minimum royalty per CD sold, it's Ok to sublicense. If you get flat fee, think about territorries and terms of Agreement (2 yrs is OK).
Good luck.

Hmm.. what if the territory is USA ? should I ask for a bigger flat fee ? The point is.. how can you tell how many CDs these publisher produces especially if they're just sublicense your game to a bigger publisher ?

[MerscomMan]

I'd like to offer one publisher's perspective, as we have licensed games both on a flat fee and a royalty basis. I'm sure other publishers have different agendas but for us it really comes down to the developer's priorities as there is a trade-off between the guaranteed/advance money and royalty rate.

If the developer is only valuing the deal by the guaranteed money, then a flat fee makes sense for everybody. Historically, I would bet that 90% of the games published at retail do not recoup the advance. The nature of retail is that only a few products do really well and the rest represent a loss for a publisher (advance aside, it costs us at least $30,000 to launch a $19.99 game at retail in the US, usually more). Thus, a lot of developers believe they will not see any revenue past the advance and thus that is all they care about. If this is the case, we will try to provide the best possible advance but also get a flat fee. The main reason we want the flat fee is not the revenue but the book-keeping. We have one royalty manager and just last year licensed over 60 games (a lot of our publishing is only in Europe). If we didn't have flat fees, he would have to do 60 royalty report at the end of each quarter (and he would probably kill me). And, as I said earlier, 90% of these royalty reports would not have any value to the developer so it is just an exercise in paperwork.

The counter is we love it when a developer asks us for a higher royalty in lieu of a guarantee. If they are that confident in their game why not share a higher percentage, especially if it allows us to focus our resources on packaging and sales. For one game we licensed this year, we are working with a developer who had sold the three previous versions of their game to different publishers looking for the highest advance. In all three cases it was a debacle and they never earned through their advance (and weren't even always payed the guarantee). With us, we both decided to share the risk and they sold more in six months than the other three publishers combined (and earned more than they had with the other three publishers despite the advances).

So, to answer the question, I think flat fees are good for some people, royalty based deals for other. It really depends on your personal expectations for the title and what you are trying to get out of retail.

Lloyd Melnick
www.merscom.com